Document ID: SEC-2014-0990-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-06-13T04:00Z

[Federal Register Volume 79, Number 114 (Friday, June 13, 2014)]
[Notices]
[Pages 33964-33973]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-13819]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72347; File No. SR-NYSEArca-2014-20]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment Nos. 3 and 5 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment Nos. 3 and 5, Relating to the Listing and Trading 
of Shares of Reality Shares DIVS ETF Under NYSE Arca Equities Rule 
8.600

June 9, 2014.
    On February 25, 2014, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares of Reality Shares Isolated Dividend Growth ETF under NYSE Arca 
Equities Rule 8.600. On March 7, 2014, the Exchange filed Amendment No. 
2 to the proposed rule change, which amended and replaced the proposed 
rule change in its entirety.\3\ The proposed rule change, as modified 
by Amendment No. 2, was published for comment in the Federal Register 
on March 17, 2014.\4\ The Commission received no comments on

[[Page 33965]]

the proposal. On April 23, 2014, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within which to 
either approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was filed on March 6, 2014 and withdrawn on 
March 7, 2014.
    \4\ See Securities Exchange Act Release No. 71686 (March 11, 
2014), 79 FR 14761.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 72000 (April 23, 2014), 
79 FR 24032 (April 29, 2014). The Commission determined that it was 
appropriate to designate a longer period within which to take action 
on the proposed rule change so that it has sufficient time to 
consider the proposed rule change. Accordingly, the Commission 
designated June 13, 2014 as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
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    Pursuant to Section 19(b)(1) of the Act\7\ and Rule 19b-4 
thereunder,\8\ notice is hereby given that, on May 27, 2014 and June 5, 
2014, the Exchange filed with the Commission Amendment Nos. 3 and 5, 
respectively, to the proposed rule change, as described in Sections I 
and II below, which Sections have been prepared by the Exchange.\9\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment Nos. 3 and 5, from 
interested persons.
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    \7\ 15 U.S.C.78s(b)(1).
    \8\ 17 CFR 240.19b-4.
    \9\ Amendment No. 3 replaces SR-NYSEArca-2014-20, as previously 
amended by Amendment No. 2, and supersedes such filing in its 
entirety. Amendment No. 4 was filed on June 4, 2014 and withdrawn on 
June 5, 2014. Amendment No. 5 reflects a change to the name of the 
fund from ``Reality Shares Isolated Dividend Growth ETF'' to 
``Reality Shares DIVS ETF.''
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    Additionally, this order institutes proceedings under Section 
19(b)(2)(B) of the Act \10\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment Nos. 3 
and 5, as discussed in Section III below. The institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved, nor does it 
mean that the Commission will ultimately disapprove the proposed rule 
change. Rather, as described in Section III, below, the Commission 
seeks and encourages interested persons to provide additional comment 
on the proposed rule change to inform the Commission's analysis of 
whether to approve or disapprove the proposed rule change.
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    \10\ 15 U.S.C. 78s(b)(2)(B).
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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 following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): Reality 
Shares DIVS ETF. 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 shares (``Shares'') of the 
following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares\11\ on the Exchange: Reality 
Shares DIVS ETF (the ``Fund''). \12\ The Shares of the Fund will be 
offered by the Reality Shares ETF Trust (formerly, the ERNY Financial 
ETF Trust) (the ``Trust''). The Trust will be registered with the 
Commission as an open-end management investment company.\13\ Reality 
Shares Advisors, LLC (formerly, ERNY Financial Advisors, LLC) will 
serve as the investment adviser to the Fund (the ``Adviser''). ALPS 
Distributors, Inc. (the ``Distributor'') will be the principal 
underwriter and distributor of the Fund's Shares. The Bank of New York 
Mellon (the ``Administrator,'' ``Transfer Agent'' or ``Custodian'') 
will serve as administrator, custodian and transfer agent for the 
Fund.\14\
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    \11\ 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) (``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.
    \12\ The Commission approved NYSE Arca Equities Rule 8.600 and 
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); 60460 (August 7, 2009), 74 FR 41468 (August 17, 
2009) (SR-NYSEArca-2009-55) (order approving listing and trading of 
Dent Tactical 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); 64643 (June 10, 2011) 76 FR 35062 
(June 15, 2011) (SR-NYSEArca-2011-21) (order approving listing and 
trading of WisdomTree Global Real Return Fund); 69397 (April 18, 
2013) 78 FR 24276 (April 24, 2013) (SR-NYSEArca-2013-18) (order 
approving listing and trading of fourteen actively-managed funds of 
the iShares Trust); 69591 (May 16, 2013) 78 FR 30372 (May 22, 2013) 
(SR-NYSEArca-2013-33) (order approving listing and trading of the 
International Bear ETF).
    \13\ The Trust will be registered under the 1940 Act. On 
November 12, 2013, the Trust filed a registration statement on Form 
N-1A under the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 
77a), and under the 1940 Act relating to the Fund, as amended by 
Pre-Effective Amendment Number 1, filed with the Commission on 
February 6, 2014 (File Nos. 333-192288 and 811-22911) and Pre-
Effective Amendment Number 2, filed with the Commission on May 1, 
2014 (File Nos. 333-192288 and 811-22911) (the ``Registration 
Statement''). The description of the operation of the Trust and the 
Fund herein is based, in part, on the Registration Statement. The 
Commission has issued an order granting certain exemptive relief to 
the Trust under the 1940 Act. Investment Company Act Release No. 
30552 (June 10, 2013) (``Exemptive Order''). The Trust filed an 
Application for an Order under Section 6(c) of the 1940 Act for 
exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-14146), on April 5, 2013, as amended on May 
10, 2013 (together, the ``Exemptive Application''). Investments made 
by the Fund will comply with the conditions set forth in the 
Exemptive Application and the Exemptive Order.
    \14\ This Amendment No. 3 to SR-NYSEArca-2014-20 replaces SR-
NYSEArca-2014-20 as amended by Amendment No. 2 to SR-NYSEArca-2014-
20 and supersedes such filing in its entirety. See supra note 9.
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    As described in more detail below, the Fund will seek to produce 
long-term capital appreciation by attempting to isolate the value of 
dividends paid by a portfolio of U.S., European and Japanese large 
capitalization companies.
    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 of and/or 
changes to such investment company portfolio. 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

