Document ID: SEC-2014-1966-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-11-24T05:00Z

[Federal Register Volume 79, Number 226 (Monday, November 24, 2014)]
[Notices]
[Pages 69929-69936]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27707]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73631; File No. SR-NYSEArca-2014-41]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendments No. 1 and 
No. 4 Thereto, Relating to Listing and Trading of Shares of the Reality 
Shares DIVS Index ETF Under NYSE Arca Equities Rule 5.2(j)(3)

November 18, 2014.

I. Introduction

    On April 11, 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'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Reality Shares DIVS Index ETF (``Fund'') under NYSE Arca Equities Rule 
5.2(j)(3). The proposed rule change was published for comment in the 
Federal Register on April 30, 2014.\3\ On May 6, 2014, the Exchange 
filed Amendment No. 1 to the proposed rule change, which amended and 
replaced the proposed rule change in its entirety.\4\ On June 6, 2014, 
the Exchange filed Amendment No. 4 to the proposed rule change.\5\ On 
June 13, 2014, pursuant to Section 19(b)(2) of the Act,\6\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\7\ On July 29, 2014, the Commission instituted proceedings 
under Section 19(b)(2)(B) of the Act \8\ to determine whether to 
approve or disapprove the proposed rule change.\9\ In response to the 
Order Instituting Proceedings, the Commission received two comment 
letters on the proposal.\10\ On October 23, 2014, the Commission 
designated a longer period for Commission action on the Order 
Instituting Proceedings.\11\ This order grants approval of the proposed 
rule change, as modified by Amendments No. 1 and No. 4 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. 72015 (Apr. 24, 
2014), 79 FR 24475 (``Notice'').
    \4\ In Amendment No. 1, the Exchange clarified the valuation of 
investments for purposes of calculating net asset value, provided 
additional details regarding the dissemination of the Disclosed 
Portfolio, and made other minor technical edits to the proposed rule 
change. Amendment No. 1 provided clarification to the proposed rule 
change, and because it does not materially affect the substance of 
the proposed rule change or raise novel or unique regulatory issues, 
Amendment No. 1 is not subject to notice and comment.
    \5\ The Exchange filed Amendment No. 2 on June 4, 2014 and 
withdrew it on June 5, 2014, and filed Amendment No. 3 on June 5, 
2014 and withdrew it on June 6, 2014. Amendment No. 4 supersedes 
both Amendments No. 2 and No. 3. In Amendment No. 4, the Exchange 
amended the proposal to reflect a change to the name of the Fund and 
the underlying index. Specifically, the Exchange replaced each 
reference in the proposal to the ``Reality Shares Isolated Dividend 
Growth Index ETF'' (the original name of the Fund) with a reference 
to the ``Reality Shares DIVS Index ETF.'' Similarly, the Exchange 
replaced each reference in the proposal to the ``Reality Shares 
Isolated Dividend Growth Index'' with a reference to the ``Reality 
Shares DIVS Index.'' Amendment No. 4 is a technical amendment and is 
not subject to notice and comment as it does not materially affect 
the substance of the filing.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 72385, 79 FR 35205 
(Jun. 19, 2014). The Commission designated a longer period within 
which to take action on the proposed rule change and designated July 
29, 2014, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 72714, 79 FR 45574 
(Aug. 5, 2014) (``Order Instituting Proceedings''). Specifically, 
the Commission instituted proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 
6(b)(5) of the Act, which requires, among other things, that the 
rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade,'' and ``to protect investors and the 
public interest.'' See id.
    \10\ See Letter from Eric R. Ervin, President, Reality Shares 
ETF Trust and Reality Shares Advisors, LLC, and President and CEO, 
Reality Shares, Inc., to Kevin M. O'Neill, Deputy Secretary, 
Commission, dated August 22, 2014 (``Reality Shares Letter 1''); 
Letter from Eric R. Ervin, President, Reality Shares ETF Trust and 
Reality Shares Advisors, LLC, and President and CEO, Reality Shares, 
Inc., to Arun Manoharan, Financial Economist, Commission, dated 
October 21, 2014 (``Reality Shares Letter 2'').
    \11\ See Securities Exchange Act Release No. 73417, 79 FR 64430 
(Oct. 29, 2014).
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II. Description of the Proposal, as Modified by Amendments No. 1 and 
No. 4 Thereto

A. The Fund, Generally

    The Exchange proposes to list and trade Shares of the Fund under 
NYSE Arca Equities Rule 5.2(j)(3), which

[[Page 69930]]

