Document ID: SEC-2013-0316-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-02-13T05:00Z

[Federal Register Volume 78, Number 30 (Wednesday, February 13, 2013)]
[Notices]
[Pages 10233-10246]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03278]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68862; File No. SR-NYSEArca-2013-08]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to the Listing and Trading of the SPDR 
Blackstone/GSO Senior Loan ETF Under NYSE Arca Equities Rule 8.600

February 7, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on January 24, 2013, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the SPDR 
Blackstone/GSO Senior Loan ETF under NYSE Arca Equities Rule 8.600. The 
text of the proposed rule change is available on the Exchange's Web 
site at www.nyse.com, at the principal office of the Exchange, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade the shares (``Shares'') of 
the following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares \4\ on the Exchange: SPDR 
Blackstone/GSO

[[Page 10234]]

Senior Loan ETF (the ``Fund'').\5\ The Shares will be offered by SSgA 
Active ETF Trust (the ``Trust''), which is organized as a Massachusetts 
business trust and is registered with the Commission as an open-end 
management investment company.\6\ SSgA Funds Management, Inc. 
(``Adviser'' or ``SSgA FM'') serves as the investment adviser to the 
Fund (the ``Adviser''). GSO/Blackstone Debt Funds Management LLC will 
serve as sub-adviser (``Sub-Adviser'' or ``GSO'') to the Portfolio (as 
referenced below) and the Fund, subject to supervision by the Adviser 
and the Trust's Board of Trustees (``Board''). State Street Global 
Markets, LLC (the ``Distributor'' or ``Principal Underwriter'') will be 
the principal underwriter and distributor of the Fund's Shares. State 
Street Bank and Trust Company (the ``Administrator,'' ``Custodian'' or 
``Transfer Agent'') will serve as administrator, custodian and transfer 
agent for the Fund.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') organized 
as an open-end investment company or similar entity that invests in 
a portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \5\ The Commission has previously approved listing and trading 
on the Exchange of a number of actively managed funds under Rule 
8.600. See, e.g., Securities Exchange Act Release Nos. 57801 (May 8, 
2008), 73 FR 27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order 
approving Exchange listing and trading of twelve actively-managed 
funds of the WisdomTree Trust); 60981 (November 10, 2009), 74 FR 
59594 (November 18, 2009) (SR-NYSEArca-2009-79) (order approving 
listing and trading of five fixed income funds of the PIMCO ETF 
Trust); 62502 (July 15, 2010), 75 FR 42471 (July 21, 2010) (SR-
NYSEArca-2010-57) (order approving listing and trading of 
AdvisorShares WCM/BNY Mellon Focused Growth ADR ETF); 63076 (October 
12, 2010), 75 FR 63874 (October 18, 2010) (SR-NYSEArca-2010-79) 
(order approving listing and trading of Cambria Global Tactical 
ETF); 63329 (November 17, 2010), 75 FR 71760 (November 24, 2010) 
(SR-NYSEArca-2010-86) (order approving listing and trading of 
Peritus High Yield ETF). Additionally, the Commission has previously 
approved the listing and trading of five other actively managed SSgA 
FM advised funds on the Exchange under Rule 8.600. Securities 
Exchange Act Release No. 66343 (February 7, 2012) 77 FR 7647 
(February 13, 2012).
    \6\ The Trust is registered under the 1940 Act. On April 1, 
2011, the Trust filed with the Commission Form N-1A under the 
Securities Act of 1933 (15 U.S.C. 77a) (``1933 Act''), and under the 
1940 Act relating to the Fund (File Nos. 333-173276 and 811-22542) 
(``Registration Statement''). The description of the operation of 
the Trust and the Fund herein is based, in part, on the 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. 29524 (December 13, 2010) (File 
No. 812-13487) (``Exemptive Order'').
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    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.\7\ Commentary .06 to Rule 
8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca 
Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the 
establishment of a ``fire wall'' between the investment adviser and the 
broker-dealer reflects the applicable open-end fund's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. The 
Adviser and the Sub-Adviser are each affiliated with a broker-dealer 
and have implemented a ``fire wall'' with respect to such broker-
dealers regarding access to information concerning the composition and/
or changes to the Fund's portfolio. In the event (a) the Adviser or 
Sub-Adviser becomes newly affiliated with a broker-dealer, or (b) any 
new adviser or sub-adviser becomes affiliated with a broker-dealer, 
they 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.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``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.
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SPDR Blackstone/GSO Senior Loan ETF
    The investment objective of the Fund is to provide current income 
consistent with the preservation of capital. Under normal market 
conditions,\8\ the Fund will invest all of its assets in the shares of 
the Blackstone/GSO Senior Loan Portfolio (the ``Portfolio''), a 
separate series of the SSgA Master Trust with an identical investment 
objective as the Fund. As a result, the Fund will invest indirectly 
through the Portfolio.
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    \8\ The terms ``under normal market conditions'' or ``under 
normal market circumstances'' include, but are 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. In periods 
of extreme market disturbance, the Fund may take temporary defensive 
positions, by overweighting its portfolio in cash/cash-like 
instruments; however, to the extent possible, the investment Sub-
Adviser would continue to seek to achieve the Fund's investment 
objective. Specifically, the Portfolio and Fund would continue to 
invest in Senior Loans. In response to prolonged periods of 
constrained or difficult market conditions the Sub-Adviser will 
likely focus on investing in the largest and most liquid loans 
available in the market.
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    According to the Registration Statement, in pursuing its investment 
objective, the Fund, under normal market conditions, will seek to 
outperform a primary and secondary loan index (as described below), by 
investing at least 80% of its net assets (plus any borrowings for 
investment purposes) in ``Senior Loans,'' which are described further 
below in ``Description of Senior Loans and the Senior Loan Market.'' 
The S&P/LSTA U.S. Leveraged Loan 100 Index (the ``Primary Index'') is 
comprised of the 100 largest Senior Loans, as measured by the borrowed 
amounts outstanding. The Markit iBoxx USD Leveraged Loan Index (the 
``Secondary Index'') selects the 100 most liquid Senior Loans in the 
market. In addition to size, liquidity is also measured, in part, based 
on the number of market makers who trade a specific Senior Loan and the 
number and size of transactions in the context of the prevailing bid/
offer spread. Markit utilizes proprietary models for the Secondary 
Index composition and updates to the Secondary Index.
    The Fund will not seek to track either the Primary or Secondary 
Index, but rather will seek to outperform those indices. In doing so, 
the Sub-Adviser represents that the Portfolio will primarily invest in 
Senior Loans.\9\ The

[[Page 10235]]

