Document ID: SEC-2014-1252-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-07-24T04:00Z

[Federal Register Volume 79, Number 142 (Thursday, July 24, 2014)]
[Notices]
[Pages 43114-43117]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17401]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 72645; File No. SR-NYSEArca-2014-44]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating To Listing and Trading Shares 
of First Trust Long/Short Equity ETF Under NYSE Arca Equities Rule 
8.600

July 18, 2014.

I. Introduction

    On May 21, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares (``Shares'') of the First Trust Long/Short Equity 
ETF (``Fund'') under NYSE Arca Equities Rule 8.600. The proposed rule 
change was published for comment in the Federal Register on June 9, 
2014.\3\ The Commission received no comments on the proposed rule 
change. This order grants approval of the proposed rule change.
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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. 72299 (Jun. 3, 
2014), 79 FR 33018 (``Notice'').
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II. Description of Proposed Rule Change

    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 \4\ on the Exchange. The Fund will be a series of 
First Trust Exchange-Traded Fund III (``Trust''),\5\ a registered 
management investment company. The Fund will be an actively-managed 
exchange-traded fund (``ETF'') and will not seek to replicate the 
performance of a specified index. First Trust Advisors L.P. 
(``Adviser'') will be the investment adviser for the Fund.\6\ Brown 
Brothers Harriman & Co. will be the administrator, accounting agent, 
custodian, and transfer agent for the Fund, and First Trust Portfolios 
L.P. will be the principal underwriter and distributor for the Fund.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (``1940 Act''), organized as an open-end 
investment company or similar entity that invests in a portfolio of 
securities selected by its investment adviser consistent with its 
investment objectives and policies. In contrast, an open-end 
investment company that issues Investment Company Units, listed and 
traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(3), 
seeks to provide investment results that correspond generally to the 
price and yield performance of a specific foreign or domestic stock 
index, fixed income securities index, or combination thereof.
    \5\ The Trust is registered under the 1940 Act. According to the 
Exchange, on April 1, 2014, the Trust filed with the Commission an 
amendment to its registration statement on Form N-1A relating to the 
Fund (File Nos. 333-176976 and 811-22245) (``Registration 
Statement''). In addition, the Exchange states that the Trust has 
obtained certain certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 28468 (Oct. 27, 2008) (File No. 
812-13477).
    \6\ The Exchange represents that the Adviser is not registered 
as a broker-dealer, but is affiliated with First Trust Portfolios 
L.P., a broker dealer. The Exchange further represents that the 
Adviser has implemented a ``fire wall'' with respect to its broker-
dealer affiliate regarding access to information concerning the 
composition and changes to the Fund's portfolio. In addition, 
according to the Exchange, in the event (a) the Adviser or any sub-
adviser becomes, or becomes newly affiliated with, a broker-dealer, 
or (b) any new adviser or sub-adviser is, or becomes affiliated 
with, a broker-dealer, the Adviser or any new adviser or sub-
adviser, as applicable, will implement a fire wall with respect to 
its relevant personnel or its broker-dealer affiliate regarding 
access to information concerning the composition and changes to the 
Fund's portfolio, and will be subject to procedures designed to 
prevent the use and dissemination of material, non-public 
information regarding such portfolio.
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategies, including other 
portfolio holdings and investment restrictions.\7\
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    \7\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, net asset value (``NAV'') calculation, creation 
and redemption procedures, fees, portfolio holdings disclosure 
policies, distributions, and taxes, among other information, is 
included in the Notice and the Registration Statement, as 
applicable. See Notice and Registration Statement, supra notes 3 and 
5, respectively.
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Principal Investments of the Fund

    According to the Exchange, the Fund will seek to provide investors 
with long-term total return. The Fund intends to pursue its investment 
objective by establishing long and short positions in a portfolio of 
Equity Securities (as defined below). Under normal market 
conditions,\8\ at least 80% of the Fund's

