Document ID: SEC-2011-0862-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-06-22T04:00Z

[Federal Register Volume 76, Number 120 (Wednesday, June 22, 2011)]
[Notices]
[Pages 36608-36610]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15554]

[[Page 36608]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64689; File No. SR-NYSEArca-2011-18]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change To List and Trade the Meidell Tactical 
Advantage ETF

 June 16, 2011.

I. Introduction

    On April 15, 2011, 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 Meidell Tactical Advantage 
ETF (``Fund'') under NYSE Arca Equities Rule 8.600. The proposed rule 
change was published in the Federal Register on May 3, 2011.\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. 64357 (April 28, 
2011), 76 FR 24936 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the Fund 
pursuant to NYSE Arca Equities Rule 8.600. 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.\4\ The investment adviser to 
the Fund is AdvisorShares Investments, LLC (``Adviser''). American 
Wealth Management is the Fund's sub-adviser (``Sub-Adviser'') and 
provides day-to-day portfolio management of the Fund. Foreside Fund 
Services, LLC (``Distributor'') is the principal underwriter and 
distributor of the Fund's Shares. The Exchange states that neither the 
Adviser nor the Sub-Adviser is affiliated with a broker-dealer.\5\
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On March 15, 2011, the Trust filed with the 
Commission Post-Effective Amendment No. 20 to Form N-1A under the 
Securities Act of 1933 (15 U.S.C. 77a) and under the 1940 Act 
relating to the Fund (File Nos. 333-157876 and 811-22110) 
(``Registration Statement'').
    \5\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The 
Exchange represents that, in the event (a) the Adviser or Sub-
Adviser becomes newly affiliated with a broker-dealer, or (b) any 
new adviser or sub-adviser becomes affiliated with a broker-dealer, 
such adviser and/or sub-adviser will implement a fire wall with 
respect to such broker-dealer regarding access to information 
concerning the composition and/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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Description of the Fund

    The Fund's investment objective is to seek to provide long-term 
capital appreciation with a secondary emphasis on capital preservation. 
The Fund is an actively managed exchange-traded fund (``ETF'') and, 
thus, does not seek to replicate the performance of a specified index. 
The Fund is considered a ``fund-of-funds'' that seeks to achieve its 
investment objective by primarily investing in other ETFs that offer 
diversified exposure to global regions, countries, styles (market 
capitalization, value, growth, etc.) or sectors, and other exchange-
traded products (``ETPs,'' and, together with ETFs, ``Underlying 
ETPs''),\6\ including, but not limited to, exchange-traded notes 
(``ETNs''), exchange-traded currency trusts, and closed-end funds. The 
Fund will primarily invest in U.S.-listed domestic and foreign equity-
based, fixed income-based, currency-based, and commodity-based 
Underlying ETPs.
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    \6\ Underlying ETPs include Investment Company Units (as 
described in NYSE Arca Equities Rule 5.2(j)(3)); Index-Linked 
Securities (as described in NYSE Arca Equities Rule 5.2(j)(6)); 
Portfolio Depositary Receipts (as described in NYSE Arca Equities 
Rule 8.100); Trust Issued Receipts (as described in NYSE Arca 
Equities Rule 8.200); Commodity-Based Trust Shares (as described in 
NYSE Arca Equities Rule 8.201); Currency Trust Shares (as described 
in NYSE Arca Equities Rule 8.202); Commodity Index Trust Shares (as 
described in NYSE Arca Equities Rule 8.203); Trust Units (as 
described in NYSE Arca Equities Rule 8.500); Managed Fund Shares (as 
described in NYSE Arca Equities Rule 8.600); and closed-end funds.
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    The Sub-Adviser will seek to achieve the Fund's investment 
objective by managing a tactical strategy that has the ability to 
dynamically rebalance the Fund's portfolio from as much as 100% equity-
based assets to 100% fixed income-based assets or cash and cash 
equivalents depending on market trends. This is a long-only tactical 
strategy that seeks to minimize portfolio losses by rotating out of 
higher volatility assets and into lower volatility assets when the Sub-
Adviser believes there are significant risks in the equity markets. 
Risk management is an integral part of the Sub-Adviser's investment 
strategy. The Sub-Adviser will use a quantitative tactical methodology 
to identify the Underlying ETPs believed to be participating in long-
term ``durable trends'' within the market. This model will enable the 
Sub-Adviser to evaluate, rank, and select the appropriate mix of 
investments in Underlying ETPs given market conditions.
    The Sub-Adviser's investment philosophy emphasizes investments in 
broad market indexes and market sector indexes. In general, the Fund 
will purchase or increase its exposure to Underlying ETPs that track 
equity markets or market sectors when the Sub-Adviser's quantitative 
tactical asset allocation model and risk analysis indicate that the 
applicable market or sector is at low risk of losing value or presents 
opportunity for growth and appreciation. The Fund will generally sell 
interests in, or reduce investment exposure to, Underlying ETPs 
tracking equity markets or market sectors in favor of fixed income-
based Underlying ETPs or cash positions when the Sub-Adviser's 
quantitative tactical asset allocation model and risk analysis indicate 
that such markets have become, or are becoming, risky.
    The Sub-Adviser will use a quantitative metric to rank and select 
the appropriate mix of investments given prevailing market conditions. 
The Sub-Adviser's quantitative tactical asset allocation model 
determines asset allocation between bonds and stocks, equity selection, 
sector concentration, as well as limiting portfolio drawdown. The 
general guidelines for the Fund's portfolio are as follows:
Assets Held by Underlying ETPs