Portfolio intends to hold a large percentage of the components of the 
Primary and Secondary Indices. It is anticipated that the Portfolio, in 
accordance with its principal investment strategy, will invest 
approximately 50% to 75% of its net assets in Senior Loans that are 
eligible for inclusion and meet the liquidity thresholds of the Primary 
and/or the Secondary Indices. Each of the Portfolio's Senior Loan 
investments is expected to have no less than $250 million USD par 
outstanding.
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    \9\ The Sub-Adviser represents that, in general, the Portfolio 
(i.e., the master fund) is where investments will be held, which 
investments will primarily consist of Senior Loans; and may, to a 
lesser extent, include ``other investments'' as described under 
``Other Investments'' below. The Fund (i.e., the feeder fund) will 
invest in shares of the Portfolio and will not invest in ``Other 
Investments,'' but may be exposed to such investments by means of 
the Fund's investment in shares of the Portfolio. In extraordinary 
instances, the Fund reserves the right to make direct investments in 
Senior Loans and other investments.
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    The Sub-Adviser considers Senior Loans to be first lien senior 
secured floating rate bank loans. A Senior Loan is an advance or 
commitment of funds made by one or more banks or similar financial 
institutions to one or more corporations, partnerships or other 
business entities and typically pays interest at a floating or 
adjusting rate that is determined periodically at a designated premium 
above a base lending rate, most commonly the London-Interbank Offered 
Rate (``LIBOR''). A Senior Loan is considered senior to all other 
unsecured claims against the borrower, senior to or pari passu with all 
other secured claims, meaning that in the event of a bankruptcy the 
Senior Loan, together with other first lien claims, is entitled to be 
the first to be repaid out of proceeds of the assets securing the 
loans, before other existing unsecured claims or interests receive 
repayment. However, in bankruptcy proceedings, there may be other 
claims, such as taxes or additional advances which take precedence.\10\
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    \10\ Senior Loans consist generally of obligations of companies 
and other entities (collectively, ``borrowers'') incurred for the 
purpose of reorganizing the assets and liabilities of a borrower; 
acquiring another company; taking over control of a company 
(leveraged buyout); temporary refinancing; or financing internal 
growth or other general business purposes. Senior Loans are often 
obligations of borrowers who have incurred a significant percentage 
of debt compared to equity issued and thus are highly leveraged.
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    According to the Registration Statement, the Portfolio will invest 
in Senior Loans that are made predominantly to businesses operating in 
North America, but may also invest in Senior Loans made to businesses 
operating outside of North America. The Portfolio may invest in Senior 
Loans directly, either from the borrower as part of a primary issuance 
or in the secondary market through assignments of portions of Senior 
Loans from third parties, or participations in Senior Loans, which are 
contractual relationships with an existing lender in a loan facility 
whereby the Portfolio purchases the right to receive principal and 
interest payments on a loan but the existing lender remains the record 
holder of the loan. Under normal market conditions, the Portfolio 
expects to maintain an average interest rate duration of less than 90 
days.
    In selecting securities for the Portfolio, the Portfolio's Sub-
Adviser will seek to construct a portfolio of loans that it believes is 
less volatile than the general loan market. In addition, when making 
investments, the Sub-Adviser will seek to maintain appropriate 
liquidity and price transparency for the Portfolio. On an on-going 
basis, the Sub-Adviser will add or remove those individual loans that 
it believes will cause the Portfolio to outperform or underperform, 
respectively, either the Primary or Secondary Index.
    When identifying prospective investment opportunities in Senior 
Loans, the Sub-Adviser currently intends to invest primarily in Senior 
Loans that are below investment grade quality and will rely on 
fundamental credit analysis in an effort to attempt to minimize the 
loss of the Portfolio's capital.\11\ The Sub-Adviser expects to invest 
in Senior Loans or other debt of companies possessing the attributes 
described below, which it believes will help generate higher risk 
adjusted total returns.\12\ The Sub-Adviser does not intend to purchase 
Senior Loans that are in default. However, the Portfolio may hold a 
Senior Loan that has defaulted subsequent to its purchase by the 
Portfolio.
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    \11\ The Portfolio will primarily invest in securities 
(including Senior Loans) which typically will be rated below 
investment grade. Securities rated below investment grade, commonly 
referred to as ``junk'' or ``high yield'' securities, include 
securities that are rated Ba1/BB+/BB+ or below by Moody's Investors 
Service, Inc. (``Moody's''), Fitch Inc., or Standard & Poor's, Inc. 
(``S&P''), respectively, and may involve greater risks than 
securities in higher rating categories.
    \12\ According to the Registration Statement, the loan market, 
as represented by the S&P/LSTA (Loan Syndications and Trading 
Association) Leveraged Loan Index, experienced significant growth in 
terms of number and aggregate volume of loans outstanding since the 
inception of the index in 1997. In 1997, the total amount of loans 
in the market aggregated less than $10 billion. By April of 2000, it 
had grown to over $100 billion, and by July of 2007 the market had 
grown to over $500 billion. The size of the market peaked in 
November of 2008 at $594 billion. During this period, the demand for 
loans and the number of investors participating in the loan market 
also increased significantly.
    According to the Registration Statement, since 2008, the 
aggregate size of the market has contracted, characterized by 
limited new loan issuance and payoffs of outstanding loans. From the 
peak in 2008 through July 2010, the overall size of the loan market 
contracted by approximately 15%. The number of market participants 
also decreased during that period. Although the number of new loans 
being issued in the market since 2010 is increasing, there can be no 
assurance that the size of the loan market, and the number of 
participants, will return to earlier levels. An increase in demand 
for Senior Loans may benefit the Fund by providing increased 
liquidity for such loans and higher sales prices, but it may also 
adversely affect the rate of interest payable on such loans acquired 
by the Portfolio and the rights provided to the Portfolio under the 
terms of the applicable loan agreement, and may increase the price 
of loans that the Portfolio wishes to purchase in the secondary 
market. A decrease in the demand for Senior Loans may adversely 
affect the price of loans in the Portfolio, which could cause the 
Fund's net asset value (``NAV'') to decline.
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    The Sub-Adviser intends to invest in Senior Loans or other debt of 
companies that it believes have developed strong positions within their 
respective markets and exhibit the potential to maintain sufficient 
cash flows and profitability to service their obligations in a range of 
economic environments. The Sub-Adviser will seek Senior Loans or other 
debt of companies that it believes possess advantages in scale, scope, 
customer loyalty, product pricing, or product quality versus their 
competitors, thereby minimizing business risk and protecting 
profitability.
    The Sub-Adviser intends to invest primarily in Senior Loans or 
other debt of established companies which have demonstrated a record of 
profitability and cash flows over several economic cycles. The Sub-
Adviser believes such companies are well-positioned to maintain 
consistent cash flow to service and repay their obligations and 
maintain growth in their businesses or market share. The Sub-Adviser 
does not intend to invest in Senior Loans or other debt of primarily 
start-up companies, companies in turnaround situations or companies 
with speculative business plans.
    The Sub-Adviser intends to focus on investments in which the Senior 
Loans or other debt of a target company has an experienced management 
team with an established track record of success. The Sub-Adviser will 
typically require companies to have in place proper incentives to align 
management's goals with the Portfolio's goals.
    Often the Sub-Adviser will seek to participate in transactions 
sponsored by what it believes to be high-quality private equity firms. 
The Sub-Adviser believes that a private equity sponsor's willingness to 
invest significant sums of equity capital into a company is an implicit 
endorsement of the quality of the investment. Further, private equity 
sponsors of companies with significant investments at risk have the 
ability and a strong incentive to contribute

[[Page 10236]]

additional capital in difficult economic times should operational 
issues arise.
    The Sub-Adviser will seek to invest in Senior Loans or other debt 
broadly among companies and industries, thereby potentially reducing 
the risk of a downturn in any one company or industry having a 
disproportionate impact on the value of the Portfolio's holdings. 
However, as a result of its investment in participations in loans and 
the fact that originating banks may be deemed issuers of loans, the 
Portfolio may be deemed to concentrate its investments in the financial 
services industries. Loans, and the collateral securing them, are 
typically monitored by agents for the lenders, which may be the 
originating bank or banks.\13\
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    \13\ According to the Registration Statement, the Portfolio may 
be reliant on the creditworthiness of the agent bank and other 
intermediate participants in a Senior Loan, in addition to the 
borrower, since rights that may exist under the loan against the 
borrower if the borrower defaults are typically asserted by or 
through the agent bank or intermediate participant. Agents are 
typically large commercial banks, although for Senior Loans that are 
not broadly syndicated they can also include thrift institutions, 
insurance companies or finance companies (or their affiliates). Such 
companies may be especially susceptible to the effects of changes in 
interest rates resulting from changes in U.S. or foreign fiscal or 
monetary policies, governmental regulations affecting capital 
raising activities or other economic or market fluctuations. It is 
the expectation that the Portfolio will only invest in broadly 
syndicated loans.
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    The Portfolio and the Fund are expected to be managed in a 
``master-feeder'' structure, under which the Fund, under normal market 
conditions, will invest all of its assets in the Portfolio, the 
corresponding ``master fund,'' which is a separate 1940 Act-registered 
mutual fund that has an identical investment objective. As a result, 
the Fund (i.e., a ``feeder fund'') has an indirect interest in all of 
the securities owned by the Portfolio. Because of this indirect 
interest, the Fund's investment returns should be the same as those of 
the Portfolio, adjusted for the expenses of the Fund. In extraordinary 
instances, the Fund reserves the right to make direct investments.
    The Sub-Adviser will manage the investments of the Portfolio. Under 
the master-feeder arrangement, investment advisory fees charged at the 
master-fund level are deducted from the advisory fees charged at the 
feeder-fund level. According to the Registration Statement, this 
arrangement avoids a ``layering'' of fees, e.g., the Fund's total 
annual operating expenses would be no higher as a result of investing 
in a master-feeder arrangement than they would be if the Fund pursued 
its investment objectives directly. In addition, the Fund may 
discontinue investing through the master-feeder arrangement and pursue 
its investment objectives directly if the Trust's Board of Trustees 
determines that doing so would be in the best interests of 
shareholders.
    According to the Registration Statement, historically, the amount 
of public information available about a specific Senior Loan has been 
less extensive than if the loan were registered or exchange-traded. As 
noted above, the loans in which the Portfolio will invest will, in most 
instances, be Senior Loans, which are secured and senior to other 
indebtedness of the borrower. Each Senior Loan will generally be 
secured by collateral such as accounts receivable, inventory, 
equipment, real estate, intangible assets such as trademarks, 
copyrights and patents, and securities of subsidiaries or affiliates. 
The value of the collateral generally will be determined by reference 
to financial statements of the borrower, by an independent appraisal, 
by obtaining the market value of such collateral, in the case of cash 
or securities if readily ascertainable, or by other customary valuation 
techniques considered appropriate by the Sub-Adviser. The value of 
collateral may decline after the Portfolio's investment, and collateral 
may be difficult to sell in the event of default. Consequently, the 
Portfolio may not receive all the payments to which it is entitled. By 
virtue of their senior position and collateral, Senior Loans typically 
provide lenders with the first right to cash flows or proceeds from the 
sale of a borrower's collateral if the borrower becomes insolvent 
(subject to the limitations of bankruptcy law, which may provide higher 
priority to certain claims such as employee salaries, employee 
pensions, and taxes). This means Senior Loans are generally repaid 
before unsecured bank loans, corporate bonds, subordinated debt, trade 
creditors, and preferred or common stockholders. To the extent that the 
Portfolio invests in unsecured loans, if the borrower defaults on such 
loan, there is no specific collateral on which the lender can 
foreclose. If the borrower defaults on a subordinated loan, the 
collateral may not be sufficient to cover both the senior and 
subordinated loans.
    According to the Registration Statement, there is no organized 
exchange on which loans are traded and reliable market quotations may 
not be readily available. A majority of the Portfolio's assets are 
likely to be invested in loans that are less liquid than securities 
traded on national exchanges. Loans with reduced liquidity involve 
greater risk than securities with more liquid markets. Available market 
quotations for such loans may vary over time, and if the credit quality 
of a loan unexpectedly declines, secondary trading of that loan may 
decline for a period of time. During periods of infrequent trading, 
valuing a loan can be more difficult and buying and selling a loan at 
an acceptable price can be more difficult and delayed. In the event 
that the Portfolio voluntarily or involuntarily liquidates Portfolio 
assets during periods of infrequent trading, it may not receive full 
value for those assets. Therefore, elements of judgment may play a 
greater role in valuation of loans. To the extent that a secondary 
market exists for certain loans, the market may be subject to irregular 
trading activity, wide bid/ask spreads and extended trade settlement 
periods.
    According to the Registration Statement, Senior Loans will usually 
require, in addition to scheduled payments of interest and principal, 
the prepayment of the Senior Loan from free cash flow, as described in 
the Registration Statement. The degree to which borrowers prepay Senior 
Loans, whether as a contractual requirement or at their election, may 
be affected by general business conditions, the financial condition of 
the borrower and competitive conditions among loan investors, among 
others. As such, prepayments cannot be predicted with accuracy. Recent 
market conditions, including falling default rates among others, have 
led to increased prepayment frequency and loan renegotiations. These 
renegotiations are often on terms more favorable to borrowers. Upon a 
prepayment, either in part or in full, the actual outstanding debt on 
which the Portfolio derives interest income will be reduced. However, 
the Portfolio may receive a prepayment penalty fee assessed against the 
prepaying borrower.
Other Investments
    According to the Registration Statement, in addition to the 
principal investments described above, the Portfolio may invest in 
other investments, as described below. The Fund may (indirectly through 
its investments in the Portfolio or, in extraordinary circumstances, 
directly) invest in the following types of investments. The investment 
practices of the Portfolio are the same in all material respects to 
those of the Fund.
    The Portfolio may invest in bonds, including corporate bonds; high 
yield debt securities; and U.S. Government

