Document ID: SEC-2018-0202-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE, Arca, Inc.
Posted Date: 2018-02-01T05:00Z

[Federal Register Volume 83, Number 22 (Thursday, February 1, 2018)]
[Notices]
[Pages 4704-4707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01952]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82592; File No. SR-NYSEArca-2017-99]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 2, To List and Trade Shares of the Hartford Schroders 
Tax-Aware Bond ETF Under NYSE Arca Rule 8.600-E

January 26, 2018.

I. Introduction

    On October 11, 2017, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Hartford Schroders Tax-Aware Bond ETF (``Fund'') under NYSE Arca Rule 
8.600-E. The proposed rule change was published for comment in the 
Federal Register on October 31, 2017.\3\ On November 21, 2017, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced and superseded the proposed rule change as originally filed. 
On December 14, 2017, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On January 18, 2018, the Exchange filed Amendment No. 2 to 
the proposed rule change, which replaced and superseded the proposed 
rule change as modified by Amendment No. 1.\6\ The Commission is

[[Page 4705]]

publishing this notice and order to solicit comments on the proposed 
rule change, as modified by Amendment No. 2, from interested persons 
and to institute proceedings pursuant to Section 19(b)(2)(B) of the Act 
\7\ to determine whether to approve or disapprove the proposed rule 
change, as modified by Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 81944 (October 25, 
2017), 82 FR 50461.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82323, 82 FR 60455 
(December 20, 2017). The Commission designated January 29, 2018 as 
the date by which the Commission shall either approve or disapprove, 
or institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ In Amendment No. 2, the Exchange: (1) Stated that State 
Street Bank and Trust Company will serve as transfer agent and 
custodian for the Fund; (2) removed certain conditions on the 
definition of the ``fire wall'' between the Sub-Adviser and its 
broker-dealer subsidiary; (3) represented that personnel who make 
decisions on the Fund's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Fund's portfolio; (4) 
clarified that cash and cash equivalents are included in the Fund's 
principal investments and specified that for purposes of this 
filing, cash equivalents are the short-term instruments enumerated 
in Commentary .01(c) to NYSE Arca Rule 8.600-E; (5) provided 
additional information regarding the Fund's non-principal 
investments; (6) specified that restricted securities are included 
in the Fund's non-principal investments; (7) added an explanation 
regarding the Manager's belief that the creation and redemption 
cutoff time (1:00 p.m. Eastern Time) will not have a material impact 
on an authorized participant's arbitrage opportunities with respect 
to the Fund; (8) added a statement that the Manager represents that, 
to the extent the Trust effects the creation or redemption of Shares 
wholly or partially in cash, such transactions will be effected in 
the same manner for all authorized participants; (9) specified 
additional quantitative information relating to the Shares that will 
be included on the Fund's website; (10) supplemented the description 
of the availability of information for the Fund's investments; (11) 
defined the term ``periods of high cash inflows or outflows'' as 
used in this filing; (12) added a statement that the Manager 
represents that the fixed income weight of the Fund's portfolio, 
other than holdings in Municipal Securities, will meet the generic 
listing requirements of Commentary .01(b) to NYSE Arca Rule 8.600-E; 
(13) stated that the Manager will be the ``Reporting Authority'' for 
purposes of NYSE Arca Rule 8.600-E(d)(2)(B)(ii); and (14) made other 
clarifications, corrections, and technical changes. Amendment No. 2 
is available at https://www.sec.gov/comments/sr-nysearca-2017-99/nysearca201799-2935844-161848.pdf.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal, as Modified by Amendment No. 2 [bds8]
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    \8\ For more information regarding the Fund and the Shares, see 
Amendment No. 2, supra note 6.
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    The Exchange proposes to list and trade Shares of the Fund under 
NYSE Arca Rule 8.600-E, which governs the listing and trading of 
Managed Fund Shares. The Fund is a series of the Hartford Funds 
Exchange-Traded Trust (``Trust''), which is registered with the 
Commission as an open-end management investment company.\9\
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    \9\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On June 26, 2017, the Trust filed with the 
Commission its registration statement on Form N-1A under the 
Securities Act of 1933 and under the 1940 Act relating to the Fund 
(File Nos. 333-215165 and 811-23222). The Exchange states that the 
Commission has issued an order granting certain exemptive relief to 
the Trust under the 1940 Act. See Investment Company Act Release No. 
32454 (January 27, 2017) (File No. 812-13828-01).
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    Hartford Funds Management Company, LLC (``Manager'') will be the 
investment manager to the Fund, and Schroder Investment Management 
North America Inc. (``Sub-Adviser'') will be the sub-adviser to the 
Fund and perform the daily investment of the assets for the Fund.\10\ 
ALPS Distributors, Inc. will be the principal underwriter to the Fund. 
State Street Bank and Trust Company will serve as transfer agent and 
custodian for the Fund.
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    \10\ According to the Exchange, neither the Manager nor the Sub-
Adviser is registered as a broker-dealer, but each is affiliated 
with a broker-dealer. The Exchange states that the Manager and Sub-
Adviser each has implemented and will maintain a ``fire wall'' with 
respect to such broker-dealer affiliate regarding access to 
information concerning the composition of and/or changes to the 
Fund's portfolio. In addition, personnel who make decisions on the 
Fund's portfolio composition must be subject to procedures designed 
to prevent the use and dissemination of material, non-public 
information regarding the Fund's portfolio. In the event (a) the 
Manager or Sub-Adviser becomes registered as a broker-dealer or 
newly affiliated with a broker-dealer, or (b) any new adviser or 
sub-adviser to the Fund is a registered broker-dealer or becomes 
affiliated with a broker-dealer, the applicable adviser or sub-
adviser will implement and maintain a fire wall with respect to its 
relevant personnel or broker-dealer affiliate regarding access to 
information concerning the composition of and/or changes to the 
Fund's 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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    According to the Exchange, the Fund will seek total return on an 
after-tax basis and will seek to achieve its investment objective by 
investing in a diversified portfolio of fixed income debt instruments 
of varying maturities.\11\
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    \11\ In seeking to achieve the Fund's investment objective, the 
Sub-Adviser will employ a tax-aware investing strategy that attempts 
to realize total return for shareholders, primarily in the form of 
current income and price appreciation, by balancing investment 
considerations and tax considerations.
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A. Principal Investments