governs the listing and trading of Investment Company Units on the 
Exchange.\12\ The Fund is an exchange-traded fund (``ETF'') that will 
seek long-term capital appreciation by tracking the performance of the 
Reality Shares DIVS Index (``Index''). The Shares of the Fund will be 
offered by the Reality Shares ETF Trust (``Trust''). The Exchange 
represents that the Trust will be registered with the Commission as an 
open-end management investment company.\13\ Reality Shares Advisors, 
LLC will serve as the investment adviser to the Fund (``Adviser'').\14\ 
The Exchange states that the Adviser is not registered as a broker-
dealer and is not affiliated with any broker-dealers.\15\ ALPS 
Distributors, Inc. will be the principal underwriter and distributor of 
the Fund's Shares. The Bank of New York Mellon will serve as 
administrator, custodian, and transfer agent for the Fund.
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    \12\ NYSE Arca Equities Rule 5.2(j)(3)(A) provides that an 
Investment Company Unit is a security that represents an interest in 
a registered investment company that holds securities comprising, or 
otherwise based on or representing an interest in, an index or 
portfolio of securities (or holds securities in another registered 
investment company that holds securities comprising, or otherwise 
based on, or representing an interest in, an index or portfolio of 
securities).
    \13\ According to the Exchange, the Trust will be registered 
under the Investment Company Act of 1940 (``1940 Act''). On February 
6, 2014, the Trust filed a registration statement on Form N-1A under 
the Securities Act of 1933 and the 1940 Act relating to the Fund, as 
amended by Pre-Effective Amendment Number 1, filed with the 
Commission on February 6, 2014 (File Nos. 333-192288 and 811-22911) 
(``Registration Statement''). In addition, the Exchange states that 
the Trust has obtained certain exemptive relief under the 1940 Act. 
Investment Company Act Release No. 30678 (Aug. 27, 2013) 
(``Exemptive Order''). The Exchange represents that investments made 
by the Fund will comply with the conditions set forth in the 
Exemptive Order.
    \14\ The Adviser is a wholly-owned subsidiary of Reality Shares, 
Inc. (``Index Provider'').
    \15\ According to the Exchange, the Adviser and the Index 
Provider have represented that a fire wall exists around the 
respective personnel who have access to information concerning 
changes and adjustments to the Index. The Exchange further 
represents that in the event (a) the Adviser, any sub-adviser, or 
the Index Provider becomes registered as a broker-dealer or newly 
affiliated with a broker-dealer, or (b) any new adviser, sub-
adviser, or Index Provider is a registered broker-dealer or becomes 
affiliated with a broker-dealer, it will implement a fire wall with 
respect to the relevant personnel or broker-dealer affiliate 
regarding access to information concerning the composition or 
changes to the portfolio, and will be subject to procedures designed 
to prevent the use and dissemination of material, non-public 
information regarding such portfolio.
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B. The Exchange's Description of the Fund

    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategy, including permitted 
portfolio holdings and investment restrictions.\16\
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    \16\ Additional information regarding the Trust, the Fund, and 
the Shares, including investment strategy, risks, creation and 
redemption procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes, among other things, is included in the 
Notice, Registration Statement, and Exemptive Order, as applicable. 
See Notice, supra note 3; see also Registration Statement and 
Exemptive Order, supra note 13.
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Reality Shares DIVS Index ETF
    The Index was developed and is maintained by Reality Shares, 
Inc.\17\ The Exchange states that the Index Provider is not registered 
as an investment adviser or broker dealer and is not affiliated with 
any broker-dealers.\18\ The Exchange states that the Index for the Fund 
does not meet all of the ``generic'' listing requirements of Commentary 
.01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) applicable to the 
listing of Investment Company Units based upon an index of ``US 
Component Stocks.'' \19\ Specifically, Commentary .01(a)(A) to NYSE 
Arca Equities Rule 5.2(j)(3) sets forth the requirements to be met by 
components of an index or portfolio of US Component Stocks. As 
discussed in more detail herein, the Index is calculated using a 
proprietary, rules-based methodology designed to track market 
expectations for dividend growth conveyed in real-time using bid-ask 
prices on exchange-listed S&P 500 Index options and exchange-listed 
options on exchange traded funds (``ETFs'') designed to track the S&P 
500 Index.\20\ The Fund may also invest up to 20% of its total assets 
in other securities such as over-the-counter (``OTC'') options, 
futures, and forward contracts on the S&P 500 Index, and OTC options, 
futures, and forward contracts on ETFs that track the S&P 500 Index. 
Because the Index will consist primarily of S&P 500 Index options and 
options on ETFs designed to track the S&P 500 Index, and not US 
Component Stocks, the Index does not satisfy the requirements of 
Commentary .01(a)(A).\21\
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    \17\ The Index will be calculated by International Data 
Corporation (``IDC''), which is not affiliated with the Adviser or 
Index Provider, and which is not a broker-dealer or fund advisor.
    \18\ See supra note 15.
    \19\ NYSE Arca Equities Rule 5.2(j)(3) defines the term ``US 
Component Stock'' as an equity security that is registered under 
Sections 12(b) or 12(g) of the Act or an American Depositary 
Receipt, the underlying equity security of which is registered under 
Sections 12(b) or 12(g) of the Act.
    \20\ For purposes of this proposed rule change, ETFs include 
Investment Company Units (as described in NYSE Arca Equities Rule 
5.2(j)(3)) and Portfolio Depositary Receipts (as described in NYSE 
Arca Equities Rule 8.100). The ETFs all will be listed and traded in 
the U.S. on registered exchanges. The Fund may not invest in 
leveraged or inverse leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs or 
options on such ETFs.
    \21\ NYSE Arca Equities Rule 5.2(j)(3), Commentary .01(a)(A)(5) 
provides that all securities in the applicable index or portfolio 
shall be US Component Stocks listed on a national securities 
exchange and shall be NMS Stocks as defined in Rule 600 under 
Regulation NMS of the Act. The Exchange states that each component 
stock of the S&P 500 Index is a US Component Stock that is listed on 
a national securities exchange and is an NMS Stock. Options, 
however, are excluded from the definition of NMS Stock. The Exchange 
represents that the Fund and the Index meet all of the requirements 
of the listing standards for Investment Company Units in Rule 
5.2(j)(3) and the requirements of Commentary .01, except the 
requirements in Commentary .01(a)(A)(1)-(5), because the Index 
includes options on US Component Stocks.
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Principal Investments of the Fund
    The Fund will seek long-term capital appreciation and will seek 
investment results that, before fees and expenses, generally correspond 
to the performance of the Index. At least 80% of the Fund's total 
assets (exclusive of collateral held from securities lending, if any) 
will be invested in the component securities of the Index. The Fund 
will seek a correlation of 0.95 or better between its performance and 
the performance of its Index (a figure of 1.00 would represent perfect 
correlation). The Fund generally will use a representative sampling 
investment strategy.
    The Fund will buy (i.e., hold a ``long'' position in) and sell 
(i.e., hold a ``short'' position in) put and call options. The strategy 
of taking both a long position in a security through its ex-dividend 
date (the last date an investor can own the security and receive 
dividends paid on the security) and a corresponding short position in 
the same security immediately thereafter is designed to allow the Fund 
to isolate its exposure to the growth of the level of dividends 
expected to be paid on such security while minimizing its exposure to 
changes in the trading price of such security.
    The Fund will buy and sell U.S. exchange-listed options on the S&P 
500 Index and U.S. exchange-listed options on ETFs designed to track 
the S&P 500 Index. A put option gives the purchaser of the option the 
right to sell, and the issuer of the option the obligation to buy, the 
underlying security or instrument on a specified date or during a 
specified period of time. A call option on a security gives the 
purchaser of the option the right to buy, and the writer of the option 
the obligation to sell, the underlying security or instrument on a 
specified date or during a specified period of time. The Fund will 
invest in a combination of put and call options designed to allow the 
Fund to isolate its

