Document ID: SEC-2017-1001-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2017-06-14T04:00Z

[Federal Register Volume 82, Number 113 (Wednesday, June 14, 2017)]
[Notices]
[Pages 27302-27307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12260]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80885; File No. SR-NYSEArca-2017-44]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 
2, To List and Trade of Shares of the IQ Municipal Insured ETF, IQ 
Municipal Short Duration ETF, and IQ Municipal Intermediate ETF Under 
NYSE Arca Equities Rule 8.600

June 8, 2017.

I. Introduction

    On April 20, 2017, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of the IQ Municipal Insured ETF, IQ Municipal Short 
Duration ETF, and IQ Municipal Intermediate ETF (each a ``Fund,'' and 
collectively, the ``Funds'') under NYSE Arca Equities Rule 8.600. The 
Commission published notice of the proposed rule change in the Federal 
Register on May 9, 2017.\3\ On May 9, 2017, the Exchange filed 
Amendment No. 1 to the proposed rule change and on May 31, 2017, the 
Exchange filed Amendment No. 2 to the proposed rule change.\4\ The 
Commission received no

[[Page 27303]]

comments on the proposed rule change. The Commission is approving the 
proposed rule change, as modified by Amendment Nos. 1 and 2 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 80584 (May 3, 2017), 
82 FR 21573.
    \4\ In Amendment No. 1, which replaced the original filing in 
its entirety, the Exchange: (1) Clarified that each of the Adviser 
(as defined herein) and Subadviser (as defined herein) is not a 
registered broker-dealer but each is affiliated with a broker-dealer 
and each will maintain a ``fire wall'' with respect to such broker-
dealer affiliate regarding access to information concerning the 
composition of and/or changes to each Fund's portfolio; (2) 
clarified that cash creations and redemptions will be the default 
mechanism for creation and redemption of Shares, and provided 
additional information relating to creation and redemption of Shares 
when a Fund utilizes in-kind creations and redemptions; (3) 
represented that upon the commencement of operations of a Fund, a 
copy of the Funds' prospectus will be available on the Funds' Web 
site in a form that may be downloaded; (4) provided additional 
information regarding publicly available information relating to the 
Shares and each Fund's underlying investments; (5) clarified that 
less than 75% of the weight of a Fund's portfolio may consist of 
components with $100 million or more minimum original principal 
amount outstanding; (6) represented that trading in the Shares of 
the Funds will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of the Funds may 
be halted; and (7) made other non-substantive, technical amendments. 
Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2017-44/nysearca201744-1745942-151492.pdf. In Amendment No. 
2, which replaced Amendment No. 1 in its entirety, the Exchange: (1) 
Clarified that each of the Adviser and Subadviser has implemented 
and will maintain a ``fire wall'' with respect to its broker-dealer 
affiliate regarding access to information concerning the composition 
of and/or changes to each Fund's portfolio; (2) represented that the 
quantitative information on the Funds' Web site relating to the 
Shares and relating to the underlying portfolio securities and other 
assets held by the Funds will be publicly available at no charge; 
(3) represented that trade price and other information relating to 
Municipal Bonds (as defined below) is available through the 
Municipal Securities Rulemaking Board's Electronic Municipal Market 
Access (``EMMA'') system; and (4) made other clarifying and 
technical amendments. Amendment No. 2 is available at: https://www.sec.gov/comments/sr-nysearca-2017-44/nysearca201744-1780627-152846.pdf. Because Amendment Nos. 1 and 2 do not materially alter 
the substance of the proposed rule change or raise unique or novel 
regulatory issues, Amendment Nos. 1 and 2 are not subject to notice 
and comment.
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II. The Exchange's Description of the Proposal

