Document ID: SEC-2013-2008-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-11-25T05:00Z

[Federal Register Volume 78, Number 227 (Monday, November 25, 2013)]
[Notices]
[Pages 70370-70380]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28162]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70902; File No. SR-NYSEArca-2013-121]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to the Listing and Trading of Shares 
of AdvisorShares Sage Core Reserves ETF Under NYSE Arca Equities Rule 
8.600

November 19, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 5, 2013, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade the shares of the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): 
AdvisorShares Sage Core Reserves ETF. The text of the proposed rule 
change is available on the Exchange's Web site at www.nyse.com, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares: \4\ AdvisorShares Sage Core 
Reserves ETF(``Fund''). The Shares will be offered by AdvisorShares 
Trust (the ``Trust''),\5\ a statutory trust organized under the laws of 
the State of Delaware and registered with the Commission as an open-end 
management investment company.\6\ The investment adviser to the Fund 
will be AdvisorShares Investments, LLC (the ``Adviser''). Sage Advisory 
Services Ltd. Co. (``Sub-Adviser'') will be the Fund's sub-adviser and 
will provide day-to-day portfolio management of the Fund.

[[Page 70371]]

Foreside Fund Services, LLC (the ``Distributor'') will be the principal 
underwriter and distributor of the Fund's Shares. The Bank of New York 
Mellon (the ``Administrator'') will serve as the administrator, 
custodian, transfer agent, and accounting agent for the Fund.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \5\ The Trust is registered under the 1940 Act. On August 13, 
2013, the Trust filed with the Commission an amendment to its 
registration statement on Form N-1A under the Securities Act of 1933 
(15 U.S.C. 77a) (``Securities Act''), and under the 1940 Act 
relating to the Fund (File Nos. 333-157876 and 811-22110) 
(``Registration Statement''). The description of the operation of 
the Trust and the Fund herein is based, in part, on the Registration 
Statement. In addition, the Commission has issued an order granting 
certain exemptive relief to the Trust under the 1940 Act. See 
Investment Company Act Release No. 29291 (May 28, 2010) (File No. 
812-13677) (``Exemptive Order'').
    \6\ The Commission has approved listing and trading on the 
Exchange of a number of actively managed funds under Rule 8.600. 
See, e.g., Securities Exchange Act Release Nos. 63076 (October 12, 
2010), 75 FR 63874 (October 18, 2010) (SR-NYSEArca-2010-79) (order 
approving Exchange listing and trading of Cambria Global Tactical 
ETF); 63802 (January 31, 2011), 76 FR 6503 (February 4, 2011) (SR-
NYSEArca-2010-118) (order approving Exchange listing and trading of 
the SiM Dynamic Allocation Diversified Income ETF and SiM Dynamic 
Allocation Growth Income ETF); and 65468 (October 3, 2011), 76 FR 
62873 (October 11, 2011) (SR-NYSEArca-2011-51) (order approving 
Exchange listing and trading of TrimTabs Float Shrink ETF).
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    Commentary .06 to Rule 8.600 provides that, if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall 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 such investment company portfolio. In addition, Commentary 
.06 further requires that personnel who make decisions on the open-end 
fund's portfolio composition must be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the open-end fund's portfolio.\7\ Commentary .06 to Rule 
8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca 
Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the 
establishment of a ``fire wall'' between the investment adviser and the 
broker-dealer reflects the applicable open-end fund's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. 
Neither the Adviser nor the Sub-Adviser is registered as a broker-
dealer or is affiliated with a broker-dealer. In the event (a) the 
Adviser or the Sub-Adviser becomes a registered broker-dealer or 
becomes newly affiliated with a broker-dealer, or (b) any new adviser 
or sub-adviser is a registered broker-dealer or becomes affiliated with 
a broker-dealer, it will implement a fire wall with respect to its 
relevant personnel or its broker-dealer affiliate regarding access to 
information concerning the composition 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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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``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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Principal Investments
    According to the Registration Statement, the Fund will seek to 
preserve capital while maximizing income. Under normal market 
conditions,\8\ the Sub-Adviser will seek to achieve the Fund's 
investment objective by investing at least 80% of the Fund's net assets 
in a variety of fixed income securities issued by U.S. and foreign 
issuers. Such fixed income securities will be U.S. dollar-denominated 