[[Page 33966]]

open-end fund's portfolio.\15\ 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 is 
not registered as a broker-dealer and is not affiliated with any 
broker-dealers. In the event (a) the Adviser or any sub-adviser becomes 
registered as a broker-dealer or newly affiliated with a broker-dealer, 
or (b) any new adviser or sub-adviser is a registered broker-dealer or 
becomes affiliated with a broker-dealer, they will implement a fire 
wall with respect to their relevant personnel or broker-dealer 
affiliate 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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    \15\ 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 its related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. This Rule requires investment advisers 
to adopt a code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with Rule 204A-1 under the Advisers Act. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser to provide investment advice to clients 
unless such investment adviser has (i) adopted and implemented 
written policies and procedures reasonably designed to prevent 
violation, by the investment adviser and its supervised persons, of 
the Advisers Act and the Commission rules adopted thereunder; (ii) 
implemented, at a minimum, an annual review regarding the adequacy 
of the policies and procedures established pursuant to subparagraph 
(i) above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
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Principal Investments
    According to the Registration Statement, the Fund is actively 
managed by the Adviser and seeks long-term capital appreciation by 
using proprietary trading strategies designed to isolate and capture 
the growth in the level of dividends expected to be paid on a portfolio 
of large-capitalization equity securities listed for trading in the 
U.S., Europe and Japan, while attempting to minimize the Fund's 
exposure to the price fluctuations associated with these 
securities.\16\ The Adviser believes that, over time, the level of 
expected dividends reflected in the Fund's portfolio will be highly 
correlated to the level of actual dividends paid on such large 
capitalization securities.
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    \16\ There is no guarantee that either the level of overall 
dividends paid by such companies will grow over time, or that the 
Fund's investment strategies will capture such growth. The Fund will 
include appropriate risk disclosure in its offering documents 
disclosing both of these risks.
     The Adviser considers U.S. large capitalization companies to be 
those with market capitalizations within the range of market 
capitalizations of the companies included in the S&P 500 Index. The 
Adviser considers European large capitalization companies to be 
those with market capitalizations within the range of market 
capitalizations of the companies included in the Euro Stoxx 50 
Index. The Adviser considers Japanese large capitalization companies 
to be those with market capitalizations within the range of market 
capitalizations of the companies included in the Nikkei 225 Index.
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    Under normal market conditions,\17\ the Fund will invest 
substantially all of its assets in (i) a combination of exchange-listed 
options contracts on large capitalization equity indexes and exchange-
listed option contracts on exchange traded funds (``ETFs'') \18\ 
designed to track the performance of large capitalization equity 
securities listed for trading in the U.S., Europe or Japan, as well as 
(ii) derivatives, including swaps, exchange-listed futures contracts 
and forward contracts, designed to capture the growth of the level of 
dividends expected to be paid on large capitalization equity securities 
listed for trading in the U.S., Europe and Japan. In addition to the 
investments described above, the Fund may also buy and sell over-the 
counter (``OTC'') options on indexes of large-capitalization U.S., 
European and Japanese equity securities listed for trading in the U.S., 
Europe and Japan, such as the S&P 500 Index, the Euro Stoxx 50 Index 
and the Nikkei 225 Index, and listed and OTC options on the securities, 
or any group of securities, issued by large capitalization U.S., 
European and Japanese companies.\19\
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    \17\ The term ``under normal market conditions'' includes, but 
is not limited to, the absence of extreme volatility or trading 
halts in the equity markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
    \18\ For purposes of this proposed rule change, ETFs include 
Investment Company Units (as described in NYSE Arca Equities Rule 
5.2(j)(3)), Portfolio Depositary Receipts as described in NYSE Arca 
Equities Rule 8.100, and Managed Fund Shares (as described in NYSE 
Arca Equities Rule 8.600). The ETFs all will be listed and traded in 
the U.S. on registered exchanges. While the Fund may invest in 
inverse ETFs, it may not invest in leveraged or inverse leveraged 
(e.g., 2X, -2X, 3X or -3X) ETFs.
    \19\ The Fund will transact only with OTC options dealers that 
have in place an International Swaps and Derivatives Association 
(``ISDA'') agreement with the Fund.
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    The Fund will buy (i.e., hold a ``long'' position in) and sell 
(i.e., hold a ``short'' position in) put and call options. A put option 
gives the purchaser of the option the right to sell, and the issuer of 
the option the obligation to buy, the underlying security or instrument 
on a specified date or during a specified period of time. A call option 
on a security gives the purchaser of the option the right to buy, and 
the writer of the option the obligation to sell, the underlying 
security or instrument on a specified date or during a specified period 
of time. The Fund will invest in a combination of put and call options 
designed to allow the Fund to isolate its exposure to the growth of the 
level of dividends expected to be paid on a portfolio of securities 
issued by large capitalization companies listed for trading in the 
United States, Europe and Japan, while minimizing the Fund's exposure 
to changes in the trading price of such securities. The Fund may invest 
up to 80% of its assets through options transactions.
    The prices of index and ETF options reflect the market trading 
prices of the securities included in the applicable index or securities 
held by the applicable ETF, as well as market expectations regarding 
the level of dividends to be paid on such indexes or ETFs during the 
term of the option. A significant portion of the Fund's portfolio 
holdings will consist of multiple corresponding near-term and long-term 
put and call option combinations on the same reference assets (e.g., 
options on the S&P 500 Index or options on S&P 500 ETFs) with the same 
strike price. Because option prices reflect both stock price and 
dividend expectations, they can be used in combination to isolate 
either price exposure or dividend expectations. The use of near-term 
and long-term put and call option combinations on the same reference 
asset with the same strike price, but with different maturities, is 
designed to gain exposure to the level of dividends expected to be paid 
on a portfolio of large-capitalization equity securities listed for 
trading in the U.S., Europe and Japan, while attempting to minimize the 
Fund's exposure to the price fluctuations associated with these 
securities.
    Once established, this portfolio construction of option 
combinations will accomplish two goals. First, the use

