Document ID: SEC-2010-1403-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc
Posted Date: 2010-09-14T04:00Z

[Federal Register: September 14, 2010 (Volume 75, Number 177)]
[Notices]               
[Page 55840-55842]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14se10-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62856; File No. SR-NYSEArca-2010-68]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change Relating to Listing and Trading of 
Shares of the PIMCO Build America Bond Strategy Fund

September 7, 2010.

I. Introduction

    On July 14, 2010, NYSE Arca, Inc. (the ``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 shares (``Shares'') of the PIMCO 
Build America Bond Strategy Fund (the ``Fund'') of the PIMCO ETF Trust 
(the ``Trust'') under NYSE Arca Equities Rule 8.600 (Managed Fund 
Shares). The proposed rule change was published in the Federal Register 
on August 4, 2010.\3\ The Commission received no comments on the 
proposal. This order approves 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. 62585 (July 28, 
2010), 75 FR 47045 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares pursuant to NYSE 
Arca Equities Rule 8.600, which governs the listing and trading of 
Managed Fund Shares. The Shares will be offered by the Trust.\4\ 
Pacific Investment Management Company LLC (``PIMCO'') is the investment 
adviser (``Adviser'') for the Fund.\5\ State Street Bank & Trust Co. is 
the custodian and transfer agent for the Fund. The Trust's Distributor 
is Allianz Global Investors Distributors LLC (the ``Distributor''), an 
indirect subsidiary of Allianz Global Investors of America L.P. 
(``AGI''), PIMCO's parent company.\6\ The Distributor is a registered 
broker-dealer.\7\
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    \4\ The Trust is a Delaware statutory trust that is registered 
under the Investment Company Act of 1940 (15 U.S.C. 80a) (``1940 
Act''). See Registration Statement on Amendment No. 15 to Form N-1A 
for the Trust filed with the Securities and Exchange Commission on 
March 10, 2010 (File Nos. 333-155395 and 811-22250) (the 
``Registration Statement'').
    \5\ The Exchange represents that the Adviser, as the investment 
adviser of the Fund, and its related personnel, are subject to 
Investment Advisers Act Rule 204A-1.
    \6\ The Fund has received an order granting certain exemptive 
relief to the Trust under the Investment Company Act of 1940 (15 
U.S.C. 80a-1) (``1940 Act''). In compliance with Commentary .04 to 
NYSE Arca Equities Rule 8.600, which applies to Managed Fund Shares, 
the Trust's application for exemptive relief under the 1940 Act 
states that the Fund will comply with the federal securities laws in 
accepting securities for deposits and satisfying redemptions with 
redemption securities, including that the securities accepted for 
deposits and the securities used to satisfy redemption requests are 
sold in transactions that would be exempt from registration under 
the Securities Act of 1933 (15 U.S.C. 77a). See email from Tim 
Malinowski, Senior Director, Global Index and Exchange Traded Funds, 
Exchange, to Ronesha Butler and Kristie Diemer, Special Counsels, 
Division, Commission, dated September 2, 2010, clarifying 
applicability of Commentary .04.
    \7\ Commentary .06 to Rule 8.600 provides that, if the 
investment adviser to the Investment Company issuing Managed Fund 
Shares is affiliated with a broker-dealer, such investment adviser 
shall erect a ``fire wall'' between the investment adviser and the 
broker-dealer with respect to access to information concerning the 
composition and/or changes to such Investment Company portfolio. In 
addition, Commentary .06 further requires that personnel who make 
decisions on the open-end fund's portfolio composition must be 
subject to procedures designed to prevent the use and dissemination 
of material nonpublic information regarding the open-end fund's 
portfolio. The Adviser is affiliated with a broker-dealer, Allianz 
Global Investors Distributors LLC, and has implemented a fire wall 
with respect to such broker-dealer regarding access to information 
concerning the composition and/or changes to a portfolio.
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    The Fund seeks to achieve its investment objective by investing 
under