investment grade debt securities rated Baa or higher by Moody's 
Investors Service, Inc. (``Moody's''), or equivalently rated by 
Standard & Poor's Ratings Services (``S&P'') or Fitch, Inc. 
(``Fitch''), or, if unrated, determined by the Sub-Adviser to be of 
comparable quality. The Fund may retain a security if its rating falls 
below investment grade and the Sub-Adviser determines that retention of 
the security is in the Fund's best interest.\9\
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    \8\ The term ``under normal market conditions'' means, without 
limitation, the absence of extreme volatility or trading halts in 
the fixed income markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
    \9\ In determining whether a security is of ``comparable 
quality'', the Sub-Adviser will consider, for example, whether the 
issuer of the security has issued other rated securities; whether 
the obligations under the security are guaranteed by another entity 
and the rating of such guarantor (if any); whether and (if 
applicable) how the security is collateralized; other forms of 
credit enhancement (if any); the security's maturity date; liquidity 
features (if any); relevant cash flow(s); valuation features; other 
structural analysis; macroeconomic analysis and sector or industry 
analysis.
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    The Exchange notes that the Fund's investment portfolio of fixed 
income securities will meet certain criteria for index-based, fixed 
income exchange-traded funds (``ETFs'') contained in NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .02.\10\
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    \10\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 
governing fixed income based Investment Company Units. The 
requirements of Rule 5.2(j)(3), Commentary .02(a) that will be met 
include the following: (i) The index or portfolio must consist of 
Fixed Income Securities (as defined in Rule 5.2(j)(3), 
Commentary.02) (Commentary .02(a)(1)); (ii) components that in the 
aggregate account for at least 75% of the weight of the index or 
portfolio each must have a minimum original principal amount 
outstanding of $100 million or more (Rule 5.2(j)(3), 
Commentary.02(a)(2)); (iii) a component may be a convertible 
security; however, once the convertible security converts to an 
underlying equity security, the component is removed from the index 
or portfolio (Rule 5.2(j)(3), Commentary.02(a)(3)); (iv) no 
component fixed-income security (excluding Treasury Securities) will 
represent more than 30% of the weight of the index or portfolio, and 
the five highest weighted component fixed-income securities do not 
in the aggregate account for more than 65% of the weight of the 
index or portfolio (Rule 5.2(j)(3), Commentary.02(a)(4)); and (v) an 
underlying index or portfolio (excluding exempted securities) must 
include securities from a minimum of 13 non-affiliated issuers (Rule 
5.2(j)(3), Commentary.02(a)(5)).
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    The average duration of the Fund will vary based on the Sub-
Adviser's forecast for interest rates and will normally not exceed one 
year.\11\ The dollar-weighted average portfolio maturity of the Fund 
will normally not be expected to exceed three years.
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    \11\ Duration is a measure used to determine the sensitivity of 
a security's price to changes in interest rates. The longer a 
security's duration, the more sensitive it will be to changes in 
interest rates.
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    The Fund may invest in debt securities, which are securities 
consisting of a certificate or other evidence of a debt (secured or 
unsecured) on which the issuing company or governmental body promises 
to pay the holder thereof a fixed, variable, or floating rate of 
interest for a specified length of time, and to repay the debt on the 
specified maturity date. Some debt securities, such as zero coupon 
bonds, do not make regular interest payments but are issued at a 
discount to their principal or maturity value. The debt securities that 
the Fund will invest in will include a variety of fixed income 
obligations, including, but not limited to, corporate debt securities, 
government securities, municipal securities, convertible securities, 
and mortgage-backed securities.
    The Fund may invest in variable and floating rate instruments, 
which involve certain obligations that may carry variable or floating 
rates of interest, and may involve a conditional or unconditional 
demand feature. Such instruments bear interest at rates which are not 
fixed, but which vary with changes in specified market rates or 
indices. The interest rates on these securities may be reset daily, 
weekly, quarterly, or some other reset period, and may have a set floor 
or ceiling on interest rate changes. There is a risk that the current 
interest rate on such obligations may not accurately reflect existing 
market interest rates. A demand instrument with a demand notice 
exceeding seven days may be

