Document ID: SEC-2010-1794-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2010-11-24T05:00Z

[Federal Register: November 24, 2010 (Volume 75, Number 226)]
[Notices]               
[Page 71760-71762]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no10-136]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63329; File No. SR-NYSEArca-2010-86]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
Shares of the Peritus High Yield ETF

November 17, 2010.

I. Introduction

    On September 23, 2010, NYSE Arca, Inc. (``NYSE Arca'' or 
``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 
Peritus High Yield ETF (``Fund''). The proposed rule change was 
published for comment in the Federal Register on October 13, 2010.\3\ 
The Commission received no comments on the proposal. 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. 63041 (October 5, 
2010), 75 FR 62905 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares pursuant to NYSE 
Arca Equities Rule 8.600, which governs the listing and trading of 
Managed Fund Shares.\4\ The Shares will be offered by AdvisorShares 
Trust (``Trust''), a statutory trust organized under the laws of the 
State of Delaware and registered with the Commission as an open-end 
management investment company.\5\ The investment advisor to the Fund is 
AdvisorShares Investments, LLC (``Advisor''), and Peritus I Asset 
Management, LLC is the Fund's sub-advisor (``Peritus'' or ``Sub-
Advisor'').\6\

[[Page 71761]]

The Exchange represents that the Shares will conform to the initial and 
continued listing criteria under NYSE Arca Equities Rule 8.600 and 
that, for initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\7\ as provided by 
NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be 
outstanding at the commencement of trading on the Exchange.
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    \4\ A Managed Fund Share is a security that, among other things, 
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 advisor consistent with its 
investment objectives and policies. See NYSE Arca Equities Rule 
8.600(c)(1).
    \5\ The Trust is registered under the 1940 Act. On May 11, 2010, 
the Trust filed with the Commission Post-Effective Amendment No. 6 
to Form N-1A relating to the Fund (File Nos. 333-157876 and 811-
22110) (``Registration Statement'').
    \6\ The Exchange represents that the Advisor and Sub-Advisor are 
not affiliated with a broker-dealer. See Commentary .06 to NYSE Arca 
Equities Rule 8.600 (requiring that, if the investment adviser is 
affiliated with a broker-dealer, the investment adviser erect a 
``fire wall'' between the investment adviser and the broker-dealer 
with respect to access to information concerning the composition 
and/or changes to the portfolio).
    \7\ 17 CFR 240.10A-3.
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    The Fund's investment objective is high current income with a 
secondary goal of capital appreciation. The Fund, under normal 
circumstances, will invest at least 80% of its net assets, plus any 
borrowings for investment purposes, in high-yield debt securities, 
which include senior and subordinated corporate debt obligations (such 
as bonds, debentures, notes and commercial paper). The Fund does not 
have any portfolio maturity limitation and may invest its assets from 
time to time primarily in instruments with short-term, medium-term or 
long-term maturities.
    In selecting securities for the Fund's portfolio, Peritus will 
perform its own independent investment analysis of each issuer to 
determine its creditworthiness. Peritus will focus on the secondary 
market, predominantly investing in assets at a discount to par ($100), 
allowing for a potential opportunity to generate capital gains in 
addition to current yield. Peritus will place limited value on credit 
ratings and instead will focus on true cash flow while looking to buy 
credit at prices that it feels provide a margin of safety. Additional 
factors will be considered when constructing the portfolio including, 
but not limited to, excess cash on the balance sheet and/or a history 
of producing real free cash flow, as well as a capital structure that 
can be sustained on conservative forecasts. The Fund's portfolio will 
typically consist of 40-60 holdings,\8\ which will be disclosed on its 
Web site (http://www.advisorshares.com) daily after the close of 
trading on the Exchange and prior to the opening of trading on the 
Exchange the following day.
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    \8\ The Fund represents that the portfolio will include a 
minimum of 13 non-affiliated issuers.
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    The Fund may seek investments in corporate debt securities 
representative of one or more high-yield bond or credit derivative 
indices, which may change from time to time. Selection will generally 
be dependent on independent credit analysis or fundamental analysis 
performed by the Sub-Advisor. The Fund may invest in all grades of 
corporate securities, including those below investment grade.\9\ The 
Fund will only invest in liquid securities and only purchase performing 
securities and not distressed debt.\10\ To a lesser extent, the Fund 
also may invest in unrated securities. The Fund may invest in the 
securities of other investment companies to the extent that such an 
investment would be consistent with the requirements of Section 
12(d)(1) of the 1940 Act, or any rule, regulation or order of the 
Commission.
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    \9\ The Fund has represented that it will invest only in U.S.-
registered bonds that are listed or traded in the United States. 
However, certain of the Fund's debt holdings may be issued by 
corporations domiciled outside the United States.
    \10\ Distressed debt is debt that is currently in default and is 
not expected to pay the current coupon.
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    To respond to adverse market, economic, political or other 
conditions, the Fund may invest 100% of its total assets, without 
limitation, in high-quality short-term debt securities and money market 
instruments. The Fund may be invested in these instruments for extended 
periods, depending on the Sub-Advisor's assessment of market 
conditions. These short-term debt securities and money market 
instruments include shares of other mutual funds, commercial paper, 
certificates of deposit, bankers' acceptances, and U.S. Government 
securities.
    Additional details regarding the Shares and the Fund including, 
among other things, the organization and structure of the Fund, the 
investment objectives and methodologies, investment risks, 
dissemination and availability of key information about the Fund, the 
Shares, and the portfolio, creations and redemptions of Shares, trading 
halts, trading rules, surveillance, and the Information Bulletin can be 
found in the Notice and the Registration Statement, as applicable.\11\
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    \11\ See supra notes 3 and 5.
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III. Discussion and Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\12\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6(b)(5) of 
the Act,\13\ which requires, among other things, that the Exchange's 
rules be designed to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, 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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    \12\ 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).
    \13\ 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,\14\ 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 will be disseminated through the facilities 
of the Consolidated Tape Association. In addition, the Portfolio 
Indicative Value (``PIV'') will be disseminated at least every 15 
seconds during the Core Trading Session by one or more major market 
data vendors. On each business day before commencement of trading in 
Shares in the Core Trading Session on the Exchange, the 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 the Fund's 
calculation of net asset value (``NAV'') at the end of the business 
day.\15\ In addition, information regarding market price and trading 
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, and the previous day's closing price and trading 
volume information will be published daily in the financial section of 
newspapers. The Fund will also make available on its Web site daily 
trading volume of the Shares, closing prices of the Shares, NAV, and 
other related quantitative and trading information. A basket 
composition file, which includes the security names and share 
quantities required to be delivered in exchange for Fund 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