[[Page 69931]]

exposure to the growth of the level of expected dividends reflected in 
options on the S&P 500 Index and options on ETFs tracking the S&P 500 
Index, while minimizing the Fund's exposure to changes in the trading 
price of such securities.
Index Methodology
    The Index will be calculated using a proprietary, rules-based 
methodology designed to track market expectations for dividend growth 
conveyed in real-time using the mid-point of the bid-ask spread on S&P 
500 Index options and options on ETFs designed to track the S&P 500 
Index.\22\ All options included in the Index will be listed and traded 
on a U.S. national securities exchange. The Index will consist of a 
minimum of 20 components.
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    \22\ The Exchange notes that there is no guarantee that either 
the level of overall dividends paid by such companies will grow over 
time, or that the Index or Fund's investment strategies will capture 
such growth. The Fund will include appropriate risk disclosure in 
its offering documents disclosing these risks, which will be 
available for free on the Commission's Web site and on the Fund's 
Web site, www.realityshares.com.
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    The prices of index and ETF options reflect the market trading 
prices of the securities included in the applicable underlying index or 
ETF, as well as market expectations regarding the level of dividends to 
be paid on such indexes or ETFs during the term of the option. The 
Index constituents, and, therefore, most of the Fund's portfolio 
holdings, will consist of multiple corresponding near-term and long-
term put and call option combinations on the same reference assets 
(i.e., options on the S&P 500 Index or options on S&P 500 ETFs) with 
the same strike price. Because option prices reflect both stock price 
and dividend expectations, they can be used in combination to isolate 
either price exposure or dividend expectations. The use of near-term 
and long-term put and call options combinations on the same reference 
asset with the same strike price, but with different maturities, is 
designed to gain exposure to the expected dividends reflected in 
options on the S&P 500 Index and options on ETFs tracking the S&P 500 
Index while neutralizing the impact of stock price.
    Once established, this portfolio construction of options 
combinations will accomplish two goals. First, the use of corresponding 
buy or sell positions on near and long-term options at the same strike 
price is designed to neutralize underlying stock price movements. In 
other words, the corresponding ``buy'' and ``sell'' positions on the 
same reference asset are designed to net against each other and 
eliminate the impact that changes to the stock price of the reference 
asset would otherwise have on the value of the Index (and Fund Shares). 
Second, by minimizing the impact of price fluctuations through the 
construct of the near- and long-term contract combinations, the 
strategy is designed to isolate market expectations for dividends 
implied between expiration dates of the near-term and long-term option 
contracts. Over time, the Index will increase or decrease in value as 
the dividend spread between the near-term and long-term options 
combinations increases or decreases as a result of changing market 
expectations for dividend growth.
Other Fund Investments
    While, as described above, at least 80% of the Fund's total assets 
(exclusive of collateral held from securities lending, if any) will be 
invested in the component securities of the Index, the Fund may invest 
up to 20% of its total assets in other securities and financial 
instruments, as described below.
    The Fund may invest in: (a) U.S. exchange-listed futures contracts 
based on the S&P 500 Index and ETFs designed to track the S&P 500 
Index; and (b) forward contracts based on the S&P 500 Index and ETFs 
designed to track the S&P 500 Index. The Fund's use of exchange-listed 
futures contracts and forward contracts is designed to allow the Fund 
to isolate its exposure to the growth of the level of expected 
dividends reflected in options on the S&P 500 Index and options on ETFs 
tracking the S&P 500 Index, while minimizing the Fund's exposure to 
changes in the trading price of such securities. The Fund may also buy 
and sell OTC options on the S&P 500 Index and on ETFs designed to track 
the S&P 500 Index.
    The Fund may enter into dividend and total return swap transactions 
(including equity swap transactions) based on the S&P 500 Index and 
ETFs designed to track the S&P 500 Index.\23\ In a typical swap 
transaction, one party agrees to make periodic payments to another 
party (``counterparty'') based on the change in market value or level 
of a specified rate, index, or asset. In return, the counterparty 
agrees to make periodic payments to the first party based on the return 
of a different specified rate, index, or asset. Swap transactions are 
usually done on a net basis, whereby the Fund would receive or pay only 
the net amount of the two payments. In a typical dividend swap 
transaction, the Fund would pay the swap counterparty a premium and 
would be entitled to receive the value of the actual dividends paid on 
the subject index during the term of the swap contract. In a typical 
total return swap, the Fund might exchange long or short exposures to 
the return of the underlying securities or index to isolate the value 
of the dividends paid on the underlying securities or index 
constituents. The Fund also may engage in interest rate swap 
transactions. In a typical interest rate swap transaction one stream of 
future interest payments is exchanged for another. Such transactions 
often take the form of an exchange of a fixed payment for a variable 
payment based on a future interest rate. The Fund intends to use 
interest rate swap transactions to manage or hedge exposure to interest 
rate fluctuations.
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    \23\ The Fund will transact only with swap dealers that have in 
place an ISDA agreement with the Fund.
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    The Fund may invest up to 20% of its assets (exclusive of 
collateral held from securities lending, if any) in exchange-listed 
equity securities and derivative instruments (specifically, futures 
contracts, forward contracts, and swap transactions, as noted above) 
\24\ relating to the Index and its component securities that the 
Adviser believes will help the Fund track the Index. For example, the 
Fund may buy and sell ETFs and, to a limited extent, individual large-
capitalization equity securities listed and traded on a U.S. national 
securities exchange.
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    \24\ Where practicable, the Fund intends to invest in swaps 
cleared through a central clearing house (``Cleared Swaps''). 
Currently, only certain of the interest rate swaps in which the Fund 
intends to invest are Cleared Swaps, while the dividend and total 
return swaps (including equity swaps) in which the Fund may invest 
are currently not Cleared Swaps.
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    The Fund may invest in the securities of other investment companies 
(including money market funds) to the extent permitted under the 1940 
Act.
    The Fund's short positions and its investments in swaps, futures 
contracts, forward contracts, and options based on the S&P 500 Index 
and ETFs designed to track the S&P 500 Index will be backed by 
investments in cash, high-quality short-term debt securities, and 
money-market instruments in an amount equal to the Fund's maximum 
liability under the applicable position or contract, or will otherwise 
be offset in accordance with Section 18 of the 1940 Act. Short-term 
debt securities and money market instruments include shares of fixed 
income or money market mutual funds, commercial paper, certificates of 
deposit, bankers'