[[Page 70372]]

considered illiquid if there is no secondary market for such security.
    The Fund may invest in bank obligations, including certificates of 
deposit, bankers' acceptances, and fixed time deposits. Certificates of 
deposit are negotiable certificates issued against funds deposited in a 
commercial bank for a definite period of time and earning a specified 
return. Bankers' acceptances are negotiable drafts or bills of 
exchange, normally drawn by an importer or exporter to pay for specific 
merchandise, which are ``accepted'' by a bank, meaning, in effect, that 
the bank unconditionally agrees to pay the face value of the instrument 
on maturity. Fixed time deposits are bank obligations payable at a 
stated maturity date and bearing interest at a fixed rate. Fixed time 
deposits may be withdrawn on demand by the investor, but may be subject 
to early withdrawal penalties which vary depending upon market 
conditions and the remaining maturity of the obligation.
    The Fund may invest in commercial paper. Commercial paper is a 
short-term obligation with a maturity ranging from one to 270 days 
issued by banks, corporations, and other borrowers. Such investments 
are unsecured and usually discounted. To the extent the Fund invests in 
commercial paper, the Fund will invest in commercial paper rated A-1 or 
A-2 by S&P or Prime-1 or Prime-2 by Moody's.
    The Fund may invest in U.S. government securities. Securities 
issued or guaranteed by the U.S. government or its agencies or 
instrumentalities include U.S. Treasury securities, which are backed by 
the full faith and credit of the U.S. Treasury and which differ only in 
their interest rates, maturities, and times of issuance. U.S. Treasury 
bills have initial maturities of one year or less; U.S. Treasury notes 
have initial maturities of one to ten years; and U.S. Treasury bonds 
generally have initial maturities of greater than ten years. Certain 
U.S. government securities are issued or guaranteed by agencies or 
instrumentalities of the U.S. government including, but not limited to, 
obligations of U.S. government agencies or instrumentalities such as 
Fannie Mae, Freddie Mac, the Government National Mortgage Association 
(``Ginnie Mae''), the Small Business Administration, the Federal Farm 
Credit Administration, the Federal Home Loan Banks, Banks for 
Cooperatives (including the Central Bank for Cooperatives), the Federal 
Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley 
Authority, the Export-Import Bank of the United States, the Commodity 
Credit Corporation, the Federal Financing Bank, the National Credit 
Union Administration, and the Federal Agricultural Mortgage Corporation 
(``Farmer Mac'').
    The Fund may invest in inflation-indexed bonds, which are fixed 
income securities whose principal value is periodically adjusted 
according to the rate of inflation. Two structures are common. The U.S. 
Treasury and some other issuers use a structure that accrues inflation 
into the principal value of the bond. Most other issuers pay out the 
Consumer Price Index (``CPI'') accruals as part of a semiannual coupon. 
Inflation-indexed securities issued by the U.S. Treasury have 
maturities of five, ten or thirty years, although it is possible that 
securities with other maturities will be issued in the future. The U.S. 
Treasury securities pay interest on a semi-annual basis, equal to a 
fixed percentage of the inflation-adjusted principal amount.
    The Fund may invest in mortgage-related securities and asset-backed 
securities (``ABSs'').\12\ Mortgage-related securities are interests in 
pools of residential or commercial mortgage loans, including mortgage 
loans made by savings and loan institutions, mortgage bankers, 
commercial banks, and others. Pools of mortgage loans are assembled as 
securities for sale to investors by various governmental, government-
related and private organizations. The Fund also may invest in debt 
securities which are secured with collateral consisting of mortgage-
related securities. Interests in pools of mortgage-related securities 
differ from other forms of debt securities, which normally provide for 
periodic payment of interest in fixed amounts with principal payments 
at maturity or specified call dates. Instead, these securities provide 
a monthly payment which consists of both interest and principal 
payments. In effect, these payments are a ``pass-through'' of the 
monthly payments made by the individual borrowers on their residential 
or commercial mortgage loans, net of any fees paid to the issuer or 
guarantor of such securities. Additional payments are caused by 
repayments of principal resulting from the sale of the underlying 
property, refinancing or foreclosure, net of fees or costs which may be 
incurred. Some mortgage-related securities (such as securities issued 
by Ginnie Mae) are described as ``modified pass-through''. These 
securities entitle the holder to receive all interest and principal 
payments owed on the mortgage pool, net of certain fees, at the 
scheduled payment dates regardless of whether or not the mortgagor 
actually makes the payment.
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    \12\ ABSs are bonds backed by pools of loans or other 
receivables. ABSs are created from many types of assets, including 
auto loans, credit card receivables, home equity loans, and student 
loans. ABSs are issued through special purpose vehicles that are 
bankruptcy remote from the issuer of the collateral. The credit 
quality of an ABS transaction depends on the performance of the 
underlying assets. To protect ABS investors from the possibility 
that some borrowers could miss payments or even default on their 
loans, ABSs include various forms of credit enhancement.
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    The Fund may invest in agency mortgage-related securities. The 
principal governmental guarantor of mortgage-related securities is 
Ginnie Mae. Ginnie Mae is a wholly owned United States Government 
corporation within the Department of Housing and Urban Development. 
Ginnie Mae is authorized to guarantee, with the full faith and credit 
of the United States Government, the timely payment of principal and 
interest on securities issued by institutions approved by Ginnie Mae 
(such as savings and loan institutions, commercial banks, and mortgage 
bankers) and backed by pools of mortgages insured by the Federal 
Housing Administration (the ``FHA''), or guaranteed by the Department 
of Veterans Affairs (the ``VA'').
    The Fund may invest up to 10% of its net assets in privately issued 
(non-government-sponsored entity (``GSE'')) mortgage-related 
securities, including commercial mortgage-backed securities,\13\ 
collateralized mortgage obligations (``CMOs''),\14\ and adjustable rate 
mortgage-backed securities (``ARMBSs'').\15\ Commercial banks, savings 
and loan institutions, private mortgage insurance companies, mortgage 
bankers and other secondary market issuers also create pass-through 
pools of conventional residential mortgage loans. Such issuers may be 
the originators and/or servicers of the

