Document ID: SEC-2016-2344-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2016-12-30T05:00Z

[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Notices]
[Pages 96539-96545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31683]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79683; File No. SR-NYSEArca-2016-82]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 2, 
and 3 Thereto, To List and Trade Shares of the JPMorgan Diversified 
Event Driven ETF Under NYSE Arca Equities Rule 8.600

December 23, 2016.

I. Introduction

    On June 20, 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 JPMorgan 
Diversified Event Driven ETF (``Fund'') under NYSE Arca Equities Rule 
8.600. The proposed rule change was published for comment in the 
Federal Register on July 7, 2016.\3\ On August 18, 2016, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ On the same day, 
pursuant to Section 19(b)(2) of the Act,\5\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\6\ On 
September 1, 2016, the Exchange filed Amendment No. 2 to the proposed 
rule change.\7\ On

[[Page 96540]]

September 2, 2016, the Exchange filed Amendment No. 3 to the proposed 
rule change.\8\ On October 5, 2016, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Act \9\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment Nos. 1, 2, and 3 thereto.\10\ The Commission has received 
no comments on the proposal. This order grants approval of the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3 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. 78218 (Jul. 1, 
2016), 81 FR 44339 (``Notice'').
    \4\ In Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, the Exchange clarified: (a) Certain 
aspects relating to the Fund's investment strategy, including 
descriptions of (i) certain return factors that the Fund seeks to 
utilize to achieve its investment objective, (ii) the Fund's total 
net long market exposure, (iii) the Fund's use of derivative 
instruments and its market exposure to such instruments, and (iv) 
the Fund's investments in mutual funds; (b) that the common stock 
into which convertible securities held by the Fund can be converted 
will be exchange-traded; (c) that the Fund may invest no more than 
5% of its assets, in the aggregate, in over-the-counter (``OTC'') 
common stocks, preferred stocks, warrants, rights, and contingent 
value rights (``CVRs'') of U.S. and foreign corporations (including 
emerging market securities); (d) the redemption order submission 
cut-off time; (e) that no more than 10% of the net assets of the 
Fund will be invested in Depositary Receipts (as defined herein) 
that are not exchange-listed; and (f) the use of certain defined 
terms. Amendment No. 1 to the proposed rule change is available at: 
https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-1.pdf. Because Amendment No. 1 to the proposed rule change does not 
materially alter the substance of the proposed rule change or raise 
unique or novel regulatory issues, Amendment No. 1 is not subject to 
notice and comment.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 78610, 81 FR 57960 
(Aug. 24, 2016). The Commission designated October 5, 2016, as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ In Amendment No. 2, which partially amended the proposed 
rule change, as modified by Amendment No. 1 thereto, the Exchange 
clarified (a) the Fund's holdings in mutual fund shares as the only 
non-exchange-traded investment company securities the Fund may hold, 
and (b) that Depositary Receipts (as defined herein) are included as 
equity securities subject to the 10% limitation on equity securities 
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. 
Amendment No. 2 to the proposed rule change is available at: https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-2.pdf. 
Because Amendment No. 2 to the proposed rule change does not 
materially alter the substance of the proposed rule change or raise 
unique or novel regulatory issues, Amendment No. 2 is not subject to 
notice and comment.
    \8\ In Amendment No. 3, which partially amended the proposed 
rule change, as modified by Amendment Nos. 1 and 2 thereto, the 
Exchange (a) made conforming changes to the Statutory Basis section 
of the filing to reflect the same changes made by Amendment No. 2 to 
the proposed rule change, and (b) clarified a reference to the term 
``advisor'' to mean ``Adviser.'' Amendment No. 3 to the proposed 
rule change is available at: https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-3.pdf. Because Amendment No. 3 to 
the proposed rule change does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
Amendment No. 3 is not subject to notice and comment.
    \9\ 15 U.S.C. 78s(b)(2)(B).
    \10\ See Securities Exchange Act Release No. 79052, 81 FR 70455 
(Oct. 12, 2016). Specifically, the Commission instituted proceedings 
to allow for additional analysis of the proposed rule change's 
consistency with Section 6(b)(5) of the Act, which requires, among 
other things, that the rules of a national securities exchange be 
``designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade,'' and 
``to protect investors and the public interest.'' See id., 81 FR at 
70459.
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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. The Fund is a series of J.P. Morgan Exchange-
Traded Fund Trust (``Trust''), a Delaware statutory trust.\11\ J.P. 
Morgan Investment Management Inc. (``Adviser'') will be the investment 
adviser to the Fund. The Adviser will also provide administrative 
services for, and will oversee the other service providers of, the 
Fund. SEI Investments Distribution Co. will be the distributor of the 
Fund's Shares. The Exchange represents that the Adviser is not 
registered as a broker-dealer, but is affiliated with a broker-dealer 
and has implemented and will maintain a fire wall with respect to such 
broker-dealer affiliate regarding access to information concerning the 
