Document ID: SEC-2014-0845-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-05-22T04:00Z

[Federal Register Volume 79, Number 99 (Thursday, May 22, 2014)]
[Notices]
[Pages 29461-29473]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-11831]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72180; File No. SR-NYSEArca-2014-57]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to Listing and Trading of Shares of 
the following Under NYSE Arca Equities Rule 8.600: PIMCO Foreign Bond 
Exchange-Traded Fund (U.S. Dollar-Hedged), PIMCO Foreign Bond Exchange-
Traded Fund (Unhedged), PIMCO Global Advantage Bond Exchange-Traded 
Fund, and PIMCO International Advantage Bond Exchange-Traded Fund

May 16, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on May 1, 2014, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
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''): PIMCO 
Foreign Bond Exchange-Traded Fund (U.S. Dollar-Hedged), PIMCO Foreign 
Bond Exchange-Traded Fund (Unhedged), PIMCO Global Advantage Bond 
Exchange-Traded Fund, and PIMCO International Advantage Bond Exchange-
Traded Fund. 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,\4\ which governs the 
listing and trading of Managed Fund Shares.\5\ PIMCO Foreign Bond 
Exchange-Traded Fund (U.S. Dollar-Hedged) (``Hedged Foreign Bond 
Fund''), PIMCO Foreign Bond Exchange-Traded Fund (Unhedged) (``Unhedged 
Foreign Bond Fund''), PIMCO Global Advantage Bond Exchange-Traded Fund 
(``Global Advantage Bond Fund''), and PIMCO International Advantage 
Bond Exchange-Traded Fund (``International Advantage Bond Fund''), each 
also referred to as a ``Fund,'' and collectively referred to as the 
``Funds.'' The Shares will be offered by PIMCO ETF Trust (the 
``Trust''), a statutory trust organized under the laws of the State of 
Delaware and registered with the Commission as an open-end management 
investment company.\6\
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    \4\ The Commission has previously approved the listing and 
trading on the Exchange of other actively managed funds under Rule 
8.600. See, e.g., Securities Exchange Act Release Nos. 60981 
(November 10, 2009), 74 FR 59594 (November 18, 2009) (SR-NYSEArca-
2009-79) (order approving Exchange listing and trading of five fixed 
income funds of the PIMCO ETF Trust); 66321 (February 3, 2012), 77 
FR 6850 (February 9, 2012) (SR-NYSEArca-2011-95) (order approving 
listing and trading of PIMCO Total Return Exchange Traded Fund); 
66670 (March 28, 2012), 77 FR 20087 (April 3, 2012) (SR-NYSEArca-
2012-09) (order approving listing and trading of PIMCO Global 
Advantage Inflation-Linked Bond Strategy Fund).
    \5\ 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.
    \6\ The Trust is registered under the 1940 Act. On January 27, 
2014, the Trust filed an amendment to its registration statement on 
Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a) (``1933 
Act'') and the 1940 Act relating to the Funds (File Nos. 333-155395 
and 811-22250) (the ``Registration Statement''). The description of 
the operation of the Trust and the Funds herein is based, in part, 
on the Registration Statement. In addition, the Commission has 
issued an order granting certain exemptive relief to the Trust under 
the 1940 Act. See Investment Company Act Release No. 28993 (November 
10, 2009) (File No. 812-13571) (``Exemptive Order'').
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    The investment manager to the Funds will be Pacific Investment 
Management Company LLC (``PIMCO'' or the ``Adviser''). PIMCO 
Investments LLC will serve as the distributor for the Funds 
(``Distributor''). State Street Bank & Trust Co. will serve as the 
custodian and transfer agent for the Funds (``Custodian'' or ``Transfer 
Agent'').
    Commentary .06 to Rule 8.600 provides that, if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment

[[Page 29462]]

company portfolio.\7\ In addition, Commentary .06 further requires that 
personnel who make decisions on the open-end fund's portfolio 
composition must be subject to procedures designed to prevent the use 
and dissemination of material nonpublic information regarding the open-
end fund's portfolio. The Adviser is not registered as a broker-dealer, 
but is affiliated with a broker-dealer, and will implement a ``fire 
wall'' with respect to such broker-dealer regarding access to 
information concerning the composition and/or changes to a Fund's 
portfolio. If PIMCO elects to hire a sub-adviser for the Funds that is 
also affiliated with a broker-dealer, such sub-adviser will implement a 
fire wall with respect to such broker-dealer affiliate regarding access 
to information concerning the composition and/or changes to the 
applicable portfolio, and will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding such portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and 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 
violations, 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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    In the event (a) the 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, it will implement a fire wall with respect to its 
relevant personnel or its broker-dealer affiliate regarding access to 
information concerning the composition and/or changes to the applicable 
[sic], and will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding such 
portfolio.
Characteristics of the Funds \8\
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    \8\ Many of the investment strategies of the Funds are 
discretionary, which means that PIMCO can decide from time to time 
whether to use them or not.
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    According to the Registration Statement, in selecting investments 
for each Fund, PIMCO will develop an outlook for interest rates, 
currency exchange rates and the economy, analyze credit and call risks 
and use other investment selection techniques. The proportion of each 
Fund's assets committed to investment in securities with particular 
characteristics (such as quality, sector, interest rate or maturity) 
will vary based on PIMCO's outlook for the U.S. economy and the 
economies of other countries in the world, the financial markets and 
other factors.
    With respect to each Fund, in seeking to identify undervalued 
currencies, PIMCO may consider many factors, including but not limited 
to, longer-term analysis of relative interest rates, inflation rates, 
real exchange rates, purchasing power parity, trade account balances 
and current account balances, as well as other factors that influence 
exchange rates such as flows, market technical trends and government 
policies. With respect to fixed income investing, PIMCO will attempt to 
identify areas of the bond market that are undervalued relative to the 
rest of the market. PIMCO will identify these areas by grouping fixed 
income investments into sectors such as money markets, governments, 
corporates, mortgages, asset-backed and international. Sophisticated 
proprietary software will then assist in evaluating sectors and pricing 
specific investments. Once investment opportunities are identified, 
PIMCO will shift assets among sectors depending upon changes in 
relative valuations, credit spreads and other factors.
Fixed Income Instruments
     Among other investments described in more detail herein, 
each Fund may invest in Fixed Income Instruments, which include:
     Securities issued or guaranteed by the U.S. Government, 
its agencies or government-sponsored enterprises (``U.S. Government 
Securities'');
     corporate debt securities of U.S. and non-U.S. issuers, 
including convertible securities and corporate commercial paper; \9\
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    \9\ With respect to each of the Funds, while non-emerging 
markets corporate debt securities (excluding commercial paper) 
generally must have $100 million or more par amount outstanding and 
significant par value traded to be considered as an eligible 
investment for each of the Funds, at least 80% of issues of such 
securities held by a Fund must have $100 million or more par amount 
outstanding at the time of investment. See also note 24, infra, 
regarding emerging market corporate debt securities.
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     mortgage-backed and other asset-backed securities; \10\
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    \10\ Mortgage-related and other asset-backed securities include 
collateralized mortgage obligations (``CMO''s), commercial mortgage-
backed securities, mortgage dollar rolls, CMO residuals, stripped 
mortgage-backed securities and other securities that directly or 
indirectly represent a participation in, or are secured by and 
payable from, mortgage loans on real property. A to-be-announced 
(``TBA'') transaction is a method of trading mortgage-backed 
securities. In a TBA transaction, the buyer and seller agree upon 
general trade parameters such as agency, settlement date, par amount 
and price. The actual pools delivered generally are determined two 
days prior to the settlement date.
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     inflation-indexed bonds issued both by governments and 
corporations; \11\
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    \11\ Inflation-indexed bonds (other than municipal inflation-
indexed bonds and certain corporate inflation-indexed bonds) are 
fixed income securities whose principal value is periodically 
adjusted according to the rate of inflation (e.g., Treasury 
Inflation Protected Securities (``TIPS'')). Municipal inflation-
indexed securities are municipal bonds that pay coupons based on a 
fixed rate plus the Consumer Price Index for All Urban Consumers 
(``CPI''). With regard to municipal inflation-indexed bonds and 
certain corporate inflation-indexed bonds, the inflation adjustment 
is reflected in the semi-annual coupon payment.
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     structured notes, including hybrid or ``indexed'' 
securities and event-linked bonds; \12\
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    \12\ The Funds may obtain event-linked exposure by investing in 
``event-linked bonds'' or ``event-linked swaps'' or by implementing 
``event-linked strategies.'' Event-linked exposure results in gains 
or losses that typically are contingent, or formulaically related to 
defined trigger events. Examples of trigger events include 
hurricanes, earthquakes, weather-related phenomena, or statistics 
relating to such events. Some event-linked bonds are commonly 
referred to as ``catastrophe bonds.'' If a trigger event occurs, the 
Fund may lose a portion or its entire principal invested in the bond 
or notional amount on a swap.
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     bank capital and trust preferred securities; \13\
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    \13\ There are two common types of bank capital: Tier I and Tier 
II. Bank capital is generally, but not always, of investment grade 
quality. According to the Registration Statement, Tier I securities 
often take the form of trust preferred securities. Tier II 
securities are commonly thought of as hybrids of debt and preferred 
stock, are often perpetual (with no maturity date), callable and, 
under certain conditions, allow for the issuer bank to withhold 
payment of interest until a later date. However, such deferred 
interest payments generally earn interest.
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     loan participations and assignments; \14\
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    \14\ The Funds may invest in fixed- and floating-rate loans, 
which investments generally will be in the form of loan 
participations and assignments of portions of such loans.
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     delayed funding loans and revolving credit facilities;
     bank certificates of deposit, fixed time deposits and 
bankers' acceptances;
     repurchase agreements on Fixed Income Instruments and 
reverse repurchase agreements on Fixed Income Instruments;