[[Page 69932]]

acceptances, U.S. government securities (including securities issued or 
guaranteed by the U.S. government or its authorities, agencies, or 
instrumentalities), repurchase agreements,\25\ and bonds that are rated 
BBB or higher. In addition to the investments described above, and in a 
manner consistent with its investment objective, the Fund may invest a 
limited portion of its net assets in high-quality, short-term debt 
securities and money market instruments for cash management 
purposes.\26\
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    \25\ The Fund may enter into repurchase agreements with banks 
and broker-dealers. A repurchase agreement is an agreement under 
which securities are acquired by a fund from a securities dealer or 
bank subject to resale at an agreed upon price on a later date. The 
acquiring fund bears a risk of loss in the event that the other 
party to a repurchase agreement defaults on its obligations and the 
fund is delayed or prevented from exercising its rights to dispose 
of the collateral securities.
    \26\ The Fund may invest in shares of money market mutual funds 
to the extent permitted by the 1940 Act.
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    The Fund will attempt to limit counterparty risk in non-cleared 
swap, forward, and OTC option contracts by entering into such contracts 
only with counterparties the Adviser believes are creditworthy and by 
limiting the Fund's exposure to each counterparty. The Adviser will 
monitor the creditworthiness of each counterparty and the Fund's 
exposure to each counterparty on an ongoing basis.\27\
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    \27\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, the Adviser will 
evaluate each approved counterparty using various methods of 
analysis, such as, for example, the counterparty's liquidity in the 
event of default, the counterparty's reputation, the Adviser's past 
experience with the counterparty, and the counterparty's share of 
market participation.
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    The Fund's investments in swaps, futures contracts, forward 
contracts, and options will be consistent with the Fund's investment 
objective and with the requirements of the 1940 Act.\28\
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    \28\ To limit the potential risk associated with such 
transactions, the Fund will segregate or ``earmark'' assets 
determined to be liquid by the Adviser in accordance with procedures 
established by the Trust's Board of Trustees and in accordance with 
the 1940 Act (or, as permitted by applicable regulation, enter into 
certain offsetting positions) to cover its obligations arising from 
such transactions. These procedures have been adopted consistent 
with Section 18 of the 1940 Act and related Commission guidance. In 
addition, the Fund will include appropriate risk disclosure in its 
offering documents, including leveraging risk. Leveraging risk is 
the risk that certain transactions of the Fund, including the Fund's 
use of derivatives, may give rise to leverage, causing the Fund to 
be more volatile than if it had not been leveraged. To mitigate 
leveraging risk, the Adviser will segregate or ``earmark'' liquid 
assets or otherwise cover the transactions that may give rise to 
such risk.
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Investment Restrictions
    To the extent the Index concentrates (i.e., holds 25% or more of 
its total assets) in the securities of a particular industry or group 
of industries, the Fund will concentrate its investments to 
approximately the same extent as the Index.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) deemed 
illiquid by the Adviser, consistent with Commission guidance.\29\ The 
Fund will monitor its portfolio liquidity on an ongoing basis to 
determine whether, in light of current circumstances, an adequate level 
of liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
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    \29\ 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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    The Fund may make secured loans of its portfolio securities; 
however, securities loans will not be made if, as a result, the 
aggregate amount of all outstanding securities loans by the Fund 
exceeds 33\1/3\% of its total assets (including the market value of 
collateral received). To the extent the Fund engages in securities 
lending, securities loans will be made to broker-dealers that the 
Adviser believes to be of relatively high credit standing pursuant to 
agreements requiring that the loans continuously be collateralized by 
cash, liquid securities, or shares of other investment companies with a 
value at least equal to the market value of the loaned securities.
    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act. The Fund intends to qualify for and to 
elect treatment as a separate regulated investment company (``RIC'') 
under Subchapter M of the Internal Revenue Code.
    The Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns.

