Document ID: SEC-2014-0293-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-02-19T05:00Z

[Federal Register Volume 79, Number 33 (Wednesday, February 19, 2014)]
[Notices]
[Pages 9515-9520]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03569]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71540; File No. SR-NYSEArca-2013-138]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, Relating to Listing and Trading of Shares of iShares Enhanced 
International Large-Cap ETF and iShares Enhanced International Small-
Cap ETF Under NYSE Arca Equities Rule 8.600

February 12, 2014.

I. Introduction

    On December 13, 2013, 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 
iShares Enhanced International Large-Cap ETF (``Large-Cap Fund'') and 
iShares Enhanced International Small-Cap ETF (``Small-Cap Fund,'' each 
a ``Fund,'' and, collectively, ``Funds'') of the iShares U.S. ETF Trust 
(``Trust''). The proposed rule change was published for comment in the 
Federal Register on January 2, 2014.\3\ On February 12, 2014, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\4\ The 
Commission received no comments on the proposal. This order grants 
approval of the proposed rule change, as modified by Amendment No. 1 
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. 71186 (December 26, 
2013), 79 FR 154 (``Notice'').
    \4\ The Exchange's initial proposal stated that the Funds' 
Indicative Optimized Portfolio Value (``IOPV''), which is the 
Portfolio Indicative Value as defined in NYSE Arca Equities Rule 
8.600(c)(3), would be based on the current value of the securities 
and/or cash to be deposited in exchange for a creation unit of the 
Funds using market data converted into U.S. dollars at the current 
currency rates. In Amendment No. 1, the Exchange revised this 
statement and clarified that the IOPV instead will be based on the 
current value of the securities and other assets held by the Funds 
using market data converted into U.S. dollars at the current 
currency rates. Because Amendment No. 1 seeks to clarify the 
description of the IOPV and does not materially affect the substance 
of the proposed rule change or raise novel or unique issues, 
Amendment No. 1 does not require notice and comment.
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Funds under 
NYSE Arca Equities Rule 8.600, which governs the listing and trading of 
Managed Fund Shares. The Shares will be offered by the Trust,\5\ which 
is registered with the Commission as an open-end management investment 
company. BlackRock Fund Advisors (``BFA'' or ``Adviser'') will serve as 
the investment adviser to the Funds. BFA is an indirect, wholly-owned 
subsidiary of BlackRock, Inc. BlackRock Investments, LLC will be the 
principal underwriter and distributor of the Funds' Shares. State 
Street Bank and Trust Company will serve as administrator, custodian, 
and transfer agent for the Funds. The Exchange represents that the 
Adviser is not registered as a broker-dealer but is affiliated with 
multiple broker-dealers and has implemented a ``fire wall'' with 
respect to such broker-dealers regarding access to information 
concerning the composition or changes to a Fund's portfolio.\6\
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    \5\ The Exchange represents that, on October 4, 2013, the Trust 
filed with the Commission Post-Effective Amendment No. 22 (with 
respect to the Large-Cap Fund, ``Large-Cap Registration Statement'') 
and Post-Effective Amendment No. 23 (with respect to the Small-Cap 
Fund, ``Small-Cap Registration Statement'') to its registration 
statement on Form N-1A under the Securities Act of 1933 
(``Securities Act''), and under the Investment Company Act of 1940 
(``1940 Act'') (File Nos. 333-179904 and 811-22649) (collectively, 
``Registration Statements''). In addition, the Exchange states that 
the Trust has obtained certain exemptive relief under the 1940 Act. 
See Investment Company Act Release No. 29571 (January 24, 2011) 
(File No. 812-13601).
    \6\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The 
Exchange represents that, in the event that (a) the Adviser or any 
sub-adviser registers as a broker-dealer or becomes newly affiliated 
with a broker-dealer, or (b) any new adviser or sub-adviser is a 
registered broker-dealer or becomes affiliated with a broker-dealer, 
it will implement a fire wall with respect to its relevant personnel 
or its broker-dealer affiliate regarding access to information 
concerning the composition of or changes to a portfolio and will be 
subject to procedures designed to prevent the use and dissemination 
of material, non-public information regarding a portfolio.