[[Page 29463]]

     debt securities issued by states or local governments and 
their agencies, authorities and other government-sponsored enterprises 
(``Municipal Bonds'');
     obligations of non-U.S. governments or their subdivisions, 
agencies and government-sponsored enterprises; and obligations of 
international agencies or supranational entities.
Use of Derivatives by the Funds
    A Fund's investments in derivative instruments will be made in 
accordance with the 1940 Act and consistent with the Fund's investment 
objective and policies. With respect to each Fund, derivative 
instruments primarily will include forwards,\15\ exchange-traded and 
over-the-counter (``OTC'') options contracts, exchange-traded futures 
contracts, swap agreements and options on futures contracts and swap 
agreements. Generally, derivatives are financial contracts whose value 
depends upon, or is derived from, the value of an underlying asset, 
reference rate or index, and may relate to stocks, bonds, interest 
rates, currencies or currency exchange rates, commodities, and related 
indexes. A Fund may, but is not required to, use derivative instruments 
for risk management purposes or as part of its investment 
strategies.\16\
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    \15\ Forwards are contracts to purchase or sell securities for a 
fixed price at a future date beyond normal settlement time (forward 
commitments).
    \16\ Each Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. PIMCO's Counterparty Risk Committee evaluates the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, PIMCO credit analysts 
evaluate each approved counterparty using various methods of 
analysis, including company visits, earnings updates, the broker-
dealer's reputation, PIMCO's past experience with the broker-dealer, 
market levels for the counterparty's debt and equity, the 
counterparty's liquidity and its share of market participation.
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    As described further below, each Fund will typically use derivative 
instruments as a substitute for taking a position in the underlying 
asset and/or as part of a strategy designed to reduce exposure to other 
risks, such as interest rate or currency risk. A Fund may also use 
derivative instruments to enhance returns. To limit the potential risk 
associated with such transactions, a Fund will segregate or ``earmark'' 
assets determined to be liquid by PIMCO in accordance with procedures 
established by the Trust's Board of Trustees (``Board'') and in 
accordance with the 1940 Act (or, as permitted by applicable 
regulation, enter into certain offsetting positions) to cover its 
obligations under derivative instruments. These procedures have been 
adopted consistent with Section 18 of the 1940 Act and related 
Commission guidance. In addition, each 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.\17\ Because the markets for certain securities, or the 
securities themselves, may be unavailable or cost prohibitive as 
compared to derivative instruments, suitable derivative transactions 
may be an efficient alternative for a Fund to obtain the desired asset 
exposure.
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    \17\ 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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    The Adviser believes that derivatives can be an economically 
attractive substitute for an underlying physical security that each 
Fund would otherwise purchase. For example, a Fund could purchase 
Treasury futures contracts instead of physical Treasuries or could sell 
credit default protection on a corporate bond instead of buying a 
physical bond. Economic benefits include potentially lower transaction 
costs or attractive relative valuation of a derivative versus a 
physical bond (e.g., differences in yields).
    The Adviser further believes that derivatives can be used as a more 
liquid means of adjusting portfolio duration as well as targeting 
specific areas of yield curve exposure, with potentially lower 
transaction costs than the underlying securities (e.g., interest rate 
swaps may have lower transaction costs than physical bonds). Similarly, 
money market futures can be used to gain exposure to short-term 
interest rates in order to express views on anticipated changes in 
central bank policy rates. In addition, derivatives can be used to 
protect client assets through selectively hedging downside (or ``tail 
risks'') in each Fund.\18\ Each Fund also can use derivatives to 
increase or decrease credit exposure. Index credit default swaps (CDX) 
can be used to gain exposure to a basket of credit risk by ``selling 
protection'' against default or other credit events, or to hedge broad 
market credit risk by ``buying protection.'' Single name credit default 
swaps (CDS) can be used to allow a Fund to increase or decrease 
exposure to specific issuers, saving investor capital through lower 
trading costs. A Fund can use total return swap contracts to obtain the 
total return of a reference asset or index in exchange for paying a 
financing cost. A total return swap may be much more efficient than 
buying underlying securities of an index, potentially lowering 
transaction costs.
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    \18\ Each Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. PIMCO's Counterparty Risk Committee evaluates the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, PIMCO credit analysts 
evaluate each approved counterparty using various methods of 
analysis, including company visits, earnings updates, the broker-
dealer's reputation, PIMCO's past experience with the broker-dealer, 
market levels for the counterparty's debt and equity, the 
counterparty's liquidity and its share of market participation. 
According to the Registration Statement, the Funds have adopted 
procedures that are consistent with Section 18 of the 1940 Act and 
related Commission guidance, which require that a fund's derivative 
instruments be fully collateralized bv [sic] liquid assets of the 
fund.
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    The Adviser believes that the use of derivatives will allow each 
Fund to selectively add diversifying sources of return from selling 
options. Option purchases and sales can also be used to hedge specific 
exposures in the portfolio, and can provide access to return streams 
available to long-term investors such as the persistent difference 
between implied and realized volatility. Option strategies can generate 
income or improve execution prices (i.e., covered calls).
Hedged Foreign Bond Fund--Principal Investments
    According to the Registration Statement, the Hedged Foreign Bond 
Fund will seek maximum total return,\19\ consistent with preservation 
of capital and prudent investment management. The Fund will seek to 
achieve its investment objective by investing, under normal 
circumstances,\20\ at least 80% of its assets in Fixed Income 
Instruments and derivatives based on Fixed Income Instruments that are 
economically tied to foreign (non-U.S.) countries,\21\

[[Page 29464]]

