Document ID: SEC-2011-0203-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-02-14T05:00Z

[Federal Register Volume 76, Number 30 (Monday, February 14, 2011)]
[Notices]
[Pages 8388-8389]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3182]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63856; File No. SR-NYSEArca-2010-117]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change To List and Trade Shares of the Grail Western 
Asset Ultra Short Duration ETF

February 7, 2011.

I. Introduction

    On December 13, 2010, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of the Grail Western Asset Ultra Short Duration ETF 
(``ETF'' or ``Fund'') under NYSE Arca Equities Rule 8.600. The proposed 
rule change was published for comment in the Federal Register on 
December 28, 2010.\3\ The Commission received no comments on the 
proposal. This order grants approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63581 (December 20, 
2010), 75 FR 81692 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the Fund 
under NYSE Arca Equities Rule 8.600. The ETF will be an actively 
managed exchange traded fund and is a series of Grail Advisors ETF 
Trust (``Trust''). The Trust is registered with the Commission as an 
investment company.\4\ Grail Advisors, LLC is the Fund's investment 
manager (``Manager''). Western Asset Management Company is the sub-
adviser (``Western Asset'' or ``Sub-Adviser'') of the ETF. The Bank of 
New York Mellon Corporation is the administrator, Fund accountant, 
transfer agent and custodian for the ETF. ALPS Distributors, Inc. 
serves as the distributor of Creation Units for the Fund on an agency 
basis.
---------------------------------------------------------------------------

    \4\ See Preliminary Prospectus on Form N-1A for the Trust, dated 
August 31, 2010 (File Nos. 333-148082 and 811-22154) (``Registration 
Statement''). The descriptions of the ETF and the Shares contained 
herein are based on information in the Registration Statement.
---------------------------------------------------------------------------

    The investment objective of the ETF is maximum current income, 
consistent with preservation of capital and daily liquidity. Under 
normal circumstances, the ETF will invest primarily in short-term, 
investment grade fixed income securities. Typically, the ETF will 
invest in money market securities and short-term debt securities, 
including U.S. treasuries and agencies, corporate and bank obligations, 
asset backed and mortgage backed instruments, commercial paper and 
other highly rated, short maturity securities. While the ETF may invest 
in securities of any maturity, under normal circumstances, the average 
duration of the portfolio is typically expected to be one year or less. 
Duration is a measure of the underlying portfolio's price sensitivity 
to changes in interest rates.
    The ETF invests primarily in investment grade securities (Baa or 
higher by Moody's; BBB or higher by Standard & Poor's) that are rated 
by at least one nationally recognized statistical rating organization 
rating that security or, if unrated, determined by Western Asset to be 
of comparable quality. The ETF may invest only in U.S. dollar-
denominated securities.
    The ETF may invest in derivative instruments, such as futures and 
interest rate, total return and credit default swaps.\5\ The ETF will 
not invest in non-U.S. equity securities.
---------------------------------------------------------------------------

    \5\ Investments in derivatives must be consistent with the ETF's 
investment objective and may only be used to manage risk and not to 
enhance leverage.
---------------------------------------------------------------------------

    The ETF may not invest more than 15% of its net assets in: (1) 
Illiquid securities; \6\ and (2) unregistered securities, including 
Rule 144A securities (which include time deposits and repurchase 
agreements that mature in more than seven days).\7\
---------------------------------------------------------------------------

    \6\ For this purpose, ``illiquid securities'' are securities 
that the ETF may not sell or dispose of within seven days in the 
ordinary course of business at approximately the amount at which the 
ETF has valued the securities.
    \7\ See e-mail from Michael Cavalier, Chief Counsel, NYSE 
Euronext, to Christopher W. Chow, Special Counsel, and Andrew Madar, 
Senior Special Counsel, Commission, dated February 2, 2011.
---------------------------------------------------------------------------

    The ETF may invest in mortgage- or other asset-backed securities. 
Mortgage backed securities in which the Fund invests will be investment 
grade. Mortgage-related securities include mortgage pass-through 
securities, collateralized mortgage obligations (``CMOs''), commercial 
mortgage-backed securities, mortgage dollar rolls, CMO residuals, 
stripped mortgage-backed securities and other securities that directly 
or indirectly represent a participation in, or are secured by and 
payable from, mortgage loans on real property.
    Additional information regarding the Fund and the Shares, the 
investment strategies, risks, creation and redemption procedures, fees, 
portfolio holdings and disclosure policies, distributions and taxes, 
availability of information, trading rules and halts, and surveillance 
procedures, among other things, can be found in the Registration 
Statement and in the Notice, as applicable.\8\
---------------------------------------------------------------------------