    Under normal market conditions,\12\ the Fund will invest 
principally (that is, more than 50% of its assets) in the U.S. dollar-
denominated fixed income debt instruments described below, and in cash 
and cash equivalents.\13\
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    \12\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5).
    \13\ For purposes of this filing, cash equivalents are the 
short-term instruments enumerated in Commentary .01(c) to NYSE Arca 
Rule 8.600-E.
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    The fixed income debt instruments in which the Fund may invest as 
part of its principal investment strategy are securities issued or 
guaranteed by the U.S. government and its agencies, government-
sponsored enterprise securities, corporate bonds, agency mortgage-
backed securities (including ``to be announced'' or ``TBA'' 
transactions), agency asset-backed securities (``ABS''), ``Municipal 
Securities'' (as described below), sovereign debt, and debt securities 
issued by supranational organizations. They may pay fixed, variable, or 
floating interest rates.
    The Fund may invest in the following Municipal Securities: General 
obligation bonds; revenue (or limited obligation) bonds; private 
activity (or industrial development) bonds; bonds that are 
collateralized with agency and/or treasury securities; municipal notes; 
municipal lease obligations; and municipal inverse floaters.

B. Other Investments

    While the Fund, under normal market conditions, will invest 
principally in the securities and financial instruments described 
above, the Fund may invest its remaining assets in the securities and 
financial instruments described below.
    The Fund may invest in U.S. and foreign non-agency ABS, which are 
securities backed by a pool of some underlying asset, including but not 
limited to home equity loans, installment sale contracts, credit card 
receivables, or other assets.
    The Fund may invest in U.S. and foreign non-agency mortgage-related 
securities. Mortgage-related securities may be composed of one or more 
classes and may be structured either as pass-through securities or 
collateralized debt obligations (which include collateralized bond 
obligations and collateralized loan obligations).
    The Fund may invest in U.S. exchange-traded closed-end funds and 
exchange-traded funds (``ETFs'').\14\ The Fund also may invest in non-
exchange-traded securities of other registered investment companies 
(i.e., mutual funds).
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    \14\ For purposes of this filing, ETFs include Investment 
Company Units (as described in NYSE Arca Rule 5.2-E(j)(3)); 
Portfolio Depositary Receipts (as described in NYSE Arca Rule 8.100-
E); and Managed Fund Shares (as described in NYSE Arca Rule 8.600-
E). The ETFs all will be listed and traded in the U.S. on registered 
exchanges. The Fund will not invest in inverse or leveraged (e.g., 
+2x, -2x) index ETFs.
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    The Fund may engage actively in transactions in derivatives 
(futures, options, swaps, and forward rate agreements) as described 
below. The Fund will normally use derivatives to supplement the 
effective management of its duration profile, to gain exposure to 
particular securities or markets, in connection with hedging 
transactions, or for purposes of efficient portfolio management, 
including managing cash flows or as part of the Fund's risk management 
process.
    The Fund may invest in U.S and foreign exchange-traded and over-the 
counter (``OTC'') put and call options. The Fund may engage in options 
transactions on any security, index, or instrument in which it may 
invest.