representing at least three foreign countries (the ``Hedged Foreign 
Bond Fund 80% policy''). The average portfolio duration \22\ of the 
Fund will normally vary within three years (plus or minus) of the 
portfolio duration of the securities comprising the Fund's broad-based 
securities market index, as calculated by PIMCO, which as of December 
31, 2013 was 7.7 years.
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    \19\ With respect to each Fund, the term ``total return'' sought 
by the Fund will consist of both income and capital appreciation, if 
any, which generally arises from decreases in interest rates, 
foreign currency appreciation, or improving credit fundamentals for 
a particular sector or security.
    \20\ With respect to each Fund, the term ``under normal 
circumstances'' includes, but is not limited to, the absence of 
extreme volatility or trading halts in the fixed income markets or 
the financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as a systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance.
    \21\ PIMCO generally considers an instrument to be economically 
tied to a non-U.S. country if the issuer is a foreign government (or 
any political subdivision, agency, authority or instrumentality of 
such government), or if the issuer is organized under the laws of a 
non-U.S. country. In the case of certain money market instruments, 
such instruments will be considered economically tied to a non-U.S. 
country if either the issuer or the guarantor of such money market 
instruments is organized under the laws of a non-U.S. country. With 
respect to derivative instruments, PIMCO will generally consider 
such instruments to be economically tied to non-U.S. countries if 
the underlying assets are foreign currencies (or baskets or indices 
of such currencies), or instruments or securities that are issued by 
foreign governments or issuers organized under the laws of a non-
U.S. country (or if the underlying assets are certain money market 
instruments, if either the issuer or the guarantor of such money 
market instruments is organized under the laws of a non-U.S. 
country).
    \22\ Duration is a measure used to determine the sensitivity of 
a security's price to changes in interest rates. The longer a 
security's duration, the more sensitive it will be to changes in 
interest rates.
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    The Hedged Foreign Bond Fund will invest primarily in investment 
grade debt securities, but may invest up to 10% of its total assets in 
high yield securities (``junk bonds'') rated B or higher by Moody's 
Investors Service, Inc. (``Moody's''), or equivalently rated by 
Standard & Poor's Ratings Services (``S&P'') or Fitch, Inc. 
(``Fitch''), or, if unrated, determined by PIMCO to be of comparable 
quality,\23\ except that, within such limitation, the Fund may invest 
in mortgage-backed securities rated below B.
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    \23\ In determining whether a security is of comparable quality 
the Adviser will consider, for example, whether the issuer of the 
security has issued other rated securities; whether the obligations 
under the security are guaranteed by another entity and the rating 
of such guarantor (if any); whether and (if applicable) how the 
security is collateralized; other forms of credit enhancement (if 
any); the security's maturity date; liquidity features (if any); 
relevant cash flow(s); valuation features; other structural 
analysis; macroeconomic analysis; and sector or industry analysis.
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    The Fund's portfolio will include a minimum of 13 non-affiliated 
issuers.
    The Hedged Foreign Bond Fund may invest in securities and 
instruments that are economically tied to emerging market countries 
subject to applicable limitations set forth herein.\24\
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    \24\ PIMCO will generally consider an instrument to be 
economically tied to an emerging market country if the security's 
``country of exposure'' is an emerging market country, as determined 
by the criteria set forth in the Registration Statement. 
Alternatively, such as when a ``country of exposure'' is not 
available or when PIMCO believes the following tests more accurately 
reflect which country the security is economically tied to, PIMCO 
may consider an instrument to be economically tied to an emerging 
market country if the issuer or guarantor is a government of an 
emerging market country (or any political subdivision, agency, 
authority or instrumentality of such government), if the issuer or 
guarantor is organized under the laws of an emerging market country, 
or if the currency of settlement of the security is a currency of an 
emerging market country. With respect to derivative instruments, 
PIMCO will generally consider such instruments to be economically 
tied to emerging market countries if the underlying assets are 
currencies of emerging market countries (or baskets or indices of 
such currencies), or instruments or securities that are issued or 
guaranteed by governments of emerging market countries or by 
entities organized under the laws of emerging market countries. 
While emerging markets corporate debt securities (excluding 
commercial paper) generally must have $200 million or more par 
amount outstanding and significant par value traded to be considered 
as an eligible investment for each of the Funds, at least 80% of 
issues of such securities held by a Fund must have $200 million or 
more par amount outstanding at the time of investment.
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    In furtherance of the Hedged Foreign Bond Fund 80% policy, or with 
respect to the Fund's other investments, the Hedged Foreign Bond Fund 
may invest, without limitation, in derivative instruments, subject to 
applicable law and any other restrictions described herein.\25\
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    \25\ With respect to each Fund, derivatives are generally 
financial contracts whose value depends upon, or is derived from, 
the value of an underlying asset, reference rate or index, and may 
relate to stocks, bonds, interest rates, spreads between different 
interest rates, currencies or currency exchange rates, commodities, 
and related indices. Examples of derivative instruments include 
forwards, options contracts, futures contracts, options on futures 
contracts and swap agreements.
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    The Hedged Foreign Bond Fund may invest up to 20% of its assets in 
mortgage-related and other asset-backed securities, although this 20% 
limitation does not apply to securities issued or guaranteed by Federal 
agencies and/or U.S. government sponsored instrumentalities.\26\
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    \26\ With respect to each Fund, mortgage-related and asset-
backed securities include mortgage pass-through securities, 
collateralized mortgage obligations (``CMO''s), commercial mortgage-
backed securities, mortgage dollar rolls, CMO residuals, stripped 
mortgage-backed securities and other securities that directly or 
indirectly represent a participation in, or are secured by and 
payable from, mortgage loans on real property. A to-be-announced 
(``TBA'') transaction is a method of trading mortgage-backed 
securities. In a TBA transaction, the buyer and seller agree upon 
general trade parameters such as agency, settlement date, par amount 
and price. The actual pools delivered generally are determined two 
days prior to the settlement date.
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    According to the Registration Statement, the Hedged Foreign Bond 
Fund will normally limit its foreign currency exposure (from non-U.S. 
dollar-denominated securities or currencies) to 20% of its total 
assets. The Fund may engage in foreign currency transactions on a spot 
(cash) basis and forward basis \27\ and invest in foreign currency 
futures and options contracts. The Fund may enter into these contracts 
to hedge against foreign exchange risk, to increase exposure to a 
foreign currency or to shift exposure to foreign currency fluctuations 
from one currency to another. Suitable hedging transactions may not be 
available in all circumstances and there can be no assurance that the 
Fund will engage in such transactions at any given time or from time to 
time.
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    \27\ A forward foreign currency exchange contract, which 
involves an obligation to purchase or sell a specific currency at a 
future date at a price set at the time of the contract, would reduce 
a Fund's exposure to changes in the value of the currency it will 
deliver and increases its exposure to changes in the value of the 
currency it will receive for the duration of the contract. Certain 
foreign currency transactions may also be settled in cash rather 
than the actual delivery of the relevant currency. The effect on the 
value of a Fund would be similar to selling securities denominated 
in one currency and purchasing securities denominated in another 
currency. A contract to sell a foreign currency would limit any 
potential gain which might be realized if the value of the hedged 
currency increases. Each Fund will limit its investments in 
currencies to those currencies with a minimum average daily foreign 
exchange turnover of USD $1 billion as determined by the Bank for 
International Settlements (``BIS'') Triennial Central Bank Survey. 
As of the most recent BIS Triennial Central Bank Survey, at least 52 
separate currencies had minimum average daily foreign exchange 
turnover of USD $1 billion. For a list of eligible BIS currencies, 
see www.bis.org.
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    The Hedged Foreign Bond Fund may, without limitation, seek to 
obtain market exposure to the securities in which it primarily invests 
by entering into a series of purchase and sale contracts or by using 
other investment techniques (such as buy backs or dollar rolls).
Hedged Foreign Bond Fund--Other (Non-Principal) Investments
    The Hedged Foreign Bond Fund may invest up to 10% of its total 
assets in preferred stock, convertible securities and other equity-
related securities.\28\ The Fund may invest in variable and floating 
rate securities, which are securities that pay interest at rates that 
adjust whenever a specified interest rate

[[Page 29465]]

changes and/or that reset on predetermined dates (such as the last day 
of a month or calendar quarter). The Fund may invest in floating rate 
debt instruments (``floaters''), inverse floating rate debt instruments 
(``inverse floaters'') and may engage in credit spread trades.
---------------------------------------------------------------------------

    \28\ Convertible securities are generally preferred stocks and 
other securities, including fixed income securities and warrants, 
that are convertible into or exercisable for common stock at a 
stated price or rate. Equity-related investments may include 
investments in small-capitalization (``small-cap''), mid-
capitalization (``mid-cap'') and large-capitalization (``large-
cap'') companies. With respect to each Fund, a small-cap company 
will be defined as a company with a market capitalization of up to 
$1.5 billion, a mid-cap company will be defined as a company with a 
market capitalization of between $1.5 billion and $10 billion and a 
large-cap company will be defined as a company with a market 
capitalization above $10 billion. Not more than 10% of the net 
assets of a Fund in the aggregate shall consist of non-U.S. equity 
securities, including non-U.S. stocks into which a convertible 
security is converted, whose principal market is not a member of the 
Intermarket Surveillance Group (``ISG'') or is a market with which 
the Exchange does not have a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    As disclosed in the Registration Statement, the Hedged Foreign Bond 
Fund may also invest in trade claims,\29\ privately placed and 
unregistered securities, and exchange-traded and OTC-traded structured 
products, including credit-linked securities, commodity-linked notes, 
and structured notes. The Fund may invest in Brady Bonds, which are 
securities created through the exchange of existing commercial bank 
loans to sovereign entities for new obligations in connection with a 
debt restructuring.
---------------------------------------------------------------------------