Equity-Based                             0%-100%
Fixed Income-Based/Cash                  0%-100%
 

Depending on the economic and market climate, the portfolio may 
increase or decrease portfolio concentrations within the ranges shown 
below.

Foreign Equity                           0%-50%
Large Cap Equity                         0%-50%
Mid Cap Equity                           0%-30%
Small Cap Equity                         0%-30%
Commodities                              0%-20%
Currencies                               0%-10%
 

The Fund's portfolio may temporarily exceed these percentage ranges for 
short periods without notice, and the Sub-Adviser may alter the 
percentage ranges when it deems appropriate.
    Additional quantitative tools will be used to evaluate the 
probability of investment success within the equity market. These tools 
will allow the Sub-Adviser to get into or out of equity positions and 
will include, but are not limited to: (1) Interest rate spreads; (2) 
options activity; (3) market breadth; and (4) equity index trends.
    The Fund intends to invest primarily in the securities of 
Underlying ETPs consistent with the requirements of Section 12(d)(1) of 
the 1940 Act, or any rule, regulation, or order of the Commission or 
interpretation thereof. In addition, the Fund will only make such

[[Page 36609]]

investments in conformity with the requirements of Section 817 of the 
Internal Revenue Code of 1986, as amended (``Code'').

Other Investments of the Fund

    The Fund may invest 100% of its total assets in high-quality debt 
securities and money market instruments either directly or through 
Underlying ETPs to respond to adverse market, economic, political, or 
other conditions.\7\ The Fund may be invested in these instruments for 
extended periods, depending on the Sub-Adviser's assessment of market 
conditions. These debt securities and money market instruments include 
shares of other mutual funds, commercial paper, certificates of 
deposit, bankers' acceptances, U.S. Government securities, repurchase 
and reverse repurchase agreements, and bonds that are BBB or higher.
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    \7\ Adverse market conditions would include large downturns in 
the broad market value of two or more times current average 
volatility, where the Sub-Adviser views such downturns as likely to 
continue for an extended period of time. Adverse economic conditions 
would include significant negative results in factors deemed 
critical at the time by the Sub-Adviser, including significant 
negative results regarding unemployment, Gross Domestic Product, 
consumer spending or housing numbers. Adverse political conditions 
would include events such as government overthrows or instability, 
where the Sub-Adviser expects that such events may potentially 
create a negative market or economic condition for an extended 
period of time. E-mail from Timothy J. Malinowski, Senior Director, 
NYSE Euronext, to Edward Y. Cho, Special Counsel, Division of 
Trading and Markets, Commission, dated June 8, 2011.
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    The Fund will not (i) with respect to 75% of its total assets, 
purchase securities of any issuer (except securities issued or 
guaranteed by the U.S. Government, its agencies or instrumentalities, 
or shares of investment companies) if, as a result, more than 5% of its 
total assets would be invested in the securities of such issuer, or 
(ii) acquire more than 10% of the outstanding voting securities of any 
one issuer. For purposes of this policy, the issuer of the underlying 
security will be deemed to be the issuer of any respective American 
Depositary Receipts (``ADRs'') or Global Depositary Receipts 
(``GDRs'').\8\
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    \8\ ADRs, as well as GDRs, are certificates evidencing ownership 
of shares of a foreign issuer, and may be sponsored or unsponsored. 
These certificates are issued by depositary banks and generally 
trade on an established market in the United States or elsewhere. 
The underlying shares are held in trust by a custodian bank or 
similar financial institution in the issuer's home country. The 
depositary bank may not have physical custody of the underlying 
securities at all times and may charge fees for various services, 
including forwarding dividends and interest and corporate actions.
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    The Fund may not invest 25% or more of its total assets in the 
securities of one or more issuers conducting their principal business 
activities in the same industry or group of industries. This limitation 
does not apply to investments in securities issued or guaranteed by the 
U.S. Government, its agencies or instrumentalities, or shares of 
investment companies. The Fund will not invest 25% or more of its total 
assets in any investment company that so concentrates. For purposes of 
this policy, the issuer of the underlying security will be deemed to be 
the issuer of any respective ADRs or GDRs.
    The Fund will seek to qualify for treatment as a Regulated 
Investment Company under the Code. In addition, the Fund will not: (1) 
Purchase illiquid securities; (2) except for Underlying ETPs that may 
hold non-U.S. issues, invest in non-U.S. issues; and (3) invest in 