[[Page 43115]]

net assets will be exposed to U.S. exchange-listed equity securities of 
U.S. and foreign companies by investing in such securities directly and 
in U.S. ETFs that provide exposure to such securities.\9\ The 
securities of the companies and ETFs in which the Fund will invest are 
referred to collectively as ``Equity Securities.'' The Equity 
Securities held by the Fund may include U.S. exchange-listed equity 
securities of foreign issuers as well as investments in the equity 
securities of foreign issuers that are in the form of U.S. exchange-
listed American Depositary Receipts (``ADRs'') or U.S. exchange-listed 
Global Depositary Receipts (``GDRs,'' and together with ADRs, 
``Depositary Receipts''), as well as unsponsored ADRs.\10\ The Equity 
Securities in which the Fund may invest (with the exception of 
unsponsored ADRs) will be listed on a U.S. national securities 
exchange, all of which are members of the Intermarket Surveillance 
Group (``ISG'').
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    \8\ The term ``under normal market conditions'' or ``under 
normal circumstances'' includes, but is not limited to, the absence 
of adverse market, economic, political, or other conditions, 
including extreme volatility or trading halts in the equities 
markets or the financial markets generally; operational issues 
causing dissemination of inaccurate market information; or force 
majeure type events such as systems failure, natural or man- made 
disaster, act of God, armed conflict, act of terrorism, riot or 
labor disruption, or any similar intervening circumstance.
    \9\ For purposes of the Fund's principal investments, ETFs 
include Investment Company Units (as described in NYSE Arca Equities 
Rule 5.2(j)(3)); Portfolio Depositary Receipts (as described in NYSE 
Arca Equities Rule 8.100); and Managed Fund Shares (as described in 
NYSE Arca Equities Rule 8.600). The ETFs all will be listed and 
traded in the U.S. on registered exchanges. The ETFs in which the 
Fund may invest will primarily be equity index-based ETFs that hold 
substantially all of their assets in securities representing a 
specific equity index. While the Fund may invest in inverse ETFs, 
the Fund will not invest in leveraged (e.g., 2X, -2X, 3X, or -3X) 
ETFs.
    \10\ The Fund will not invest more than 10% of its investments 
in Equity Securities in unsponsored ADRs.
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    As indicated above, the Fund will take long and short positions in 
Equity Securities. As opposed to taking long positions in which an 
investor seeks to profit from increases in the price of a security, 
short selling (or ``selling short'') is a technique that will be used 
by the Fund to try and profit from the falling price of a security. 
Short selling involves selling a security that has been borrowed from a 
third party with the intention of buying an identical security back at 
a later date to return to that third party.
    The Adviser will select Equity Securities using an investment 
process that analyzes fundamental, market-related, technical and 
statistical attributes of Equity Securities to assess total return 
potential. The Adviser will then use this analysis as the basis to 
establish long and short positions within the Fund's portfolio. The 
Exchange notes that having both long and short positions in an equity 
security portfolio is a common way to create returns that are 
independent of market moves. One advantage of a long and short 
portfolio is that the long and short positions may offset one another 
in a manner that results in a lower net exposure to the direction of 
the market. In addition, cash balances arising from the use of short 
selling typically will be held in money market instruments.\11\
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    \11\ Money market instruments will generally be short-term cash 
instruments that have a remaining maturity of 397 days or less and 
exhibit high quality credit profiles. These include U.S. Treasury 
Bills and repurchase agreements.
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Other Investments of the Fund

    While the Fund, under normal circumstances,\12\ will invest at 
least 80% of its net assets in Equity Securities as described above, 
the Fund may also invest its remaining assets in other investments as 
described below.
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    \12\ See supra note 8.
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    The Fund may invest a portion of its net assets in high-quality, 
money market instruments on an ongoing basis. The instruments in which 
the Fund may invest include: (1) Short-term obligations issued by the 
U.S. government; (2) negotiable certificates of deposit (``CDs''), 
fixed time deposits and bankers' acceptances of U.S. and foreign banks 
and similar institutions; (3) commercial paper rated at the date of 
purchase ``Prime-1'' by Moody's Investors Service, Inc. or ``A-1+'' or 
``A-1'' by Standard & Poor's Ratings Group, Inc., a division of The 
McGraw-Hill Companies, Inc., or, if unrated, of comparable quality as 
determined by the Adviser; (4) repurchase agreements (only from or to a 
commercial bank or a broker-dealer, and only if the purchase is 
scheduled to occur within seven (7) days or less); and (5) money market 
mutual funds. CDs are short-term negotiable obligations of commercial 
banks. Time deposits are non-negotiable deposits maintained in banking 
institutions for specified periods of time at stated interest rates. 
Bankers' acceptances are time drafts drawn on commercial banks by 
borrowers, usually in connection with international transactions.
    The Fund also may invest up to 20% of its net assets in U.S. 
exchange-listed equity index futures contracts. All of such equity 
index futures contracts will be listed on an exchange that is a member 
of ISG.
    In certain situations or market conditions, the Fund may 
temporarily depart from its normal investment policies and strategies 
provided that the alternative is consistent with its investment 
objective and is in the best interest of the Fund. For example, the 
Fund may hold little or no short positions for extended periods, or the 
Fund may hold a higher than normal proportion of its net assets in cash 
in times of extreme market stress.