    \29\ Trade claims are non-securitized rights of payment arising 
from obligations that typically arise when vendors and suppliers 
extend credit to a company by offering payment terms for products 
and services. If the company files for bankruptcy, payments on these 
trade claims stop and the claims are subject to compromise along 
with the other debts of the company. Trade claims may be purchased 
directly from the creditor or through brokers.
---------------------------------------------------------------------------

    The Hedged Foreign Bond Fund may purchase or sell securities which 
it is eligible to purchase or sell on a when-issued basis, may purchase 
and sell such securities for delayed delivery and may make contracts to 
purchase or sell such securities for a fixed price at a future date 
beyond normal settlement time (forward commitments). The Fund may make 
short sales as part of its overall portfolio management strategies or 
to offset a potential decline in value of a security.
    The Hedged Foreign Bond Fund may enter into repurchase agreements, 
in which the Fund purchases a security from a bank or broker-dealer, 
which agrees to repurchase the security at the Fund's cost plus 
interest within a specified time. Repurchase agreements maturing in 
more than seven days and which may not be terminated within seven days 
at approximately the amount at which the Fund has valued the agreements 
will be considered illiquid securities. The Fund may enter into reverse 
repurchase agreements and dollar rolls subject to the Fund's 
limitations on borrowings.\30\ The Fund will segregate or ``earmark'' 
assets determined to be liquid by PIMCO in accordance with procedures 
established by the Fund's Board to cover its obligations under reverse 
repurchase agreements and dollar rolls.
---------------------------------------------------------------------------

    \30\ With respect to each Fund, a reverse repurchase agreement 
involves the sale of a security by a Fund and its agreement to 
repurchase the instrument at a specified time and price. A dollar 
roll is similar except that the counterparty is not obligated to 
return the same securities as those originally sold by a Fund but 
only securities that are ``substantially identical.''
---------------------------------------------------------------------------

Unhedged Foreign Bond Fund--Principal Investments
    According to the Registration Statement, the Unhedged Foreign Bond 
Fund will seek maximum total return, consistent with preservation of 
capital and prudent investment management. The Fund will seek to 
achieve its investment objective by investing, under normal 
circumstances, at least 80% of its assets in Fixed Income Instruments 
and derivatives based on Fixed Income Instruments that are economically 
tied to foreign (non-U.S.) countries \31\ representing at least three 
foreign countries (the ``Unhedged Foreign Bond Fund 80% policy''). The 
average portfolio duration of the Fund will vary within approximately 
three years (plus or minus) of the portfolio duration of the securities 
comprising the Fund's broad-based securities market index, as 
calculated by PIMCO, which as of December 31, 2013 was 7.7 years.
---------------------------------------------------------------------------

    \31\ See supra, note 21.
---------------------------------------------------------------------------

    The Unhedged Foreign Bond Fund will invest primarily in investment 
grade debt securities, but may invest up to 10% of its total assets in 
high yield securities (junk bonds) rated B or higher by Moody's, or 
equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO 
to be of comparable quality,\32\ except that, within such limitation, 
the Fund may invest in mortgage-backed securities rated below B.
---------------------------------------------------------------------------

    \32\ See supra, note 23.
---------------------------------------------------------------------------

    The Fund's portfolio will include a minimum of 13 non-affiliated 
issuers.
    The Unhedged Foreign Bond Fund may invest in fixed income and 
equity securities and instruments that are economically tied to 
emerging market countries, subject to applicable limitations set forth 
herein.\33\
---------------------------------------------------------------------------

    \33\ See supra, note 24.
---------------------------------------------------------------------------

    In furtherance of the Unhedged Foreign Bond Fund 80% policy, or 
with respect to the Fund's other investments, the Unhedged Foreign Bond 
Fund may invest, without limitation, in derivative instruments, subject 
to applicable law and any other restrictions described in the 
Registration Statement.\34\
---------------------------------------------------------------------------

    \34\ See supra, note 25.
---------------------------------------------------------------------------

    The Unhedged Foreign Bond Fund may invest up to 20% of its assets 
in mortgage-related and other asset-backed securities, although this 
20% limitation does not apply to securities issued or guaranteed by 
Federal agencies and/or U.S. government sponsored 
instrumentalities.\35\
---------------------------------------------------------------------------

    \35\ See supra, note 26.
---------------------------------------------------------------------------

    According to the Registration Statement, the Unhedged Foreign Bond 
Fund may invest in fixed income and equity securities denominated in 
foreign (non-U.S.) currencies, engage in foreign currency transactions 
on a spot (cash) basis and forward basis \36\ and invest in foreign 
currency futures and options contracts. The Fund may enter into these 
contracts to hedge against foreign exchange risk, to increase exposure 
to a foreign currency or to shift exposure to foreign currency 
fluctuations from one currency to another. Suitable hedging 
transactions may not be available in all circumstances and there can be 
no assurance that the Fund will engage in such transactions at any 
given time or from time to time.
---------------------------------------------------------------------------

    \36\ See supra, note 27.
---------------------------------------------------------------------------

    The Unhedged Foreign Bond Fund may, without limitation, seek to 
obtain market exposure to the securities in which it primarily invests 
by entering into a series of purchase and sale contracts or by using 
other investment techniques (such as buy backs or dollar rolls).
Unhedged Foreign Bond Fund--Other (Non-Principal) Investments
    The Unhedged Foreign Bond Fund may invest up to 10% of its total 
assets in preferred stock, convertible securities and other equity-
related securities.\37\ The Fund may invest in variable and floating 
rate securities. The Fund may invest in floaters, inverse floaters and 
may engage in credit spread trades.
---------------------------------------------------------------------------

    \37\ See supra, note 28.
---------------------------------------------------------------------------

    The Unhedged Foreign Bond Fund may invest in trade claims, 
privately placed and unregistered securities, and exchange-traded and 
OTC-traded structured products, including credit-linked securities, 
commodity-linked notes, and structured notes. The Fund may invest in 
Brady Bonds.
    The Unhedged Foreign Bond Fund may purchase or sell securities 
which it is eligible to purchase or sell on a when-issued basis, may 
purchase and sell such securities for delayed delivery and may make 
contracts to purchase or sell such securities for a fixed price at a 
future date beyond normal settlement time (forward commitments). The 
Fund may make short sales as part of its overall portfolio management 
strategies or to offset a potential decline in value of a security.
    The Unhedged Foreign Bond Fund may enter into repurchase 
agreements, in which the Fund purchases a security from a bank or 
broker-dealer, which

[[Page 29466]]

agrees to repurchase the security at the Fund's cost plus interest 
within a specified time. Repurchase agreements maturing in more than 
seven days and which may not be terminated within seven days at 
approximately the amount at which the Fund has valued the agreements 
will be considered illiquid securities. The Fund may enter into reverse 
repurchase agreements and dollar rolls subject to the Fund's 
limitations on borrowings.
Global Advantage Bond Fund--Principal Investments
    According to the Registration Statement, the Global Advantage Bond 
Fund will seek total return exceeding that of its benchmarks, 
consistent with prudent investment management. The Fund will seek to 
achieve its investment objective by investing, under normal 
circumstances, at least 80% of its assets in Fixed Income Instruments 
and derivatives based on Fixed Income Instruments that are economically 
tied to at least three countries, which may include foreign (non-U.S.) 
countries and may also include the U.S. (the ``Global Advantage Bond 
Fund 80% policy''). The average portfolio duration of the Fund will 
vary based on PIMCO's forecast for interest rates and, under normal 
circumstances, will not be expected to exceed eight years.\38\
---------------------------------------------------------------------------

    \38\ The Global Advantage Bond Fund will utilize the PIMCO 
Global Advantage[supreg] (``PIMCO Index'') as a secondary benchmark. 
PIMCO owns the intellectual property rights to the PIMCO Index, and 
has filed a patent application with respect to certain features of 
the PIMCO Index. PIMCO has retained an unaffiliated leading 
financial information services company and global index provider to 
independently administer and calculate the PIMCO Index (the 
``Calculation Agent''). The Calculation Agent, using a publicly 
available rules-based methodology, will calculate, maintain and 
disseminate the PIMCO Index.
---------------------------------------------------------------------------

