Document ID: SEC-2016-1339-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2016-08-01T04:00Z

[Federal Register Volume 81, Number 147 (Monday, August 1, 2016)]
[Notices]
[Pages 50576-50580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18052]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78414; File No. NYSEArca-2016-79]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Listing and Trading of Shares of the Virtus Japan Alpha 
ETF Under NYSE Arca Equities Rule 8.600

July 26, 2016.
I. Introduction
    On May 24, 2016, 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'' or 
``Exchange Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares (``Shares'') of the Virtus Japan Alpha 
ETF (``Fund'') under NYSE Arca Equities Rule 8.600 (``Managed Fund 
Shares''). The proposed rule change was published for comment in the 
Federal Register on June 9, 2016.\3\ On June 20, 2016, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ The Commission 
received no comments on the proposed rule change. This order grants 
approval of the proposed rule change, as modified by Amendment No. 1.
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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. 77992 (Jun. 3, 
2016), 81 FR 37222 (``Notice'').
    \4\ In Amendment No. 1, the Exchange made minor, clarifying 
changes to the description of the Fund, including, among other 
things, the Fund's permitted investments, restrictions on 
investments, calculation of net asset value (``NAV''), and publicly 
available information relating to the Fund and its investments. 
Because Amendment No. 1 does not materially alter the substance of 
the proposed rule change or raise novel regulatory issues, Amendment 
No. 1 is not subject to notice and comment. Amendment No. 1 is 
available at: https://www.sec.gov/comments/sr-nysearca-2016-79/nysearca201679-1.pdf.
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II. Exchange's Description of the Proposal
    The Exchange proposes to list and trade Shares of the Fund under 
NYSE Arca Equities Rule 8.600, which governs the listing and trading of 
Managed Fund Shares on the Exchange. The Fund will be an actively 
managed exchange-traded fund (``ETF''). The Shares will be offered by 
Virtus ETF Trust II (``Trust''), which is registered with the 
Commission as an open-end management investment company.\5\ Virtus ETF 
Advisers LLC will serve as the investment adviser to the Fund 
(``Adviser''). Euclid Advisors LLC will serve as the Fund's sub-adviser 
(``Sub-Adviser''). ETF Distributors LLC will be the principal 
underwriter and distributor of the Fund's Shares, Virtus ETF Solutions 
LLC will serve as the administrator for the Fund, and the Bank of New 
York Mellon will serve as accounting services administrator, custodian, 
and transfer agent for the Fund. The Exchange further states that the 
Adviser and Sub-Adviser are not registered broker-dealers but are 
affiliated with a broker-dealer and each has implemented a ``fire 
wall'' with respect to such broker-dealer regarding access to 
information concerning the composition and/or changes to the Fund's 
portfolio.\6\
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    \5\ According to the Exchange, the Trust is registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act''). The 
Exchange also states that, on February 26, 2016, the Trust filed 
with the Commission an amendment to its registration statement on 
Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a), and 
under the 1940 Act relating to the Fund (File Nos. 333-206600 and 
811-23078) (``Registration Statement''). The Exchange also states 
that the Commission has issued an order granting certain exemptive 
relief to the Trust under the 1940 Act. See Notice, supra note 3, 81 
FR at 37222-37223.
    \6\ See Notice, supra note 3, 81 FR at 37223. The Exchange 
further represents that in the event (i) the Adviser or Sub-Adviser 
becomes registered as a broker-dealer or newly affiliated with a 
broker-dealer or (ii) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with a broker-dealer, the 
Exchange represents that such adviser or sub-adviser, as applicable, 
will implement a fire wall with respect to its relevant personnel or 
broker-dealer affiliate regarding access to information concerning 
the composition and/or changes to the portfolio, and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding the portfolio. See id.
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategy, including the 
Fund's portfolio holdings and investment restrictions.\7\
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    \7\ The Commission notes that additional information regarding 
the Fund, the Trust, and the Shares, including investment 
strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, calculation of NAV, 
distributions, and taxes, among other things, can be found in the 
Notice, Amendment No. 1, and the Registration Statement, as 
applicable. See Notice, Amendment No. 1, and Registration Statement, 
supra notes 3, 4, and 5, respectively.
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A. Exchange's Description of the Fund's Principal Investments
    Under normal circumstances,\8\ the Fund will invest not less than 
80% of its assets in the common stocks of certain Japanese companies 
listed in the JPX-Nikkei 400 Total Return Index (``Index''), a free-
float adjusted market-capitalization-weighted equity index composed of 
400 Tokyo Stock Exchange-listed securities, and in the financial 
instruments listed below in this section.