III. Summary of Comment Letters

    As noted above, the Commission received two comment letters in 
response to the Order Instituting Proceedings.\30\ Both comment 
letters, which were in favor of the proposal, sought to address certain 
questions, as outlined in the Order Instituting Proceedings,\31\ and 
provide additional clarification regarding the proposal.
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    \30\ See Reality Shares Letter 1; Reality Shares Letter 2, supra 
note 10.
    \31\ In the Order Instituting Proceedings, the Commission sought 
comment on the following questions: (a) Because the Index is 
designed to reflect changes in market expectations of future 
dividend growth, rather than to track actual dividend growth, is the 
Fund's investment strategy fundamentally based on an assumption that 
the options markets systemically underprice dividend growth? What 
are commenters' views regarding whether investors would be able to 
understand the strategy, risks, potential rewards, assumptions, and 
expected performance of the Fund's strategy? (b) With respect to the 
trading of the Shares on the Exchange, do commenters believe that 
the Exchange's rules governing sales practices are adequately 
designed to ensure the suitability of recommendations regarding the 
Shares? Why or why not? If not, should the Exchange's rules 
governing sales practices be enhanced? If so, in what ways? (c) How 
closely do commenters think the market price of the Shares will 
track the Fund's intraday indicative value (``IIV'') or the intraday 
value of the Index? Are certain of these values likely to be more 
volatile than others? If so, how would this affect trading in the 
Shares? Are the Shares likely to trade with a significant premium or 
discount to IIV? What are commenters' views of how effectively the 
IIV of the Fund would represent the Fund's portfolio? What are 
commenters' views of how the Shares' market price, the Fund's IIV, 
and the intraday value of the Index will relate to one another 
during times of market stress? and (d) Does the liquidity of the 
long-dated options in which the Fund will invest differ materially 
from that of the short-dated options in which the Fund will invest? 
If so, how would that affect the ability of market makers to engage 
in arbitrage or to hedge their positions while making a market in 
the Shares? Would the liquidity characteristics of the Index 
components or of the options in the Fund's portfolio affect the 
calculation of the Index value, the calculation of the Fund's IIV, 
the calculation of the Fund's NAV, or the ability of market makers 
or other market participants to value the Shares? If so, how?
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A. Reality Shares Letter 1

    In Reality Shares Letter 1, the commenter offers its responses to 
the Commission's questions. The commenter responds that the Fund's 
investment strategy is not based on the assumption that dividend growth 
is underpriced by the options markets, stating that it is instead based 
on the expected dividend value to be paid on S&P 500 securities (as 
implied in the price of listed S&P 500 Index options over time) and the 
``historical high correlation between such expected dividend values and 
the value of actual dividends paid on S&P 500

[[Page 69933]]

securities.'' \32\ The commenter then explains that as the value of 
actual dividends paid increases or decreases, market expectations for 
dividends typically move up or down in a corresponding direction, and 
that if the current expected dividend value of the options in the 
Fund's portfolio changes, the value of an investment in the Fund 
changes correspondingly.\33\
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    \32\ See Reality Shares Letter 1, supra note 10, at 2-3.
    \33\ See id., at 3.
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    The commenter asserts that the Fund's Registration Statement will 
sufficiently disclose to investors the key features of the Fund, 
including explanations of how the Fund's strategy works and how the 
Fund is expected to perform under various market conditions, and 
disclosures highlighting all material risks of investing in the 
Fund.\34\ The commenter believes that these disclosures and the 
disclosures in the Fund's marketing materials, will allow investors to 
understand the Fund's investment objective, strategy, risks, potential 
rewards, assumptions, and performance characteristics.\35\ Further, the 
commenter believes that the Exchange's rules governing sales practices 
are sufficient to ensure the suitability of recommendations to 
investors regarding the Fund's Shares.\36\
---------------------------------------------------------------------------

    \34\ See id., at 3-4.
    \35\ See id., at 4.
    \36\ See id., at 5.
---------------------------------------------------------------------------

    With respect to IIV, the commenter responds that it believes that 
the market price of the Fund Shares will closely approximate the IIV of 
the Fund's portfolio and the intraday value of the Fund's underlying 
Index.\37\ While it believes that ``the Fund's IIV and intraday Index 
values may reflect higher volatility than the market trading price of 
Fund Shares,'' the commenter does not expect this will have any 
material impact on secondary market trading of Fund Shares or arbitrage 
in Fund Shares.\38\ The commenter expects that Authorized Participants 
and other institutional investors will quote and trade the option 
contracts held by the Fund in combination (by holding simultaneous long 
and short positions in the same put/call contracts) and that this 
combination tends to trade at tighter bid/ask spreads than do the 
individual contracts.\39\ The commenter expects that Authorized 
Participants and other market makers will factor the price of the 
combination trades into their assessment of the value of Fund Shares, 
which will be reflected in the trading price of Fund Shares.\40\ The 
commenter explains that the Fund's IIV and the intraday Index values 
are based on the intraday market price of individual option contracts 
and do not reflect the trading price of option contracts held in 
combination. So, while the commenter expects the price of Fund Shares 
to closely approximate the Fund's IIV and the intraday values of the 
Index, it also expects that the trading price of Fund shares will be 
less volatile than the Fund's IIV and the intraday value of the 
Index.\41\
---------------------------------------------------------------------------