    The Global Advantage Bond Fund may invest in both investment-grade 
debt securities and high-yield securities (junk bonds) subject to a 
maximum of 15% of its total assets in securities rated below B by 
Moody's, S&P or Fitch, or, if unrated, determined by PIMCO to be of 
comparable quality.
    The Fund's portfolio will include a minimum of 13 non-affiliated 
issuers.
    The Fund may invest, without limitation, in securities and 
instruments that are economically tied to emerging market 
countries.\39\
---------------------------------------------------------------------------

    \39\ See supra, note 24.
---------------------------------------------------------------------------

    In furtherance of the Global Advantage Bond Fund 80% policy, or 
with respect to the Fund's other investments, the Global Advantage Bond 
Fund may invest, without limitation, in derivative instruments, subject 
to applicable law and any other restrictions described herein.\40\
---------------------------------------------------------------------------

    \40\ See supra, note 25.
---------------------------------------------------------------------------

    The Global Advantage Bond Fund may invest up to 20% of its assets 
in mortgage-related and other asset-backed securities, although this 
20% limitation does not apply to securities issued or guaranteed by 
Federal agencies and/or U.S. government sponsored 
instrumentalities.\41\
---------------------------------------------------------------------------

    \41\ See supra, note 26.
---------------------------------------------------------------------------

    The Global Advantage Bond Fund may invest, without limitation, in 
securities denominated in foreign currencies and in U.S. dollar-
denominated securities of foreign issuers. The Fund may engage in 
foreign currency transactions on a spot (cash) basis and forward basis 
and invest in foreign currency futures and options contracts.\42\ The 
Fund may enter into these contracts to hedge against foreign exchange 
risk, to increase exposure to a foreign currency or to shift exposure 
to foreign currency fluctuations from one currency to another.
---------------------------------------------------------------------------

    \42\ See supra, note 27.
---------------------------------------------------------------------------

    The Global Advantage Bond Fund may, without limitation, seek to 
obtain market exposure to the securities in which it primarily invests 
by entering into a series of purchase and sale contracts or by using 
other investment techniques (such as buy backs or dollar rolls).
Global Advantage Bond Fund--Other (Non-Principal) Investments
    The Global Advantage Bond Fund may invest up to 10% of its total 
assets in preferred stock, convertible securities and other equity-
related securities.\43\ The Fund may invest in variable and floating 
rate securities. The Fund may invest in floaters, inverse floaters and 
may engage in credit spread trades.
---------------------------------------------------------------------------

    \43\ See supra, note 28.
---------------------------------------------------------------------------

    The Global Advantage Bond Fund may invest in trade claims, 
privately placed and unregistered securities, and exchange-traded and 
OTC-traded structured products, including credit-linked securities, 
commodity-linked notes, and structured notes. The Fund may invest in 
Brady Bonds.
    The Global Advantage Bond Fund may purchase or sell securities 
which it is eligible to purchase or sell on a when-issued basis, may 
purchase and sell such securities for delayed delivery and may make 
contracts to purchase or sell such securities for a fixed price at a 
future date beyond normal settlement time (forward commitments). The 
Fund may make short sales as part of its overall portfolio management 
strategies or to offset a potential decline in value of a security.
    The Global Advantage Bond Fund may enter into repurchase 
agreements, in which the Fund purchases a security from a bank or 
broker-dealer, which agrees to repurchase the security at the Fund's 
cost plus interest within a specified time. Repurchase agreements 
maturing in more than seven days and which may not be terminated within 
seven days at approximately the amount at which the Fund has valued the 
agreements will be considered illiquid securities. The Fund may enter 
into reverse repurchase agreements and dollar rolls subject to the 
Fund's limitations on borrowings.
International Advantage Bond Fund--Principal Investments
    According to the Registration Statement, the International 
Advantage Bond Fund will seek total return exceeding that of its 
benchmarks, consistent with prudent investment management. The Fund 
will seek to achieve its investment objective by investing, under 
normal circumstances, at least 80% of its assets in Fixed Income 
Instruments and derivatives based on Fixed Income Instruments that are 
economically tied to foreign (non-U.S.) countries,\44\ representing at 
least three foreign countries (the ``International Advantage Bond Fund 
80% policy''). The average portfolio duration of the Fund will vary 
based on PIMCO's forecast for interest rates and, under normal 
circumstances, will not be expected to exceed eight years.
---------------------------------------------------------------------------

    \44\ See supra, note 21.
---------------------------------------------------------------------------

    The International Advantage Bond Fund may invest in both 
investment-grade debt securities and high-yield securities (junk bonds) 
subject to a maximum of 15% of its total assets in securities rated 
below B by Moody's, S&P or Fitch, or, if unrated, determined by PIMCO 
to be of comparable quality.
    The Fund's portfolio will include a minimum of 13 non-affiliated 
issuers.
    The Fund may invest, without limitation, in securities and 
instruments that are economically tied to emerging market 
countries.\45\
---------------------------------------------------------------------------

    \45\ See supra, note 24.
---------------------------------------------------------------------------

    In furtherance of the International Advantage Bond Fund 80% policy, 
or with respect to the Fund's other investments, the International 
Advantage Bond Fund may invest, without limitation, in derivative 
instruments, subject to applicable law and any other restrictions 
described in its prospectus or Statement of Additional Information 
(``SAI'').\46\
---------------------------------------------------------------------------

    \46\ See supra, note 25.

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

[[Page 29467]]

    The International Advantage Bond Fund may invest up to 20% of its 
assets in mortgage-related and other asset-backed securities, although 
this 20% limitation does not apply to securities issued or guaranteed 
by Federal agencies and/or U.S. government sponsored 
instrumentalities.\47\
---------------------------------------------------------------------------

    \47\ See supra, note 26.
---------------------------------------------------------------------------

    The International Advantage Bond Fund may invest, without 
limitation, in securities denominated in foreign currencies and in U.S. 
dollar-denominated securities of foreign issuers. The Fund may engage 
in foreign currency transactions on a spot (cash) basis and forward 
basis and invest in foreign currency futures and options contracts.\48\ 
The Fund may enter into these contracts to hedge against foreign 
exchange risk, to increase exposure to a foreign currency or to shift 
exposure to foreign currency fluctuations from one currency to another.
---------------------------------------------------------------------------

    \48\ See supra, note 27.
---------------------------------------------------------------------------

    The International Advantage Bond Fund may, without limitation, seek 
to obtain market exposure to the securities in which it primarily 
invests by entering into a series of purchase and sale contracts or by 
using other investment techniques (such as buy backs or dollar rolls).
International Advantage Bond Fund--Other (Non-Principal) Investments
    The International Advantage Bond Fund may invest up to 10% of its 
total assets in preferred stock, convertible securities and other 
equity-related securities.\49\
---------------------------------------------------------------------------

    \49\ See supra, note 28.
---------------------------------------------------------------------------

    The International Advantage Bond Fund may invest in variable and 
floating rate securities. The Fund may invest in floaters, inverse 
floaters and may engage in credit spread trades.
    The International Advantage Bond Fund may invest in trade claims, 
privately placed and unregistered securities, and exchange-traded and 
OTC-traded structured products, including credit-linked securities, 
commodity-linked notes and structured notes. The Fund may invest in 
Brady Bonds.
    The International Advantage Bond Fund may purchase or sell 
securities which it is eligible to purchase or sell on a when-issued 
basis, may purchase and sell such securities for delayed delivery and 
may make contracts to purchase or sell such secure ties for a fixed 
price at a future date beyond normal settlement time (forward 
commitments). The Fund may make short sales as part of its overall 
portfolio management strategies or to offset a potential decline in 
value of a security.
    The International Advantage Bond Fund may enter into repurchase 
agreements, in which the Fund purchases a security from a bank or 
broker-dealer, which agrees to repurchase the security at the Fund's 
cost plus interest within a specified time. Repurchase agreements 
maturing in more than seven days and which may not be terminated within 
seven days at approximately the amount at which the Fund has valued the 
agreements will be considered illiquid securities. The Fund may enter 
into reverse repurchase agreements and dollar rolls subject to the 
Fund's limitations on borrowings.
All Funds--Other Restrictions
    Each Fund may invest in, to the extent permitted by Section 
12(d)(1)(A) of the 1940 Act, other affiliated and unaffiliated funds, 
such as open-end or closed-end management investment companies, 
including other exchange-traded funds, provided that each Fund's 
investment in units or shares of investment companies and other open-
end collective investment vehicles will not exceed 10% of that Fund's 
total assets. Each Fund may invest in securities lending collateral in 
one or more money market funds to the extent permitted by Rule 12d1-1 
under the 1940 Act, including series of PIMCO Funds.
    Each Fund's investments, including investments in derivative 
instruments, will be subject to all of the restrictions under the 1940 
Act, including restrictions with respect to illiquid assets; that is, 
the limitation that a 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.\50\ Each 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 such 
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.\51\
---------------------------------------------------------------------------