composition of, and changes to, the portfolio.\12\
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    \11\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). The Exchange states that, on April 22, 2016, 
the Trust filed with the Commission an amendment to its registration 
statement on Form N-1A under the Securities Act of 1933 
(``Securities Act'') and the 1940 Act relating to the Fund (File 
Nos. 333-191837 and 811-22903) (``Registration Statement''). The 
Exchange also notes that an exemptive order (``Exemptive Order'') 
was issued under the 1940 Act on February 19, 2016. The Exchange 
represents that investments made by the Fund will comply with the 
conditions set forth in the Exemptive Order.
    \12\ The Exchange further represents that, in the event (a) the 
Adviser becomes registered as a broker-dealer or newly affiliated 
with one or more broker-dealers, or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a 
broker-dealer, it will implement and maintain a fire wall with 
respect to its relevant personnel or its broker-dealer affiliate 
regarding access to information concerning the composition of, and 
changes to, the portfolio, and will be subject to procedures 
designed to prevent the use and dissemination of material, non-
public information regarding such portfolio.
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    The Fund will seek to provide long-term total return and will seek 
to achieve its investment objective by employing an event-driven 
investment strategy, primarily investing in companies that the Adviser 
believes will be impacted by pending or anticipated corporate or 
special situation events. Under normal market conditions,\13\ the Fund 
will seek to achieve its investment objective by employing its 
investment strategy to access certain ``return factors.'' The Fund will 
invest its assets globally to gain exposure to equity securities 
(across market capitalizations) in developed markets. The Fund may use 
both long and short positions (achieved primarily through the use of 
derivative instruments as described below). The Fund generally will 
maintain a total net long market exposure, meaning that the Fund's 
aggregate exposure will be greater to instruments that the Adviser 
expects to outperform. However, the Fund may have net long or net short 
exposure to one or more industry sectors, individual markets, and/or 
currencies based on the return factors.
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    \13\ The term ``under normal market conditions'' 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 cyber-attacks, natural or man-made 
disaster, act of God, armed conflict, act of terrorism, riot or 
labor disruption, or any similar intervening circumstance.
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    The Adviser will make use of derivatives (as described below) in 
implementing its strategies. Under normal market conditions, the 
Adviser currently expects that a significant portion of the Fund's 
exposure will be attained through the use of derivatives in addition to 
its exposure through direct investments. Derivatives will primarily be 
used as an efficient means of implementing a particular strategy in 
order to gain exposure to a desired return factor. For example, the 
Fund may use a total return swap to establish both long and short 
positions in order to gain the desired exposure rather than physically 
purchasing and selling short each instrument. Derivatives may also be 
used to increase gain, to effectively gain targeted exposure from its 
cash positions, to hedge various investments, and/or for risk 
management. As a result of the Fund's use of derivatives and to serve 
as collateral, the Fund may hold significant amounts of U.S. Treasury 
obligations, including Treasury bills, bonds and notes and other 
obligations issued or guaranteed by the U.S. Treasury, other short-term 
investments, including money market funds, and foreign currencies, in 
which certain derivatives are denominated.
    The amount that may be invested in any one instrument will vary and 
generally depend on the return factors employed by the Adviser at that 
time. However, with the exception of specified investment limitations 
for certain assets described below, there are no stated percentage 
limitations on the amount that can be invested in any one type of 
instrument, and the Adviser may, at times, focus on a smaller number of 
instruments. Moreover, the Fund will generally be unconstrained by any 
particular capitalization, style, or sector, and may invest in any 
developed region or country. The Adviser will make use of quantitative 
models and information and data supplied by third parties to, among 
other things, help determine the portfolio's weightings among various 
investments and construct sets of transactions and investments.
    In addition to its main return factors, the Fund may utilize return 
factors that use debt securities. The Fund may invest, either directly 
or through financial derivative instruments, debt securities that are 
subject to a downgrade from investment grade to non-investment grade 
(also known as high yield/junk bond) status. For example, the Fund may 
invest in the bonds that have been downgraded while hedging credit risk 
more broadly by using credit default swaps indices in order to attempt 
to keep the Fund's exposure market neutral.
    The Exchange has made the following representations and statements 
in describing the Fund.\14\
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    \14\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, creation and redemption procedures, calculation 
of net asset value (``NAV''), fees, distributions, and taxes, among 
other things, can be found in the Notice, Amendment Nos. 1, 2, and 
3, and the Registration Statement, as applicable. See supra notes 3, 
4, 7, 8, and 11, respectively, and accompanying text.