[[Page 33967]]

of corresponding buy or sell positions on near and long-term options at 
the same strike price is designed to neutralize underlying stock price 
movements. In other words, the corresponding ``buy'' and ``sell'' 
positions on the same reference asset are designed to net against each 
other and eliminate the impact that changes to the stock price of the 
reference asset would otherwise have on the value of the Fund Shares. 
Second, by minimizing the impact of price fluctuations through the 
construct of the near- and long-term contract combinations, the 
strategy is designed to isolate market expectations for dividends 
implied between expiration dates of the near-term and long-term option 
contracts.
    The Fund may invest in exchange-listed futures contracts and 
forward contracts based on indexes of large-capitalization U.S., 
European and Japanese equity securities listed for trading in the U.S., 
Europe or Japan, such as the S&P 500 Index, the Euro Stoxx 50 Index and 
the Nikkei 225 Index, and the securities, or any group of securities, 
issued by large capitalization U.S., European and Japanese companies. A 
listed futures contract is a standardized contract traded on a 
recognized exchange in which two parties agree to exchange either a 
specified financial asset or the cash equivalent of said asset at a 
specified future date and price. A forward contract involves the 
obligation to purchase or sell either a specified financial asset or 
the cash equivalent of said asset at a future date at a price set at 
the time of the contract. The Fund's use of listed futures contracts 
and forward contracts will be designed to allow the Fund to isolate its 
exposure to the growth of the level of the dividends expected to be 
paid on a portfolio of securities of large capitalization U.S., 
European and Japanese companies, while minimizing the Fund's exposure 
to changes in the trading price of such securities. As with option 
contracts, the prices of equity index futures contracts and forward 
contracts reflect the market trading prices of the securities included 
in the applicable index, as well as market expectations regarding the 
level of dividends to be paid on such indexes during the term of such 
futures or forward contract. Therefore, as with option contracts, long 
and short positions in near-dated and far-dated futures and forward 
contracts can be used in combination to isolate either price exposure 
or dividend expectations. For example, as with option contracts, the 
use of long and short positions in near-dated and far-dated futures and 
forward contracts can be used to gain exposure to the level of 
dividends expected to be paid on a portfolio of securities, while 
attempting to minimize the Fund's exposure to the price fluctuations 
associated with such securities. In addition, the Fund may invest in 
listed dividend futures contracts. Listed dividend futures contracts 
are available for certain indices (such as EURO STOXX 50 Index Dividend 
Futures and Nikkei 225 Dividend Index Futures). These futures contracts 
provide direct exposure to the level of implied dividends in the 
designated index, without exposure to the price of the securities 
included in the index. The Fund also may invest in Eurodollar futures 
contracts to manage or hedge exposure to interest rate fluctuations. 
The Fund may invest up to 80% of its assets through futures contracts 
and forward transactions.
    The Fund may enter into dividend and total return swap transactions 
(including equity swap transactions) based on indexes of large-
capitalization U.S., European and Japanese equity securities listed for 
trading in the U.S., Europe and Japan, such as the S&P 500 Index, the 
Euro Stoxx 50 Index and the Nikkei 225 Index, and securities, or any 
group of securities, issued by large capitalization U.S., European and 
Japanese companies.\20\ In a typical swap transaction, one party agrees 
to make periodic payments to another party (``counterparty'') based on 
the change in market value or level of a specified rate, index, or 
asset. In return, the counterparty agrees to make periodic payments to 