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[[Page 9516]]

    The Exchange has made the following representations and statements 
in describing the Funds and their respective 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 Funds, 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 Statements, as 
applicable. See Notice and Registration Statements, supra notes 3 
and 5, respectively.
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Large-Cap Fund

    The Large-Cap Fund will seek long-term capital appreciation. The 
Fund will seek to achieve its investment objective by investing, under 
normal circumstances,\8\ at least 80% of its net assets in equity 
securities of international large-capitalization issuers. The Fund will 
seek to maintain strategic exposure to international large-
capitalization stocks with targeted investment characteristics. BFA 
will utilize a proprietary investment process to assemble an investment 
portfolio from a defined group of international large-capitalization 
stocks based on certain quantitative investment characteristics.
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    \8\ The term ``under normal circumstances'' includes, but is not 
limited to, the absence of extreme volatility or trading halts in 
the equity 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.
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    The Fund's proprietary investment process will begin with 
securities representing a defined investable universe of stocks of 
international large-capitalization issuers. The universe will then be 
subjected to rules-based screens designed to exclude securities with 
very low trading volume or very low prices. The stocks will then be 
scored based on quantitative metrics, including, but not limited to, 
cash earnings, earnings variability, leverage, price-to-book ratio, and 
market capitalization. BFA will assemble a portfolio emphasizing those 
stocks with higher cash earnings, lower earnings variability, lower 
leverage, lower price-to-book ratio, and smaller market capitalization 
relative to other stocks in the investable universe. BFA will seek to 
ensure that the Fund avoids unnecessary turnover and minimizes sources 
of risk by taking into account volatilities of certain factors and by 
placing constraints on the weighting of sectors, industries, and 
issuers.
    The Fund will purchase publicly-traded exchange-listed common 
stocks of non-U.S. issuers. The Fund's investment in such stocks may be 
in the form of American Depositary Receipts (``ADRs''), Global 
Depositary Receipts (``GDRs''), and European Depositary Receipts 
(``EDRs,'' and together with ADRs and GDRs, collectively, ``Depositary 
Receipts'').\9\ With respect to its investments in exchange-listed 
common stocks and Depositary Receipts of non-U.S. issuers, the Fund 
will invest at least 90% of its assets invested in such securities in 
exchange-listed common stocks and Depositary Receipts that trade in 
markets that are members of the Intermarket Surveillance Group 
(``ISG'') or are parties to a comprehensive surveillance sharing 
agreement with the Exchange.
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    \9\ The Exchange states that Depositary Receipts are receipts, 
typically issued by a bank or trust issuer, which evidence ownership 
of underlying securities issued by a non-U.S. issuer. For ADRs, the 
depository is typically a U.S. financial institution and the 
underlying securities are issued by a non-U.S. issuer. For other 
forms of Depositary Receipts, the depository may be a non-U.S. or a 
U.S. entity, and the underlying securities may be issued by a non-
U.S. or a U.S. issuer. Depositary Receipts are not necessarily 
denominated in the same currency as their underlying securities. 
Generally, ADRs, issued in registered form, are designed for use in 
the U.S. securities markets, and EDRs, issued in bearer form, are 
designed for use in European securities markets. GDRs are tradable 
both in the United States and in Europe and are designed for use 
throughout the world.
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    The Fund will generally invest in sponsored Depositary Receipts 
that are listed on ISG member exchanges and that BFA deems as liquid at 
the time of purchase. In certain limited circumstances, the Fund may 
invest in unlisted or unsponsored Depositary Receipts, Depositary 
Receipts listed on non-ISG member exchanges, or Depositary Receipts 
that BFA deems illiquid at the time of purchase or for which pricing 
information is not readily available.\10\ The Exchange states that the 
issuers of unlisted or unsponsored Depositary Receipts are not 
obligated to disclose material information in the United States. 
Therefore, according to the Exchange, there may be less information 
available regarding such issuers, and there may be no correlation 
between available information and the market value of the Depositary 
Receipts.
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    \10\ Not more than 10% of the net assets of each Fund, in the 
aggregate, will be invested in (1) unlisted or unsponsored 
Depositary Receipts; (2) Depositary Receipts not listed on an 
exchange that is a member of the ISG or a party to a comprehensive 
surveillance sharing agreement with the Exchange; or (3) unlisted 
common stocks or common stocks not listed on an exchange that is a 
member of the ISG or a party to a comprehensive surveillance sharing 
agreement with the Exchange.
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Small-Cap Fund