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    \8\ The term ``under normal circumstances'' includes, but is not 
limited to, the absence of extreme volatility or trading halts in 
the securities markets or the financial markets generally; 
circumstances under which the Fund's investments are made for 
temporary defensive purposes; 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. See Amendment No. 1, supra 
note 4 at 5-6.
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    The Fund will be actively-managed through the selection, at any 
given time, of approximately 80-100 common stocks from the Index based 
on quantitative and qualitative factors, including an assessment of the 
following characteristics: cash flow return on invested capital; 
earnings quality and momentum; operational quality; corporate 
governance policies; and capital stewardship. The Fund may invest in 
such Index components by directly purchasing shares of common stock or 
investing in American

[[Page 50577]]

Depositary Receipts (``ADRs'') \9\ on the common stock of such Index 
components. Securities held by the Fund may be underweighted or 
overweighted relative to their positions in the Index.
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    \9\ ADRs, which evidence ownership of underlying securities 
issued by a foreign corporation, are bought and sold in the United 
States and are typically issued by a U.S. bank or trust company. No 
more than 10% of the net assets of the Fund will be invested in ADRs 
that are not exchange listed. See Notice, supra note 3, 81 FR at 
37223.
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    Although the Fund will focus on investment in securities in the 
Index as described above, the Fund may also invest in common stocks of 
other Japanese companies with characteristics similar to those listed 
on the Index, as determined by the Sub-Adviser. With respect to such 
common stocks, the Fund will only invest in securities that are listed 
on the Tokyo Stock Exchange\10\ and that have a market capitalization 
of $250,000,000 U.S. dollars or greater. The Fund may also invest in 
exchange-traded and over-the-counter ADRs on those common stocks.\11\
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    \10\ Japan Exchange Regulation (``JPX-R''), an affiliate of the 
Tokyo Stock Exchange that conducts self-regulatory functions on 
behalf of the Tokyo Stock Exchange, is a member of the Intermarket 
Surveillance Group, and information relating to transactions in 
Tokyo Stock Exchange listed securities is available through JPX-R. 
See Amendment No. 1, supra note 4, at 6.
    \11\ Id.
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    Positions may be reduced or removed when the Sub-Adviser determines 
that a security has become overweighted within the Fund's portfolio, 
that the security's prospects have adversely changed, that the Fund 
should raise funds for new or other investments, or that there are more 
attractive opportunities.\12\
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    \12\ See Notice, supra note 3, 81 FR at 37223.
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B. Exchange's Description of Other Investments for the Fund
    While the Fund, under normal circumstances, will invest at least 
80% of its assets in common stock of Japanese companies listed in the 
Index, common stock of certain other Japanese companies and ADRs, as 
described above, the Fund may invest its remaining assets in the 
securities and financial instruments described below.\13\
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    \13\ Id.
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    The Fund may invest in securities index futures contracts and 
foreign currency futures contracts.\14\ In general, the Fund will not 
purchase or sell futures contracts unless either (i) the futures 
contracts are purchased for ``bona fide hedging'' purposes (as defined 
under applicable Commodity Futures Trading Commission regulations) or 
(ii) if purchased for other purposes, the sum of the amounts of initial 
margin deposits and premiums required to establish the positions on the 
Fund's existing futures would not exceed 5% of the liquidation value of 
the Fund's total assets.\15\
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    \14\ In instances involving the purchase of futures contracts, 
the Fund will deposit in a segregated account with its custodian an 
amount of cash, cash equivalents, or appropriate securities equal to 
the cost of the futures contracts, to the extent that such deposits 
are required under the 1940 Act. See id. at 37223.
    \15\ See id. at 37223-37224.
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    The Fund may also invest in forward contracts and non-deliverable 
forward (``NDF'') contracts on the foreign currency spot market.\16\
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    \16\ See id. at 37224.
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    The Fund may invest in when-issued and forward-commitment 
securities (which means that delivery and payment would take place a 
number of days after the date of the commitment to purchase), if the 
Fund holds sufficient liquid assets to meet the purchase price.\17\
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    \17\ Id.