leveraged, inverse, or inverse leveraged Underlying ETPs. Additional 
information regarding the Trust, the Fund, and the Shares, the Fund's 
investment strategies, risks, creation and redemption procedures, fees, 
portfolio holdings and disclosure policies, distributions and taxes, 
availability of information, trading rules and halts, and surveillance 
procedures, among other things, can be found in the Notice and the 
Registration Statement, as applicable.\9\
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    \9\ See Notice and Registration Statement, supra notes 3 and 4, 
respectively.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \10\ and the rules and regulations thereunder applicable to a 
national securities exchange.\11\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\12\ 
which requires, among other things, that the Exchange's rules be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Commission notes that the Shares must comply with 
the requirements of NYSE Arca Equities Rule 8.600 to be listed and 
traded on the Exchange.
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    \10\ 15 U.S.C. 78f.
    \11\ 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).
    \12\ 17 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,\13\ which sets forth Congress's 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 high-speed line and, for the Underlying ETPs, will be 
available from the national securities exchange(s) on which they are 
listed. In addition, the Portfolio Indicative Value (``PIV''), as 
defined in NYSE Arca Equities Rule 8.600(c)(3), will be disseminated by 
one or more major market data vendors at least every 15 seconds during 
the Core Trading Session. On each business day, before commencement of 
trading in Shares during 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 the net asset value (``NAV'') at the end of 
the business day.\14\ The NAV of the Fund will normally be determined 
as of the close of the regular trading session on the New York Stock 
Exchange (``NYSE'') (ordinarily 4 p.m. Eastern Time) on each business 
day. 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 NYSE via the National 
Securities Clearing Corporation. 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 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 also include a form of the prospectus for the Fund, 
information relating to NAV (updated daily), and

[[Page 36610]]

other quantitative and trading information.
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    \13\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \14\ On a daily basis, the Adviser 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 will be 
calculated daily and that the NAV and the Disclosed Portfolio will be 
made available to all market participants at the same time.\15\ In 
addition, 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 may halt trading in the Shares if trading is not 
occurring in the securities and/or the financial instruments comprising 
the Disclosed Portfolio of the Fund, or if other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.\16\ Further, the Commission notes that the 
Reporting Authority that provides the Disclosed Portfolio must 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the actual components of the portfolio.\17\ The Exchange 
states that it has a general policy prohibiting the distribution of 
material, non-public information by its employees, and neither the 
Adviser nor the Sub-Adviser is affiliated with a broker-dealer.\18\
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    \15\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \16\ 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 of the Fund. 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.
    \17\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
    \18\ See supra note 5 and accompanying text. The Commission 
notes 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 Sub-Adviser and their 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.
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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:
    (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 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 PIV will not be calculated or publicly 
disseminated; (d) how information regarding the PIV 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 
and other information.
    (5) For initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act,\19\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \19\ See 17 CFR 240.10A-3.
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    (6) The Fund will not: (a) Purchase illiquid securities; (b) invest 
in non-U.S. issues (except for Underlying ETPs that may hold non-U.S. 
issues); and (c) invest in leveraged, inverse, or inverse leveraged 
Underlying ETPs.
    (7) A minimum of 100,000 Shares of the Fund will be outstanding at 
the commencement of trading on the Exchange.

This approval order is based on the Exchange's representations.

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \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-2011-18) 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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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15554 Filed 6-21-11; 8:45 am]
BILLING CODE 8011-01-P