    \37\ See Reality Shares Letter 1, supra note 10, at 6.
    \38\ See id.
    \39\ See id.
    \40\ See id., at 7.
    \41\ See id.
---------------------------------------------------------------------------

    In times of market stress, the commenter believes that the Fund's 
Shares will trade within an acceptable spread to the Fund's IIV and the 
intraday value of the Index.\42\ The commenter believes that because 
the Fund's portfolio is transparent and the Index constituents are 
publicly disclosed, market participants will be able to assess the 
value of the Fund and the Index and access the securities necessary to 
hedge their position exposures, even during times of market stress.\43\ 
Further, the commenter asserts that, ``[b]ecause of the transparency of 
the Fund's portfolio and the liquidity and transparency of the 
underlying listed index options . . . investors will continue to have 
the ability to buy and sell Shares in the secondary market at fair and 
representative prices should there be any material departure from the 
IIV.'' \44\
---------------------------------------------------------------------------

    \42\ See Reality Shares Letter 1, supra note 10, at 9.
    \43\ See id.
    \44\ See id., at 10.
---------------------------------------------------------------------------

    The commenter states that the liquidity of the longer-dated option 
contracts in the Fund's portfolio will not differ materially from the 
liquidity of the shorter-dated option contracts.\45\ Further, the 
commenter explains that the liquidity characteristics of the option 
contracts held by the Fund will not negatively impact the Fund's 
operation, the calculation of the Index value, the calculation of the 
Fund's IIV, or the calculation of the Fund's NAV.\46\ The commenter 
believes that the options contracts provide ``sufficient and ample 
liquidity . . . for Authorized Participants and other investors to 
engage in efficient hedging activity, to value Fund Shares and to make 
markets in Fund Shares.'' \47\
---------------------------------------------------------------------------

    \45\ See id.
    \46\ See id., at 11.
    \47\ See Reality Shares Letter 1, supra note 10, at 12.
---------------------------------------------------------------------------

B. Reality Shares Letter 2

    In Reality Shares Letter 2, the commenter seeks to address whether 
the Fund's strategy will produce positive returns for buy-and-hold 
investors over the longer term in light of the efficient nature of 
markets and the ability of astute market participants to predict 
dividend growth.\48\ The commenter claims that the historical returns 
of the Fund's strategy have been positive over long periods of time and 
that an investor can reasonably expect returns in the future that are 
non-zero and positive in the long term.\49\
---------------------------------------------------------------------------

    \48\ See Reality Shares Letter 2, supra note 10, at 1.
    \49\ See id.
---------------------------------------------------------------------------

    In support of this claim, the commenter argues that all 
investments, even in perfectly efficient markets, are expected to have, 
at minimum, a risk-free rate associated with them.\50\ For example, 
Treasury Bills (theoretically risk-free assets) are discounted by the 
risk-free rate in order to entice investors to purchase them.\51\ Thus, 
even in a perfectly efficient market such as the one for Treasury 
Bills, an investment in a riskless asset will produce a long-term 
return greater than zero.\52\ In addition, the commenter adds that, if 
any uncertainty surrounds the future payoff of an investment, one would 
expect a risk premium to be attached to the investment.\53\ This would 
be quantified as the amount of money by which the expected return on 
the asset exceeds the known return of a risk-free asset.\54\ This risk 
premium compensates investors for the uncertainty in their investment 
in a risky asset.\55\ If the dividend risk premium were low, one would 
expect the strategy to earn less than the actual growth of dividends; 
if dividend risk premium were high, one would expect the strategy to 
earn more than actual dividend growth.\56\ The commenter notes that, 
while expected dividend returns may not match dividend growth exactly, 
the rate of return would (at a minimum) be expected to be equal to the 
risk free rate, plus the risk premium.\57\
---------------------------------------------------------------------------

    \50\ See id.
    \51\ See id.
    \52\ See id.
    \53\ See Reality Shares Letter 2, supra note 10, at 2.
    \54\ See id.
    \55\ See id.
    \56\ See id.
    \57\ See id.
---------------------------------------------------------------------------

    The commenter further asserts that, beyond the theoretical analogy 
stated above, an investment in the expected dividend implied in the 
options markets has historically produced positive returns and that the 
Fund's strategy can

[[Page 69934]]

be expected to produce future positive long-term returns.\58\ While the 
commenter believes that it is possible for implied dividend strategies 
to outperform equity returns, as well as actual dividend growth, the 
commenter argues that the foundation of the Fund's investment strategy 
is predicated on its conclusion that implied dividends carry risk and 
that, in an efficient market, this risk will be reflected in the form 
of a dividend risk premium.\59\
---------------------------------------------------------------------------

    \58\ See Reality Shares Letter 2, supra note 10, at 2.
    \59\ See id., at 3.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposal and the 
comments submitted in response to the questions raised by the 
Commission in the Order Instituting Proceedings. For the reasons 
discussed below, the Commission finds that the Exchange's proposal to 
list and trade the Shares is consistent with the Exchange Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\60\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendments No. 1 and No. 4 thereto, is 
consistent with Section 6(b)(5) of the Exchange Act,\61\ 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.
---------------------------------------------------------------------------