[[Page 70373]]

underlying mortgage loans as well as the guarantors of the mortgage-
related securities. The Fund will not purchase mortgage-related 
securities (including non-GSE mortgage-related securities) or any other 
assets which in the Sub-Adviser's opinion are illiquid if, as a result, 
more than 15% of the Fund's net assets will be invested in illiquid 
securities.\16\
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    \13\ Commercial mortgage-backed securities include securities 
that reflect an interest in, and are secured by, mortgage loans on 
commercial real property.
    \14\ CMOs are debt obligations of a legal entity that are 
collateralized by mortgages and divided into classes. Similar to a 
bond, interest and prepaid principal is paid, in most cases, on a 
monthly basis. CMOs may be collateralized by whole mortgage loans or 
private mortgage bonds, but are more typically collateralized by 
portfolios of mortgage pass-through securities guaranteed by Ginnie 
Mae, Freddie Mac, or Fannie Mae, and their income streams.
    \15\ ARMBSs have interest rates that reset at periodic 
intervals. Acquiring ARMBSs permits the Fund to participate in 
increases in prevailing current interest rates through periodic 
adjustments in the coupons of mortgages underlying the pool on which 
ARMBSs are based. Such ARMBSs generally have higher current yield 
and lower price fluctuations than is the case with more traditional 
fixed income debt securities of comparable rating and maturity.
    \16\ See note 29 and accompanying text, infra.
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    The Sub-Adviser will seek to manage the portion of the Fund's 
assets committed to privately issued mortgage-related securities in a 
manner consistent with the Fund's investment objective, policies and 
overall portfolio risk profile. In determining whether and how much to 
invest in privately issued mortgage-related securities, and how to 
allocate those assets, the Sub-Adviser will consider a number of 
factors. These include, but are not limited to: (1) The nature of the 
borrowers (e.g., residential vs. commercial); (2) the collateral loan 
type (e.g., for residential: First Lien--Jumbo/Prime, First Lien--Alt-
A, First Lien--Subprime, First Lien--Pay-Option or Second Lien; for 
commercial: Conduit, Large Loan or Single Asset/Single Borrower); and 
(3) in the case of residential loans, whether they are fixed rate or 
adjustable mortgages. Each of these criteria can cause privately issued 
mortgage-related securities to have differing primary economic 
characteristics and distinguishable risk factors and performance 
characteristics.
Other Fund Investments
    According to the Registration Statement, to respond to adverse 
market, economic, political or other conditions, the Fund may invest 
100% of its total assets, without limitation, in investment grade debt 
securities and money market instruments, either directly or through 
ETFs.\17\ The Fund may be invested in this manner for extended periods, 
depending on the Sub-Adviser's assessment of market conditions. Such 
debt securities and money market instruments include shares of other 
fixed income mutual funds, commercial paper, certificates of deposit, 
bankers' acceptances, U.S. government securities, repurchase 
agreements, and bonds that are rated BBB or higher. While the Fund is 
in a defensive position, the opportunity to achieve its investment 
objective will be limited.
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    \17\ The ETFs in which the Fund may invest will be registered 
under the 1940 Act and include Investment Company Units (as 
described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio 
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100); 
and Managed Fund Shares (as described in NYSE Arca Equities Rule 
8.600). Such ETFs all will be listed and traded in the U.S. on 
registered exchanges. While the Fund may invest in inverse ETFs, the 
Fund will not invest in leveraged or inverse leveraged (e.g., 2X, -
2X, 3X or -3X) ETFs.
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    While the Fund, under normal market conditions, will invest at 