[[Page 4706]]

    The Fund may invest in U.S and foreign exchange-traded and OTC 
currency options.
    The Fund may invest in U.S. and foreign exchange-traded futures 
contracts and options on futures contracts with respect to equity and 
debt securities, foreign currencies, aggregates of equity and debt 
securities (aggregates are composites of equity or debt securities that 
are not tied to a commonly known index), interest rates, indices, 
commodities, and other financial instruments.
    The Fund may enter into the following U.S exchange-traded, foreign 
exchange-traded, and OTC swaps: Commodity swaps; total return swaps; 
currency swaps; credit default swaps (``CDS''); CDS index swaps 
(``CDX''); asset swaps; inflation swaps; event-linked swaps; interest 
rate swaps; swaps on specific securities or indices; and swaps on rates 
(such as mortgage prepayment rates). The Fund may invest in U.S. 
exchange-traded and OTC municipal derivatives (i.e., municipal credit 
default swaps, municipal market data derivatives, rate locks, caps, 
collars, and floors). The Fund may also enter into options on swap 
agreements (``swaptions'').\15\
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    \15\ Options on swaps are traded OTC. In the event that there 
are exchange-traded options on swaps, the Fund may invest in these 
instruments.
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    The Fund may enter into forward rate agreements.
    The Fund may invest in inflation-protected debt securities.
    The Fund may invest in convertible and nonconvertible preferred 
stock traded OTC or on U.S. and non-U.S. exchanges.
    The Fund may hold restricted securities, which are securities that 
cannot be offered for public resale unless registered under the 
applicable securities laws or that have a contractual restriction that 
prohibits or limits their resale.\16\
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    \16\ Restricted securities include private placement securities 
that have not been registered under the applicable securities laws, 
such as Rule 144A securities, and securities of U.S. and non-U.S. 
issuers that are issued pursuant to Regulation S.
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    With respect to any of the Fund's investments, the Fund may invest 
in when-issued and delayed delivery securities and forward commitments.

C. Investment Restrictions

    The Exchange represents that the Fund's investments will be 
consistent with its investment goal and will not be used to provide 
multiple returns of a benchmark or to produce leveraged returns.
    With respect to the Fund's investments in Municipal Securities, 
under normal market conditions, except for periods of high cash inflows 
or outflows,\17\ the Fund will satisfy the following criteria:
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    \17\ ``Periods of high cash inflows or outflows'' as used in 
this filing means rolling periods of seven calendar days during 
which inflows or outflows of cash, in the aggregate, exceed 10% of 
the Fund's net assets as of the opening of business on the first day 
of such periods. During such periods, the Fund may depart from its 
principal investment strategies; for example, it may hold a higher 
than normal proportion of its assets in cash.
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    1. The Fund will have a minimum of 20 non-affiliated issuers;
    2. No single Municipal Securities issuer will account for more than 
10% of the weight of the Fund's portfolio;
    3. No individual bond will account for more than 5% of the weight 
of the Fund's portfolio;
    4. The Fund will limit its investments in Municipal Securities of 
any one state or U.S. territory to 25% of the Fund's total assets, 
except that up to and including 40% of the Fund's total assets may be 
invested in Municipal Securities of issuers in each of California, New 
York, and Texas;
    5. The Fund's investments in Municipal Securities will be 
diversified among issuers in at least 10 states and U.S. territories; 
and
    6. The Fund will be diversified among a minimum of five different 
sectors of the Municipal Securities market.\18\
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    \18\ The Fund's investments in Municipal Securities will include 
investments in state and local (e.g., county, city, town) Municipal 
Securities relating to such sectors as the following: airports; 
bridges and highways; hospitals; housing; jails; mass 
transportation; nursing homes; parks; public buildings; recreational 
facilities; school facilities; streets; and water and sewer works.
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    The Exchange states that pre-refunded bonds will be excluded from 
the above limits given that they have a high level of credit quality 
and liquidity.\19\
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    \19\ The Exchange states that pre-refunded bonds (also known as 
refunded or escrow-secured bonds) have a high level of credit 
quality and liquidity because the issuer ``pre-refunds'' the bond by 
setting aside in advance all or a portion of the amount to be paid 
to the bondholders when the bond is called. Generally, an issuer 
uses the proceeds from a new bond issue to buy high grade, interest 
bearing debt securities, including direct obligations of the U.S. 
government, which are then deposited in an irrevocable escrow 
account held by a trustee bank to secure all future payments of 
principal and interest on the pre-refunded bonds.
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D. Application of Generic Listing Requirements