the first party based on the return of a different specified rate, 
index, or asset. Swap transactions are usually done on a net basis, the 
Fund receiving or paying only the net amount of the two payments. In a 
typical dividend swap transaction, the Fund would pay the swap 
counterparty a premium and would be entitled to receive the value of 
the actual dividends paid on the subject index during the term of the 
swap contract. In a typical total return swap, the Fund might exchange 
long or short exposures to the return of the underlying securities or 
an underlying index to isolate the value of the dividends paid on the 
underlying securities or index constituents. The Fund also may engage 
in interest rate swap transactions. In a typical interest rate swap 
transaction one stream of future interest payments is exchanged for 
another. Such transactions often take the form of an exchange of a 
fixed payment for a variable payment based on a future interest rate. 
The Fund intends to use interest rate swap transactions to manage or 
hedge exposure to interest rate fluctuations. The Fund may invest up to 
80% of its assets through swap transactions.\21\
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    \20\ The Fund will transact only with swap dealers that have in 
place an ISDA agreement with the Fund.
    \21\ Where practicable, the Fund intends to invest in swaps 
cleared through a central clearing house (``Cleared Swaps''). 
Currently, only certain of the interest rate swaps in which the Fund 
intends to invest are Cleared Swaps, while the dividend and total 
return swaps (including equity swaps) in which the Fund may invest 
are currently not Cleared Swaps.
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    The Fund will attempt to limit counterparty risk by entering into 
non-cleared swap, forward and option contracts only with counterparties 
the Adviser believes are creditworthy and by limiting the Fund's 
exposure to each counterparty. The Adviser will monitor the 
creditworthiness of each counterparty and the Fund's exposure to each 
counterparty on an ongoing basis.\22\
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    \22\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, the Adviser will 
evaluate each approved counterparty using various methods of 
analysis, such as, for example, the counterparty's liquidity in the 
event of default, the counterparty's reputation, the Adviser's past 
experience with the counterparty, and the counterparty's share of 
market participation.
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    The Fund's investments in swaps, futures contracts, forward 
contracts and options will be consistent with the Fund's investment 
objective and with the requirements of the 1940 Act.\23\
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    \23\ To limit the potential risk associated with such 
transactions, the Fund will segregate or ``earmark'' assets 
determined to be liquid by the Adviser in accordance with procedures 
established by the Trust's Board of Trustees and in accordance with 
the 1940 Act (or, as permitted by applicable regulation, enter into 
certain offsetting positions) to cover its obligations arising from 
such transactions. These procedures have been adopted consistent 
with Section 18 of the 1940 Act and related Commission guidance. In 
addition, the Fund will include appropriate risk disclosure in its 
offering documents, including leveraging risk. Leveraging risk is 
the risk that certain transactions of the Fund, including the Fund's 
use of derivatives, may give rise to leverage, causing the Fund to 
be more volatile than if it had not been leveraged. To mitigate 
leveraging risk, the Adviser will segregate or ``earmark'' liquid 
assets or otherwise cover the transactions that may give rise to 
such risk.
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Other Investments
    In addition to the investments described above, the Fund may invest 
up to 20% of its net assets in high-quality, short-term debt securities 
and money market instruments.\24\ Debt securities and money market