    The Small-Cap Fund will seek long-term capital appreciation. The 
Fund will seek to achieve its investment objective by investing, under 
normal circumstances,\11\ at least 80% of its net assets in equity 
securities of international small-capitalization issuers. The Fund will 
seek to maintain strategic exposure to international small-
capitalization stocks with targeted investment characteristics. BFA 
will utilize a proprietary investment process to assemble an investment 
portfolio from a defined group of international small-capitalization 
stocks based on certain quantitative investment characteristics.
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    \11\ See note 8, supra.
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    The Fund's proprietary investment process will begin with 
securities representing a defined investable universe of stocks of 
international small-capitalization issuers. The universe will then be 
subjected to rules-based screens designed to exclude securities with 
very low trading volume or very low prices. The stocks will then be 
scored based on quantitative metrics, including, but not limited to, 
cash earnings, earnings variability, leverage, price-to-book ratio, and 
market capitalization. BFA will assemble a portfolio emphasizing those 
stocks with higher cash earnings, lower earnings variability, lower 
leverage, lower price-to-book ratio, and smaller market capitalization 
relative to other stocks in the investable universe. BFA will seek to 
ensure that the Fund avoids unnecessary turnover and minimizes sources 
of risk by taking into account volatilities of certain factors and by 
placing constraints on the weighting of sectors, industries, and 
issuers.
    The Fund will purchase publicly-traded exchange-listed common 
stocks of non-U.S. issuers. To the extent the Fund invests in stocks of 
non-U.S. issuers, the Fund's investment in such stocks may be in the 
form of Depositary Receipts.\12\ With respect to its investments in 
exchange-listed common stocks and Depositary Receipts of non-U.S. 
issuers, the Fund will invest at least 90% of its assets invested in 
such securities in exchange-listed common stocks and Depositary 
Receipts that trade in markets that are members of the ISG or are 
parties to a comprehensive

[[Page 9517]]

surveillance sharing agreement with the Exchange.
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    \12\ See note 9, supra.
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    The Fund will generally invest in sponsored Depositary Receipts 
that are listed on ISG member exchanges and that BFA deems as liquid at 
time of purchase. In certain limited circumstances, the Fund may invest 
in unlisted or unsponsored Depositary Receipts, Depositary Receipts 
listed on non-ISG member exchanges, or Depositary Receipts that BFA 
deems illiquid at the time of purchase or for which pricing information 
is not readily available.\13\ The Exchange states that issuers of 
unlisted or unsponsored Depositary Receipts are not obligated to 
disclose material information in the United States. Therefore, 
according to the Exchange, there may be less information available 
regarding such issuers, and there may be no correlation between 
available information and the market value of the Depositary Receipts.
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    \13\ See note 10, supra.
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Other Investments