[[Page 10237]]

obligations.\14\ The Portfolio also may invest in preferred securities.
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    \14\ U.S. Government obligations are a type of bond and include 
securities issued or guaranteed as to principal and interest by the 
U.S. Government, its agencies or instrumentalities. The Portfolio 
also may purchase U.S. registered, dollar-denominated bonds of 
foreign corporations, governments, agencies and supra-national 
entities.
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    The Portfolio may invest in repurchase agreements with commercial 
banks, brokers or dealers to generate income from its excess cash 
balances and its securities lending cash collateral. A repurchase 
agreement is an agreement under which the Portfolio acquires a 
financial instrument (e.g., a security issued by the U.S. government or 
an agency thereof, a banker's acceptance or a certificate of deposit) 
from a seller, subject to resale to the seller at an agreed upon price 
and date (normally, the next business day). A repurchase agreement may 
be considered a loan collateralized by securities. In addition, the 
Portfolio may enter into reverse repurchase agreements, which involve 
the sale of securities with an agreement to repurchase the securities 
at an agreed-upon price, date and interest payment and have the 
characteristics of borrowing.
    The Portfolio may invest in commercial paper. Commercial paper 
consists of short-term, promissory notes issued by banks, corporations 
and other entities to finance short-term credit needs. These securities 
generally are discounted but sometimes may be interest bearing.
    Subject to limitations, the Portfolio may invest in secured loans 
that are not first lien loans or loans that are unsecured. These loans 
have the same characteristics as Senior Loans except that such loans 
are not first in priority of repayment and/or may not be secured by 
collateral. Accordingly, the risks associated with these loans are 
higher than the risks for loans with first priority over the 
collateral. Because these loans are lower in priority and/or unsecured, 
they are subject to the additional risk that the cash flow of the 
borrower may be insufficient to meet scheduled payments after giving 
effect to the secured obligations of the borrower or in the case of a 
default, recoveries may be lower for unsecured loans than for secured 
loans.\15\
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    \15\ According to the Registration Statement, secured loans that 
are not first lien and loans that are unsecured generally have 
greater price volatility than Senior Loans and may be less liquid. 
There is also a possibility that originators will not be able to 
sell participations in these loans, which would create greater 
credit risk exposure for the holders of such loans. Secured loans 
that are not first lien and loans that are unsecured share the same 
risks as other below investment grade instruments.
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    The Portfolio may invest in short-term instruments, including money 
market instruments (including money market funds advised by the 
Adviser), cash and cash equivalents, on an ongoing basis to provide 
liquidity or for other reasons.
    The Portfolio may invest in the securities of other investment 
companies, including closed-end funds (including loan-focused closed 
end funds), subject to applicable limitations under Section 12(d)(1) of 
the 1940 Act.\16\ To the extent allowed by law, regulation, the 
Portfolio's investment restrictions and the Trust's Exemptive Order, 
the Portfolio may invest its assets in securities of investment 
companies that are money market funds, including those advised by the 
Adviser or otherwise affiliated with the Adviser, in excess of the 
limits discussed above.
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    \16\ The Portfolio may invest in other debt or fixed income 
exchange-traded funds (``ETFs''), such as securities listed on the 
Exchange under NYSE Arca Equities Rules 5.2(j)(3), 8.100 and 8.600, 
(including ETFs managed by the Adviser). ETFs may be structured as 
investment companies that are registered under the 1940 Act, 
typically as open-end funds or unit investment trusts. These ETFs 
are generally based on specific domestic and foreign market 
securities indices.
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    In addition, the Portfolio may invest in exchange-traded notes 
(``ETNs''), such as securities listed on the Exchange under NYSE Arca 
Equities Rule 5.2(j)(6), which are debt obligations of investment banks 
that are traded on exchanges and the returns of which are linked to the 
performance of certain reference assets, which may include market 
indexes.
    The Portfolio will not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry; however it may be 
deemed to concentrate its investment in any of the industries or group 
of industries in the financial services sector (consisting of financial 
institutions, including commercial banks, insurance companies and other 
financial companies and their respective holding companies) to the 
extent that the banks originating or acting as agents for the lenders, 
or granting or acting as intermediaries in participation interests, in 
loans held by the Portfolio are deemed to be issuers of such loans.\17\
---------------------------------------------------------------------------

    \17\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
---------------------------------------------------------------------------

    The Portfolio 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, junior subordinated loans and unsecured 
loans deemed illiquid by the Adviser and Sub-Adviser. The Portfolio 
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 
Portfolio'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.\18\
---------------------------------------------------------------------------

    \18\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the 1933 Act).
---------------------------------------------------------------------------

    Except for investments in ETFs that may hold non-U.S. issues, the 
Portfolio will not otherwise invest in non-U.S.-registered equity 
issues.
    The Portfolio will not invest in options contracts, futures 
contracts or swap agreements.
    In certain situations or market conditions, the Portfolio may 
temporarily depart from its normal investment policies and strategies 
provided that the alternative is consistent with the Portfolio's 
investment objective and is in the best interest of the Portfolio. For 
example, the Portfolio may hold a higher than normal proportion of its 
assets in cash in times of extreme market stress.\19\ The Portfolio may 
borrow money from a bank as permitted by the 1940 Act or other 
governing statute, by applicable rules thereunder, or by Commission or 
other regulatory agency with authority over the Portfolio, but only for 
temporary or emergency purposes.
---------------------------------------------------------------------------

    \19\ See note 8, supra.
---------------------------------------------------------------------------

    The Portfolio will be classified as a ``diversified'' investment 
company under the 1940 Act.\20\
---------------------------------------------------------------------------

    \20\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act (15 U.S.C. 80a-5).
---------------------------------------------------------------------------

    The Portfolio intends to qualify for and to elect treatment as a 
separate

[[Page 10238]]

regulated investment company (``RIC'') under Subchapter M of the 
Internal Revenue Code.\21\
---------------------------------------------------------------------------

    \21\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Portfolio's investments will be consistent with the Portfolio's 
investment objective and will not be used to enhance leverage.
Criteria To Be Applied to the Fund
    While the Fund, which would be listed pursuant to the criteria 
applicable to actively managed funds under NYSE Arca Equities Rule 
8.600, is not eligible for listing under NYSE Arca Equities Rule 
5.2(j)(3) applicable to listing and trading of Investment Company Units 
based on a securities index, the Adviser and Sub-Adviser represent 
that, under normal market conditions, the Fund would satisfy the 
generic fixed income initial listing requirements in NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .02 on a continuous basis measured at the 
time of purchase, as described below.\22\
---------------------------------------------------------------------------