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    The Fund may invest in the following equity securities: common 
stocks traded on U.S. or Japanese securities exchanges (other than the 
Tokyo Stock Exchange); common stocks traded in the over-the-counter 
market; U.S. and foreign exchange-traded preferred stocks; U.S. and 
foreign exchange-traded convertible preferred stocks; U.S. and foreign 
exchange-traded convertible bonds; U.S. and foreign exchange-traded 
warrants; and U.S. and foreign exchange-traded rights. The Fund will 
not invest in ADRs on any of these equity securities.\18\
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    \18\ Id.
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    In addition, the Fund may invest in, to the extent permitted by 
Section 12(d)(1) of the 1940 Act and the rules thereunder, other 
exchange-traded and non-exchange traded open-end investment companies, 
including other ETFs.\19\
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    \19\ For purposes of this filing, ETFs consist of 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). All ETFs will be listed and traded in the U.S. 
on a national securities exchange. The Fund will not invest in 
inverse ETFs or in leveraged (e.g., 2X, -2X, 3X or -3X) ETFs. See 
Notice, supra note 3, 81 FR at 37224.
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    The Fund may invest in Currency Trust Shares.\20\
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    \20\ Currency Trust Shares are securities such as those 
described in NYSE Arca Equities Rule 8.202. Id.
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    The Fund may invest in real estate investment trusts (``REITs'') 
traded on U.S. exchanges and Japanese exchanges.\21\
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    \21\ Id.
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    The Fund may enter into short sales of securities. The Fund may 
also enter into short sales ``against the box,'' i.e., when the Fund 
sells a security short while owning a securities equivalent in kind and 
amount to the securities sold short (or securities convertible or 
exchangeable into such securities) and will hold such securities while 
the short sale is outstanding.\22\
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    \22\ Id.
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    The Fund may invest in the following money market instruments: U.S. 
Government obligations; corporate debt obligations \23\ (including, 
without limitation, those subject to repurchase agreements); banker's 
acceptances (credit instruments evidencing the obligation of a bank to 
pay a draft drawn on it by a customer); certificates of deposit of 
domestic branches of banks (certificates representing the obligation of 
a bank to repay funds deposited with it for a specified period of 
time); commercial paper \24\ (unsecured, short-term debt obligation of 
a bank, corporation, or other borrower); and master notes (unsecured 
obligations that are redeemable upon demand of the holder and that 
permit the investment of fluctuating amounts at varying rates of 
interest).\25\
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    \23\ The Adviser expects that under normal market conditions, 
the Fund will seek to invest at least 75% of its corporate bond 
assets in issuances that have at least $100,000,000 par amount 
outstanding in developed countries or at least $200,000,000 par 
amount outstanding in emerging market countries. Id.
    \24\ The Fund will directly invest in commercial paper only if 
such commercial paper is rated in one of the two highest rating 
categories as rated by a major credit agency or, if unrated, will be 
of comparable quality as determined by the Sub-Adviser. Id.
    \25\ Id.
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    The Fund may invest assets in shares of money market funds.\26\
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    \26\ Id.
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    The Fund may, from time to time, take temporary defensive positions 
that are inconsistent with its principal investment strategies in an 
attempt to respond to adverse market, economic, political, or other 
conditions. In such circumstances, the Fund may also hold up to 100% of 
its portfolio in cash and cash equivalent positions.\27\
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    \27\ Cash equivalents are short-term instruments with maturities 
of less than 3 months. Short-term instruments shall include the 
following: (i) 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; (ii) certificates of 
deposit issued against funds deposited in a bank or savings and loan 
association; (iii) bankers' acceptances; (iv) repurchase agreements 
and reverse repurchase agreements; (v) bank time deposits; (vi) 
commercial paper; and (vii) money market funds. Id.

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[[Page 50578]]

C. Exchange's Description of the Fund's Investment Restrictions
    The Fund intends to maintain the required level of diversification 
and otherwise conduct its operations so as to qualify as a ``regulated 
investment company'' for purposes of the Internal Revenue Code of 
1986.\28\
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    \28\ 26 U.S.C. 851. Id.
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets. The Fund will monitor its portfolio 
liquidity on an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid assets.\29\ 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.\30\
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    \29\ Under the supervision of the Board of Trustees of the Trust 
(``Board''), the Fund will determine the liquidity of the Fund's 
investments, which will be monitored by the Board pursuant to 
reports. In determining the liquidity of the Fund's investments, the 
Fund may consider various factors including, without limitation: (i) 
The frequency of trades and quotations; (ii) the number of dealers 
and prospective purchasers in the marketplace; (iii) dealer 
undertakings to make a market; (iv) the nature of the security 
(including, without limitation, any demand or tender features; and 
(v) the nature of the marketplace for trades (including, without 
limitation, the ability to assign or offset the Fund's rights and 
obligations relating to the investment). See Amendment No. 1, supra 
note 4, at 9-10.