least 80% of its net assets in investment grade fixed income 
securities, as described above, the Fund may invest its remaining 
assets in the following.
    The Fund may invest in non-investment-grade securities. Non-
investment-grade securities, also referred to as ``high yield 
securities'' or ``junk bonds,'' are debt securities that are rated 
lower than the four highest rating categories by a nationally 
recognized statistical rating organization (for example, lower than 
Baa3 by Moody's or lower than BBB- by S&P) or are determined to be of 
comparable quality by the Fund's Sub-Adviser. These securities are 
generally considered to be, on balance, predominantly speculative with 
respect to capacity to pay interest and repay principal in accordance 
with the terms of the obligation and will generally involve more credit 
risk than securities in the investment-grade categories. Investment in 
these securities generally provides greater income and increased 
opportunity for capital appreciation than investments in higher quality 
securities, but they also typically entail greater price volatility and 
principal and income risk.
    The Fund may invest in equity securities, including common stocks, 
preferred stocks, warrants to acquire common stock, securities 
convertible into common stock, investments in master limited 
partnerships and rights. With respect to its equity securities 
investments, the Fund will invest only in equity securities that trade 
in markets that are members of the Intermarket Surveillance Group 
(``ISG'') or are parties to a comprehensive surveillance sharing 
agreement with the Exchange.\18\
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    \18\ See note 38, infra.
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    The Fund may invest in exchange-traded notes (``ETNS''). ETNs (also 
called ``index-linked securities'' as would be listed, for example, 
under NYSE Arca Equities Rule 5.2(j)(6)), are senior, unsecured 
unsubordinated debt securities issued by an underwriting bank that are 
designed to provide returns that are linked to a particular benchmark 
less investor fees. ETNs have a maturity date and, generally, are 
backed only by the creditworthiness of the issuer.
    The Fund may invest in CMO residuals, which are mortgage securities 
issued by agencies or instrumentalities of the U.S. government or by 
private originators of, or investors in, mortgage loans, including 
savings and loan associations, homebuilders, mortgage banks, commercial 
banks, investment banks, and special purpose entities of the foregoing. 
CMO residuals, whether or not registered under the 1933 Act, may be 
subject to certain restrictions on transferability, and may be deemed 
``illiquid'' and subject to the Fund's limitations on investment in 
illiquid securities.
    The Fund may invest in the securities of exchange-traded pooled 
vehicles that are not investment companies and, thus, not required to 
comply with the provisions of the 1940 Act.\19\ As a result, as a 
shareholder of such pooled vehicles, the Fund will not have all of the 
investor protections afforded by the 1940 Act. Such pooled vehicles 
may, however, be required to comply with the provisions of other 
federal securities laws, such as the Securities Act. These pooled 
vehicles typically hold currency or commodities, such as gold or oil, 
or other property that is itself not a security. If the Fund invests 
in, and, thus, is a shareholder of, a pooled vehicle, the Fund's 
shareholders will indirectly bear the Fund's proportionate share of the 
fees and expenses paid by the pooled vehicle, including any applicable 
management fees, in addition to both the management fees payable 
directly by the Fund to the Adviser and the other expenses that the 
Fund bears directly in connection with its own operations.
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    \19\ Such securities include 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); and 
Trust Units (as described in NYSE Arca Equities Rule 8.500).
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    The Fund may invest in equities issuers located outside the United 
States directly,\20\ or in financial instruments,

[[Page 70374]]