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[[Page 96541]]

A. Exchange's Description of the Fund's Principal Investments

    Under normal market conditions, the Fund will invest principally 
(i.e., more than 50% of the Fund's assets) in the securities and 
financial instruments described below, which may be represented by 
derivatives, as discussed below.
    The Fund may invest in exchange-listed and traded common stocks, 
preferred stocks, warrants and rights of U.S. and foreign corporations 
(including emerging market securities), and U.S. and non-U.S. real 
estate investment trusts (``REITs''). Exchange-listed and traded common 
stocks, preferred stocks, warrants and rights of U.S. corporations, and 
U.S. REITs will be traded on U.S. national securities exchanges.
    The Fund may invest in exchange-listed and OTC ``Depositary 
Receipts'' \15\ as described below.
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    \15\ Depositary Receipts include American Depositary Receipts 
(``ADRs''), Global Depositary Receipts (``GDRs'') and European 
Depositary Receipts (``EDRs''). No more than 10% of the net assets 
of the Fund will be invested in Depositary Receipts that are not 
exchange-listed.
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    The Fund may invest in the following cash and cash equivalents: 
Investments in money market funds (for which the Adviser and/or its 
affiliates serve as investment adviser or administrator), bank 
obligations,\16\ commercial paper, repurchase agreements, and short-
term funding agreements.\17\
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    \16\ Bank obligations include the following: Bankers' 
acceptances, certificates of deposit, and time deposits.
    \17\ Short-term funding agreements are agreements issued by 
banks and highly rated U.S. insurance companies such as Guaranteed 
Investment Contracts and Bank Investment Contracts.
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    The Fund may invest in corporate debt.\18\
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    \18\ The Adviser expects that, under normal market conditions, 
the Fund will invest at least 75% of its corporate debt securities 
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.
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    In addition to money market funds referenced above, the Fund may 
invest in shares of non-exchange-traded investment company securities, 
that is, mutual fund shares, including mutual fund shares for which the 
Adviser and/or its affiliates may serve as investment adviser or 
administrator, to the extent permitted by Section 12(d)(1)\19\ of the 
1940 Act and the rules thereunder.
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    \19\ 15 U.S.C. 80a-12(d)(1).
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    In addition, the Fund may invest in exchange traded funds 
(``ETFs''),\20\ purchase and sell futures contracts on indexes of 
securities, invest in swaps (credit default swaps (``CDSs''), CDS 
indices, and total return swaps on equity securities, equity indexes, 
fixed income securities, and fixed income futures), invest in forward 
and spot currency transactions \21\ (such investments consist of non-
deliverable forwards (``NDFs''), foreign forward currency contracts, 
and spot currency transactions), and invest in OTC and exchange-traded 
call and put options on equities, fixed income securities, and 
currencies or options on indexes of equities, fixed income securities, 
and currencies.
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    \20\ The ETFs in which the Fund may invest will be registered 
under the 1940 Act and 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). Such ETFs all will be listed and traded in the U.S. on 
registered exchanges. While the Fund may invest in inverse ETFs, the 
Fund will not invest in leveraged or inverse leveraged (e.g., 2X, -
2X, 3X, or -3X) ETFs.
    \21\ The 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.
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    The Fund may invest in U.S. Government obligations, which may 
include direct obligations of the U.S. Treasury, including Treasury 
bills, notes and bonds, all of which are backed as to principal and 
interest payments by the full faith and credit of the United States, 
and separately traded principal and interest component parts of such 
obligations that are transferable through the Federal book-entry system 
known as Separate Trading of Registered Interest and Principal of 
Securities and Coupons Under Book Entry Safekeeping.