[[Page 33968]]

instruments include shares of fixed income or money market mutual 
funds, commercial paper, certificates of deposit, bankers' acceptances, 
U.S. Government securities (including securities issued or guaranteed 
by the U.S. government or its authorities, agencies, or 
instrumentalities), repurchase agreements \25\ and bonds that are rated 
BBB or higher.
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    \24\ The Fund may invest in shares of money market mutual funds 
to the extent permitted by the 1940 Act.
    \25\ The Fund may enter into repurchase agreements with banks 
and broker-dealers. A repurchase agreement is an agreement under 
which securities are acquired by a fund from a securities dealer or 
bank subject to resale at an agreed upon price on a later date. The 
acquiring fund bears a risk of loss in the event that the other 
party to a repurchase agreement defaults on its obligations and the 
fund is delayed or prevented from exercising its rights to dispose 
of the collateral securities.
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    The Fund will not purchase the securities of issuers conducting 
their principal business activity in the same industry if, immediately 
after the purchase and as a result thereof, the value of the Fund's 
investments in that industry would equal or exceed 25% of the current 
value of the Fund's total assets, provided that this restriction does 
not limit the Fund's: (i) Investments in securities of other investment 
companies, (ii) investments in securities issued or guaranteed by the 
U.S. government, its agencies or instrumentalities, or (iii) 
investments in repurchase agreements collateralized by U.S. Government 
securities.\26\
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    \26\ 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).
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance.\27\ The Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of the Fund's net assets are held 
in illiquid assets. Illiquid assets 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.\28\
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    \27\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers, and the mechanics of transfer).
    \28\ 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).
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    The Fund may buy and sell individual large-capitalization equity 
securities listed for trading in the U.S., Europe and Japan.
    The Fund may invest in the securities of other investment companies 
(including money market funds) to the extent permitted under the 1940 
Act.
    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act.\29\
---------------------------------------------------------------------------

    \29\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------

    The Fund intends to qualify for and to elect treatment as a 
separate regulated investment company (``RIC'') under Subchapter M of 
the Internal Revenue Code.\30\
---------------------------------------------------------------------------

    \30\ 26 U.S.C. 851 et seq.
---------------------------------------------------------------------------

    The Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns. The Fund's investments will 
not be used to seek performance that is the multiple or inverse 
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based 
securities benchmark index (as defined in Form N-1A).\31\ The Trust's 
Exemptive Order does not place any limit on the amount of derivatives 
in which the Fund can invest (other than adherence to the requirements 
of the 1940 Act and the rules thereunder).
---------------------------------------------------------------------------

    \31\ The Fund's broad-based securities benchmark index will be 
identified in a future amendment to the Registration Statement 
following the Fund's first full calendar year of performance.
---------------------------------------------------------------------------

Creation and Redemption of Shares
    According to the Registration Statement, the Fund will issue and 
redeem Shares only in Creation Units at the net asset value (``NAV'') 
next determined after receipt of an order on a continuous basis every 
business day. Creation Unit sizes are 25,000 Shares or more per 
Creation Unit. The Creation Unit size for the Fund may change.
    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 (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. 
Because non-exchange traded derivatives are not eligible for in-kind 
transfer, they will be substituted with an amount of cash of equal 
value (i.e., Deposit Cash) when the Fund processes purchases of 
Creation Units in-kind. Specifically, the Fund will not accept OTC 
options, forward contracts, dividend swap transactions, total return 
swap transactions and interest rate swap transactions as Deposit 
Securities. 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 constitute the ``Fund Deposit,'' 
which represents the minimum initial and subsequent investment amount 
for a Creation Unit of the Fund. The ``Cash Component'' is 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. The Cash Component serves 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.
    A portfolio composition file, to be sent via the National 
Securities Clearing Corporation (``NSCC''), will be made available on 
each business day, prior to the opening of business on the Exchange 
(currently 9:30 a.m., Eastern time) containing a list of the names and 
the required number of shares of each security in the Deposit 
Securities to be included in the current Fund Deposit for the Fund 
(based on information about the Fund's portfolio at the end of the 
previous business day). In addition, on each business day, the 
estimated Cash Component, effective through and including the previous 
business day, will be made available through NSCC.
    The Fund Deposit is applicable for purchases of Creation Units of 
the Fund until such time as the next-announced Fund Deposit is made 
available. In accordance with the Exemptive Order, the Fund reserves 
the right to accept a