    The Exchange proposes to list and trade the Shares under NYSE Arca 
Equities Rule 8.600, which governs the listing and trading of Managed 
Fund Shares on the Exchange. The Shares will be offered by the IndexIQ 
Active ETF Trust (``Trust''), which is registered with the Commission 
as an open-end management investment company.\5\ Each Fund is a series 
of the Trust. The investment adviser to each Fund will be IndexIQ 
Advisors LLC (``Adviser''), and MacKay Shields LLC will be each Fund's 
sub-adviser (``Subadviser'').\6\ ALPS Distributors, Inc. will serve as 
the distributor of each Fund's Shares on an agency basis and the Bank 
of New York Mellon will serve as each Fund's administrator, custodian, 
transfer agent, and securities lending agent (``Administrator'').
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    \5\ According to the Exchange, on February 24, 2017, the Trust 
filed with the Commission a registration statement on Form N-1A 
under the Securities Act of 1933 and the Investment Company Act of 
1940 (``1940 Act'') relating to the Funds (File Nos. 333-183489 and 
811-22739) (``Registration Statement''). According to the Exchange, 
the Commission has issued an order granting certain exemptive relief 
to the Trust under the 1940 Act. See Investment Company Act Release 
No. 30198 (September 10, 2012) (File No. 812-13956).
    \6\ According to the Exchange, neither the Adviser nor 
Subadviser is a registered broker-dealer; however, each is 
affiliated with a broker-dealer. Each of the Adviser and Subadviser 
has implemented and will maintain a ``fire wall'' with respect to 
such broker-dealer affiliate regarding access to information 
concerning the composition of and/or changes to each Fund's 
portfolio. In the event (a) the Adviser or Subadviser becomes 
registered as a broker-dealer or newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser to a Fund is a 
registered broker-dealer or becomes affiliated with a broker-dealer, 
the applicable adviser or sub-adviser will implement and maintain a 
fire wall with respect to its relevant personnel or broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to a Fund's portfolio, and will be subject to 
procedures designed to prevent the use and dissemination of material 
non-public information regarding such portfolio.
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    The Exchange has made the following representations and statements 
in describing the Funds and their investment strategies, including each 
Fund's portfolio holdings and investment restrictions.\7\
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    \7\ The Commission notes that additional information regarding 
the Trust, the Funds, and the Shares, including investment 
strategies, risks, creation and redemption procedures, calculation 
of net asset value (``NAV''), fees, distributions, and taxes, among 
other things, is included in the proposed rule change, as modified 
by Amendment Nos. 1 and 2, and the Registration Statement, as 
applicable. See Amendment No. 2 and Registration Statement, supra 
notes 4 and 5, respectively.
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A. The Exchange's Description of the Principal Investments of the Funds

    According to the Exchange, for purposes of the filing, the term 
``Municipal Bonds'' as applied to each of the Funds means the 
following:
     Municipal lease obligations (and certificates of 
participation in such obligations);
     municipal general obligation bonds (including industrial 
development bonds issued pursuant to federal tax law), which are issued 
for either project or enterprise financings in which the bond issuer 
pledges to the bondholders the revenues generated by the operating 
projects financed from the proceeds of the bond issuance;
     limited obligation bonds, which are payable only from the 
revenues derived from a particular facility or class of facilities or, 
in some cases from the proceeds of a special excise or other specific 
revenue source;
     municipal revenue bonds (which are typically secured by 
revenues generated by the issuer), including revenue anticipation 
notes;
     municipal bond anticipation notes (which are normally 
issued to provide interim financial assistance until long-term 
financing can be arranged);
     municipal bonds that feature credit enhancements, such as 
lines of credit, letters of credit, municipal bond insurance, and 
standby bond purchase agreements;
     discount municipal bonds (which may be originally issued 
at a discount to par value or sold at market price below par value);
     premium municipal bonds, which are sold at a premium to 
par value;
     zero coupon municipal bonds, which are issued at an 
original issue discount, with the full value, including accrued 
interest, paid at maturity;
     taxable municipal bonds, including Build America Bonds;
     municipal notes;
     municipal cash equivalents;
     private activity bonds (including without limitation 
industrial development bonds);
     pre-refunded and escrowed to maturity municipal bonds; and
     securities issued by entities whose underlying assets are 
Municipal Bonds (i.e., tender option bond trusts and custodial receipts 
trusts and variable rate demand notes that pay interest monthly or 
quarterly based on a floating rate that is reset daily or weekly based 
on an index of short-term municipal rates).
    For each Fund, the Subadviser's investment process will begin with 
an assessment of macro factors that may impact the municipal bond 
market, as well as other regulatory, tax, governmental, and technical 
factors that may impact the municipal bond market. Following the 
assessment of these factors, the Subadviser will develop an investment 
strategy to position a Fund among various sectors of the municipal bond 
market and different states. The Subadviser then will employ a 
fundamental, ``bottom-up'' credit research analysis to select 
individual Municipal Bonds.
(i) Principal Investments of the IQ Municipal Insured ETF
    According to the Exchange, the Fund will seek current income exempt 
from federal income tax. The Fund, under normal market conditions,\8\ 
will invest