Investment Restrictions of the Fund

    The Fund will seek to qualify for treatment as a regulated 
investment company under Subchapter M of the Internal Revenue Code of 
1986, as amended.
    In addition, as part of its non-principal strategy, the Fund may 
hold up to an aggregate amount of 15% of its net assets in illiquid 
assets (calculated at the time of investment). 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 securities and other illiquid assets.
    The Fund will not invest 25% or more of the value of its net assets 
in securities of issuers in any one industry. This restriction will not 
apply to (a) obligations issued or guaranteed by the U.S. government, 
its agencies, or instrumentalities, or (b) securities of other 
investment companies.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \13\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\14\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\15\ which 
requires, among other things, that the Exchange's rules be designed 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. The Commission notes that the Fund and the Shares must comply 
with the initial and continued listing criteria in NYSE Arca Equities 
Rule 8.600 for the Shares to be listed and traded on the Exchange.
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    \13\ 15 U.S.C. 78f.
    \14\ 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).
    \15\ 15 U.S.C. 78f(b)(5).

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[[Page 43116]]

    The Commission 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,\16\ 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 the underlying U.S. exchange-traded 
Equity Securities will be available via the Consolidated Tape 
Association (``CTA'') high-speed line. In addition, the Fund's 
Portfolio Indicative Value, as defined in NYSE Arca Equities Rule 
8.600(c)(3), will be widely disseminated at least every fifteen seconds 
during the NYSE Arca Core Trading Session by one or more major market 
data vendors.\17\ On a daily basis, the Adviser, on behalf of the Fund, 
will disclose on the Fund's Web site the following information 
regarding each portfolio holding (``Disclosed Portfolio,'' as defined 
in NYSE Arca Equities Rule 8.600(c)(2)), as applicable to the type of 
holding: ticker symbol, CUSIP number or other identifier, if any; a 
description of the 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. In addition, 
a basket composition file, which includes the security names and share 
quantities, if applicable, required to be delivered in exchange for a 
Fund's Shares, together with estimates and actual cash components, will 
be publicly disseminated daily prior to the opening of the New York 
Stock Exchange (``NYSE'') via the National Securities Clearing 
Corporation. The NAV of the Fund will be determined as of the close of 
trading (normally 4:00 p.m., Eastern Time) on each day the NYSE is open 
for business.\18\ Information regarding market price and trading volume 
of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services. Information regarding the previous day's closing price and 
trading volume information for the Shares will be published daily in 
the financial section of newspapers. Information regarding the Equity 
Securities and U.S. exchange-traded futures contracts held by the Fund 
will be available from the national exchanges trading such securities 
and futures contracts, respectively, automated quotation systems, 
published or other public sources, or on-line information services, 
such as Bloomberg or Reuters or any such future service provider. In 
addition, quotation information from brokers and dealers or pricing 
services will be available for fixed income securities, including U.S. 
government obligations, other money market instruments, and repurchase 
agreements. 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 for the Fund.
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    \16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \17\ According to the Exchange, several major market data 
vendors display or make widely available Portfolio Indicative Values 
taken from CTA or other data feeds.
    \18\ NAV will be calculated for the Fund by taking the market 
price of the Fund's net assets, including interest or dividends 
accrued but not yet collected, less all liabilities, and dividing 
such amount by the total number of Shares outstanding. The result, 
rounded to the nearest cent, will be the NAV per Share. All 
valuations will be subject to review by the Board of Trustees of the 
Trust or its delegate. According to the Exchange, equity securities 
(including ETFs and Depositary Receipts) listed on any exchange 
other than The NASDAQ Stock Market LLC (``NASDAQ'') will be valued 
at the last sale price on the exchange on which they are principally 
traded on the business day as of which such value is being 
determined. Equity securities listed on the NASDAQ will be valued at 
the official closing price on the business day as of which such 
value is being determined. If there has been no sale on such day, or 
no official closing price in the case of securities traded on the 
NASDAQ, the securities will be valued using fair value pricing. 
Equity securities traded on more than one securities exchange will 
be valued at the last sale price or official closing price, as 
applicable, on the business day as of which such value is being 
determined at the close of the exchange representing the principal 
market for such securities. Exchange-traded futures contracts will 
be valued at the closing price in the market where such contracts 
are principally traded. Intra-day and closing price information 
regarding unsponsored ADRs will be available from major market data 
vendors such as Bloomberg and Reuters. Overnight repurchase 
agreements will be valued at cost. Term repurchase agreements (i.e., 
those whose maturity exceeds seven days) will be valued at the 
average of the bid quotations obtained daily from at least two 
recognized dealers.
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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 for the Fund 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,\19\ 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 trading in the Shares of the Fund may be halted. The 
Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. 
Consistent with NYSE Arca Equities Rule 8.600(d)(2)(B)(ii), the 
Commission notes that the Reporting Authority 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 Fund's portfolio. In addition, the Exchange states 
that the Adviser is affiliated with a broker-dealer and that the 
Adviser has implemented a fire wall with respect to its broker-dealer 
affiliate regarding access to information concerning the composition 
and changes to the Fund's portfolio.\20\ The Exchange represents that 
trading in the Shares will be subject to the existing trading 
surveillances, administered by