    \22\ NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 sets 
forth generic listing criteria applicable to listing under Rule 19b-
4(e) under the Exchange Act of Investment Company Units (``Units'') 
based on an index or portfolio of ``Fixed Income Securities,'' which 
are debt securities that are notes, bonds, debentures or evidence of 
indebtedness that include, but are not limited to, U.S. Department 
of Treasury securities (``Treasury Securities''), government-
sponsored entity securities (``GSE Securities''), municipal 
securities, trust preferred securities, supranational debt and debt 
of a foreign country or a subdivision thereof. NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .02(a) is as follows: (a) Eligibility 
Criteria for Index Components. Upon the initial listing of a series 
of Units pursuant to Rule 19b-4(e) under the Securities Exchange Act 
of 1934 on the Corporation, the components of an index or portfolio 
underlying a series of Units shall meet the following criteria: (1) 
The index or portfolio must consist of Fixed Income Securities; (2) 
Components that in aggregate account for at least 75% of the weight 
of the index or portfolio each shall have a minimum original 
principal amount outstanding of $100 million or more; (3) A 
component may be a convertible security, however, once the 
convertible security component converts to the underlying equity 
security, the component is removed from the index or portfolio; (4) 
No component fixed-income security (excluding Treasury Securities 
and GSE Securities) shall represent more than 30% of the weight of 
the index or portfolio, and the five most heavily weighted component 
fixed-income securities in the index or portfolio shall not in the 
aggregate account for more than 65% of the weight of the index or 
portfolio; (5) An underlying index or portfolio (excluding one 
consisting entirely of exempted securities) must include a minimum 
of 13 non-affiliated issuers; and (6) Component securities that in 
aggregate account for at least 90% of the weight of the index or 
portfolio must be either (a) from issuers that are required to file 
reports pursuant to Sections 13 and 15(d) of the Securities Exchange 
Act of 1934; (b) from issuers that have a worldwide market value of 
its outstanding common equity held by non-affiliates of $700 million 
or more; (c) from issuers that have outstanding securities that are 
notes, bonds debentures, or evidence of indebtedness having a total 
remaining principal amount of at least $1 billion; (d) exempted 
securities as defined in Section 3(a)(12) of the Securities Exchange 
Act of 1934; or (e) from issuers that are a government of a foreign 
country or a political subdivision of a foreign country.
---------------------------------------------------------------------------

    With respect to the requirement of Commentary .02(a)(1), as noted 
in the Registration Statement, the Fund (though its investment in the 
Portfolio) will invest at least 80% of its net assets (plus any 
borrowings for investment purposes) in Senior Loans. The Adviser and 
Sub-Adviser expect that substantially all of the Fund's assets will be 
invested in Fixed Income Securities or cash/cash-like instruments. With 
respect to the requirement of Commentary .02(a)(2), the Portfolio's 
Adviser and Sub-Adviser expect that substantially all, but at least 75% 
of the Portfolio's portfolio will be invested in loans that have an 
aggregate outstanding exposure of greater than $100 million. With 
respect to the requirement of Commentary .02(a)(3), the Sub-Adviser 
represents that the Portfolio will not typically invest in convertible 
securities; however, should the Portfolio make such investments, the 
Sub-Adviser would direct the Portfolio to divest any converted equity 
security as soon as practicable.
    With respect to the requirement of Commentary .02(a)(4), the Sub-
Adviser represents that the Portfolio will not concentrate its 
investments in excess of 30% in any one security (excluding Treasury 
Securities and GSE Securities), and will not invest more than 65% of 
its assets in five or fewer securities (excluding Treasury Securities 
and GSE Securities).
    With respect to the requirement of Commentary .02(a)(5), the Sub-
Adviser represents that the Portfolio will invest in Senior Loans 
issued to at least 13 non-affiliated borrowers.
    With respect to the requirements of Commentary .02(a)(6), the Sub-
Adviser represents that the Portfolio's portfolio may make investments 
on a continuous basis in compliance with such requirement at the time 
of purchase; however, the market for Senior Loans differs in several 
material respects from the market of other fixed income securities 
(e.g., bonds). A significant percentage of the Senior Loan market would 
not meet the criteria set forth in Commentary .02(a)(6), but would be 
readily tradable in the secondary market. For the 12 month period 
ending August 12, 2012, 53.4% of the borrowers of primary Senior Loans 
(also known as leveraged loans) had total indebtedness of $1 billion or 
less and Senior Loans outstanding of $250 million or more. (Source: 
S&P). In order to add to the Portfolio's diversification and to expand 
the Portfolio's investment universe, the Portfolio may invest in Senior 
Loans borrowed by entities that would not meet the criteria set forth 
in Commentary .02(a)(6) above provided the borrower has at least $250 
million outstanding in Senior Loans. The Senior Loans borrowed by such 
entities would be well known to participants in the Senior Loan 
markets, would typically attract multiple market makers, and would 
share liquidity and transparency characteristics of senior secured debt 
borrowed by entities meeting the criteria in the generic listing 
criteria of NYSE Arca Equities Rule 5.2(j)(3), Commentary .02.
Description of Senior Loans and the Senior Loan Market
    The Sub-Adviser represents that Senior Loans represent debt 
obligations of sub-investment grade corporate borrowers, similar to 
high yield bonds; however, Senior Loans are different from traditional 
high yield bonds in several important respects. First, Senior Loans are 
typically senior to other obligations of the borrower and secured by 
the assets of the borrower. Senior Loans rank at the top of a 
borrower's capital structure in terms of priority of payment, ahead of 
any subordinated debt (high yield) or the borrower's common equity. 
These loans are also secured, as the holders of these loans have a lien 
on most if not all of the corporate issuer's plant, property, 
equipment, receivables, cash balances, licenses, trademarks, etc. 
Furthermore, the corporate borrower of Senior Loans executes a credit 
agreement that typically restricts what it can do (debt incurrence, 
asset dispositions, etc.) without the lenders' approval, and, in 
addition, often requires the borrower to meet certain ongoing financial 
covenants (EBITDA, leverage tests, etc.). Finally, Senior Loans are 
floating rate obligations which typically pay a fixed spread over 3 
month LIBOR.
    Institutional investors access the market today primarily through 
commingled funds or separately managed accounts. Individual investors 
have gained exposure to Senior Loans primarily through registered open 
end or closed end mutual funds and business development companies or 
occasionally through limited partnerships.
    The performance of a Senior Loans portfolio is driven by credit 
selection. Investing in Senior Loans involves detailed credit analysis 
and sound investment judgment culminating in the timely payout of 
interest and ultimate return of principal. Loans are generally 
prepayable at any time, typically without penalty. Loans are typically

[[Page 10239]]

purchased at close to 100 (``par'') and are also typically repaid at 
100; the return to the investor comes from the quarterly interest 
coupons and the return of principal. Underperformance comes from making 
investment misjudgments whereby the corporate borrower fails to repay 
the loan at maturity or otherwise defaults on the obligation.\23\
---------------------------------------------------------------------------

    \23\ Additional capital features inherent to Senior Loans 
include the following: (1) Such loans are subject to mandatory and 
discretionary prepayments and can be prepaid in full, often without 
penalty, for a variety of reasons; (2) companies may opt to 
refinance an existing loan at a lower spread or repay the loan with 
a high yield bond issuance; (3) required excess cash flow sweeps; 
(4) covenants requiring loan prepayment from proceeds of asset 
sales; and (5) quarterly amortization.
---------------------------------------------------------------------------

    The Sub-Adviser represents that the Senior Loan market, in terms of 
total outstanding loans by dollar volume is approximately equal in size 
to the high yield corporate bond market in the U.S.--between $1.2 
trillion and $1.5 trillion. The market for Senior Loans is almost 
exclusively comprised of non-investment grade corporate borrowers. The 
Loan Syndication and Trading Association (``LSTA''), a trade group 
sponsored by both underwriters of and institutional investors in senior 
bank loans, has been tracking trading volumes and bid-offer spreads for 
the asset class since 2007. For the month ended June 30, 2012--a 
representative period--$30 billion of Senior Loans changed hands 
representing 1,109 individual transactions. (Source: LSTA.) Average 
quarterly Senior Loan trading volume exceeded $100 billion during 2011. 
Quarterly trading volumes fell modestly to $98 billion in the second 
calendar quarter of 2012.\24\
---------------------------------------------------------------------------

    \24\ As of October 2012, 195 open ended loan funds and open 
ended bond funds were invested in the Senior Loan market as a 
primary or secondary asset class. (Source: Morningstar.) As of 
October 2012, there were approximately $65 billion of assets under 
management in 39 open ended loan funds and approximately $252 
billion of assets under management in 158 open ended high yield bond 
funds. 86 of the 158 open ended high yield bond funds made an 
allocation to Senior Loans, and, among high yield bond funds that 
had an allocation to Senior Loans, such allocation was 4.99% on 
average. (Source: Morningstar Direct.)
---------------------------------------------------------------------------