[[Page 27304]]

at least 80% of its assets in Municipal Bonds that are covered by 
insurance policies that guarantee the timely payment of principal and 
interest. The Fund generally will maintain a dollar-weighted average 
duration within plus or minus two years of the dollar-weighted average 
duration of the S&P Municipal Bond Insured Index.\9\
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    \8\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the fixed income markets or the 
financial markets generally; operational issues (e.g., systems 
failure) causing dissemination of inaccurate market information; or 
force majeure type events such as natural or man-made disaster, act 
of God, armed conflict, act of terrorism, riot or labor disruption 
or any similar intervening circumstance. On a temporary basis, 
including for defensive purposes, during the initial invest-up 
period (i.e., the six-week period following the commencement of 
trading of Shares on the Exchange) and during periods of high cash 
inflows or outflows (i.e., rolling periods of seven calendar days 
during which inflows or outflows of cash, in the aggregate, exceed 
10% of a Fund's net assets as of the opening of business on the 
first day of such periods), a Fund may depart from its principal 
investment strategies; for example, it may hold a higher than normal 
proportion of its assets in cash. During such periods, a Fund may 
not be able to achieve its investment objectives. A Fund may adopt a 
defensive strategy when the Adviser believes securities in which a 
Fund normally invests have elevated risks due to political or 
economic factors and in other extraordinary circumstances.
    \9\ Municipal bonds are issued by or on behalf of the District 
of Columbia, states, territories, commonwealths, and possessions of 
the United States and their political subdivisions and agencies, 
authorities, and instrumentalities. Municipal securities, which may 
be issued in various forms, including bonds and notes, are issued to 
obtain funds for various public purposes.
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(ii) Principal Investments of the IQ Municipal Short Duration ETF
    According to the Exchange, the Fund will seek current income exempt 
from federal income tax. The Fund, under normal market conditions, will 
invest at least 80% of its assets in Municipal Bonds. The Fund 
generally will maintain a dollar-weighted average portfolio duration of 
three years or less.
(iii) Principal Investments of the IQ Municipal Intermediate ETF
    According to the Exchange, the Fund will seek current income exempt 
from federal income tax. The Fund, under normal market conditions, will 
invest at least 80% of its assets in Municipal Bonds. The Fund 
generally will maintain a dollar-weighted average duration within plus 
or minus two years of the dollar-weighted average duration of the S&P 
Municipal Bond Intermediate Index.

B. The Exchange's Description of the Other Investments of the Funds

    With respect to each of the Funds, while a Fund, under normal 
market conditions, will invest at least 80% of its assets in Municipal 
Bonds, as described above, a Fund may invest its remaining assets in 
other assets and financial instruments, as described below.
    Each Fund may invest in shares of exchange-traded funds (``ETFs'') 
and money market funds.\10\ In addition, each Fund may invest, directly 
and indirectly, in fixed rate and floating rate U.S. government 
securities, including bills, notes and bonds differing as to maturity 
and rates of interest, which are either issued or guaranteed by the 
U.S. Treasury or by U.S. government agencies or instrumentalities; 
repurchase agreements; and commercial paper; and may purchase 
securities on a when-issued basis or for settlement at a future date 
(forward commitment), if a Fund holds sufficient liquid assets to meet 
the purchase price (collectively, ``Other Investments'').
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    \10\ For purposes of the filing, ETFs include Investment Company 
Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio 
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100); 
and Managed Fund Shares (as described in NYSE Arca Equities Rule 
8.600). The ETFs all will be listed and traded in the U.S. on 
registered exchanges.
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C. The Exchange's Description of the Funds' Investment Restrictions