    \30\ Id.
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    The Fund will not invest in options or swaps.\31\
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    \31\ Id. at 10.
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    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to produce leveraged returns. 
That is, while the Fund will be permitted to borrow as permitted under 
the 1940 Act, the Fund's investments will not be used to seek 
performance that is the multiple or inverse multiple (i.e. 2Xs and 3Xs) 
of the Index.\32\
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    \32\ See Notice, supra note 3, 81 FR at 37224.
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III. Discussion and Commission Findings
    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\33\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Exchange Act,\34\ 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 system, and, in 
general, to protect investors and the public interest.
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    \33\ 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).
    \34\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Exchange Act,\35\ 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.
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    \35\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    According to the Exchange, quotation and last-sale information for 
the Shares will be available via the Consolidated Tape Association 
(``CTA'') high-speed line.\36\ On each business day, before 
commencement of trading in Shares in the Core Trading Session \37\ on 
the Exchange, the Fund will disclose on its Web site the Disclosed 
Portfolio for the Fund (as defined in NYSEArca Equities Rule 
8.600(c)(2)) that will form the basis for the Fund's calculation of NAV 
at the end of the business day.\38\ In addition, the Portfolio 
Indicative Value, as defined in NYSE Arca Equities Rule 8.600 
(c)(3),\39\ will be widely disseminated at least every 15 seconds 
during the Exchange's Core Trading Session by one or more major market 
data vendors.\40\ The Fund's NAV will be determined as of the close of 
the regular trading session on the New York Stock Exchange (``NYSE'') 
(normally at 4:00 p.m., Eastern Time) on each day that the NYSE is open 
for trading.\41\ The Fund's Web site will include a form of the 
prospectus for the Fund, as well as additional quantitative information 
updated on a daily basis.\42\ 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.\43\ 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.\44\
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    \36\ See Notice, supra note 3, 81 FR at 37226.
    \37\ The term ``Core Trading Session'' is defined in NYSE Arca 
Equities Rule 7.34(a)(2).
    \38\ On a daily basis, the Adviser will disclose on the Fund's 
Web site the following information regarding each portfolio holding, 
as applicable to the type of holding: Ticker symbol, CUSIP number or 
other identifier, if any; a description of the holding (including 
the type of holding); the identity of the security, index, or other 
asset or instrument underlying the holding, if any; quantity held 
(as measured by, for example, par value, notional value or number of 
shares, contracts, or units); maturity date, if any; coupon rate, if 
any; effective date, if any; market value of the holding; and the 
percentage weighting of the holding in the Fund's portfolio. The Web 
site information will be publicly available at no charge. See 
Notice, supra note 3, 81 FR at 37226.
    \39\ The Fund's Portfolio Indicative Value will be calculated 
based on the current market value of the Fund's portfolio holdings. 
Id. The Portfolio Indicative Value calculation will be an estimate 
of the value of the Fund's NAV per Share using market data converted 
into U.S. dollars at the current currency rates. The Portfolio 
Indicative Value price will be based on quotes and closing prices 
from the securities' local market and may not reflect events that 
occur subsequent to the local market's close. Id. at 37227.
    \40\ Currently, it is the Exchange's understanding that several 
major market data vendors display or make widely available Portfolio 
Indicative Values taken from CTA or other data feeds. Id.