B. Exchange's Description of the Fund's Other Investments

    While the Fund, under normal market conditions, will invest at 
least fifty percent (50%) of its assets in the securities and financial 
instruments described above, the Fund may invest its remaining assets 
in other assets and financial instruments, as described below.
    The Fund may invest in U.S. and non-U.S. convertible securities, 
which are bonds or preferred stock that can convert to common stock. 
The common stock into which convertible securities can be converted 
will be exchange-traded.
    The Fund may invest in reverse repurchase agreements.
    The Fund may invest in sovereign obligations, which are investments 
in debt obligations issued or guaranteed by a foreign sovereign 
government or its agencies, authorities, or political subdivisions.
    The Fund may invest no more than 5% of its assets in equity and 
debt securities that are restricted securities (Rule 144A securities), 
in addition to Rule 144A securities deemed illiquid by the Adviser, as 
referenced below.
    Under normal market conditions, the Fund may invest no more than 5% 
of its assets, in the aggregate, in OTC common stocks, preferred 
stocks, warrants, rights, and CVRs of U.S. and foreign corporations 
(including emerging market securities).\22\
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    \22\ The Exchange further represents that not more than 10% of 
the net assets of the Fund, in the aggregate, invested in equity 
securities (other than mutual fund shares) shall consist of equity 
securities, including common stock into which convertible securities 
can be converted and Depositary Receipts, 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. See 
Amendment No. 2 to the proposed rule change, supra note 7.
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C. Exchange's Description of the Fund's Investment Restrictions

    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance. The Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of the Fund's net assets are held 
in illiquid assets. Illiquid assets include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
    The Fund may invest in other investment companies to the extent 
permitted by Section 12(d)(1) of the 1940 Act and rules thereunder and/
or any applicable exemption or exemptive order under the 1940 Act with 
respect to such investments.
    The Fund may invest in securities denominated in U.S. dollars, 
major reserve currencies, and currencies of other countries in which 
the Fund may invest.
    The Fund may invest in both investment grade and high yield debt 
securities.
    The Fund intends to qualify for and to elect treatment as a 
separate regulated investment company under Subchapter M of the 
Internal Revenue Code. Furthermore, the Fund may not concentrate 
investments in a particular industry or group of industries, as 
concentration is defined under the 1940 Act, the rules or regulations 
thereunder,

[[Page 96542]]

or any exemption therefrom, as such statute, rules, or regulations may 
be amended or interpreted from time to time.
    The Fund is a diversified series of the Trust. The Fund intends to 
meet the diversification requirements of the 1940 Act.
    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and will not be used to enhance 
leverage (although certain derivatives may result in leverage). 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 
Fund's primary broad-based securities benchmark index (as defined in 
Form N-1A).\23\
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    \23\ The Fund's broad-based securities benchmark index will be 
identified in a future amendment to the Registration Statement 
following the Fund's first full calendar year of performance.
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D. Exchange's Description of the Fund's Use of Derivatives

    The Fund proposes to seek certain exposures through transactions in 
the specific derivative instruments described above. The derivatives to 
be used are futures, swaps, NDFs, foreign forward currency contracts, 
and call and put options. Derivatives, which are instruments that have 
a value based on another instrument, exchange rate, or index, may also 
be used as substitutes for securities in which the Fund can invest. The 
Fund may use these derivative instruments to increase gain, to 
effectively gain targeted exposure from its cash positions, to hedge 
various investments, and/or for risk management.
    Investments in derivative instruments will be made in accordance 
with the 1940 Act and consistent with the Fund's investment objective 
and policies. To limit the potential risk associated with such 
transactions, the Fund will segregate or ``earmark'' assets determined 
to be liquid by the Adviser in accordance with procedures established 
by the Trust's Board of Trustees and in accordance with the 1940 Act 
(or, as permitted by applicable regulation, enter into certain 
offsetting positions) to cover its obligations under derivative 
instruments. These procedures have been adopted consistent with Section 
18 of the 1940 Act and related Commission guidance. In addition, the 
Fund will include appropriate risk disclosure in its offering 
documents, including leveraging risk. Leveraging risk is the risk that 
certain transactions of the Fund, including the Fund's use of 
derivatives, may give rise to leverage, causing the Fund to be more 
volatile than if it had not been leveraged.\24\ Because the markets for 
certain assets, or the assets themselves, may be unavailable or cost 
prohibitive as compared to derivative instruments, suitable derivative 
transactions may be an efficient alternative for the Fund to obtain the 
desired asset exposure.
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    \24\ 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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E. Exchange's Description of the Impact on the Arbitrage Mechanism