    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) deemed 
illiquid by the Adviser, consistent with Commission guidance. 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 a 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.
    Each Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns.
    Each Fund may invest more than 25% of its total assets in Municipal 
Bonds that are related in such a way that an economic, business or 
political development or change affecting one such security could also 
affect the other securities. However, a Fund's investments will be 
diversified among a minimum of ten different sectors of the municipal 
bond market.\11\
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    \11\ According to the Exchange, the IQ Municipal Insured ETF's 
investments in Municipal Bonds will include investments in state and 
local (e.g., county, city, town) and authority-issued Municipal 
Bonds relating to such sectors as the following: State general 
obligation, local general obligation, education, hospital, housing, 
industrial development revenue/pollution control revenue, power, 
resource recovery, transportation, water/sewer, leasing, special 
tax, and pre-refunded bonds.
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    A Fund's investments will be diversified among at least 15 
different states, with no more than 30% of a Fund's securities invested 
in municipal securities from a single state.
    Under normal market conditions, no security (excluding Treasury 
securities) will represent more than 25% of the weight of the 
portfolio, and the five highest weighted securities will not, in the 
aggregate, account for more than 50% of the weight of a Fund. No 
Municipal Bond held by a Fund will exceed 5% of the weight of a Fund's 
portfolio and no single Municipal Bond issuer will account for more 
than 8% of the weight of a Fund's portfolio. A Fund will hold Municipal 
Bonds of a minimum of 25 non-affiliated issuers.\12\
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    \12\ For purposes of this restriction, each state and each 
separate political subdivision, agency, authority, or 
instrumentality of such state, each multi-state agency or authority, 
and each guarantor, if any, will be treated as separate issuers of 
Municipal Bonds.
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D. The Exchange's Description of the Application of the Generic Listing 
Requirements to the Funds

    The Exchange states that it is submitting the proposed rule change 
because the portfolios for the Funds will not meet all of the 
``generic'' listing requirements of Commentary .01 to NYSE Arca 
Equities Rule 8.600 applicable to the listing of Managed Fund Shares. 
The Exchange states that each Fund's portfolio will meet all the 
requirements set forth in Commentary .01 to NYSE Arca Equities Rule 
8.600 except for those set forth in Commentary .01(b)(1), which 
requires that components that in the aggregate account for at least 75% 
of the fixed income weight of the portfolio each shall have a minimum 
original principal amount outstanding of $100 million or more.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with Section 6(b)(5) of the Act,\14\ which requires, among 
other things, that the Exchange's rules be 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 a national market

[[Page 27305]]