    \41\ Id. at 37224. According to the Exchange, in determining the 
value of the Fund's assets, U.S. and foreign exchange-traded equity 
securities, including shares of common stocks, preferred stocks, 
convertible preferred stocks, convertible bonds, warrants, rights, 
ETFs, REITs, Currency Trust Shares, and exchange-traded ADRs, 
generally will be valued at market value using quotations from the 
primary market on which they are traded. The Fund normally will use 
third party pricing services to obtain market quotations. Common 
stocks and ADRs traded in the over-the-counter markets will be 
priced utilizing market quotations provided by approved pricing 
services or by broker quotation. Money market instruments and cash 
equivalents will be valued on the basis of broker quotes or 
valuations provided by a third party pricing service, which in 
determining value utilizes information regarding recent sales, 
market transactions in comparable securities, quotations from 
dealers, and various relationships between securities. Futures 
contracts will generally be valued at the settlement price of the 
relevant exchange. Investments in other open-end investment 
companies (other than ETFs) that are registered under the 1940 Act, 
including money market funds, will be valued based upon the NAVs 
reported by those registered open-end investment companies. NDFs and 
forward contracts will be valued intraday using market quotes or 
another proxy as determined to be appropriate by a third party 
market data provider. Securities and assets for which market 
quotations are not readily available, or that cannot be accurately 
valued using the Fund's normal pricing procedures, will be valued by 
the Trust's Fair Value Pricing Committee at fair value as determined 
in good faith under policies approved by the Board. In addition, the 
Trust may fair value foreign equity portfolio securities each day 
the Trust calculates the Fund's NAV. Pursuant to policies adopted by 
the Board, the Adviser will consult with Bank of New York Mellon and 
the Sub-Adviser on a regular basis regarding the need for fair value 
pricing. The Board will monitor and evaluate the Fund's use of fair 
value pricing, and will periodically review the results of any fair 
valuation under the Trust's policies. See Amendment No. 1, supra 
note 4 at 10-12.
    \42\ Id. at 14.
    \43\ Id. at 16.
    \44\ Id.
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    Intra-day, closing, and settlement prices of U.S. exchange-listed 
equity

[[Page 50579]]

securities (including common stocks, shares of preferred stocks, 
convertible preferred stocks, convertible bonds, warrants, rights, 
ETFs, REITs, Currency Trust Shares and ADRs) will be readily available 
from the national securities exchanges trading such securities, 
automated quotation systems, published or other public sources, or on-
line information services such as Bloomberg or Reuters. Intra-day, 
closing, and settlement prices of non-U.S. exchange-listed equity 
securities (including common stocks, REITs traded on Japanese 
exchanges, preferred stocks, convertible preferred stocks, convertible 
bonds, warrants, and rights), will be available from the foreign 
exchanges on which such securities trade as well as from major market-
data vendors. Intra-day and closing price information for common stocks 
and ADRs traded in the over-the-counter markets will be available from 
major market-data vendors. Price information from brokers and dealers 
or pricing services will be available for money market instruments, 
money market funds, cash equivalents, forwards, and NDFs held by the 
Fund. Quotation and last sale information for futures will be available 
from the exchange on which they are listed. Price information regarding 
open-end investment company securities (other than ETFs), including 
money market funds, will be available from the applicable fund.\45\
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    \45\ Id.
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    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 will be calculated daily and that the 
NAV and the Disclosed Portfolio will be made available to all market 
participants at the same time.\46\ Trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
circumstances under which trading in the Shares may be halted. In 
addition, trading in the Shares 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.\47\ The Exchange states that it 
has a general policy prohibiting the distribution of material, non-
public information by its employees.\48\ In addition, the Exchange 
states that, while the Adviser and Sub-Adviser are not registered as 
broker-dealers, the Adviser and Sub-Adviser are affiliated with broker-
dealers and that each has implemented a fire wall with respect to that 
broker-dealer regarding access to information concerning the 
composition of, and changes to, the portfolio.\49\ Further, the 
Commission notes that the Reporting Authority that provides the 
Disclosed Portfolio must 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 the 
portfolio.\50\ The Exchange represents that trading in the Shares will 
be subject to the existing trading surveillances administered by the 
Exchange, as well as cross-market 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.\51\
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    \46\ See Notice, supra note 3, 81 FR at 37227.
    \47\ These may include: (1) The extent to which trading is not 
occurring in the securities and/or the financial instruments 
comprising the Disclosed Portfolio of the Fund; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance 
of a fair and orderly market are present. Id.
    \48\ Id. at 37228.
    \49\ See id. at 37223; see also supra note 6 and accompanying 
text. The Exchange further represents that an investment adviser to 
an open-end fund is required to be registered under the Investment 
Advisers Act of 1940 (``Advisers Act''). As a result, the Adviser, 
the Sub-Adviser, and their related personnel are subject to the 
provisions of Rule 204A-1 under the Advisers Act relating to codes 
of ethics. This Rule requires investment advisers to adopt a code of 
ethics that reflects the fiduciary nature of the relationship to 
clients as well as compliance with other applicable securities laws. 