    The Exchange states that, according to the Adviser, there will be 
minimal 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 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.
    In addition, the Exchange states that, according to the Adviser, 
there will not be any significant impacts to the settlement or 
operational aspects of the 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 the Fund processes purchases or redemptions of creation 
units in-kind.

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.\25\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\26\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, 
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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    \25\ 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).
    \26\ 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,\27\ which sets forth Congress' finding 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 for portfolio holdings of the Fund 
that are U.S. exchange listed, including common stocks, preferred 
stocks, warrants, rights, ETFs, REITs, and U.S. exchange-traded ADRs 
will be available via the Consolidated Tape Association (``CTA'') high 
speed line. Quotation and last-sale information for such U.S. exchange-
listed securities, as well as futures, also will be available from the 
exchange on which they are listed. Quotation and last-sale information 
for exchange-listed options cleared via the Options Clearing 
Corporation will be available via the Options Price Reporting 
Authority, and quotation and last-sale information for non-U.S. equity 
securities (including GDRs and EDRs) will be available from the 
exchanges on which they trade and from major market data vendors, as 
applicable.
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    \27\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    In addition, the Intra-day Indicative Value (``IIV''), which is the 
Portfolio Indicative Value, 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.\28\ According to the Exchange, a third party market data 
provider will calculate the IIV for the Fund. 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).
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    \28\ According to the Exchange, several major market data 
vendors display and/or make widely available IIVs taken from the CTA 
or other data feeds.
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    With respect to specific derivatives:
     NDFs and foreign forward currency contracts 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.
     CDS and CDS indices swaps may be valued using intraday 
data from market

[[Page 96543]]