[[Page 33969]]

nonconforming Fund Deposit. In addition, the composition of the Deposit 
Securities may change as, among other things, corporate actions and 
investment decisions by the Adviser are implemented for the Fund's 
portfolio.
    All purchase orders must be placed by or through an ``Authorized 
Participant''. An Authorized Participant must be either a broker-dealer 
or other participant in the Continuous Net Settlement System 
(``Clearing Process'') of the NSCC or a participant in The Depository 
Trust Company (``DTC'') with access to the DTC system, and must execute 
an agreement with the Distributor that governs transactions in the 
Fund's Creation Units. In-kind portions of purchase orders will be 
processed through the Clearing Process when it is available.
    Fund 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 Distributor and only on a business day. The Fund, 
through the NSCC, will make available immediately prior to the opening 
of business on the Exchange on each business day, the list of the names 
and quantities of the Fund's portfolio securities that will be 
applicable (subject to possible amendment or correction) to redemption 
requests received in proper form on that day (``Fund 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 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''). 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 
representing one or more Fund Securities.\32\ Because non-exchange 
traded derivatives are not eligible for in-kind transfer, they will be 
substituted with an amount of cash of equal value when the Fund 
processes redemptions of Creation Units in-kind. Specifically, the Fund 
will transfer the corresponding cash value of OTC options, forward 
contracts, dividend swap transactions, total return swap transactions 
and interest rate swap transactions in lieu of in-kind securities. In 
accordance with the Exemptive Order, the Fund also reserves the right 
to distribute to the Authorized Participant non-conforming Fund 
Securities.
---------------------------------------------------------------------------

    \32\ The Adviser represents that, to the extent the Trust 
effects the redemption of Shares in cash, such transactions will be 
effected in the same manner for all Authorized Participants.
---------------------------------------------------------------------------

    The right of redemption may be suspended or the date of payment 
postponed: (i) For any period during which the New York Stock Exchange 
(``NYSE'') is closed (other than customary weekend and holiday 
closings); (ii) for any period during which trading on the NYSE is 
suspended or restricted; (iii) for any period during which an emergency 
exists as a result of which disposal of the Shares or determination of 
the Fund's NAV is not reasonably practicable; or (iv) in such other 
circumstances as permitted by the Commission.
    For an order involving a Creation Unit to be effectuated at the 
Fund's NAV on a particular day, it must be received by the Distributor 
by or before the deadline for such order (``Order Cut-Off Time''). The 
Order Cut-Off Time for creation and redemption orders for the Fund is 
generally expected to be 4:00 p.m. Eastern Time. Orders for creation or 
redemption of Creation Units for cash generally must be submitted by 
4:00 p.m. Eastern Time. A standard creation or redemption transaction 
fee (as applicable) will be imposed to offset transfer and other 
transaction costs that may be incurred by the Fund.
    Detailed descriptions of the Fund's procedures for creating and 
redeeming Shares, transaction fees and expenses, dividends, 
distributions, taxes, risks, and reports to be distributed to 
beneficial owners of the Shares can be found in the Registration 
Statement or on the Web site for the Fund (which will be publicly 
available prior to the public offering of Shares), as applicable.
Determination of Net Asset Value
    The Fund will calculate its NAV by: (i) Taking the current market 
value of its total assets; (ii) subtracting any liabilities; and (iii) 
dividing that amount by the total number of Shares outstanding. The 
Fund will calculate NAV once each business day as of the regularly 
scheduled close of trading on the NYSE (normally, 4:00 p.m., Eastern 
Time) as described in its Registration Statement.
    In calculating the Fund's NAV per Share, the Fund's investments 
will be valued in accordance with procedures approved by the Trust's 
Board of Trustees. These procedures, which may be changed by the 
Trust's Board of Trustees from time to time, generally require 
investments to be valued using market valuations. A market valuation 
generally means a valuation (i) obtained from an exchange, an 
independent 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, an independent pricing service, or a major 
market maker (or dealer) or (iii) based on amortized cost. The Trust 
may use various independent pricing services, or discontinue the use of 
any independent pricing service, as determined by the Trust's Board of 
Trustees from time to time.
    The Trust will generally value exchange-listed equity securities 
(which include common stocks and ETFs) and exchange-listed options on 
such securities at market closing prices. Market closing price is 
generally determined on the basis of last reported sales prices, or if 
no sales are reported, based on the midpoint between the last reported 
bid and ask. The Trust will generally value listed futures at the 
settlement price determined by the applicable exchange. Non-exchange-
traded derivatives, such as forwards, OTC options and swap 
transactions, will normally be valued on the basis of quotations or 
equivalent indication of value supplied by an independent pricing 
service or major market makers or dealers. Investment company 
securities (other than ETFs) will be valued at NAV. Debt securities and 
money market instruments generally will be valued based on prices 
provided by independent pricing services, which may use valuation 
models or matrix pricing to determine current value. The Trust 
generally will use amortized cost to value debt securities and money 
market instruments that have a remaining maturity of 60 days or less.
    In the event that current market valuations are not readily 
available or the Trust or Adviser believes such valuations do not 
reflect current market value, the Trust's procedures require that a 
security's fair value be determined.\33\ In determining such