    The Portfolio, as noted above, will primarily invest in the more 
liquid and higher rated segment of the Senior Loan market. The average 
credit rating of the Senior Loans that the Fund typically will hold 
will be rated between BB+ and B+ as rated by S&P. The most actively 
traded loans will generally have a tranche size outstanding (or total 
float of the issue) in excess of $250 million. The borrowers of these 
broadly syndicated bank loans will typically be followed by many ``buy-
side'' and ``sell-side'' credit analysts who will in turn rely on the 
borrower to provide transparent financial information concerning its 
business performance and operating results. The Sub-Adviser represents 
that such borrowers typically provide significant financial 
transparency to the market through the delivery of financial statements 
on at least a quarterly basis as required by the executed credit 
agreements. Additionally, bid and offers in the Senior Loans are 
available throughout the trading day on larger Senior Loans issues with 
multiple dealer quotes available.
    The Sub-Adviser represents that the underwriters, or agent banks, 
which distribute, syndicate and trade Senior Loans are among the 
largest global financial institutions, including JPMorgan, Bank of 
America, Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo, 
Deutsche Bank, Barclays, Credit Suisse and others. It is common for 
multiple firms to act as underwriters and market makers for a specific 
Senior Loan issue. For example, two underwriters may co-underwrite and 
fund a Senior Loan that has a $1 billion institutional tranche. One of 
the underwriters acting as syndication agent for the financing, will 
then draft an offering memorandum (similar to an equity IPO 
prospectus), distribute it to potential investors, schedule management 
meetings with the largest loan investors and arrange a bank meeting 
that includes management presentations along with a question and answer 
session. The investor audience attends in person as well as via 
telephone with both live and recorded conference call options. After a 
two week syndication process where investors can complete their due 
diligence work with access to company management and underwriter 
bankers to answer credit questions, investors' commitments are 
collected by the underwriter. The underwriter will typically allocate 
the loan to 80-120 investors within the following week, with the 
largest position representing 3-5% of the tranche size in a successful 
syndication. The underwriters will both make executable two sided 
markets in the loan with eighth to a quarter point bid/ask spreads on 
sizes in the $2 million to $20 million range, depending on the issue. 
Other banks also have Senior Loan trading desks that make secondary 
bid/ask markets in the loans after they are allocated. Senior Loan 
investors can also obtain information on Senior Loans and their 
borrowers from numerous public sources, including Bloomberg, FactSet, 
public financial statement filings (Forms 10-K and 10-Q), and sell side 
research analysts.
    The Sub-Adviser represents that the segment of the Senior Loan 
market that the Portfolio will focus on is highly liquid. Senior Loans 
of $250 million or more in issuance are typically quite liquid and will 
have multiple market makers and typically 75 or more institutional 
holders. The standard bid/offer spreads for such loans are \1/4\ to \1/
2\ point, although the largest firms, such as the Sub-Adviser, can 
transact on a 1/8th point market across dealers for Senior Loans of 
$250 million or more outstanding.\25\
---------------------------------------------------------------------------

    \25\ The Exchange notes that the PowerShares Senior Loan 
Portfolio (Symbol: BKLN), is an index-based exchange-traded fund 
listed on the Exchange since March 5, 2011 under NYSE Arca Equities 
Rule 5.2(j)(3). The underlying index for BKLN is the S&P/LSTA U.S. 
Leveraged Loan 100 Index, the Fund's Primary Index. As of November 
20, 2012, BKLN had assets under management of approximately $1.28 
billion. Since inception, BKLN's average daily trading volume has 
been 545,065 shares, with an average premium/discount to NAV of 
0.43%.
---------------------------------------------------------------------------

    The Sub-Adviser represents that, while Senior Loans are not 
reported through TRACE,\26\ there is significant transparency with 
dealers updating investors on trades and trading activity throughout 
the day. Dealers update their ``trading runs'' of Senior Loans 
throughout the day and distribute these via electronic messaging to the 
institutional investor community. The Adviser represents further that, 
upon commencement of trading in the Fund, the Adviser and Sub-Adviser 
would ensure that all ``Authorized Participants'' (as described below) 
for the Portfolio were added to these intraday market maker Senior Loan 
``trading runs.''
---------------------------------------------------------------------------

    \26\ TRACE (Trade Reporting and Compliance Engine), is a vehicle 
developed by the Financial Industry Regulatory Authority (``FINRA'') 
that facilitates the mandatory over-the-counter secondary market 
transactions in eligible fixed income securities.
---------------------------------------------------------------------------

Description of the S&P/LSTA U.S. Leveraged Loan 100 Index \27\
---------------------------------------------------------------------------

    \27\ The description herein of the Primary Index is based on 
information in ``S&P LSTA U.S. Leveraged Loan 100 Index Methodology, 
August 2011'' (``Primary Index Description'').
---------------------------------------------------------------------------

    The Primary Index is a market value-weighted index designed to 
measure the performance of the largest segment of the U.S. syndicated 
leveraged loan market. The Primary Index consists of 100 loan 
facilities drawn from a larger benchmark--the S&P/LSTA Leveraged Loan 
Index (``LLI'')--which covers more than 900 facilities and, as of June 
30, 2011, had a market value of more than US$ 490 billion. As of June 
30, 2011, the Primary Index had a total market value of US$ 183.4 
billion.

[[Page 10240]]

    The Primary Index is designed to reflect the largest facilities in 
the leveraged loan market. It mirrors the market-weighted performance 
of the largest institutional leveraged loans based upon market 
weightings, spreads and interest payments.
    The Primary Index is rules based, although the S&P/LSTA U.S. 
Leveraged Loan 100 Index Committee (the ``Index Committee,'' described 
below) reserves the right to exercise discretion when necessary.\28\
---------------------------------------------------------------------------

    \28\ S&P is not a broker-dealer or affiliated with a broker-
dealer and has implemented procedures designed to prevent the use 
and dissemination of material, non-public information regarding the 
Primary Index.
---------------------------------------------------------------------------

    The Primary Index is rebalanced semi-annually to avoid excessive 
turnover, but reviewed weekly to reflect pay-downs and ensure that the 
Primary Index portfolio maintains 100 loan facilities. The constituents 
of the Primary Index (the ``Index Loans'') are drawn from a universe of 
syndicated leveraged loans representing over 90% of the leveraged loan 
market.
    All syndicated leveraged loans covered by the LLI universe are 
eligible for inclusion in the Primary Index. Term loans from syndicated 
credits must meet the following criteria at issuance in order to be 
eligible for inclusion in the LLI:
     Senior secured
     Minimum initial term of one year
     Minimum initial spread of LIBOR + 125 basis points
     U.S. dollar denominated.
    All Primary Index loans must have a publicly assigned CUSIP.
    According to the Primary Index Description, the Primary Index is 
designed to include the largest loan facilities from the LLI universe. 
Par outstanding is a key criterion for loan selection. Loan facilities 
are included if they are among the largest first lien facilities from 
the Primary Index in terms of par amount outstanding. There is no 
minimum size requirement on individual facilities in the Primary Index, 
but the LLI universe minimum is US$ 50 million. Only the 100 largest 
first lien facilities from the LLI that meet all eligibility 
requirements are considered for inclusion. The Primary Index covers all 
borrowers regardless of origin; however, all facilities must be 
denominated in U.S. dollars.
    A Primary Index addition is generally made only if a vacancy is 
created by a Primary Index deletion. Primary Index additions are 
reviewed on a weekly basis and are made according to par outstanding 
and overall liquidity. Liquidity is determined by the par outstanding 
and number of market bids available. Facilities are retired when they 
are no longer priced by ``LSTA/LPC Mark-to-Market Pricing'' or when the 
facility is repaid.\29\
---------------------------------------------------------------------------

    \29\ LSTA/LPC Mark-to-Market Pricing is used to price each loan 
in the index. LSTA/LPC Mark-to-Market Pricing is based on bid/ask 
quotes gathered from dealers and is not based upon derived pricing 
models. The Primary Index uses the average bid for its market value 
calculation.
---------------------------------------------------------------------------

    Each loan facility's total return is calculated by aggregating the 
interest return, reflecting the return due to interest paid and accrued 
interest, and price return, reflecting the gains or losses due to 
changes in end-of-day prices and principal prepayments.
    The Primary Index is maintained in accordance with the following 
rules:
     The Primary Index is reviewed each week to ensure that it 
includes 100 Index Loans.
     A complete review and rebalancing of all Primary Index 
constituents is completed on a semi-annual basis coinciding with the 
last weekly rebalance in June and in December.
     Eligible loan facilities approved by the Primary Index 
Committee are added to the Primary Index during the semi-annual 
rebalancing. Eligible loan facilities are added to the Primary Index at 
the weekly review only if other facilities are repaid or otherwise drop 
out of the Primary Index, in order to maintain 100 Index Loans.
     Any loan facility that fails to meet any of the 
eligibility criteria or that has a term to maturity less than or equal 
to 12 months plus 1 calendar day, as of the weekly Rebalancing Date, 
will not be included in the Primary Index.
     Par amounts of Primary Index loans will be adjusted on the 
weekly Rebalancing Date to reflect any changes that have occurred since 
the previous Rebalancing Date, due, for example, to partial pre-
payments and pay-downs.\30\
---------------------------------------------------------------------------