ETFs, ETNs and exchange-traded pooled vehicles that are indirectly 
linked to the performance of foreign issuers.
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    \20\ Securities of such equities issuers may be any one of the 
following: American Depositary Receipts (``ADRs''), Global 
Depositary Receipts (``GDRs''), European Depositary Receipts 
(``EDRs''), International Depository Receipts (``IDRs''), ``ordinary 
shares,'' and ``New York shares'' issued and traded in the U.S. 
(collectively, ``Equity Financial Instruments''). ADRs are U.S. 
dollar denominated receipts typically issued by U.S. banks and trust 
companies that evidence ownership of underlying securities issued by 
a foreign issuer. Generally, ADRs in registered form are designed 
for use in domestic securities markets and are traded on exchanges 
or over-the-counter in the U.S. GDRs, EDRs, and IDRs are similar to 
ADRs in that they are certificates evidencing ownership of shares of 
a foreign issuer; however, GDRs, EDRs, and IDRs may be issued in 
bearer form and denominated in other currencies, and are generally 
designed for use in specific or multiple securities markets outside 
the U.S. EDRs, for example, are designed for use in European 
securities markets while GDRs are designed for use throughout the 
world. Ordinary shares are shares of foreign issuers that are traded 
abroad and on a U.S. exchange. New York shares are shares that a 
foreign issuer has allocated for trading in the U.S. ADRs may be 
sponsored or unsponsored, but unsponsored ADRs will not exceed 10% 
of the Fund's net assets. With respect to its investments in equity 
securities (including Equity Financial Instruments), the Fund will 
invest at least 90% of its assets invested in such securities that 
trade in markets that are members of the ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange. See 
note 38, infra.
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    The Fund may invest directly and indirectly in foreign currencies. 
The Fund may conduct foreign currency transactions on a spot (i.e., 
cash) or forward basis (i.e., by entering into forward contracts to 
purchase or sell foreign currencies). At the discretion of the Adviser, 
the Fund may, but is not obligated to, enter into forward currency 
exchange contracts for hedging purposes to help reduce the risks and 
volatility caused by changes in foreign currency exchange rates. When 
used for hedging purposes, forward currency contracts tend to limit any 
potential gain that may be realized if the value of the Fund's foreign 
holdings increases because of currency fluctuations.
    The Fund may invest in other mortgage-related securities, which 
include securities other than those described above that directly or 
indirectly represent a participation in, or are secured by and payable 
from, mortgage loans on real property, including mortgage dollar rolls 
(that is, a series of purchase and sale contracts),\21\ or stripped 
mortgage-backed securities (``SMBS''), which are derivative multi-class 
mortgage securities.\22\ Such other mortgage-related securities may be 
debt securities issued by agencies or instrumentalities of the U.S. 
government or by private originators of, or investors in, mortgage 
loans, including savings and loan associations, homebuilders, mortgage 
banks, commercial banks, investment banks, partnerships, trusts, and 
special purpose entities of the foregoing.
---------------------------------------------------------------------------

    \21\ A mortgage dollar roll involves the sale of mortgage-backed 
securities by the Fund and its agreement to repurchase the 
instrument (or one which is substantially similar) at a specified 
time and price.
    \22\ SMBSs are usually structured with two classes that receive 
different proportions of the interest and principal distributions on 
a pool of mortgage assets. A common type of SMBS will have one class 
receiving some of the interest and most of the principal from the 
mortgage assets, while the other class will receive most of the 
interest and the remainder of the principal. In the most extreme 
case, one class will receive all of the interest (the ``IO'' class), 
while the other class will receive all of the principal (the 
principal-only or ``PO'' class). The yield to maturity on an IO 
class is extremely sensitive to the rate of principal payments 
(including pre-payments) on the related underlying mortgage assets, 
and a rapid rate of principal payments may have a material adverse 
effect on the Fund's yield to maturity from these securities. If the 
underlying mortgage assets experience greater than anticipated pre-
payments of principal, the Fund may fail to recoup some or all of 
its initial investment in these securities even if the security is 
in one of the highest rating categories.
---------------------------------------------------------------------------