Accordingly, procedures designed to prevent the communication and 
misuse of non-public information by an investment adviser must be 
consistent with Rule 204A-1 under the Advisers Act. In addition, 
Rule 206(4)-7 under the Advisers Act makes it unlawful for an 
investment adviser to provide investment advice to clients unless 
such investment adviser has (i) adopted and implemented written 
policies and procedures reasonably designed to prevent violation, by 
the investment adviser and its supervised persons, of the Advisers 
Act and the Commission rules adopted thereunder; (ii) implemented, 
at a minimum, an annual review regarding the adequacy of the 
policies and procedures established pursuant to subparagraph (i) 
above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above. See Amendment No. 1, supra note 4, at 5.
    \50\ See NYSEArca Equities Rule 8.600(d)(2)(B)(ii).
    \51\ According to the Exchange, FINRA conducts cross-market 
surveillances on behalf of the Exchange pursuant to a regulatory 
services agreement, and the Exchange is responsible for FINRA's 
performance under this regulatory services agreement. See Notice, 
supra note 3, 81 FR at 37227.
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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.\52\ In support of this proposal, the Exchange has also 
represented that:
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    \52\ Id.
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    (1) The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange's surveillance 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.
    (3) The Exchange and FINRA will communicate as needed regarding 
trading in the Shares, ETFs, and certain exchange-traded equity 
securities underlying the Shares 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, ETFs and certain 
exchange-traded equity securities underlying the Shares from those 
markets and entities. In addition, the Exchange may obtain information 
regarding trading in the Shares, ETFs, and certain exchange-traded 
equity securities underlying the Shares from markets and other entities 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement (``CSSA''). The Exchange is able to access from 
FINRA, as needed, trade information for certain fixed income securities 
held by the Fund reported to FINRA's Trade Reporting and Compliance 
Engine.
    (4) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (5) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit Holders in an Information Bulletin of the 
special characteristics and risks associated with trading the Shares. 
Specifically, the Bulletin will discuss the following: (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 Portfolio Indicative Value will not be 
calculated

[[Page 50580]]

or publicly disseminated; (d) how information regarding the Portfolio 
Indicative Value 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.
    (6) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act,\53\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \53\ See 17 CFR 240.10A-3.
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    (7) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets.
    (8) Not more than 10% of the net assets of the Fund in the 
aggregate invested in equity securities (other than non-exchange-traded 
investment company securities) shall consist of equity securities whose 
principal market is not a member of the ISG or is a market with which 
the Exchange does not have a CSSA. Furthermore, not more than 10% of 
the net assets of the Fund in the aggregate invested in futures 
contracts shall consist of futures contracts whose principal market is 
not a member of ISG or is a market with which the Exchange does not 
have a CSSA. No more than 10% of the net assets of the Fund will be 
invested in ADRs that are not exchange-listed.
    (9) The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to produce leveraged returns. 
The Fund's investments will not be used to seek performance that is the 
multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Index.
    (10) All ETFs in which the Fund invests will be listed and traded 
in the U.S. on a national securities exchange and the Fund will not 
invest in inverse ETFs or in leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
    (11) The Fund will not invest in options or swaps.
    (12) A minimum of 100,000 Shares for the Fund will be outstanding 
at the commencement of trading on the Exchange.
    The Exchange represents 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 rules and surveillance procedures shall 
constitute continued listing requirements for listing the Shares on the 
Exchange. In addition, the issuer has represented to the Exchange that 
it will advise the Exchange of any failure by the 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.\54\ If the 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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    \54\ 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. 
77499 (April 1, 2016), 81 FR 20428 (April 7, 2016) (SR-BATS-2016-04) 
(approving a proposed rule change to list and trade shares of the 
SPDR DoubleLine Short Duration Total Return Tactical ETF), available 
at: http://www.sec.gov/rules/sro/bats/2016/34-77499.pdf. In the 
context of this representation, it is the Commission's view that 
``monitor'' and ``surveil'' both mean ongoing oversight of the 
Fund's 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, in the Notice, and in 
Amendment No. 1 to the proposed rule change. The Commission notes that 
the Fund and the Shares must comply with the requirements of NYSE Arca 
Equities Rule 8.600, including those set forth in this proposed rule 
change, as modified by Amendment No. 1, to be listed and traded on the 
Exchange on an initial and continuing basis.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act \55\ and the rules and regulations thereunder 
applicable to a national securities exchange.
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    \55\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\56\ that the proposed rule change (SR-NYSEArca-2016-79), 
as modified by Amendment No. 1, be, and it hereby is, approved.
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    \56\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
Robert W. Errett,
Deputy Secretary.
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    \57\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-18052 Filed 7-29-16; 8:45 am]
 BILLING CODE 8011-01-P