    While each Fund, under normal circumstances, will invest at least 
80% of its net assets in its investments as described above, a Fund may 
directly invest in certain other investments, as described below. A 
Fund may temporarily depart from its normal investment process,\14\ 
provided that the alternative, in the opinion of BFA, is consistent 
with a Fund's investment objective and is in the best interest of a 
Fund. However, BFA will not seek to actively time market movements.
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    \14\ Circumstances under which a Fund may temporarily depart 
from its normal investment process include, but are not limited to, 
extreme volatility or trading halts in the equity 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.
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    A Fund may hold up to an aggregate amount of 15% of its net assets 
in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance.\15\ Each Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of a Fund's net assets are held 
in illiquid securities. According to the Exchange, illiquid securities 
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.
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    \15\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers and the mechanics of transfer).
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    Each Fund may invest in repurchase and reverse repurchase 
agreements. The Exchange states that a repurchase agreement is an 
instrument under which the purchaser (i.e., a Fund) acquires the 
security and the seller agrees, at the time of the sale, to repurchase 
the security at a mutually agreed upon time and price, thereby 
determining the yield during the purchaser's holding period. Reverse 
repurchase agreements involve the sale of securities with an agreement 
to repurchase the securities at an agreed-upon price, date, and 
interest payment and have the characteristics of borrowing.
    Each Fund may invest in other short-term instruments, including 
money market instruments, on an ongoing basis to provide liquidity or 
for other reasons. According to the Exchange, money market instruments 
are generally short-term investments that may include but are not 
limited to: (i) Shares of money market funds (including those advised 
by BFA or otherwise affiliated with BFA); (ii) obligations issued or 
guaranteed by the U.S. government, its agencies or instrumentalities 
(including government-sponsored enterprises); (iii) negotiable 
certificates of deposit, bankers' acceptances, fixed-time deposits, and 
other obligations of U.S. and non-U.S. banks (including non-U.S. 
branches) and similar institutions; (iv) commercial paper rated, at the 
date of purchase, ``Prime-1'' by Moody's Investors Service, Inc., ``F-
1'' by Fitch Inc., or ``A-1'' by Standard & Poor's, or if unrated, of 
comparable quality as determined by BFA; (v) non-convertible corporate 
debt securities (e.g., bonds and debentures) with remaining maturities 
at the date of purchase of not more than 397 days and that satisfy the 
rating requirements set forth in Rule 2a-7 under the 1940 Act; and (vi) 
short-term U.S. dollar-denominated obligations of non-U.S. banks 
(including U.S. branches) that, in the opinion of BFA, are of 
comparable quality to obligations of U.S. banks which may be purchased 
by a Fund. Any of these instruments may be purchased on a current or 
forward-settled basis. According to the Exchange, time deposits are 
non-negotiable deposits maintained in banking institutions for 
specified periods of time at stated interest rates.
    Each Fund may enter into currency forward contracts for hedging and 
trade settlement purposes.\16\ Each Fund may invest in total return 
swaps on single securities in limited circumstances, including as a 
means to gain exposure to securities that trade on exchanges that are 
not members of ISG. The credit risk of counterparties to swaps and 
forward contracts will be assessed and monitored in accordance with 
policies and procedures adopted by the Adviser and such contracts will 
be collateralized.\17\ Each Fund also may invest in futures contracts 
based on currencies, stock indexes, and single stocks. The Funds will 
not invest in options.
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    \16\ According to the Exchange, a forward currency contract is 
an obligation to purchase or sell a specific currency at a future 
date, which may be any fixed number of days from the date of the 
contract agreed upon by the parties, at a price set at the time of 
the contract.
    \17\ The Adviser has implemented policies and procedures to 
assess the creditworthiness of prospective and existing derivatives 
counterparties. Derivatives transactions are conducted only with 
approved counterparties with whom appropriate documentation is 
executed. Exposure to counterparties is independently and actively 
monitored. Where appropriate, collateral is posted and actively 
managed to reduce counterparty credit exposure.
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    Each Fund may invest a small portion of its assets in exchange-
listed tracking stocks. The Exchange states that a tracking stock is a 
separate class of common stock whose value is linked to a specific 
business unit or operating division within a larger company and is 
designed to ``track'' the performance of such business unit or 
division. The tracking stock may pay dividends to shareholders 
independent of the parent company. The parent company, rather than the 
business unit or division, generally is the issuer of tracking stock. 
However, holders of the tracking stock may not have the same rights as 
holders of the company's common stock.
    Each Fund will be classified as a ``diversified'' investment 
company under the 1940 Act.
    Each Fund will not purchase the securities of issuers conducting 
their principal business activity in the same industry if, immediately 
after the purchase and as a result thereof, the value of a Fund's 
investments in that industry would equal or exceed 25% of the current 
value of a Fund's total assets, provided that this restriction does not 
limit a Fund's: (i) Investments in securities of other investment 
companies; (ii) investments in securities issued or guaranteed by the 
U.S. government, its agencies or instrumentalities; or (iii) 
investments in

[[Page 9518]]

repurchase agreements collateralized by U.S. government securities.
    Each Fund intends to qualify for and to elect treatment as a 
separate regulated investment company under Subchapter M of the 
Internal Revenue Code. In addition, each Fund's investments will be 
consistent with its investment objective and will not be used to 
enhance leverage.