    \50\ In reaching liquidity decisions, the Adviser may consider 
the following factors: the frequency of trades and quotes for the 
security; the number of dealers willing 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 trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer).
    \51\ 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).
---------------------------------------------------------------------------

    The Funds will be non-diversified, which means that each Fund may 
invest its assets in a smaller number of issuers than a diversified 
fund.\52\
---------------------------------------------------------------------------

    \52\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act (15 U.S.C. 80e).
---------------------------------------------------------------------------

    The Funds intend to qualify annually and elect to be treated as a 
regulated investment company under Subchapter M of the Internal Revenue 
Code.\53\ None of the Funds will concentrate its investments in a 
particular industry, as that term is used in the 1940 Act, and as 
interpreted, modified, or otherwise permitted by regulatory authority 
having jurisdiction from time to time.\54\
---------------------------------------------------------------------------

    \53\ 26 U.S.C. 851.
    \54\ 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).
---------------------------------------------------------------------------

    Each Fund may invest without limit, for temporary or defensive 
purposes, in U.S. debt securities, including taxable securities and 
short-term money market securities, if PIMCO deems it appropriate to do 
so. If PIMCO believes that economic or market conditions are 
unfavorable to investors, PIMCO may temporarily invest up to 100% of 
each Fund's assets in certain defensive strategies, including holding a 
substantial portion of the Fund's assets in cash, cash equivalents or 
other highly rated short-term securities, including securities issued 
or guaranteed by the U.S. government, its agencies or 
instrumentalities.
    Each Fund's investments, including derivatives, will be consistent 
with that Fund's investment objective and each Fund's use of 
derivatives may be used to enhance leverage. However, each Fund's 
investments will not be used to

[[Page 29468]]

seek performance that is the multiple or inverse multiple (i.e., 2Xs 
and 3Xs) of the Fund's broad-based securities market index (as defined 
in Form N-1A).\55\
---------------------------------------------------------------------------

    \55\ Each Fund's broad-based securities market index will be 
identified in a future amendment to the Registration Statement 
following each Fund's first full calendar year of performance.
---------------------------------------------------------------------------

Net Asset Value and Derivatives Valuation Methodology for Purposes of 
Determining Net Asset Value
    The NAV of each Fund's Shares will be determined by dividing the 
total value of a Fund's portfolio investments and other assets, less 
any liabilities, by the total number of Shares outstanding.
    Each Fund's Shares will be valued as of the close of regular 
trading of the New York Stock Exchange (``NYSE'') (normally 4:00 p.m. 
Eastern time (``E.T.'') (the ``NYSE Close'') on each day NYSE Arca is 
open (``Business Day''). Information that becomes known to each of the 
Funds or its agents after the NAV has been calculated on a particular 
day will not generally be used to retroactively adjust the price of a 
portfolio asset or the NAV determined earlier that day.
    For purposes of calculating NAV, portfolio securities and other 
assets for which market quotes are readily available will be valued at 
market value. Market value will generally be determined on the basis of 
last reported sales prices, or if no sales are reported, based on 
quotes obtained from a quotation reporting system, established market 
makers, or pricing services.
    Fixed Income Instruments, including those to be purchased under 
firm commitment agreements/delayed delivery basis, will generally be 
valued on the basis of quotes obtained from brokers and dealers or 
independent pricing services. Foreign fixed income securities will 
generally be valued on the basis of quotes obtained from brokers and 
dealers or pricing services using data reflecting the earlier closing 
of the principal markets for those assets. Short-term debt instruments 
having a remaining maturity of 60 days or less will generally be valued 
at amortized cost, which approximates market value.
    As discussed in more detail below, derivatives will generally be 
valued on the basis of quotes obtained from brokers and dealers or 
pricing services using data reflecting the earlier closing of the 
principal markets for those assets. Local closing prices will be used 
for all instrument valuation purposes. Foreign currency-denominated 
derivatives will generally be valued using market inputs as of the 
respective local region's market close.
    With respect to specific derivatives:
     Currency spot and forward rates will generally be 
determined as of the NYSE Close.
     Exchange traded futures will generally be valued at the 
settlement price of the exchange.
     A total return swap on an index will be valued at the 
publicly available index price. The index price, in turn, is determined 
by the applicable index calculation agent, which generally values the 
securities underlying the index at the last reported sale price.
     Equity total return swaps will generally be valued using 
the actual underlying equity at local market closing, while bank loan 
total return swaps will generally be valued using the evaluated 
underlying bank loan price minus the strike price of the loan.
     Exchange traded non-equity options, (for example, options 
on bonds, Eurodollar options and U.S. Treasury options), index options, 
and options on futures will generally be valued at the official 
settlement price determined by the relevant exchange, if available.
     OTC and exchange traded equity options will generally be 
valued on a basis of quotes obtained from a quotation reporting system, 
established market makers, or pricing services.
     OTC FX options will generally be valued by pricing 
vendors.
     All other swaps such as interest rate swaps, inflation 
swaps, swaptions, credit default swaps, CDX/CDS will generally be 
valued by pricing services.
    Exchange-traded equity securities will be valued at the official 
closing price or the last trading price on the exchange or market on 
which the security is primarily traded at the time of valuation. If no 
sales or closing prices are reported during the day, exchange-traded 
equity securities will generally be valued at the mean of the last 
available bid and ask quotation on the exchange or market on which the 
security is primarily traded, or using other market information 
obtained from quotation reporting systems, established market makers, 
or pricing services.
    If a foreign security's value has materially changed after the 
close of the security's primary exchange or principal market but before 
the NYSE Close, the security will be valued at fair value based on 
procedures established and approved by the Board. Foreign securities 
that do not trade when the NYSE is open are also valued at fair value.
    Securities and other assets for which market quotes are not readily 
available are valued at fair value as determined in good faith by the 
Board or persons acting at their direction. The Board has adopted 
methods for valuing securities and other assets in circumstances where 
market quotes are not readily available, and has delegated to PIMCO the 
responsibility for applying the valuation methods. In the event that 
market quotes are not readily available, and the security or asset 
cannot be valued pursuant to one of the valuation methods, the value of 
the security or asset will be determined in good faith by the Valuation 
Committee of the Board generally based upon recommendations provided by 
PIMCO.
    Market quotes are considered not readily available in circumstances 
where there is an absence of current or reliable market-based data 
(e.g., trade information, bid/ask information, broker quotes), 
including where events occur after the close of the relevant market, 
but prior to the NYSE Close, that materially affect the values of a 
Fund's securities or assets. In addition, market quotes are considered 
not readily available when, due to extraordinary circumstances, the 
exchanges or markets on which the securities trade do not open for 
trading for the entire day and no other market prices are available. 
The Board has delegated to PIMCO the responsibility for monitoring 
significant events that may materially affect the values of the Fund's 
securities or assets and for determining whether the value of the 
applicable securities or assets should be re-evaluated in light of such 
significant events.
    When a Fund uses fair value pricing to determine its NAV, 
securities will not be priced on the basis of quotes from the primary 
market in which they are traded, but rather may be priced by another 
method that the Board or persons acting at their direction believe 
reflects fair value. Fair value pricing may require subjective 
determinations about the value of a security. While the Trust's policy 
is intended to result in a calculation of the Fund's NAV that fairly 
reflects security values as of the time of pricing, the Trust cannot 
ensure that fair values determined by the Board or persons acting at 
their direction would accurately reflect the price that a Fund could 
obtain for a security if it were to dispose of that security as of the 
time of pricing (for instance, in a forced or distressed sale). The 
prices used by a Fund may differ from the value that would be realized 
if the securities were sold.
    For a Fund's 4:00 p.m. E.T. futures holdings, estimated prices from 
Reuters will be used if any cumulative futures margin impact is greater 
than $0.005 to the NAV due to futures movement after the fixed income 
futures market closes (3:00 p.m. E.T.) and up to the NYSE

[[Page 29469]]