    \60\ 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).
    \61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission also finds that the proposal to list and trade the 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Exchange Act,\62\ 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 available via the Consolidated Tape 
Association (``CTA'') high-speed line. The value of the Index will be 
published by one or more major market data vendors every 15 seconds 
during the NYSE Arca Core Trading Session of 9:30 a.m. E.T. to 4:00 
p.m. E.T. Information about the Index constituents, the weighting of 
the constituents, the Index's methodology, and the Index's rules will 
be available at no charge on the Index Provider's Web site at 
www.realityshares.com. In addition, the Intraday Indicative Value 
(``IIV'') as defined in NYSE Arca Equities Rule 5.2(j)(3), Commentary 
01(c), will be widely disseminated at least every 15 seconds during the 
Core Trading Session by one or more major market data vendors.\63\ 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 such term is defined in NYSE Arca 
Equities Rule 8.600(c)(2)) that will form the basis for the Fund's 
calculation of NAV at the end of the business day.\64\ In addition, a 
portfolio composition file, which includes the security names and 
quantities, as applicable, required to be delivered in exchange for the 
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 portfolio composition file will represent one Creation 
Unit of Shares of the Fund. The Fund will calculate its NAV by: (i) 
Taking the current market value of its total assets; (ii) subtracting 
any liabilities; and (iii) dividing that amount by the total number of 
Shares outstanding. The Fund will calculate NAV once each business day 
as of the regularly scheduled close of trading on the NYSE (normally, 
4:00 p.m., Eastern Time).\65\ The intra-day, closing, and settlement 
prices of the portfolio securities and other Fund investments, 
including futures and exchange-traded equities, ETFs, and exchange-
traded options,\66\ will also be readily available from the national 
securities exchanges trading such securities, automated quotation 
systems, published or other public sources, and, with respect to OTC 
options, swap transactions, and forward transactions, from third party 
pricing sources, or on-line information services such as Bloomberg or 
Reuters. The intra-day, closing, and settlement prices of debt 
securities and money market instruments will be readily available from 
published and other public sources or on-line information services. 
Price information regarding investment company securities, including 
ETFs, will be available from on-line information services and from the 
Web site for the applicable investment company security. 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 Fund's Web site will include a form of the 
prospectus for the Fund that may be downloaded and additional data 
relating to NAV and other applicable quantitative information.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \63\ According to the Exchange, several major market data 
vendors display and/or make widely available IIVs taken from the CTA 
or other data feeds.
    \64\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day. 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, as 
applicable to the type of holding: Ticker symbol, CUSIP number or 
other identifier, if any; a description of the holding (including 
the type of holding, such as the type of swap); the identity of the 
security, commodity, index, or other asset or instrument underlying 
the holding, if any; for options, the option strike price; quantity 
held (as measured by, for example, par value, notional value or 
number of shares, contracts or units); maturity date, if any; coupon 
rate, if any; effective date, if any; market value of the holding; 
and the percentage weighting of the holding in the Fund's portfolio. 
The Web site information will be publicly available at no charge.
    \65\ The Trust will generally value exchange-listed equity 
securities (which include common stocks and ETFs) and exchange-
listed options, including options on the S&P 500 Index and options 
on ETFs, at market closing prices. Market closing price is generally 
determined on the basis of last reported sales prices on the 
applicable exchange, or if no sales are reported, based on the mid-
point between the last reported bid and ask. The Trust will 
generally value exchange-listed futures at the settlement price 
determined by the applicable exchange. Non-exchange-traded 
derivatives, including OTC options, swap transactions, and forward 
transactions, will normally be valued on the basis of quotations or 
equivalent indication of value supplied by an independent pricing 
service or major market makers or dealers. Debt securities and money 
market instruments generally will be valued based on prices provided 
by independent pricing services, which may use valuation models or 
matrix pricing to determine current value. Investment company 
securities (other than ETFs) will be valued at NAV. The Trust 
generally will use amortized cost to value fixed income or money 
market securities that have a remaining maturity of 60 days or less.
    \66\ Information relating to U.S. exchange-listed options is 
available via the Options Price Reporting Authority.
---------------------------------------------------------------------------

    The Commission also believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be

[[Page 69935]]

necessary to price the Shares appropriately and to prevent trading when 
a reasonable degree of transparency cannot be assured. The Exchange 
represents that trading in Shares of the Fund will be halted if the 
circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been 
reached. Trading also may be halted because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the Shares 
inadvisable.\67\ In addition, if the IIV, the Index Value or the value 
of the Index Components is not being disseminated as required, the 
Exchange may halt trading during the day in which the disruption 
occurs; if the interruption persists past the day in which it occurred, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption. The Exchange will obtain a 
representation from the Fund that the NAV for the Fund will be 
calculated daily and will be made available to all market participants 
at the same time. Under NYSE Arca Equities Rule 7.34(a)(5), if the 
Exchange becomes aware that the NAV for the Fund is not being 
disseminated to all market participants at the same time, it will halt 
trading in the Shares until such time as the NAV is available to all 
market participants.
---------------------------------------------------------------------------

    \67\ 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. The Exchange represents 
that it may consider all relevant factors in exercising its 
discretion to halt or suspend trading in the Shares of the Fund.
---------------------------------------------------------------------------