[[Page 71762]]

Clearing Corporation. The basket represents one Creation Unit of the 
Fund. The NAV of the Fund will normally be determined as of the close 
of the regular trading session on the NYSE (ordinarily 4 p.m. Eastern 
Time) on each business day.
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    \14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \15\ On a daily basis, the Advisor will disclose for each 
portfolio security or other financial instrument of the Fund 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.
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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 Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV and the 
Disclosed Portfolio will be made available to all market participants 
at the same time.\16\\\ The Exchange may halt trading in the Shares if 
the value of the Portfolio Indicative Value is no longer calculated or 
available or the Disclosed Portfolio is not made available to all 
market participants at the same time.\17\\\ In addition, NYSE Arca 
Equities Rule 8.600(d)(2)(B)(ii) requires that the Reporting Authority 
that provides the Disclosed Portfolio 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. Lastly, the Commission notes that the Exchange will halt 
trading in the Shares under the specific circumstances set forth in 
NYSE Arca Equities Rule 8.600(d)(2)(D) and that, if there is an 
additional Fund sub-advisor that is affiliated with a broker-dealer, 
that sub-advisor must erect a fire wall between it and such broker-
dealer with respect to access to information concerning the composition 
and/or changes to the investment portfolio of the Fund.\18\
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    \16\ See NYSE Arca Equities Rule 8.600(d)(1)(B) (also requiring 
that the Exchange obtain a representation from the issuer that the 
NAV per Share will be calculated daily).
    \17\ See NYSE Arca Equities Rule 8.600(d)(2)(C)(ii). With 
respect to trading halts, the Exchange may consider other relevant 
factors in exercising its discretion to halt or suspend trading in 
the Shares. Trading on the Exchange in the Shares may 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 the 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.
    \18\ The Commission notes that the Exchange has represented that 
neither the Fund's Advisor nor Sub-Advisor is affiliated with a 
broker-dealer. See supra note 6.
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    The Exchange has represented 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:
    (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) 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 (including noting 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) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    (6) For initial and continued listing, the Shares must comply with 
Rule 10A-3 under the Act.\19\
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    \19\ 17 CFR 240.10A-3.
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    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 \20\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \20\ 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,\21\ that the proposed rule change (SR-NYSEArca-2010-86), be, and 
it hereby is, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29560 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P