[[Page 55841]]

normal circumstances at least 80% of its assets in taxable municipal 
debt securities publicly issued under the Build America Bond program. 
The Build America Bond program was created as part of the American 
Recovery and Reinvestment Act of 2009 (the ``2009 Act'') (``Build 
America Bonds''). The Fund invests in U.S. dollar-denominated Fixed 
Income Instruments that are primarily investment grade, but may invest 
up to 20% of its total assets in high yield securities (``junk bonds'') 
rated B or higher by Moody's Investors Service, Inc., or equivalently 
rated by Standard & Poor's Ratings Services or Fitch, Inc., or, if 
unrated, determined by PIMCO to be of comparable quality.\8\
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    \8\ According to the Registration Statement, the Fund may invest 
in ``Fixed Income Instruments,'' consistent with the Fund's 
objective. Fixed Income Instruments, as used generally in the 
Registration Statement, include:
     Securities issued or guaranteed by the U.S. Government, 
its agencies or government-sponsored enterprises (``U.S. Government 
Securities'');
     Corporate debt securities of U.S. and non-U.S. issuers, 
including corporate commercial paper;
     Mortgage-backed and other asset-backed securities;
     Inflation-indexed bonds issued both by governments and 
corporations;
     Trust preferred securities;
     Delayed funding loans and revolving credit facilities;
     Bank certificates of deposit, fixed time deposits and 
bankers' acceptances;
     Repurchase agreements on Fixed Income Instruments and 
reverse repurchase agreements on Fixed Income Instruments;
     Debt securities issued by states or local governments 
and their agencies, authorities and other government-sponsored 
enterprises;
     Obligations of non-U.S. governments or their 
subdivisions, agencies and government-sponsored enterprises; and
     Obligations of international agencies or supranational 
entities.
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    The average portfolio duration of the Fund normally varies within 
two years (plus or minus) of the duration of The Barclays Capital Build 
America Bond Index, which as of June 25, 2010, was approximately 12 
years.
    Municipal bonds generally are issued by or on behalf of states and 
local governments and their agencies, authorities and other 
instrumentalities. Unlike most municipal bonds, interest received on 
Build America Bonds is subject to federal and state income tax. 
Pursuant to the 2009 Act, issuers of ``direct pay'' Build America Bonds 
(i.e., taxable municipal bonds issued to provide funds for qualified 
capital expenditures) are entitled to receive payments from the U.S. 
Treasury over the life of the bond equal to 35% (or 45% in the case of 
Recovery Zone Economic Development Bonds) of the interest paid. The 
federal interest subsidy continues for the life of the bonds.\9\
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    \9\ Issuance of Build America Bonds will cease on December 31, 
2010 unless the relevant provisions of the 2009 Act are extended. In 
the event that the Build America Bond program is not extended, the 
Build America Bonds outstanding at such time will continue to be 
eligible for the federal interest rate subsidy, which continues for 
the life of the Build America Bonds; however, no bonds issued 
following expiration of the Build America Bond program will be 
eligible for the federal tax subsidy. If the Build America Bond 
program is not extended, the Fund will evaluate the Fund's 
investment strategy and make appropriate changes that it believes 
are in the best interests of the Fund, including changing the Fund's 
investment strategy to invest in other taxable municipal securities.
    The Exchange has represented that in the event the Build America 
Bond program is not extended and the Fund determines to change its 
investment strategy, the Exchange will file a proposed rule change 
pursuant to Rule 19b-4 under the Act to permit continued listing of 
the Fund, and the Fund has represented to the Exchange that it will 
not change its investment strategy until such proposed rule change 
is approved by the Commission or becomes effective under Section 
19(b) of the Act.
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    The Exchange states that the Shares will be subject to the initial 
and continued listing criteria under NYSE Arca Equities Rule 8.600 
applicable to Managed Fund Shares \10\ and that the Shares will comply 
with Rule 10A-3 under the Act,\11\ as provided by NYSE Arca Equities 
Rule 5.3.
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    \10\ The Exchange states that a minimum of 100,000 Shares will 
be outstanding at the commencement of trading on the Exchange, and 
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 will 
be made available to all market participants at the same time. See 
Notice, supra note 3.
    \11\ 17 CFR 240.10A-3.
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    Additional information regarding the Trust, the Fund, the Shares, 
the Fund's investment objectives, strategies, policies, and 
restrictions, risks, fees and expenses, creation and redemption 
procedures, portfolio holdings and policies, distributions and taxes, 
availability of information, trading rules and halts, and surveillance 
procedures, among other things, can be found in the Registration 
Statement and in the Notice, as applicable.\12\
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    \12\ See supra notes 3 and 4.
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III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \13\ and the rules and regulations thereunder applicable to a 
national securities exchange.\14\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\15\ 
which requires, among other things, that the Exchange's rules be 
designed to promote just and equitable principles of trade, 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 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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    \13\ 15 U.S.C. 78f.
    \14\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 17 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,\16\ 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 last-sale 
information for the Shares will be available via the Consolidated Tape 
Association (``CTA'') high-speed line, and the Exchange will 
disseminate the Portfolio Indicative Value (``PIV'') at least every 15 
seconds during the Core Trading Session on the Exchange. In addition, 
the Fund will make available on a website on each business day the 
identities and quantities of the portfolio of securities and other 
assets (``Disclosed Portfolio'') that will form the basis for the 
calculation of the NAV, which will be determined as of the close of the 
regular trading session on the Exchange (ordinarily 4 p.m. Eastern 
Time) on each business day. The Fund's website will also include 
additional quantitative information updated on a daily basis relating 
to trading volume, prices, and NAV. Information regarding the market 
price and volume of the Shares will be continually available on a real-
time basis throughout the day via electronic services, and the previous 
day's closing price and trading volume information for the Shares will 
be published daily in the financial sections of newspapers.
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    \16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission further believes that the proposal 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 
that the NAV per Share will be calculated daily and that the NAV and 
the Disclosed Portfolio will be made