system, and, in general, to protect investors and the public interest.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal to list and trade the 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Act,\15\ which sets forth the finding of Congress that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities. Quotation and last-sale 
information for the Shares and the underlying ETFs will be available 
via the Consolidated Tape Association (``CTA'') high-speed line, and 
from the national securities exchange on which they are listed.
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    \15\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The approximate value of each Fund's investments on a per-Share 
basis, the Indicative Intra-Day Value (``IIV'') (which is the Portfolio 
Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3)), 
will be disseminated every 15 seconds during the Exchange's Core 
Trading Session (ordinarily 9:30 a.m. to 4:00 p.m., Eastern Time) by 
one or more major market data vendors.\16\ On each business day, before 
commencement of trading in Shares on the Exchange, each Fund will 
disclose on its Web site the identities and quantities of the portfolio 
securities and other assets held by each Fund (each Fund's ``Disclosed 
Portfolio,'' as defined in NYSE Arca Equities Rule 8.600(c)(2)) that 
will form the basis for the calculation of NAV at the end of the 
business day.\17\ In addition, with respect to each Fund, the 
Administrator, through the National Securities Clearing Corporation, 
will make available on each business day immediately prior to the 
opening of business on the Exchange (currently 9:30 a.m., Eastern 
Time), the designated portfolio of securities and estimated cash 
component, if applicable, per each creation unit that will be 
applicable to creation and redemption requests on that day. The NAV of 
Shares of each Fund will normally be determined as of the close of the 
Core Trading Session on the Exchange (ordinarily 4:00 p.m., Eastern 
Time) on each business day.
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    \16\ The Exchange represents that several major market data 
vendors display and/or make widely available IIVs taken from CTA or 
other data feeds. According to the Exchange, the IIV for a Fund will 
be calculated by an independent third party calculator by dividing 
the ``Estimated Fund Value'' as of the time of the calculation by 
the total number of outstanding Shares of that Fund. ``Estimated 
Fund Value'' is the sum of the estimated amount of cash held in a 
Fund's portfolio, the estimated amount of accrued interest owed to a 
Fund, and the estimated value of the securities held in a Fund's 
portfolio, minus the estimated amount of a Fund's liabilities. The 
IIV will be calculated based on the same portfolio holdings 
disclosed on the Funds' Web site.
    \17\ On a daily basis, the Funds will disclose the information 
required under NYSE Arca Equities Rule 8.600 (c)(2) to the extent 
applicable. The Web site information will be publicly available at 
no charge.
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    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 publicly available and published 
daily in the financial section of newspapers. Quotation information 
from brokers and dealers or pricing services will be available for 
Municipal Bonds and Other Investments. Price information for money 
market funds will be available from the applicable investment company's 
Web site and from market data vendors. Pricing information regarding 
Municipal Bonds and Other Investments (other than money market funds) 
will generally be available through nationally recognized data service 
providers through subscription agreements. Trade price and other 
information relating to Municipal Bonds is available through the 
Municipal Securities Rulemaking Board's EMMA system. Upon the 
commencement of operations of a Fund, a copy of the Funds' prospectus 
will be available on the Funds' Web site (www.IQetfs.com) in a form 
that may be downloaded. In addition, the Funds' Web site will include 
additional data relating to NAV and other applicable quantitative 
information relating to the Shares.
    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange will obtain a representation from the issuer of 
the Shares that the NAV per Share for each Fund will be calculated 
daily and that the NAV and the Disclosed Portfolio for each Fund will 
be made available to all market participants at the same time.\18\ 
Trading in Shares 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.\19\ Trading in the Shares will 
be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
additional circumstances under which Shares of the Funds may be halted.
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    \18\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \19\ 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 a Fund.
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    The Exchange represents that it has a general policy prohibiting 
the distribution of material, non-public information by its employees. 
In addition, Commentary .06 to NYSE Arca Equities Rule 8.600 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, non-public information regarding 
the open-end fund's portfolio. The Exchange represents that the Adviser 
and Sub-Adviser are not registered as broker-dealers; however, each of 
the Adviser and the Sub-Adviser is affiliated with a broker-dealer, and 
each of the Adviser and Sub-Adviser has implemented and will maintain a 
fire wall with respect to their relevant personnel and each such 
broker-dealer affiliate regarding access to information concerning the 
composition of, and/or changes to, a portfolio.\20\
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    \20\ See supra note 6. The Exchange represents that an 
investment adviser to an open-end fund is required to be registered 
under the Investment Advisers Act of 1940.
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    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit Holders in an Information Bulletin (``Bulletin'') 
of the special characteristics and risks associated with trading the 
Shares. 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, or by regulatory staff of the Exchange, which are designed to 
detect violations of Exchange rules and applicable federal securities 
laws.\21\ The Commission believes that the Exchange's initial and 
continued listing requirements, combined with the Funds' investment 
criteria and restrictions that would apply to Municipal Bonds in the 
portfolio, are designed to mitigate the potential for price 
manipulation of the Shares.
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    \21\ The Exchange states that FINRA conducts cross-market 
surveillances on behalf of the Exchange pursuant to a regulatory 
services agreement. The Exchange is responsible for FINRA's 
performance under this regulatory services agreement.
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    The Exchange represents that it 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.

[[Page 27306]]