[[Page 43117]]

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.\21\ The Exchange further 
represents that these procedures are adequate to properly monitor 
Exchange-trading of the Shares in all trading sessions and to deter and 
detect violations of Exchange rules and federal securities laws 
applicable to trading on the Exchange. Moreover, prior to the 
commencement of trading, the Exchange states that it will inform its 
Equity Trading Permit Holders in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares.
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    \19\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities 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. 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.
    \20\ See supra note 6. The Exchange states 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.
    \21\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including the following:
    (1) The Shares will be subject to NYSE Arca Equities Rule 8.600, 
which sets forth the initial and continued listing criteria applicable 
to Managed Fund Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, underlying Equity Securities, and 
equity index futures contracts with other markets and other entities 
that are members of ISG, and FINRA, on behalf of the Exchange, may 
obtain trading information regarding trading in the Shares, Equity 
Securities, and equity index futures contracts from such markets and 
other entities. In addition, the Exchange may obtain information 
regarding trading in the Shares, underlying Equity Securities, and 
equity index futures contracts from markets and other entities that are 
members of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.
    (4) The Equity Securities in which the Fund may invest (including 
Depositary Receipts, with the exception of unsponsored ADRs) will be 
listed on a U.S. national securities exchange, all of which are members 
of ISG. The Fund will not invest more than 10% of its investments in 
Equity Securities in unsponsored ADRs. All of the Fund's equity index 
futures contracts will be listed on an exchange that is a member of 
ISG.
    (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 Information Bulletin will discuss the following: (a) 
The procedures for purchases and redemptions of Shares in creation 
units (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 or publicly 
disseminated; (d) how information regarding the Portfolio Indicative 
Value and 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,\22\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \22\ 17 CFR 240.10A-3.
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    (7) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment).
    (8) Under normal market circumstances, at least 80% of the Fund's 
net assets will be exposed to U.S. exchange-listed Equity Securities. 
While the Fund may invest in inverse ETFs, the Fund will not invest in 
leveraged ETFs. The Fund may invest up to 20% of its net assets in U.S. 
exchange-listed equity index futures contracts.
    (9) A minimum of 100,000 Shares for the Fund will be outstanding at 
the commencement of trading on the Exchange. This approval order is 
based on all of the Exchange's representations, including those set 
forth above and in the Notice, and the Exchange's description of the 
Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \23\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \23\ 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 
Act,\24\ that the proposed rule change (SR-NYSEArca-014-44) be, and it 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ 17 CFR 200.30-3(a)(12).
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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17401 Filed 7-23-14; 8:45 am]
BILLING CODE 8011-01-P