    \30\ The Sub-Adviser represents that loan prepayments in 2011 
were 40% of the S&P/LSTA Leveraged Loan Index and LTM September 30, 
2012 are 28% (Source: LCD Quarterly Review, Third Quarter 2012). As 
a result of prepayments, the weighted average life of a loan is 
typically 2-3 years versus average maturity of 5-7 years. Existing 
investors in the Senior Loan may decline to participate in a loan 
refinancing that occurs at a lower spread in which case the loan 
would be repaid.
---------------------------------------------------------------------------

     Constituent facilities are capped at 2% of the Primary 
Index and drawn-down at the weekly rebalancing. When a loan facility 
exceeds the 2% cap, the weight is reduced to 1.90% and the proceeds are 
invested in the other Primary Index components on a relative-weight 
basis.
    The Primary Index is normally reviewed and rebalanced on a weekly 
basis to maintain 100 constituents. The Primary Index Committee (as 
described below), nevertheless, reserves the right to make adjustments 
to the Primary Index at any time that it believes appropriate.
    Weekly Primary Index rebalancing maintenance (additions, deletions, 
pay-downs, and other changes to the Primary Index) is based on data as 
of Friday (or the last business day of the week in the case of 
holidays) and is announced the following Wednesday (or Tuesday in the 
case of a holiday) for implementation on the following Friday. Publicly 
available information, up to and including each Wednesday's close, is 
considered in each weekly rebalancing.
    Primary Index changes published in the announcement generally are 
not subject to revision and will become effective on the date listed in 
the announcement.
The Primary Index Committee
    The Primary Index Committee maintains the Primary Index.\31\ The 
Primary Index Committee is comprised of employees of S&P. The Primary 
Index Committee is chaired by the Managing Director and Primary Index 
Committee Chairman at S&P.
---------------------------------------------------------------------------

    \31\ The Primary Index Committee has implemented procedures 
designed to prevent the use and dissemination of material, non-
public information regarding the Primary Index.
---------------------------------------------------------------------------

    Meetings are held annually and, from time to time, as needed. It is 
the sole responsibility of the Primary Index Committee to decide on all 
matters relating to methodology, maintenance, constituent selection and 
index procedures. The Primary Index Committee makes decisions based on 
all available information and Primary Index Committee discussions are 
kept confidential to avoid any unnecessary impact on market trading.
Markit iBoxx USD Liquid Leveraged Loan Index \32\
---------------------------------------------------------------------------

    \32\ The description herein of the Secondary Index is based on 
``Markit iBoxx USD Liquid Leveraged Loan Index--Index Guide,'' 
September 2011 (``Secondary Index Description'').
---------------------------------------------------------------------------

    According to the Secondary Index Description, the Markit iBoxx USD 
Liquid Leveraged Loan Index is a subset of the benchmark Markit iBoxx 
USD Leveraged Loan Index (USD LLI). The Secondary Index limits the 
number of constituent loans by selecting larger and more liquid loans 
from the wider USD LLI index universe as determined by the Liquidity 
Ranking Procedure, described below. The procedure utilizes daily 
liquidity scores from the Markit Loan Pricing Service, which is a 
broader measure of liquidity, summarizing the performance of each loan 
across several

[[Page 10241]]

liquidity metrics, such as number of quotes, or bid-offer sizes.\33\
---------------------------------------------------------------------------

    \33\ Markit is not a broker-dealer or affiliated with a broker-
dealer and has implemented procedures designed to prevent the use 
and dissemination of material, non-public information regarding the 
Secondary Index.
---------------------------------------------------------------------------

    The selection process for the Secondary Index will be used on the 
index inception date and at every monthly rebalancing (``Secondary 
Index Selection Date''). The selection process will involve the 
identification of the eligible universe using the eligibility criteria 
set out below. If the size of the eligible universe is greater than the 
target number of loans, the Liquidity Ranking Procedure will be used to 
determine the final index constituents. Once the index members are 
selected, they are automatically carried forward to the following 
month's selection, unless they no longer satisfy the eligibility 
criteria or enter a prolonged period of relative illiquidity. The 
Secondary Index eligibility criteria and the liquidity ranking 
procedure are described in further detail below.
    The following six selection criteria are used to derive the 
eligible universe from the MarkitWSO USD-denominated loan universe: 
loan type; minimum size; liquidity/depth of market; spread; credit 
rating; and minimum time to maturity.\34\
---------------------------------------------------------------------------

    \34\ MarkitWSO is a corporate loan data base that Markit 
maintains using information provided by agent banks on each 
constituent Senior Loan in its data base of approximately 4,300 
Senior Loans.
---------------------------------------------------------------------------

    Only USD-denominated loans are eligible for the Secondary Index.
    Eligible loan types are fully funded term loans (fixed and floating 
rate) and defaulted loans. Ineligible loan types are 364-day facility; 
delayed term loans; deposit-funded tranche; letters of credit; 
mezzanine; PIK Toggle; PIK; pre-funded acquisition; revolving credit; 
strips; synthetic lease; and unfunded loans.
    A minimum facility size of $500 million USD nominal is required to 
be eligible for the Secondary Index. A constituent is removed at the 
next rebalancing if its nominal outstanding falls below $500 million 
USD.
    According to the Secondary Index Description, liquidity and depth 
of the market can be measured by the number of prices available for a 
particular loan and the length of time prices have been provided by the 
minimum required number of price contributors. The liquidity check is 
based on the 3-month period prior to the rebalancing cut-off date 
(liquidity test period). Only loans with a minimum liquidity/depth of 2 
for at least 50% of trading days of the liquidity test period are 
eligible. Loans issued less than 3 months prior to the rebalancing cut-
off date require a minimum liquidity/depth of 3 for at least 50% of 
trading days in the period from the issue date to the rebalancing cut-
off date.
    Only sub-investment grade loans are eligible for the Secondary 
Index. Each rated loan is assigned a composite index rating based on 
the ratings from Moody's and S&P's. If more than one agency publishes a 
rating for a loan, the average of the ratings determines the composite 
rating. The average rating is calculated as the numerical average of 
the ratings provided. To calculate the average, each rating [sic] 
assigned an integer number as follows: AAA/Aaa is assigned a 1, AA+/Aa1 
a 2, etc. The resulting average is rounded to the nearest integer with 
.5 rounded up. Loans designated as ``Not Rated'' by both Moody's and 
S&P must have a minimum current spread of 125 basis points over LIBOR 
to be eligible for the Secondary Index. Loans designated as ``Not 
Rated'' are not assigned an index rating. Defaulted loans are eligible 
for the Secondary Index provided they meet all other criteria.\35\
---------------------------------------------------------------------------

    \35\ While the Secondary Index can include defaulting Senior 
Loans, the Sub-Adviser does not intend to invest in such loans.
---------------------------------------------------------------------------

    The initial time to maturity is measured from the loan's issue date 
to its maturity date. A minimum initial time to maturity of one year is 
required for potential constituents. The minimum time to maturity 
threshold reduces the Secondary Index turnover and transaction costs 
associated with short-dated loans. Existing constituents with time to 
maturities of less than 1 year remain in the Secondary Index until 
maturity provided they meet all other eligibility criteria.
    In order to determine the final Secondary Index constituents, the 
loans in the eligible universe are ranked according to their liquidity 
scores, as provided by the Markit Loan Pricing Service. Each loan in 
the MarkitWSO database \36\ is assigned a daily score based on the 
loan's performance on the following liquidity metrics:
---------------------------------------------------------------------------

    \36\ See note 34, supra.
---------------------------------------------------------------------------

     Sources Quote: The number of dealers sending out runs.
     Frequency of Quotes: Total number of dealer runs.
     Number of Sources with Size: The number of dealer runs 
with associated size.
     Bid-offer spreads: The average bid-offer spread in dealer 
runs.
     Average quote size: The average size parsed from quotes.
     Movers Count: The end of day composite contributions which 
have moved on that day.
    Each loan carries a score ranging from 1 to 5 in ascending order of 
liquidity, depending on the daily values for the above components. A 
loan with a score of 1 will have the best performance in each of the 
categories above. In the liquidity ranking procedure described below, 
average liquidity scores are calculated for each loan, over a calendar 
one or three month period immediately preceding each rebalancing date.
    On the Secondary Index inception day, the target number of loans 
will be 100. Loans will be removed from the Secondary Index if they are 
no longer present in the current eligible universe or are not ranked 
within the first 125 places in terms of 3 month average liquidity 
score. On every subsequent rebalancing, the number of new loans to be 
selected will be equal to the number of loans which will be removed 
from the Secondary Index.
    According to the Secondary Index Description, the parameters used 
in the selection process, including the target number of loans and the 
eligibility criteria, are subject to an annual review process to ensure 
that the Secondary Index continues to reflect the underlying loans 
market. The results of the analysis are submitted to the oversight 
committee for the Markit iBoxx USD Leveraged Loans Indices (''Oversight 
Committee'').\37\ The review will consist of a qualitative and 
quantitative assessment of any developments in the loans market in 
terms of market size, depth, and overall liquidity conditions of the 
market together with a recommendation whether current index rules 
should be modified. Factors that will be considered in the assessment 
will include: size of the market; new issuance patterns and trends; 
outstanding number of loans and borrowers; and liquidity conditions.
---------------------------------------------------------------------------