[[Page 55842]]

available to all market participants at the same time.\17\ 
Additionally, if it becomes aware that the NAV or the Disclosed 
Portfolio is not disseminated daily to all market participants at the 
same time, the Exchange will halt trading in the Shares until such 
information is available to all market participants.\18\ Further, if 
the PIV is not being disseminated as required, the Exchange may halt 
trading during the day in which the disruption occurs; if the 
interruption persists past the trading day in which it occurred, the 
Exchange will halt trading no later than the beginning of the trading 
day following the interruption.\19\ The Exchange represents that the 
Adviser is affiliated with a broker-dealer, Allianz Global Investors 
Distributors LLC, and has implemented a ``fire wall'' between it and 
its broker-dealer affiliate with respect to access to information 
concerning the composition and/or changes to the Fund's portfolio. 
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.\20\
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    \17\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \18\ See NYSE Arca Equities Rule 8.600(d)(2)(D).
    \19\ Id. Trading in the Shares may also be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. These may include: (1) The 
extent to which trading is not occurring in the securities 
comprising the Disclosed Portfolio and/or the financial instruments 
of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.
    \20\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
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    The Exchange has represented that the Shares are equity securities 
subject to the Exchange's rules governing the trading of equity 
securities. In support of this proposal, the Exchange has made 
representations, including:
    (1) The Shares will be subject to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600(d).
    (2) 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.
    (3) 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 
Units 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 PIV will 
not be calculated or publicly disseminated; (d) how information 
regarding the PIV 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.
    (4) The Fund will be in compliance with Rule 10A-3 under the Act.
    (5) The Fund will not invest in non-U.S. equity securities.

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 the Act and the rules and regulations 
thereunder applicable to a national securities exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-NYSEArca-2010-68), be, and 
it hereby is, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-22835 Filed 9-13-10; 8:45 am]
BILLING CODE 8010-01-P