    The Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. The 
Commission notes that the Index Provider is not registered as an 
investment adviser or broker dealer and is not affiliated with any 
broker-dealers, and the Adviser is not registered as a broker-dealer 
and is not affiliated with any broker-dealers.\68\ 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. The 
Financial Industry Regulatory Authority (``FINRA''), on behalf of the 
Exchange,\69\ will communicate as needed regarding trading in the 
Shares, exchange-listed equity securities, ETFs, futures contracts, and 
exchange-traded options contracts with other markets and other entities 
that are members of the Intermarket Surveillance Group (``ISG''), and 
FINRA, on behalf of the Exchange, may obtain trading information 
regarding trading in the Shares, exchange-listed equity securities, 
ETFs, futures contracts, and exchange-traded options contracts from 
such markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, exchange-listed equity 
securities, ETFs, futures contracts, and exchange-traded options 
contracts from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.\70\ All exchange-listed equity securities, ETFs, 
futures contracts and options held by the Fund will be traded on U.S. 
exchanges, all of which are members of ISG or are exchanges with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement. In addition, FINRA, on behalf of the Exchange, is able to 
access, as needed, trade information for certain fixed income 
securities held by the Fund reported to FINRA's Trade Reporting and 
Compliance Engine.
---------------------------------------------------------------------------

    \68\ See supra note 15 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.
    \69\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
    \70\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
portfolio for the Fund may trade on markets that are members of ISG 
or with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    The Exchange deems the Shares 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 Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions (Opening, Core, and Late 
Trading Sessions).
    (2) The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2), except 
that the Index will not meet the requirements of NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .01(a)(A)(1)-(5) in that the Index will 
consist of options based on US Component Stocks (i.e., ETFs based on 
the S&P 500 Index) and options on an index of US Component Stocks 
(i.e., S&P 500 Index options), rather than US Component Stocks 
themselves. The Index will include a minimum of 20 components and, 
therefore, would meet the numerical requirement of NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .01(a)(A)(4) (a minimum of 13 index or 
portfolio components).
    (3) Trading in the Shares will be subject to the existing trading 
surveillances, administered by FINRA on behalf of the Exchange, which 
are designed to detect violations of Exchange rules and applicable 
federal securities laws, and that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to detect and help deter violations of Exchange rules and federal 
securities laws applicable to trading on the Exchange.
    (4) 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 IIV or Index value will not be calculated or 
publicly disseminated; (d) how information regarding the IIV and Index 
value will be 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.

[[Page 69936]]

    (5) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\71\ as provided by 
NYSE Arca Equities Rule 5.3.
---------------------------------------------------------------------------

    \71\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (6) At least 80% of the Fund's total assets (exclusive of 
collateral held from securities lending, if any) will be invested in 
the component securities of the Index. The Fund will seek a correlation 
of 0.95 or better between its performance and the performance of its 
Index. A figure of 1.00 would represent perfect correlation. All 
options included in the Index will be listed and traded on a U.S. 
national securities exchange.
    (7) The Fund's investments in swaps, futures contracts, forward 
contracts and options will be consistent with the Fund's investment 
objective and with the requirements of the 1940 Act. To limit the 
potential risk associated with such transactions, the Fund will 
segregate or ``earmark'' assets determined to be liquid by the Adviser 
in accordance with procedures established by the Trust's Board of 
Trustees and in accordance with the 1940 Act (or, as permitted by 
applicable regulation, enter into certain offsetting positions) to 
cover its obligations arising from such transactions. These procedures 
have been adopted consistent with Section 18 of the 1940 Act and 
related Commission guidance. In addition, the Fund will include 
appropriate risk disclosure in its offering documents, including 
leveraging risk. Leveraging risk is the risk that certain transactions 
of the Fund, including the Fund's use of derivatives, may give rise to 
leverage, causing the Fund to be more volatile than if it had not been 
leveraged. To mitigate leveraging risk, the Adviser will segregate or 
``earmark'' liquid assets or otherwise cover the transactions that may 
give rise to such risk. The Fund may not invest in leveraged or inverse 
leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs or options on such ETFs. The 
Fund's investments will be consistent with its investment objective and 
will not be used to provide multiple returns of a benchmark or to 
produce leveraged returns.
    (8) The Fund will transact only with swap dealers that have in 
place an ISDA agreement with the Fund. Where practicable, the Fund 
intends to invest in Cleared Swaps. The Fund will attempt to limit 
counterparty risk in non-cleared swap, forward, and OTC option 
contracts by entering into such contracts only with counterparties the 
Adviser believes are creditworthy and by limiting the Fund's exposure 
to each counterparty. The Adviser will monitor the creditworthiness of 
each counterparty and the Fund's exposure to each counterparty on an 
ongoing basis. The Fund will seek, where possible, to use 
counterparties, as applicable, whose financial status is such that the 
risk of default is reduced. The Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition to 
information provided by credit agencies, the Adviser will evaluate each 
approved counterparty using various methods of analysis, such as, for 
example, the counterparty's liquidity in the event of default, the 
counterparty's reputation, the Adviser's past experience with the 
counterparty, and the counterparty's share of market participation.
    (9) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) deemed 
illiquid by the Adviser, consistent with Commission guidance.
    (10) A minimum of 100,000 Shares for the Fund will be outstanding 
at the commencement of trading on the Exchange.
    (11) The Fund will include appropriate risk disclosure in its 
offering documents, which will be available on the Commission's Web 
site and on the Fund's Web site, www.realityshares.com.
    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, as modified by Amendments No. 1 and No. 4 thereto, is 
consistent with Section 6(b)(5) of the Act \72\ and the rules and 
regulations thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\73\ that the proposed rule change (SR-NYSEArca-2014-41), as 
modified by Amendments No. 1 and No. 4 thereto, be, and it hereby is, 
approved.
---------------------------------------------------------------------------

    \73\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\74\
---------------------------------------------------------------------------

    \74\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-27707 Filed 11-21-14; 8:45 am]
BILLING CODE 8011-01-P