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.
    On each business day, before commencement of trading in Shares in 
the Core Trading Session (normally, 9:30 a.m. to 4:00 p.m., Eastern 
Time or ``E.T.'') on the Exchange, the Adviser will disclose on the 
Fund's Web site the Disclosed Portfolio for the Fund as defined in NYSE 
Arca Equities Rule 8.600(c)(2) that will form the basis for the Fund's 
calculation of NAV at the end of the business day.\29\ According to the 
Exchange, the Fund's disclosure of derivative positions in the 
Disclosed Portfolio will include information that market participants 
can use to value these positions intraday. 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, such as the type of 
swap); the identity of the security, index, or other asset or 
instrument underlying the holding, if any; for options, the option 
strike price; quantity held (as measured by, for example, par value, 
notional value, or number of shares, contracts, or units); maturity 
date, if any; coupon rate, if any; effective date, if any; market value 
of the holding; and the percentage weighting of the holding in the 
Fund's portfolio. The Web site information will be publicly available 
at no charge.
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    \29\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.
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    The NAV of Shares, under normal market conditions, will be 
calculated each business day as of the close of the Exchange, which is 
typically 4:00 p.m. E.T. On occasion, the Exchange will close before 
4:00 p.m. E.T. When that happens, NAV will be calculated as of the time 
the Exchange closes.\30\
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    \30\ Securities for which market quotations are readily 
available will generally be valued at their current market value. 
Other securities and assets, including securities for which market 
quotations are not readily available or market quotations are 
determined not to be reliable; or, if their value has been 
materially affected by events occurring after the close of trading 
on the exchange or market on which the security is principally 
traded but before the Fund's NAV is calculated, may be valued at 
fair value in accordance with policies and procedures adopted by the 
Trust's Board of Trustees. Fair value represents a good faith 
determination of the value of a security or other asset based upon 
specifically applied procedures. Fair valuation may require 
subjective determinations. See Notice, supra note 3, 81 FR at 44344 
(describing additional details with respect to the Fund's NAV 
valuation methodology).
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    Price information for OTC common stocks (including certain OTC 
ADRs), preferred stocks, warrants, rights, and CVRs will be available 
from one or more major market data vendors or broker-dealers in the 
securities. Quotation information for OTC options, cash equivalents, 
swaps, money market funds, non-exchange-listed investment company 
securities (other than money market funds), Rule 144A securities, U.S. 
Government obligations, U.S. Government agency obligations, sovereign 
obligations, corporate debt, and reverse repurchase agreements may be 
obtained from brokers and dealers who make markets in such securities 
or through nationally recognized pricing services through subscription 
agreements. The U.S. dollar value of foreign securities, instruments, 
and currencies can be derived by using foreign currency exchange rate 
quotations obtained from nationally recognized pricing services. 
Forwards and spot currency price information will be available from 
major market data vendors. The Fund's Web site will include a form of 
the prospectus for the Fund and additional data relating to NAV and 
other applicable quantitative information.
    The Commission 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. Trading in Shares of the Fund will be 
halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached or because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable,\31\ and 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 Fund may be halted.
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    \31\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities or 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. With Respect to trading 
halts, the Exchange may consider all relevant factors in exercising 
its discretion to halt or suspend trading in the Shares of the Fund.
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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 
is not registered as a broker-dealer, but is affiliated with a broker-
dealer and has implemented and will maintain a fire wall with respect 
to such broker-dealer affiliate regarding access to information 
concerning the composition of, and changes to, the portfolio.\32\ The 
Commission also notes that, pursuant to NYSE Arca Equities Rule 
8.600(d)(2)(B)(ii), the ``Reporting Authority'' that provides the 
Disclosed Portfolio must implement and maintain, or be subject to, 
procedures designed to

[[Page 96544]]

prevent the use and dissemination of material, non-public information 
regarding the actual components of the portfolio.\33\
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    \32\ See supra note 12. The Exchange further notes 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 and its related personnel are subject to the 
provisions of Rule 204A-1 under the Advisers Act relating to codes 
of ethics. This Rule requires investment advisers to adopt a code of 
ethics that reflects the fiduciary nature of the relationship to 
clients as well as compliance with other applicable securities laws. 
Accordingly, procedures designed to prevent the communication and 
misuse of non-public information by an investment adviser must be 
consistent with Rule 204A-1 under the Advisers Act. In addition, 
Rule 206(4)-7 under the Advisers Act makes it unlawful for an 
investment adviser to provide investment advice to clients unless 
such investment adviser has (i) adopted and implemented written 
policies and procedures reasonably designed to prevent violation, by 
the investment adviser and its supervised persons, of the Advisers 
Act and the Commission rules adopted thereunder; (ii) implemented, 
at a minimum, an annual review regarding the adequacy of the 
policies and procedures established pursuant to subparagraph (i) 
above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
    \33\ ``Reporting Authority'' is defined in NYSE Arca Equites 
Rule (c)(4).
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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 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.\34\
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    \34\ The Exchange represents that 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.
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    The Exchange represents that it deems the Shares to be equity 
securities, thus rendering the trading of the Shares subject to the 
Exchange's existing rules governing the trading of equity securities.
    In support of this proposal, the Exchange has made the following 
additional representations:
    (1) The Shares 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) 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 applicable federal 
securities laws.
    (4) The Exchange, or FINRA, on behalf of the Exchange, or both, 
will communicate as needed regarding trading in the Shares, certain 
exchange-listed equity securities (including Depositary Receipts, ETFs, 
REITs, common and preferred stocks, common stock into which convertible 
securities can be converted, warrants, rights, certain futures, and 
certain exchange-traded options with other markets and other entities 
that are members of the ISG, and the Exchange or FINRA, on behalf of 
the Exchange, or both, may obtain trading information regarding trading 
such securities and financial instruments from such markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in such securities and financial instruments from markets and 
other entities that are members of ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement.\35\ FINRA, on 
behalf of the Exchange, is able to access, as needed, trade information 
for certain fixed income securities held by the Fund reported to 
FINRA's Trade Reporting and Compliance Engine.
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    \35\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
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    (5) Not more than 10% of the net assets of the Fund, in the 
aggregate, invested in equity securities (other than mutual fund 
shares) shall consist of equity securities, including common stock into 
which convertible securities can be converted and Depositary Receipts, 
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. In addition, not more than 10% of the net assets of the Fund 
in the aggregate invested in futures contracts or exchange-traded 
options shall consist of futures contracts or options whose principal 
market is not a member of ISG or is a market with which the Exchange 
does not have a comprehensive surveillance sharing agreement.
    (6) 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 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 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. The Bulletin will also 
discuss any exemptive, no-action, and interpretive relief granted by 
the Commission from any rules under the Act.
    (7) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\36\
---------------------------------------------------------------------------