    \8\ See Notice and Registration Statement, supra notes 3 and 4.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \9\ and the rules and regulations thereunder applicable to a 
national securities exchange.\10\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\11\ 
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 Shares must comply with 
the requirements of NYSE Arca Equities Rule 8.600 to be listed and 
traded on the Exchange.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f.
    \10\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \11\ 17 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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,\12\ 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 regarding the Shares will be disseminated through the 
facilities of the Consolidated Tape Association. In addition, an 
estimated value, defined in NYSE Arca Equities Rule 8.600 as the 
Portfolio Indicative Value (``PIV'') that reflects an estimated 
intraday value of the ETF's portfolio, will be updated and disseminated 
by

[[Page 8389]]

one or more major market data vendors at least every 15 seconds during 
the NYSE Arca Core Trading Session of 9:30 a.m. to 4 p.m. Eastern Time 
(``ET''). On each business day, before commencement of trading in 
Shares in the Core Trading Session on the Exchange, the Trust will 
disclose on its Web site the identities and quantities of the portfolio 
of securities and other assets (``Disclosed Portfolio'') held by the 
ETF that will form the basis for the ETF's calculation of the net asset 
value (``NAV'') at the end of the business day.\13\ The Web site and 
information will be publicly available at no charge. Information 
regarding market price and volume of the Shares is and will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. The previous 
day's closing price and trading volume information will be published 
daily in the financial section of newspapers.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \13\ On a daily basis, the ETF will disclose on the ETF's Web 
site for each portfolio security or other financial instrument of 
the ETF the following information: Ticker symbol (if applicable), 
name of security or financial instrument, number of shares or dollar 
value of financial instruments held in the portfolio, and percentage 
weighting of the security or financial instrument in the portfolio.
---------------------------------------------------------------------------

    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 Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time. In 
addition, if the Exchange becomes aware that the NAV or the Disclosed 
Portfolio is not disseminated to all market information as the NAV is 
available to all market participants.\14\ In addition, if the PIV is 
not being disseminated as required, the Exchange may halt trading 
during the day in which an interruption to the dissemination to the PIV 
occurs; if the interruption to the dissemination of the PIV persists 
past the trading day in which it occurred, the Exchange will halt 
trading no later than the beginning of the trading day following the 
interruption.\15\ Moreover, the Exchange represents that the Manager 
and the Sub-Adviser each is affiliated with a broker-dealer and has 
implemented a ``fire wall'' with respect to the affiliated broker-
dealer regarding access to information concerning the composition and/
or changes to the Fund's portfolio. Any additional Fund sub-advisers 
that are affiliated with a broker-dealer will be required to implement 
a fire wall with respect to such broker-dealer regarding access to 
information concerning the composition and/or changes to the portfolio. 
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.\16\
---------------------------------------------------------------------------

    \14\ See NYSE Arca Equities Rule 8.600(d)(2)(D).
    \15\ See id. Trading may also be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. These may include: (1) The extent 
to which trading is not occurring in securities comprising the 
Disclosed Portfolio and/or the financial instruments of the Fund; or 
(2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present.
    \16\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
---------------------------------------------------------------------------

    The Exchange has represented that the Shares are deemed to be 
equity securities subject to the Exchange's existing rules governing 
the trading of equity securities. In support of this proposal, the 
Exchange has made representations, including:
    (1) The Fund will meet the initial and continued listing 
requirements under NYSE Arca Equities Rule 8.600(d).
    (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) Prior to the commencement of trading, the Exchange will inform 
its ETP Holders in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information 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 ETP 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 
PIV will not be calculated or publicly disseminated; (d) how 
information regarding the PIV is disseminated; (e) the requirement that 
ETP Holders deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction; 
and (f) trading information.
    (5) For initial and/or continued listing, the Shares must be in 
compliance with Rule 10A-3 \17\ under the Exchange Act, as provided by 
NYSE Arca Equities Rule 5.3.
---------------------------------------------------------------------------

    \17\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (6) The ETF will not invest in non-U.S. equity securities.
    (7) A minimum of 100,000 Shares of the Fund will be outstanding as 
of the start of trading on the Exchange.

This approval order is based on the Exchange's representations.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \18\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b)(5).

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-NYSEArca-2010-117), be, and 
it hereby is, approved.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3182 Filed 2-11-11; 8:45 am]
BILLING CODE 8011-01-P