Close (generally 4:00 p.m. E.T.). Swaps traded on exchanges such as the 
Chicago Mercantile Exchange (``CME'') or the Intercontinental Exchange 
(``ICE-US'') will use the applicable exchange closing price where 
available.
    Investments initially valued in currencies other than the U.S. 
dollar are converted to the U.S. dollar using exchange rates obtained 
from pricing services. As a result, the NAV of a Fund's Shares may be 
affected by changes in the value of currencies in relation to the U.S. 
dollar. The value of securities traded in markets outside the United 
States or denominated in currencies other than the U.S. dollar may be 
affected significantly on a day that the NYSE is closed. As a result, 
to the extent that a Fund holds foreign (non-U.S.) securities, the NAV 
of a Fund's Shares may change when an investor cannot purchase, redeem 
or exchange shares.
Derivatives Valuation Methodology for Purposes of Determining Portfolio 
Indicative Value
    On each Business Day, before commencement of trading in Fund Shares 
on NYSE Arca, each Fund will disclose on its Web site the identities 
and quantities of the portfolio instruments and other assets held by a 
Fund that will form the basis for a Fund's calculation of NAV at the 
end of the Business Day.
    In order to provide additional information regarding the intra-day 
value of Shares of a Fund, the NYSE Arca or a market data vendor will 
disseminate every 15 seconds through the facilities of the Consolidated 
Tape Association (``CTA'') or other widely disseminated means an 
updated Portfolio Indicative Value (``PIV'') for each Fund as 
calculated by an information provider or market data vendor.
    A third party market data provider will calculate the PIV for each 
Fund. For the purposes of determining the PIV, the third party market 
data provider's valuation of derivatives is expected to be similar to 
their valuation of all securities. The third party market data provider 
may use market quotes if available or may fair value securities against 
proxies (such as swap or yield curves).
    With respect to specific derivatives:
     Foreign currency derivatives may be valued intraday using 
market quotes, or another proxy as determined to be appropriate by the 
third party market data provider.
     Futures may be valued intraday using the relevant futures 
exchange data, or another proxy as determined to be appropriate by the 
third party market data provider.
     Interest rate swaps may be mapped to a swap curve and 
valued intraday based on the swap curve, or another proxy as determined 
to be appropriate by the third party market data provider.
     CDX/CDS may be valued using intraday data from market 
vendors, or based on underlying asset price, or another proxy as 
determined to be appropriate by the third party market data provider.
     Total return swaps may be valued intraday using the 
underlying asset price, or another proxy as determined to be 
appropriate by the third party market data provider.
     Exchange listed options may be valued intraday using the 
relevant exchange data, or another proxy as determined to be 
appropriate by the third party market data provider.
     OTC options may be valued intraday through option 
valuation models (e.g., Black-Scholes) or using exchange traded options 
as a proxy, or another proxy as determined to be appropriate by the 
third party market data provider.
    A third party market data provider's valuation of forwards will be 
similar to their valuation of the underlying securities, or another 
proxy as determined to be appropriate by the third party market data 
provider. The third party market data provider will generally use 
market quotes if available. Where market quotes are not available, they 
may fair value securities against proxies (such as swap or yield 
curves). Each Fund's disclosure of forward positions will include 
information that market participants can use to value these positions 
intraday.
Disclosed Portfolio
    Each Fund's disclosure of derivative positions in the applicable 
Disclosed Portfolio will include information that market participants 
can use to value these positions intraday. On a daily basis, the Funds 
will disclose on the Funds' 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 a Fund's 
portfolio.
Impact on Arbitrage Mechanism
    For each Fund, the Adviser believes there will be minimal, if any, 
impact to the arbitrage mechanism as a result of the use of 
derivatives. Market makers and participants should be able to value 
derivatives as long as the positions are disclosed with relevant 
information. The Adviser believes that the price at which Shares trade 
will continue to be disciplined by arbitrage opportunities created by 
the ability to purchase or redeem creation Shares at their NAV, which 
should ensure that Shares will not trade at a material discount or 
premium in relation to their NAV.
    The Adviser does not believe there will be any significant impacts 
to the settlement or operational aspects of a Fund's arbitrage 
mechanism due to the use of derivatives. Because derivatives generally 
are not eligible for in-kind transfer, they will typically be 
substituted with a ``cash in lieu'' amount when each Fund processes 
purchases or redemptions of ``Creation Units'' (as described below) in-
kind.
Creations and Redemptions of Shares
    According to the Registration Statement, Shares of each of the 
Funds that trade in the secondary market will be ``created'' at NAV 
\56\ by Authorized Participants \57\ only in block-size creation units 
(``Creation Units'') of 100,000 Shares or multiples thereof. Each Fund 
will offer and issue Shares at their NAV per Share generally in 
exchange for a basket of debt securities held by that Fund (the 
``Deposit Securities'') together with a deposit of a specified cash 
payment (the ``Cash Component''), or in lieu of Deposit Securities, a 
Fund may permit a ``cash-in-lieu'' amount for any reason at the Fund's 
sole discretion. Alternatively, each Fund may issue Creation Units in 
exchange for a specified all-cash payment (``Cash Deposit''). 
Similarly,

[[Page 29470]]

Shares can be redeemed only in Creation Units, generally in-kind for a 
portfolio of debt securities held by each Fund and/or for a specified 
amount of cash.
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    \56\ The NAV of each of the Fund's Shares generally will be 
calculated once daily Monday through Friday as of the close of 
trading on the Exchange, generally 4:00 p.m. E.T. (the ``NAV 
Calculation Time'') on any Business Day. NAV per Share will be 
calculated by dividing a Fund's net assets by the number of that 
Fund's Shares outstanding. For more information regarding the 
valuation of each Fund's investments in calculating a Fund's NAV, 
see the Registration Statement.
    \57\ An ``Authorized Participant'' refers to a Participating 
Party (a broker-dealer or other participant in the clearing process 
through the Continuous Net Settlement System of the National 
Securities Clearing Corporation (``NSCC''); or a Depository Trust 
Company (``DTC'') Participant who has executed a Participant 
Agreement (an agreement with the Distributor and Transfer Agent with 
respect to creations and redemptions of Creation Unit aggregations).
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    Except when aggregated in Creation Units, Shares will not be 
redeemable by the Funds. The prices at which creations and redemptions 
occur will be based on the next calculation of NAV after an order is 
received. Requirements as to the timing and form of orders are 
described in the Authorized Participant agreement. PIMCO will make 
available on each business day via the NSCC, prior to the opening of 
business (subject to amendments) on the Exchange (currently 9:30 a.m., 
E.T.), the identity and the required amount of each Deposit Security 
and the amount of the Cash Component (or Cash Deposit) to be included 
in the current Fund Deposit \58\ (based on information at the end of 
the previous Business Day). Creations and redemptions must be made by 
an Authorized Participant.
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    \58\ The Deposit Securities and Cash Component or, 
alternatively, the Cash Deposit, will constitute the ``Fund 
Deposit,'' which will represent the investment amount for a Creation 
Unit of each of the Funds.
---------------------------------------------------------------------------

    Additional information regarding the Trust, the Funds 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 Funds that are referred to but not defined in 
this proposed rule change are defined in the Registration Statement.
Availability of Information
    The Trust's Web site (www.pimcoetfs.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for each of the Funds that may be downloaded. The 
Trust's Web site will include additional quantitative information 
updated on a daily basis, including, for each of the Funds, (1) daily 
trading volume, the prior business day's reported closing price, NAV 
and mid-point of the bid/ask \59\ spread at the time of calculation of 
such NAV (the ``Bid/Ask Price''), 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 
(9:30 a.m. E.T. to 4:00 p.m. E.T.) on the Exchange, each of the Funds 
will disclose on the Trust's Web site the Disclosed Portfolio as 
defined in NYSE Arca Equities Rule 8.600(c)(2) that will form the basis 
for the [sic] each of the Fund's [sic] calculation of NAV at the end of 
the Business Day.\60\
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    \59\ The Bid/Ask Price of each of the Funds 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 that Fund's NAV. The 
records relating to Bid/Ask Prices will be retained by each of the 
Funds and their service providers.
    \60\ Under accounting procedures followed by the Funds, trades 
made on the prior business day (``T'') will be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Funds 
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.
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    On a daily basis, for each of the Funds, the Adviser, Funds or 
Trust will disclose for each portfolio security and other financial 
instrument of each of the Funds the following information: Ticker 
symbol (if applicable), name of security or financial instrument, 
number of shares (if applicable) or dollar value of securities and 
financial instruments held in the portfolio, and percentage weighting 
of the security and financial instrument in the portfolio. In addition, 
price information for the debt securities and other financial 
instruments held by each of the Funds will be available through major 
market data vendors.\61\ As noted above, each Fund's disclosure of 
derivative positions in the applicable Disclosed Portfolio will include 
information that market participants can use to value these positions 
intraday. On a daily basis, the Funds will disclose on the Funds' 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 a Fund's portfolio.
---------------------------------------------------------------------------