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 \18\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\19\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\20\ 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 Funds 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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    \18\ 15 U.S.C. 78f.
    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
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    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,\21\ 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 of each Fund will be available via the 
Consolidated Tape Association (``CTA'') high-speed line. In addition, 
the IOPV,\22\ which is the Portfolio Indicative Value as defined in 
NYSE Arca Equities Rule 8.600(c)(3), will be widely disseminated at 
least every 15 seconds during the Core Trading Session by one or more 
major market data vendors.\23\ On each business day, before 
commencement of trading in Shares in the Core Trading Session on the 
Exchange, each Fund will disclose on its Web site the Disclosed 
Portfolio, as defined in NYSE Arca Equities Rule 8.600(c)(2), that will 
form the basis for such Fund's calculation of NAV at the end of the 
business day.\24\ In addition, a basket composition file, which 
includes the security names and share quantities (as applicable) 
required to be delivered in exchange for each 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, 
LLC (``NYSE'') via the National Securities Clearing Corporation. The 
basket will represent one creation unit of a Fund. The NAV of each Fund 
normally will be determined once each business day, generally as of the 
regularly scheduled close of normal trading on the NYSE (normally, 4:00 
p.m., Eastern Time) on each day that the NYSE is open for trading, 
based on prices at the time of closing provided that (a) any Fund 
assets or liabilities denominated in currencies other than the U.S. 
dollar will be translated into U.S. dollars at the prevailing market 
rates on the date of valuation as quoted by one or more data service 
providers, and (b) U.S. fixed-income assets may be valued as of the 
announced closing time for trading in fixed-income assets in a 
particular market or exchange.\25\ 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. The intra-day, 
closing, and settlement prices of equity securities, including common 
stocks, tracking stocks, and sponsored and unsponsored Depositary 
Receipts, will be readily available from the securities exchanges 
trading such securities, automated quotation systems, published or 
other public sources, or on-line information services such as Bloomberg 
or Reuters. Price information regarding currency, stock index, and 
single stock futures is available from the exchange on which such 
futures trade as well as from major market data vendors. Price 
information regarding unsponsored Depositary Receipts, swaps, currency 
forward contracts, and short-term instruments will be available from 
major

[[Page 9519]]