    \36\ See 17 CFR 240.10A-3.
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    (8) Exchange-listed and traded common stocks, preferred stocks, 
warrants and rights of U.S. corporations, and U.S. REITs will be traded 
on U.S. national securities exchanges. In addition, no more than 10% of 
the net assets of the Fund will be invested in Depositary Receipts that 
are not exchange-listed, and the common stock into which convertible 
securities holdings can be converted will be exchange-traded.
    (9) The ETFs in which the Fund may invest will be registered under 
the 1940 Act and 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). Such ETFs all will be 
listed and traded in the U.S. on registered exchanges. While the Fund 
may invest in inverse ETFs, the Fund will not invest in leveraged or 
inverse leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs.
    (10) The Adviser expects that, under normal market conditions, the 
Fund will invest at least 75% of its corporate debt securities 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.
    (11) The 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 BIS Triennial Central Bank Survey.
    (12) The Fund may invest no more than 5% of its assets in equity 
and debt securities that are restricted securities (Rule 144A 
securities), in addition to Rule 144A securities deemed illiquid by the 
Adviser. In addition, under normal market conditions, the Fund may 
invest no more than 5% of its assets, in the aggregate, in OTC common 
stocks, preferred stocks, warrants, rights, and CVRs of U.S. and 
foreign corporations (including emerging market securities).
    (13) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance. The Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of

[[Page 96545]]

liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
    (14) The Fund's investments, including derivatives, will be 
consistent with the Fund's investment objective and will not be used to 
enhance leverage (although certain derivatives may result in leverage). 
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 Fund's primary broad-based securities benchmark index (as 
defined in Form N-1A).
    (15) Investments in derivative instruments will be made in 
accordance with the 1940 Act and consistent with the Fund's investment 
objective and policies. To limit the potential risk associated with 
such transactions, the Fund will segregate or ``earmark'' assets 
determined to be liquid by the Adviser in accordance with procedures 
established by the Trust's Board of Trustees and in accordance with the 
1940 Act (or, as permitted by applicable regulation, enter into certain 
offsetting positions) to cover its obligations under derivative 
instruments. These procedures have been adopted consistent with Section 
18 of the 1940 Act and related Commission guidance. In addition, the 
Fund will include appropriate risk disclosure in its offering 
documents, including leveraging risk. Leveraging risk is the risk that 
certain transactions of the Fund, including the Fund's use of 
derivatives, may give rise to leverage, causing the Fund to be more 
volatile than if it had not been leveraged.\37\
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    \37\ 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 Exchange also represents that all statements and 
representations made in this 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 of the Fund on the Exchange.
    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.\38\ 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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    \38\ 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 
a 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 and in the Notice,\39\ 
Amendment Nos. 1, 2 and 3 to the proposed rule change,\40\ and the 
Exchange's description of the Fund. The Commission notes that the Fund 
and the Shares must comply with the requirements of NYSE Arca Equities 
Rule 8.600 to be listed and traded on the Exchange on an initial and 
continued basis.
---------------------------------------------------------------------------

    \39\ See supra note 3.
    \40\ See supra notes 4, 7, and 8.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, is 
consistent with Section 6(b)(5) of the Act \41\ and the rules and 
regulations thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

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

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-NYSEArca-2016-82), as 
modified by Amendment Nos. 1, 2, and 3 thereto, be, and it hereby is, 
approved.
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    \42\ Id.
    \43\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-31683 Filed 12-29-16; 8:45 am]
 BILLING CODE 8011-01-P