    The Exchange proposes to list and trade the Shares under NYSE Arca 
Rule 8.600-E, which includes generic listing requirements for Managed 
Fund Shares. According to the Exchange, the Fund's portfolio will not 
meet all of the generic listing requirements of Commentary .01 to NYSE 
Arca Rule 8.600-E. Commentary .01(b)(1) to NYSE Arca Rule 8.600-E 
requires that, on both an initial and continuing basis, components that 
in the aggregate account for at least 75% of the fixed income weight of 
the portfolio each have a minimum original principal amount outstanding 
of $100 million or more. The Exchange states that the Fund would not 
meet this requirement, as a result principally of the Fund's 
investments in Municipal Securities. The Exchange represents that the 
Fund's investments in Municipal Securities would be subject to the 
requirements described in Section II.C. above. The Exchange notes that 
the Manager represents that the fixed income weight of the Fund's 
portfolio, other than holdings in Municipal Securities, will meet the 
generic listing requirements of Commentary .01(b). The Exchange also 
represents that, other than Commentary .01(b)(1), the Fund's portfolio 
will meet all other requirements of NYSE Arca Rule 8.600-E.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2017-99, as Modified by Amendment No. 2, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \20\ to determine whether the proposed rule 
change, as modified by Amendment No. 2, 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. 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, as modified by Amendment No. 2.
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    \20\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\21\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposal'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.'' \22\ As discussed above, the Exchange notes that, other 
than

[[Page 4707]]

Commentary .01(b)(1), the Fund's portfolio will meet all other 
requirements of NYSE Arca Rule 8.600-E. The Commission notes that 
Commentary .01(a)(1)(E) to NYSE Arca Rule 8.600-E requires that, on 
both an initial and continuing basis, the component stocks of the 
equity portion of a portfolio that are U.S. Component Stocks (as 
described in NYSE Arca Rule 5.2-E(j)(3)) be listed on a national 
securities exchange and be NMS Stocks as defined in Rule 600 of 
Regulation NMS under the Act.\23\ Commentary .01(a)(2)(E) to NYSE Arca 
Rule 8.600-E requires that, on both an initial and continuing basis, 
the component stocks of the equity portion of a portfolio that are Non-
U.S. Component Stocks (as described in NYSE Arca Rule 5.2-E(j)(3)) be 
listed and traded on an exchange that has last-sale reporting. In the 
proposal, the Exchange states that the Fund may invest in non-exchange-
traded securities of other registered investment companies (i.e., 
mutual funds) and OTC convertible and nonconvertible preferred stocks, 
but does not explain the application of Commentary .01(a)(1)(E) or 
Commentary .01(a)(2)(E) (or both) to these investments, and why these 
investments are consistent with the Act. The Commission seeks 
commenters' views on these aspects of the proposal, and whether the 
Exchange's statements and representations support a determination that 
the listing and trading of the Shares would be consistent with Section 
6(b)(5) of the Act.
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    \21\ Id.
    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Commentary .01(a)(1)(F) to NYSE Arca Rule 8.600-E provides 
that American Depositary Receipts (``ADRs'') in a portfolio may be 
exchange-traded or non-exchange-traded, but no more than 10% of the 
equity weight of a portfolio may consist of non-exchange-traded 
ADRs.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule 
change, as modified by Amendment No. 2, is consistent with Section 
6(b)(5) 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 that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4 under the Act,\24\ any request for an 
opportunity to make an oral presentation.\25\
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    \24\ 17 CFR 240.19b-4.
    \25\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts 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 Acts 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 proposed rule change, as modified by 
Amendment No. 2, should be approved or disapproved by February 22, 
2018. Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by March 8, 2018.
    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 [email protected]. Please include 
File Number SR-NYSEArca-2017-99 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-2017-99. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2017-99 and should be submitted 
by February 22, 2018. Rebuttal comments should be submitted by March 8, 
2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Robert W. Errett,
Deputy Secretary.
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    \26\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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[FR Doc. 2018-01952 Filed 1-31-18; 8:45 am]
 BILLING CODE 8011-01-P