market data vendors. The Funds' Web site will include a form of the 
prospectus for each Fund and additional data relating to NAV and other 
applicable quantitative information.
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    \21\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \22\ According to the Exchange, the IOPV will be based on the 
current value of the securities and other assets held by the Funds 
using market data converted into U.S. dollars at the current 
currency rates. The IOPV price will be based on quotes and closing 
prices from the securities' local market and may not reflect events 
that occur subsequent to the local market's close. Premiums and 
discounts between the IOPV and the market price may occur. The IOPV 
will not necessarily reflect the precise composition of the current 
portfolio of securities held by a Fund at a particular point in time 
or the best possible valuation of the current portfolio. Therefore, 
the IOPV should not be viewed as a ``real-time'' update of a Fund's 
NAV, which will be calculated only once a day. The quotations of 
certain Fund holdings may not be updated during U.S. trading hours 
if such holdings do not trade in the United States.
    \23\ According to the Exchange, several major market data 
vendors display and/or make widely available IOPVs taken from CTA or 
other data feeds.
    \24\ On a daily basis, each Fund will disclose for each 
portfolio security and other financial instrument of each Fund the 
following information on the Funds' Web site: Ticker symbol (if 
applicable), name of security and financial instrument, number of 
shares and dollar value of securities and financial instruments held 
in the portfolio, and percentage weighting of the security and 
financial instrument in the portfolio. The Web site information will 
be publicly available at no charge.
    \25\ According to the Exchange, equity investments, including 
common stocks, tracking stocks, and sponsored and unsponsored 
Depositary Receipts, and investments in futures, including currency, 
stock index, and single stock futures, will be valued at market 
value, which is generally determined using the last reported 
official closing price or last trading price on the exchange or 
other market on which the security or futures contract is primarily 
traded at the time of valuation. Swaps and currency forward 
contracts generally will be valued based on quotations from market 
makers or by a pricing service in accordance with valuation 
procedures approved by the Trust's Board of Directors/Trustees 
(``Board''). Repurchase agreements and reverse repurchase agreements 
are generally valued at par. Other short-term instruments will 
generally be valued at the last available bid price received from 
independent pricing services. In determining the value of a fixed 
income investment, pricing services may use certain information with 
respect to transactions in such investments, quotations from 
dealers, pricing matrixes, market transactions in comparable 
investments, various relationships observed in the market between 
investments, and calculated yield measures. In certain 
circumstances, short-term instruments may be valued on the basis of 
amortized cost. According to the Exchange, generally, trading in 
non-U.S. securities, U.S. government securities, money market 
instruments, certain fixed-income securities, and certain 
derivatives will be substantially completed each day at various 
times prior to the close of business on the NYSE. The values of such 
securities used in computing the NAV of a Fund will be determined as 
of such times. When market quotations are not readily available or 
are believed by BFA to be unreliable, a Fund's investments will be 
valued at fair value. Fair value determinations are made by BFA in 
accordance with policies and procedures approved by the Trust's 
Board and in accordance with the 1940 Act. BFA may conclude that a 
market quotation is not readily available or is unreliable if a 
security or other asset or liability does not have a price source 
due to its lack of liquidity, if a market quotation differs 
significantly from recent price quotations or otherwise no longer 
appears to reflect fair value, where the security or other asset or 
liability is thinly traded, or where there is a significant event 
subsequent to the most recent market quotation. The Exchange states 
that a ``significant event'' is an event that, in the judgment of 
BFA, is likely to cause a material change to the closing market 
price of the asset or liability held by a Fund. Non-U.S. securities 
whose values are affected by volatility that occurs in U.S. markets 
on a trading day after the close of foreign securities markets may 
be fair valued.
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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 of each Fund will be calculated 
daily, and that the NAV and the Disclosed Portfolio for each Fund will 
be made available to all market participants at the same time. Trading 
in Shares of a 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,\26\ 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 a 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 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 Funds' 
portfolios. In addition, the Exchange states that the Adviser has 
implemented a ``fire wall'' with respect to its affiliated broker-
dealers regarding access to information concerning the composition or 
changes to a Fund's portfolio.\27\ The Exchange represents that trading 
in the Shares will be subject to the existing trading surveillances, 
administered by the Financial Industry Regulatory Authority (``FINRA'') 
on behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws.\28\ 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 applicable federal 
securities laws. 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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    \26\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities or the financial instruments 
composing the Disclosed Portfolio of a 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 
Funds.
    \27\ See supra note 6 and accompanying text. 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.
    \28\ 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 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) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares of the Funds, as well as underlying 
equity securities (including exchange-listed Depositary Receipts and 
tracking stocks) and futures with other markets and other entities that 
are members of the ISG, and FINRA, on behalf of the Exchange, may 
obtain trading information regarding trading in the Shares of the Funds 
as well as underlying equity securities and futures from such markets 
and other entities. In addition, the Exchange may obtain information 
regarding trading in the Shares of the Funds as well as underlying 
equity securities (including exchange-listed Depositary Receipts and 
tracking stocks) and futures from ISG member markets or markets with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement.
    (4) Not more than 10% of the net assets of each Fund, in the 
aggregate, will be invested in (1) unlisted or unsponsored Depositary 
Receipts; (2) Depositary Receipts not listed on an exchange that is a 
member of the ISG or a party to a comprehensive surveillance sharing 
agreement with the Exchange; or (3) unlisted common stocks or common 
stocks not listed on an exchange that is a member of the ISG or a party 
to a comprehensive surveillance sharing agreement with the Exchange.
    (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 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 IOPV will not be calculated or publicly 
disseminated; (d) how information regarding the IOPV 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 Trust will be in 
compliance with Rule 10A-3 under the Act,\29\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \29\ See 17 CFR 240.10A-3.
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    (7) The Funds will not invest in options.
    (8) To the extent that a Fund invests in futures, not more than 10% 
of the weight of such futures contracts held by a Fund in the aggregate 
will consist of components whose principal trading market is not a 
member of ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement.

[[Page 9520]]

    (9) A Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance.
    (10) The Adviser has implemented policies and procedures to assess 
the creditworthiness of prospective and existing derivatives 
counterparties. Derivatives transactions are conducted only with 
approved counterparties with whom appropriate documentation is 
executed. Exposure to counterparties is independently and actively 
monitored. Where appropriate, collateral is posted and actively managed 
to reduce counterparty credit exposure.
    (11) Each Fund's investments will be consistent with its investment 
objective and will not be used to enhance leverage.
    (12) A minimum of 100,000 Shares for each 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 Funds.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \30\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \30\ 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,\31\ that the proposed rule change (SR-NYSEArca-2013-138), as 
modified by Amendment No. 1, be, and it hereby is, approved.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-03569 Filed 2-18-14; 8:45 am]
BILLING CODE 8011-01-P