    In support of this proposal, the Exchange has made the following 
additional representations:
    (1) The Shares of each Fund will conform to the initial and 
continued listing criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) Trading in the Shares will be subject to the existing trading 
surveillances, administered by FINRA on behalf of the Exchange, or by 
regulatory staff of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities laws. 
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.
    (4) The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and ETFs with 
other markets and other entities that are members of the Intermarket 
Surveillance Group (``ISG''), and the Exchange or FINRA, on behalf of 
the Exchange, or both, may obtain trading information regarding trading 
in the Shares and ETFs from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and ETFs from markets and other entities that are members of ISG 
or with which the Exchange has in place a comprehensive surveillance 
sharing agreement. FINRA, on behalf of the Exchange, is able to access, 
as needed, trade information for certain fixed income securities held 
by a Fund reported to FINRA's Trade Reporting and Compliance Engine. 
FINRA also can access data obtained from the Municipal Securities 
Rulemaking Board relating to municipal bond trading activity for 
surveillance purposes in connection with trading in the Shares.
    (5) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit Holders in a Bulletin of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Bulletin will discuss: (a) The procedures for 
purchases and redemptions of Shares in creation unit aggregations (and 
that Shares are not individually redeemable); (b) NYSE Arca Equities 
Rule 9.2(a), which imposes a duty of due diligence on its Equity 
Trading Permit Holders to learn the essential facts relating to every 
customer prior to trading the Shares; (c) the risks involved in trading 
the Shares during the Opening and Late Trading Sessions when an updated 
IIV will not be calculated or publicly disseminated; (d) how 
information regarding the IIV and the Disclosed Portfolio is 
disseminated; (e) the requirement that Equity Trading Permit Holders 
deliver a prospectus to investors purchasing newly issued Shares prior 
to or concurrently with the confirmation of a transaction; and (f) 
trading information. In addition, the Bulletin will discuss any 
exemptive, no-action, and interpretive relief granted by the Commission 
from any rules under the Act.
    (6) For initial and continued listing, a Fund will be in compliance 
with Rule 10A-3 under the Act,\22\ as provided by NYSE Arca Equities 
Rule 5.3.
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    \22\ 17 CFR 240.10A-3.
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    (7) A minimum of 100,000 Shares for each Fund will be outstanding 
at the commencement of trading on the Exchange.
    (8) Each Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns.
    (9) Under normal market conditions, each Fund will invest at least 
80% of its assets in Municipal Bonds.
    (10) Each Fund's investments will be diversified among a minimum of 
ten different sectors of the Municipal Bond market.
    (11) Each Fund's investments will be diversified among at least 15 
different states, with no more than 30% of a Fund's securities invested 
in municipal securities from a single state.
    (12) Under normal market conditions, no security (excluding 
Treasury securities) will represent more than 25% of the weight of the 
portfolio of a Fund, and the five highest weighted securities will not, 
in the aggregate, account for more than 50% of the weight of a Fund.
    (13) No Municipal Bond held by a Fund will exceed 5% of the weight 
of that Fund's portfolio, and no single Municipal Bond issuer will 
account for more than 8% of the weight of a Fund's portfolio.
    (14) Each Fund will hold Municipal Bonds of a minimum of 25 non-
affiliated issuers.
    (15) Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) deemed 
illiquid by the Adviser, consistent with Commission guidance. 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 a Fund's 
net assets are held in illiquid assets.
    (16) The ETFs in which a Fund may invest will be listed and traded 
in the U.S. on registered exchanges.
    The Exchange has represented that all statements and 
representations made in the filing regarding (a) the description of the 
portfolio, (b) limitations on portfolio holdings or reference assets, 
or (c) the applicability of Exchange listing rules specified in the 
filing shall constitute continued listing requirements for listing the 
Shares of a Fund on the Exchange. The issuer has represented to the 
Exchange that it will advise the Exchange of any failure by a Fund to 
comply with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Act, the Exchange will 
monitor for compliance with the continued listing requirements.\23\ If 
a Fund is not in compliance with the applicable listing requirements, 
the Exchange will commence delisting procedures under NYSE Arca 
Equities Rule 5.5(m).
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    \23\ The Commission notes that certain other proposals for the 
listing and trading of managed fund shares include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Securities Exchange Act Release No. 
78005 (Jun. 7, 2016), 81 FR 38247 (Jun. 13, 2016) (SR-BATS-2015-
100). In the context of this representation, it is the Commission's 
view that ``monitor'' and ``surveil'' both mean ongoing oversight of 
the Funds' compliance with the continued listing requirements. 
Therefore, the Commission does not view ``monitor'' as a more or 
less stringent obligation than ``surveil'' with respect to the 
continued listing requirements.
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    This approval order is based on all of the Exchange's 
representations, including those set forth above and in Amendment Nos. 
1 and 2, and the Exchange's description of the Funds. The Commission 
notes that the Funds and the Shares must comply with the requirements 
of NYSE Arca Equities Rule 8.600 to be initially and continuously 
listed and traded on the Exchange.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \24\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \24\ 15 U.S.C. 78f(b)(5).

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[[Page 27307]]

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-NYSEArca-2017-44), as 
modified by Amendment Nos. 1 and 2 thereto, be, and it hereby is, 
approved.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-12260 Filed 6-13-17; 8:45 am]
 BILLING CODE 8011-01-P