[[Page 33970]]

value the Trust or the Adviser 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.
---------------------------------------------------------------------------

    \33\ The Trust's Board of Trustees has established Fair Value 
Procedures, in accordance with the 1940 Act, governing the valuation 
of any portfolio investments for which market quotations or prices 
are not readily available. The Fund has implemented procedures 
designed to prevent the use and dissemination of material, non-
public information regarding valuation of any portfolio investments.
---------------------------------------------------------------------------

Availability of Information
    The Fund's Web site, www.realityshares.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) 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''),\34\ 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 (as such 
term is defined in NYSE Arca Equities Rule 8.600(c)(2)) that will form 
the basis for the Fund's calculation of NAV at the end of the business 
day.\35\
---------------------------------------------------------------------------

    \34\ 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.
    \35\ Under accounting procedures to be 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 Fund will disclose on the Fund's Web site the 
following information regarding each portfolio holding, as applicable 
to the type of holding: Ticker symbol, CUSIP number or other 
identifier, if any; a description of the holding (including the type of 
holding, such as the type of swap); the identity of the security, 
commodity, index or other asset or instrument underlying the holding, 
if any; for options, the option strike price; quantity held (as 
measured by, for example, par value, notional value or number of 
shares, contracts or units); maturity date, if any; coupon rate, if 
any; effective date, if any; market value of the holding; and the 
percentage weighting of the holding in the Fund's portfolio. The Web 
site information will be publicly available at no charge.
    In addition, a portfolio composition file, which includes the 
security names and share quantities 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 portfolio composition file will represent one 
Creation Unit of Shares of the Fund.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's 
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 for the Shares will be published daily in the financial 
section of newspapers. Quotation and last sale information for the 
Shares will be available via the Consolidated Tape Association 
(``CTA'') high-speed line. In addition, the Portfolio Indicative Value 
(``PIV'') as defined in NYSE Arca Equities Rule 8.600(c)(3), will be 
widely disseminated at least every 15 seconds during the Core Trading 
Session by one or more major market data vendors.\36\ 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 will provide a close estimate of that value throughout 
the trading day. The intra-day, closing and settlement prices of the 
portfolio securities and other Fund investments, including ETFs, 
futures and exchange-traded equities and options, will also be readily 
available from the national securities exchanges trading such 
securities, automated quotation systems, published or other public 
sources, and, with respect to OTC options, swaps and forwards, from 
third party pricing sources, or on-line information services such as 
Bloomberg or Reuters. Price information regarding investment company 
securities other than ETFs will be available from on-line information 
services and from the Web site for the applicable investment company 
security. The intra-day, closing and settlement prices of debt 
securities and money market instruments will be readily available from 
published and other public sources or on-line information services.
---------------------------------------------------------------------------

    \36\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available PIVs 
taken from the CTA or other data feeds.
---------------------------------------------------------------------------

    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.\37\ 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.
---------------------------------------------------------------------------

    \37\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

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

[[Page 33971]]

the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. Eastern Time 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.
    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 \38\ 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.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\39\ 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 federal securities laws applicable to trading on 
the Exchange.
---------------------------------------------------------------------------

    \39\ 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, exchange-listed equity securities, 
ETFs, futures contracts and exchange-traded options contracts with 
other markets and other entities that are members of the ISG, and 
FINRA, on behalf of the Exchange, may obtain trading information 
regarding trading in the Shares, exchange-listed equity securities, 
ETFs, futures contracts and exchange-traded options contracts from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, exchange-listed equity 
securities, ETFs, futures contracts and exchange-traded options 
contracts from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.\40\ FINRA, on behalf of the Exchange, is able to 
access, as needed, trade information for certain fixed income 
securities held by the Fund reported to FINRA's Trade Reporting and 
Compliance Engine (``TRACE'').
---------------------------------------------------------------------------

    \40\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    Not more than 10% of the assets of the Fund in the aggregate 
invested in exchange-traded equity securities shall consist of equity 
securities whose principal market is not a member of ISG or is a market 
with which the Exchange does not have a comprehensive surveillance 
sharing agreement. Furthermore, not more than 10% of the net assets of 
the Fund in the aggregate invested in futures contracts or exchange-
traded options shall consist of futures contracts or options whose 
principal market is not a member of ISG or is a market with which the 
Exchange does not have 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. Eastern time each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \41\ 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.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 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 federal 
securities laws applicable to trading on the Exchange. The Adviser is 
not registered as a broker-dealer and is not affiliated with any 
broker-dealers. In the event (a) the Adviser or any sub-adviser becomes 
registered as a broker-dealer or newly affiliated with a broker-dealer, 
or (b) any new adviser or sub-adviser is a registered broker-dealer or 
becomes affiliated with a broker-dealer, they will implement a fire 
wall with respect to their relevant personnel or broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to the portfolio, and will be subject to procedures 
designed to