    \37\ The Oversight Committee has implemented procedures designed 
to prevent the use and dissemination of material, non-public 
information regarding the Secondary Index.
---------------------------------------------------------------------------

    All Markit iBoxx USD Leveraged Loans Indices are calculated at the 
end of each business day and re-balanced at the end of each month.
    The Markit iBoxx USD Leveraged Loans Indices are calculated on the 
basis of end-of-day prices provided by Markit Loan Pricing services on 
each recommended Securities Industry and Financial Markets Association 
(``SIFMA'') U.S. trading day.
    On each pricing day, end-of-day bid, mid and ask price quotes for 
the applicable loans are received from Markit Loan Pricing. Prices for 
all loans are taken at 4:15 p.m. Eastern time

[[Page 10242]]

(``E.T.''). Secondary Index data is published and distributed on the 
next day by 8:00 a.m. E.T. and is available on the Markit index Web 
site, http://indices.markit.com, and through Bloomberg and Reuters.
    Markit will provide bid, mid and ask prices for all eligible loans 
at the end of each index calculation day. Reference loan data will be 
provided by Markit, which represents up-to-date reference and 
transactional information on over 1,000 leveraged loans.
Creations and Redemptions of Shares
    The Fund will issue and redeem Shares only in Creation Units at the 
NAV next determined after receipt of an order on a continuous basis 
every day except weekends and specified holidays. The NAV of the Fund 
will be determined once each business day, normally as of the close of 
trading of the New York Stock Exchange (``NYSE''), generally, 4:00 p.m. 
E.T. Creation Unit sizes will be 50,000 Shares per Creation Unit. The 
Trust will issue and sell Shares of the Fund only in Creation Units on 
a continuous basis through the Distributor, without a sales load (but 
subject to transaction fees), at their NAV per Share next determined 
after receipt of an order, on any business day, in proper form pursuant 
to the terms of the Authorized Participant agreement (as referred to 
below).
    The consideration for purchase of a Creation Unit of the Fund 
generally will consist of either (i) the in-kind deposit of a 
designated portfolio of securities (primarily Senior Loans) (the 
``Deposit Securities'') per each Creation Unit and the Cash Component 
(defined below), computed as described below or (ii) the cash value of 
the Deposit Securities (``Deposit Cash'') and the ``Cash Component,'' 
computed as described below. The primary method of creation and 
redemption transactions will be in cash. In-kind creation and 
redemption transactions will be available only if requested by an 
Authorized Participant and approved by the Trust.
    When accepting purchases of Creation Units for cash, the Fund may 
incur additional costs associated with the acquisition of Deposit 
Securities that would otherwise be provided by an in-kind purchaser. 
Together, the Deposit Securities or Deposit Cash, as applicable, and 
the Cash Component will constitute the ``Fund Deposit,'' which 
represents the minimum initial and subsequent investment amount for a 
Creation Unit of the Fund. The ``Cash Component'' will be an amount 
equal to the difference between the NAV of the Shares (per Creation 
Unit) and the market value of the Deposit Securities or Deposit Cash, 
as applicable. If the Cash Component is a positive number (i.e., the 
NAV per Creation Unit exceeds the market value of the Deposit 
Securities or Deposit Cash, as applicable), the Cash Component will be 
such positive amount. If the Cash Component is a negative number (i.e., 
the NAV per Creation Unit is less than the market value of the Deposit 
Securities or Deposit Cash, as applicable), the Cash Component will be 
such negative amount and the creator will be entitled to receive cash 
in an amount equal to the Cash Component. The Cash Component will serve 
the function of compensating for any differences between the NAV per 
Creation Unit and the market value of the Deposit Securities or Deposit 
Cash, as applicable.
    According to the Registration Statement, to be eligible to place 
orders with respect to creations and redemptions of Creation Units, an 
entity must be (i) a ``Participating Party,'' i.e., a broker-dealer or 
other participant in the clearing process through the Continuous Net 
Settlement System of the National Securities Clearing Corporation 
(``NSCC''); or (ii) a Depository Trust Company (``DTC'') participant. 
In addition, each Participating Party or DTC Participant (each, an 
``Authorized Participant'') must execute an agreement that has been 
agreed to by the Principal Underwriter and the Transfer Agent, and that 
has been accepted by the Trust, with respect to purchases and 
redemptions of Creation Units.
    The Custodian, through the NSCC, will make available on each 
business day, immediately prior to the opening of business on the 
Exchange's Core Trading Session (currently 9:30 a.m., E.T.), the list 
of the names and the required number of shares of each Deposit Security 
or the required amount of Deposit Cash, as applicable, to be included 
in the current Fund Deposit (based on information at the end of the 
previous business day) for the Fund. Such Fund Deposit is subject to 
any applicable adjustments as described below, in order to effect 
purchases of Creation Units of the Fund until such time as the next-
announced composition of the Deposit Securities or the required amount 
of Deposit Cash, as applicable, is made available.
    Shares may be redeemed only in Creation Units at their NAV next 
determined after receipt of a redemption request in proper form by the 
Fund through the Transfer Agent and only on a business day.
    With respect to the Fund, the Custodian, through the NSCC, will 
make available immediately prior to the opening of business on the 
Exchange (9:30 a.m. Eastern time) on each business day, the list of the 
names and share quantities of the Portfolio's portfolio securities 
(``Fund Securities'') or the required amount of Deposit Cash that will 
be applicable (subject to possible amendment or correction) to 
redemption requests received in proper form (as defined below) on that 
day. Fund Securities received on redemption may not be identical to 
Deposit Securities.
    Redemption proceeds for a Creation Unit will be paid either in-kind 
or in cash or a combination thereof, as determined by the Trust. With 
respect to in-kind redemptions of the Fund, redemption proceeds for a 
Creation Unit will consist of Fund Securities as announced by the 
Custodian on the business day of the request for redemption received in 
proper form plus cash in an amount equal to the difference between the 
NAV of the Shares being redeemed, as next determined after a receipt of 
a request in proper form, and the value of the Fund Securities (the 
``Cash Redemption Amount''), less a fixed redemption transaction fee 
and any applicable additional variable charge as set forth in the 
Registration Statement. In the event that the Fund Securities have a 
value greater than the NAV of the Shares, a compensating cash payment 
equal to the differential will be required to be made by or through an 
Authorized Participant by the redeeming shareholder. Notwithstanding 
the foregoing, at the Trust's discretion, an Authorized Participant may 
receive the corresponding cash value of the securities in lieu of the 
in-kind securities value representing one or more Fund Securities.
    The creation/redemption order cut-off time for the Fund is expected 
to be 4:00 p.m. Eastern Time for purchases of Shares. On days when the 
Exchange closes earlier than normal, the Fund may require orders for 
Creation Units to be placed earlier in the day.
Net Asset Value
    The NAV per Share for the Fund will be computed by dividing the 
value of the net assets of the Fund (i.e., the value of its total 
assets less total liabilities) by the total number of Shares 
outstanding, rounded to the nearest cent. Expenses and fees, including 
the management fees, are accrued daily and taken into account for 
purposes of determining NAV.\38\ The NAV of the Fund will be

[[Page 10243]]

calculated by the Custodian and determined at the close of the regular 
trading session on the NYSE (ordinarily 4:00 p.m., E.T.) on each day 
that such exchange is open, provided that fixed-income assets (and, 
accordingly, the Fund's NAV) may be valued as of the announced closing 
time for trading in fixed-income instruments on any day that SIFMA (or 
the applicable exchange or market on which the Fund's investments are 
traded) announces an early closing time. Creation/redemption order cut-
off times may also be earlier on such days.
---------------------------------------------------------------------------

    \38\ Markit will be the primary price source for Senior Loans in 
calculating the Portfolio's NAV. To the extent ``Other Investments'' 
are held, International Data Corporation (``IDC'') will be the 
primary price source for such investments.
---------------------------------------------------------------------------

    In calculating the Portfolio's and Fund's NAV per Share, the 
Portfolio's investments will generally be valued using market 
valuations. A market valuation generally means a valuation (i) obtained 
from an exchange, a pricing service, or a major market maker (or 
dealer), (ii) based on a price quotation or other equivalent indication 
of value supplied by an exchange, a pricing service, or a major market 
maker (or dealer) or (iii) based on amortized cost. The Adviser may use 
various pricing services, or discontinue the use of any pricing 
service, as approved by the Fund's Board from time to time. A price 
obtained from a pricing service based on such pricing service's 
valuation matrix may be considered a market valuation. Any assets or 
liabilities denominated in currencies other than the U.S. dollar will 
be converted into U.S. dollars at the current market rates on the date 
of valuation as quoted by one or more sources.
    In the event that current market valuations are not readily 
available or such valuations do not reflect current market value, the 
Trust's procedures require the Pricing and Investment Committee to 
determine a security's fair value if a market price is not readily 
available.\39\ In determining such value the Trust's Pricing and 
Investment Committee may consider, among other things, (i) price 
comparisons among multiple sources, (ii) a review of corporate actions 
and news events, and (iii) a review of relevant financial indicators 
(e.g., movement in interest rates, market indices, and prices from the 
Fund's index providers). In these cases, the Fund's NAV may reflect 
certain portfolio securities' fair values rather than their market 
prices. Fair value pricing involves subjective judgments and it is 
possible that the fair value determination for a security is materially 
different than the value that could be realized upon the sale of the 
security.
---------------------------------------------------------------------------