    \61\ Supplementally, major market data vendors may include, but 
are not limited to: Thomson Reuters, JPMorgan Chase Pricing Direct 
Inc., Markit Group Limited, Bloomberg, Interactive Data Corporation 
or other major data vendors.
---------------------------------------------------------------------------

    The Web site information will be publicly available at no charge.
    In addition, a basket composition file, which includes the security 
names and share quantities, if applicable, required to be delivered in 
exchange for a Funds' Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the Exchange via the NSCC. The basket represents one Creation Unit of 
each of the Funds. The NAV of each of the Funds will normally be 
determined as of the close of the regular trading session on the 
Exchange (ordinarily 4:00 p.m. E.T.) on each Business Day. Authorized 
participants may refer to the basket composition file for information 
regarding Fixed Income Instruments, and any other instrument that may 
comprise a Fund's basket on a given day.
    Investors can also obtain the Trust's SAI, the Funds' Shareholder 
Reports, and the Funds' Forms N-CSR and Forms 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, Form N-
PX and Form N-SAR may be viewed on-screen or downloaded from the 
Commission's Web site at www.sec.gov. Intra-day and closing price 
information regarding equity securities traded on a national securities 
exchange, including common stocks, preferred stocks, securities 
convertible into stocks, closed-end funds, exchange traded funds and 
other equity-related securities, will be available from the exchange on 
which such securities are traded. Intra-day and closing price 
information regarding Fixed Income Instruments also will be available 
from major market data vendors. Price information relating to forwards 
will be available from major market data vendors. 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 CTA high-speed line. In addition, the PIV, as defined in NYSE 
Arca Equities Rule 8.600(c)(3), will be widely disseminated by one or 
more major market data vendors at least every 15 seconds during the 
Core Trading Session.\62\ The dissemination of the PIV, together with 
the Disclosed Portfolio, may allow investors to determine an 
approximate value of the underlying portfolio of each of the Funds on a 
daily

[[Page 29471]]

basis and to provide an estimate of that value throughout the trading 
day.
---------------------------------------------------------------------------

    \62\ Currently, the Exchange understands that several major 
market data vendors display and/or make widely available PIVs taken 
from the CTA or other data feeds.
---------------------------------------------------------------------------

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 any of the Funds.\63\ Trading in Shares of any 
of the Funds 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 any 
of the Funds; 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 any of the Funds may be halted.
---------------------------------------------------------------------------

    \63\ 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 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with 
NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading 
Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
    Each Fund's Shares will conform to the initial and continued 
listing criteria under NYSE Arca Equities Rule 8.600. Consistent with 
NYSE Arca Equities Rule 8.600(d)(2)(B)(ii), the Funds' Reporting 
Authority will implement and maintain, or be subject to, procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the actual components of each Fund's portfolio. 
The Exchange represents that, for initial and/or continued listing, 
each Fund will be in compliance with Rule 10A-3 \64\ under the Act, as 
provided by NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares 
for each 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 net asset value (``NAV'') per Share will be 
calculated daily and that the NAV and the Disclosed Portfolio will be 
made available to all market participants at the same time.
---------------------------------------------------------------------------

    \64\ 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.\65\ 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.
---------------------------------------------------------------------------

    \65\ 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. 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-traded options, exchange-
traded equities, futures and options on futures with other markets or 
other entities that are members of the ISG, and FINRA may obtain 
trading information regarding trading in the Shares, exchange-trade 
options, exchange-traded equities, futures and options on futures from 
such markets or entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, exchange-traded options, 
exchange-traded equities, futures and options on futures from markets 
or other entities that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement.\66\ FINRA, 
on behalf of the Exchange, is able to access, as needed, trade 
information for certain fixed income securities held by the Funds 
reported to FINRA's Trade Reporting and Compliance Engine (``TRACE'').
---------------------------------------------------------------------------

    \66\ 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 a 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 net assets of a Fund in the aggregate 
shall consist of equity securities, including stocks into which a 
convertible security is converted, whose principal market is not a 
member of the 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 a Fund in the aggregate shall consist of 
futures contracts or exchange-traded options contracts 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 each of the Funds is 
subject to various fees and expenses described in the Registration 
Statement. The Bulletin will discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act. The Bulletin will also disclose that the NAV for the Shares will 
be calculated after 4:00 p.m. E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement

[[Page 29472]]

under Section 6(b)(5) \67\ 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.
---------------------------------------------------------------------------

    \67\ 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 Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
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-traded options, exchange-traded equities, 
futures and options on futures with other markets or other entities 
that are members of the ISG, and FINRA may obtain trading information 
regarding trading in the Shares, exchange-trade options, exchange-
traded equities, futures and options on futures from such markets or 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares, exchange-traded options, exchange-traded 
equities, futures and options on futures from markets or 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 Funds reported to FINRA's TRACE. 
Not more than 10% of the net assets of a Fund in the aggregate shall 
consist of equity securities, including stocks into which a convertible 
security is converted, whose principal market is not a member of the 
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 a Fund in the aggregate shall consist of 
futures contracts or exchange-traded options contracts 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 
Hedged Foreign Bond Fund will normally limit its foreign currency 
exposure (from non-U.S. dollar-denominated securities or currencies) to 
20% of the Fund's total assets. Each of the Funds will limit its 
investments in currencies to those currencies with a minimum average 
daily foreign exchange turnover of USD $1 billion as determined by the 
BIS Triennial Central Bank Survey. Each Fund's investments, including 
derivatives, will be consistent with that Fund's investment objective 
and each Fund's use of derivatives may be used to enhance leverage. 
However, each 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 broad-based securities market index (as defined in Form N-1A). 
Each of the Fund's investment in illiquid assets will not exceed 15% of 
that Fund's net assets. The Hedged and Unhedged Foreign Bond Funds will 
invest primarily in investment grade debt securities and will not 
invest more than 10% of its total assets in high yield securities rated 
B or higher by Moody's, S&P or Fitch, or if unrated, determined by 
PIMCO to be of comparable quality. The Global and International 
Advantage Bond Funds will each primarily invest in investment-grade 
debt securities and will not invest more than 15% of its total assets 
in high yield securities rated below B (as described above). Each 
Fund's portfolio will include a minimum of 13 non-affiliated issuers. 
With respect to each of the Funds, while non-emerging markets corporate 
debt securities (excluding commercial paper) generally must have $100 
million or more par amount outstanding and significant par value traded 
to be considered as an eligible investment for each of the Funds, at 
least 80% of issues of such securities held by a Fund must have $100 
million or more par amount outstanding at the time of investment. The 
PIMCO's Counterparty Risk Committee will evaluate the creditworthiness 
of swaps counterparties on an ongoing basis.
    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 each of the Funds 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, each of the Funds will disclose on the 
Trust's Web site the Disclosed Portfolio that will form the basis for 
each 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. Exchange-traded options quotation and last sale information 
is available via the Options Price Reporting Authority. The Trust's Web 
site will include a form of the prospectus for each of the Funds 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 any of the Funds 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 any of the Funds may be 
halted. In addition, as noted above, investors will have ready access 
to information regarding each of the Funds' 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 
additional types of actively-managed exchange-traded products that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. The Adviser is not a broker-dealer but 
is affiliated with a broker-dealer and has implemented a ``fire wall'' 
with respect to such broker-dealer

[[Page 29473]]

regarding access to information concerning the composition and/or 
changes to each Fund's portfolio. In addition, the Funds' Reporting 
Authority will implement and maintain, or be subject to, procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the actual components of each Fund's portfolio.

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 
additional types of actively-managed exchange-traded products that will 
enhance competition with respect to such products among market 
participants, to the benefit of investors and the marketplace.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days of such 
date (i) as the Commission may designate if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the self-regulatory organization consents, the Commission 
will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2014-57 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-2014-57. 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 such 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-2014-57, and should 
be submitted on or before June 12, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\68\
---------------------------------------------------------------------------

    \68\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11831 Filed 5-21-14; 8:45 am]
BILLING CODE 8011-01-P