[[Page 33972]]

prevent the use and dissemination of material non-public information 
regarding such portfolio. The Fund may hold up to an aggregate amount 
of 15% of its net assets in illiquid assets (calculated at the time of 
investment), including Rule 144A securities deemed illiquid by the 
Adviser. FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, exchange-listed equity securities, 
ETFs, futures contracts and exchange-traded options contracts with 
other markets and other entities that are members of the ISG, and 
FINRA, on behalf of the Exchange, may obtain trading information 
regarding trading in the Shares, exchange-listed equity securities, 
ETFs, futures contracts and exchange-traded options contracts from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, exchange-listed equity 
securities, ETFs, futures contracts and exchange-traded options 
contracts from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement. FINRA, on behalf of the Exchange, is able to access, 
as needed, trade information for certain fixed income securities held 
by the Fund reported to FINRA's TRACE. Not more than 10% of the assets 
of the Fund in the aggregate invested in exchange-traded equity 
securities shall consist of equity securities whose principal market is 
not a member of ISG or is a market with which the Exchange does not 
have a comprehensive surveillance sharing agreement. Furthermore, not 
more than 10% of the net assets of the Fund in the aggregate invested 
in futures contracts or exchange-traded options shall consist of 
futures contracts or options whose principal market is not a member of 
ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement.
    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. Moreover, the PIV will be widely 
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 and other Fund 
investments, including ETFs, futures and exchange-traded equities and 
options, will also be readily available from the national securities 
exchanges trading such securities, automated quotation systems, 
published or other public sources, and, with respect to OTC options, 
swaps and forwards, from third party pricing sources, or on-line 
information services such as Bloomberg or Reuters. Price information 
regarding investment company securities other than ETFs will be 
available from on-line information services and from the Web site for 
the applicable investment company security. The intra-day, closing and 
settlement prices of debt securities and money market instruments will 
be readily available from published and other public sources or on-line 
information services. The Web site for the Fund will include 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 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 federal securities laws applicable to trading on the 
Exchange. FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, exchange-listed equity securities, 
ETFs, futures contracts and exchange-traded options contracts with 
other markets and other entities that are members of the ISG, and 
FINRA, on behalf of the Exchange, may obtain trading information 
regarding trading in the Shares, exchange-listed equity securities, 
ETFs, futures contracts and exchange-traded options contracts from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, exchange-listed equity 
securities, ETFs, futures contracts and exchange-traded options 
contracts from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement. FINRA, on behalf of the Exchange, is able to access, 
as needed, trade information for certain fixed income securities held 
by the Fund reported to FINRA's TRACE. Not more than 10% of the assets 
of the Fund in the aggregate invested in exchange-traded equity 
securities shall consist of equity securities whose principal market is 
not a member of ISG or is a market with which the Exchange does not 
have a comprehensive surveillance sharing agreement. Furthermore, not 
more than 10% of the net assets of the Fund in the aggregate invested 
in futures contracts or exchange-traded options shall consist of 
futures contracts or options whose principal market is not a member of 
ISG or is a market with which the Exchange does not have 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. 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 
Fund's investments will be consistent with its investment objective and 
will not be used to provide multiple returns of a benchmark or to 
produce

[[Page 33973]]

leveraged returns. The Fund's investments will not be used to seek 
performance that is the multiple or inverse multiple (i.e., 2Xs and 
3Xs) of the Fund's primary broad-based securities benchmark index (as 
defined in Form N-1A).

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 purpose of the Act. The Exchange notes 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. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-NYSEArca-2014-20 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \42\ to determine whether the proposed rule 
change, as modified by Amendment Nos. 3 and 5 thereto, should be 
approved or disapproved. Institution of such proceedings is appropriate 
at this time in view of the legal and policy issues raised by the 
proposed rule change, as discussed below. As noted above, institution 
of proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change, as modified by Amendment Nos. 3 and 5.
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    \42\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\43\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \44\
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    \43\ Id.
    \44\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended by Amendment Nos. 3 and 5, is consistent with 
Section 6(b)(5) of the Act or any other provision of the Act, or the 
rules and regulations thereunder. Although there do not appear to be 
any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\45\
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    \45\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by July 7, 2014. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by July 18, 
2014.
    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-2014-20 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2014-20. 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 also will 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 Number SR-NYSEArca-2014-20 and should 
be submitted on or before July 7, 2014. Rebuttal comments should be 
submitted by July 18, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
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    \46\ 17 CFR 200.30-3(a)(12) and 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13819 Filed 6-12-14; 8:45 am]
BILLING CODE 8011-01-P