    \39\ The Trust's Board has established a Pricing and Investment 
Committee that is composed of officers of the Trust, investment 
management personnel of the Adviser and senior operations and 
administrative personnel of State Street Bank and Trust Company. The 
Pricing and Investment Committee is responsible for the valuation 
and revaluation of any portfolio investments for which market 
quotations or prices are not readily available. The Pricing and 
Investment Committee has implemented procedures designed to prevent 
the use and dissemination of material, non-public information 
regarding valuation and revaluation of any portfolio investments.
---------------------------------------------------------------------------

    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. The Exchange represents 
that, for initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 \40\ under the Act, as provided by NYSE Arca 
Equities Rule 5.3. A minimum of 100,000 Shares for the Fund 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 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.
---------------------------------------------------------------------------

    \40\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Availability of Information
    The Fund's Web site (www.spdrs.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Fund's Web 
site will include additional quantitative information updated on a 
daily basis, including, for the Fund, (1) daily trading volume, the 
prior business day's reported closing price, NAV and mid-point of the 
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask 
Price''),\41\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. 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 that will 
form the basis for the Fund's calculation of NAV at the end of the 
business day.\42\
---------------------------------------------------------------------------

    \41\ The Bid/Ask Price of the Fund will be determined using the 
mid-point of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \42\ Under accounting procedures followed by the Fund, trades 
made on the prior business day (``T'') will be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Fund 
will be able to disclose at the beginning of the business day the 
portfolio that will form the basis for the NAV calculation at the 
end of the business day.
---------------------------------------------------------------------------

    On a daily basis, the Disclosed Portfolio will include each 
portfolio security, including Senior Loans, and other financial 
instruments of the Portfolio with the following information on the 
Fund's Web site: ticker symbol (if applicable), name of security and 
financial instrument, number of shares (if applicable) and dollar value 
of securities (including Senior Loans) and financial instruments held 
in the Portfolio, and percentage weighting of the security and 
financial instrument in the Portfolio. The Web site information will be 
publicly available at no charge.
    One or more major market data vendors will widely disseminate, 
every fifteen seconds during the NYSE Arca Core Trading Session, a 
Portfolio Indicative Value (``PIV'') (as defined in NYSE Arca Equities 
Rule 8.600 (c)(3)), relating to the Fund.\43\ The PIV calculations will 
be estimates of the value of the Fund's NAV per Share using market data 
converted into U.S. dollars at the current currency rates. The PIV 
price will be based on quotes and closing prices from the securities' 
local market and may not reflect events that occur subsequent to the 
local market's close. Premiums and discounts between the PIV and the 
market price may occur. This should not be viewed as a ``real-time'' 
update of the NAV per Share of the Fund, which is calculated only once 
a day.
---------------------------------------------------------------------------

    \43\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available PIVs 
taken from the Consolidated Tape Association (``CTA'') or other data 
feeds.
---------------------------------------------------------------------------

    In addition, a basket composition file, which includes the security 
names, amount and share quantities, as applicable, required to be 
delivered in exchange for the Fund's Shares, together with estimates 
and actual cash components, will be publicly disseminated daily prior 
to the opening of the NYSE via NSCC. The basket represents one Creation 
Unit of the Fund.
    The Primary Index description and Secondary Index description are 
publicly available. Primary and Secondary Index information, including 
values, components, and weightings, is updated and provided daily on a 
subscription basis by S&P and Markit, respectively. Complete 
methodologies for the Primary and Secondary Index are

[[Page 10244]]

made available on the Web sites of S&P and Markit, respectively.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports are available free upon request from the Trust, and those 
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or 
downloaded from the Commission's Web site at www.sec.gov. 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 will be published daily in the financial section of 
newspapers. Quotation and last sale information for the Shares will be 
available via the CTA high-speed line.
    The dissemination of the PIV, together with the Disclosed 
Portfolio, will allow investors to determine the value of the 
underlying Portfolio of the Fund on a daily basis and to provide a 
close estimate of that value throughout the trading day. The intra-day, 
closing and settlement prices of the Portfolio securities, including 
Senior Loans and other assets, will also be readily available from the 
national securities exchanges trading such securities, automated 
quotation systems, published or other public sources, or on-line 
information services such as Bloomberg or Reuters.
    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, Portfolio holdings disclosure policies, distributions 
and taxes is included in the Registration Statement. All terms relating 
to the Fund that are referred to, but not defined in, this proposed 
rule change are defined in the Registration Statement.
Trading Halts
    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.\44\ 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. These may include: (1) The 
extent to which trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Fund; 
or (2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. 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.
---------------------------------------------------------------------------

    \44\ See NYSE Arca Equities Rule 7.12, Commentary .04.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by FINRA on behalf 
of the Exchange, which are designed to detect violations of Exchange 
rules and applicable federal securities laws.\45\ The Exchange 
represents that these 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.
---------------------------------------------------------------------------

    \45\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations. FINRA, on 
behalf of the Exchange, will communicate as needed regarding trading in 
the Shares with other markets that are members of the Intermarket 
Surveillance Group (``ISG'') or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.\46\
---------------------------------------------------------------------------

    \46\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
(``Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Bulletin will discuss the 
following: (1) The procedures for purchases and redemptions of Shares 
in Creation Unit aggregations (and that Shares are not individually 
redeemable); (2) 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; (3) 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; (4) how information regarding the PIV is disseminated; 
(5) 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 (6) trading information.
    In addition, the Bulletin will reference that the Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. The 
Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \47\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78f(b)(5).

---------------------------------------------------------------------------

[[Page 10245]]

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. The Exchange may obtain information 
via ISG from other exchanges that are members of ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement. In pursuing its investment objective, the Portfolio seeks to 
outperform the Primary Index by normally investing at least 80% of its 
net assets (plus any borrowings for investment purposes) in Senior 
Loans. It is anticipated that the Portfolio, in accordance with its 
principal investment strategy, will invest 50% to 75% of its net assets 
in Senior Loans that are eligible for inclusion and meet the liquidity 
thresholds of the Primary and/or the Secondary Indices. Each of the 
Portfolio's Senior Loan investments will have no less than $250 million 
USD par outstanding. The Portfolio will not invest 25% or more of the 
value of its total assets in securities of borrowers in any one 
industry. The Portfolio 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 
Adviser and Sub-Adviser. The Adviser and the Sub-Adviser are each 
affiliated with a broker-dealer and have implemented a ``fire wall'' 
with respect to such broker-dealers regarding access to information 
concerning the composition and/or changes to the Fund's Portfolio. The 
Portfolio's and Fund's investments will be consistent with the 
Portfolio's and Fund's investment objective and will not be used to 
enhance leverage. The Portfolio will not invest in options contracts, 
futures contracts or swap agreements. The Adviser and Sub-Adviser 
represent that, under normal market conditions, the Fund would satisfy 
the generic fixed income listing requirements in NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .02 on a continuous basis measured at the 
time of purchase, as described above. Except for Underlying ETFs that 
may hold non-U.S. issues, the Fund will not otherwise invest in non-
U.S.-registered equity issues. The Primary Index Committee has 
implemented procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Primary Index. The 
Oversight Committee has implemented procedures designed to prevent the 
use and dissemination of material, non-public information regarding the 
Secondary Index.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
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. In addition, a large amount of 
information is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. S&P and Markit are not broker-
dealers or affiliated with a broker-dealer and each has implemented 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the Primary Index and Secondary Index, 
respectively. The PIV will be disseminated by one or more major market 
data vendors at least every 15 seconds during the Exchange's Core 
Trading Session. 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 that will form the 
basis for the Fund's calculation of NAV at the end of the business day. 
Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services, and 
quotation and last sale information will be available via the CTA high-
speed line. The intra-day, closing and settlement prices of the 
Portfolio securities are also readily available from the national 
securities exchanges trading such securities, automated quotation 
systems, published or other public sources, or on-line information 
services. The Web site for the Fund will include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information. Moreover, 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. Trading in Shares of the Fund will 
be halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached or because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable, and trading in the Shares will be subject to NYSE Arca 
Equities Rule 8.600(d)(2)(D), which sets forth circumstances under 
which Shares of the Fund may be halted. In addition, as noted above, 
investors will have ready access to information regarding the Fund's 
holdings, the PIV, the Disclosed Portfolio, and quotation and last sale 
information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the Fund's holdings, 
the PIV, the Disclosed Portfolio, and quotation and last sale 
information for the Shares.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded product that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory

[[Page 10246]]

organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml ); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2013-08 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2013-08. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml 
). Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing will also be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File No. SR-NYSEArca-2013-08 and should be 
submitted on or before March 6, 2013.
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    \48\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03278 Filed 2-12-13; 8:45 am]
BILLING CODE 8011-01-P