    The Fund may invest in closed-end funds. Closed-end funds are 
pooled investment vehicles that are registered under the 1940 Act and 
whose shares are listed and traded on U.S. national securities 
exchanges.
    The Fund may invest in U.S. exchange-traded futures contracts, 
options on futures contracts, including stock index futures, U.S. 
Treasury futures, and options on such futures. The Fund also may invest 
in U.S. exchange and over-the-counter traded options, which will 
generally be based on U.S. Treasuries.
    The Fund may enter into swap agreements generally based on fixed 
income securities, including, but not limited to, total return swaps, 
index swaps, and interest rate swaps. The Fund may utilize swap 
agreements in an attempt to gain exposure to the securities in a market 
without actually purchasing those securities, or to hedge a position. 
The Fund will utilize cleared swaps if available, to the extend [sic] 
practicable and not enter into any swap agreement unless the Adviser 
believed that the other party to the transaction is creditworthy. Swaps 
utilized by the Fund will be backed by collateral of the Fund's assets, 
as required. The Sub-Adviser will evaluate the creditworthiness of 
counterparties on an ongoing basis. In addition to information provided 
by credit agencies, the Sub-Adviser's credit analysts will evaluate 
each approved counterparty using various methods of analysis, including 
company visits, earnings updates, the broker-dealer's reputation, past 
experience with the broker-dealer, market levels for the counterparty's 
debt and equity, the counterparty's liquidity and its share of market 
participation.
    The Fund may invest in each of collateralized bond obligations 
(``CBOs''), collateralized loan obligations (``CLOs''), other 
collateralized debt obligations (``CDOs'') and other similarly 
structured securities. CBOs, CLOs and other CDOs are types of ABSs. A 
CBO is a trust which is often backed by a diversified pool of high 
risk, below investment grade fixed income securities. The collateral 
can be from many different types of fixed income securities such as 
high yield debt, residential privately issued mortgage-related 
securities, commercial privately issued mortgage-related securities, 
trust preferred securities and emerging market debt. A CLO is a trust 
typically collateralized by a pool of loans, which may include, among 
others, domestic and foreign senior secured loans, senior unsecured 
loans, and subordinate corporate loans, including loans that may be 
rated below investment grade or equivalent unrated loans. Other CDOs 
are trusts backed by other types of assets representing obligations of 
various parties.\23\
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    \23\ According to the Registration Statement, the risks of an 
investment in a CBO, CLO or other CDO depend largely on the type of 
the collateral securities and the class of the instrument in which 
the Fund invests. Normally, CBOs, CLOs and other CDOs are privately 
offered and sold, and thus are not registered under the securities 
laws. As a result, investments in CBOs, CLOs and other CDOs may be 
characterized by the Fund as illiquid securities; however, an active 
dealer market may exist for CBOs, CLOs and other CDOs allowing them 
to qualify for Rule 144A transactions.
---------------------------------------------------------------------------

    The Fund may invest in hybrid instruments. A hybrid instrument is a 
type of potentially high-risk derivative that combines a traditional 
stock, bond, or commodity with an option or forward contract. 
Generally, the principal amount, amount payable upon maturity or 
redemption, or interest rate of a hybrid is tied (positively or 
negatively) to the price of some security, commodity, currency or 
securities index or another interest rate or some other economic factor 
(each a ``benchmark''). The interest rate or (unlike most fixed income 
securities) the principal amount payable at maturity of a hybrid 
security may be increased or decreased, depending on changes in the 
value of the benchmark. An example of a hybrid instrument could be a 
bond issued by an oil company that pays a small base level of interest 
with additional interest that accrues in correlation with the extent to 
which oil prices exceed a certain predetermined level. Such a hybrid 
instrument would be a combination of a bond and a call option on oil.
    The Fund may invest in structured notes, which are debt obligations 
that also contain an embedded derivative component with characteristics 
that adjust the obligation's risk/return profile. Generally, the 
performance of a structured note will track that of the underlying debt 
obligation and the derivative embedded within it.\24\ The Fund would 
have the right to receive periodic interest payments from the issuer of 
the structured notes at an

[[Page 70375]]

agreed-upon interest rate and a return of the principal at the maturity 
date.
---------------------------------------------------------------------------

    \24\ Structured notes are typically privately negotiated 
transactions between two or more parties. The Fund bears the risk 
that the issuer of the structured note will default or become 
bankrupt which may result in the loss of principal investment and 
periodic interest payments expected to be received for the duration 
of its investment in the structured notes.
---------------------------------------------------------------------------

    The Fund may invest in shares of exchange-traded real estate 
investment trusts (``REITs''). REITs are pooled investment vehicles 
which invest primarily in real estate or real estate related loans. 
REITs are generally classified as equity REITs, mortgage REITs, or a 
combination of equity and mortgage REITs.
    The Fund may enter into repurchase agreements with financial 
institutions, which may be deemed to be loans. The Fund follows certain 
procedures designed to minimize the risks inherent in such agreements. 
These procedures include effecting repurchase transactions only with 
large, well-capitalized and well-established financial institutions 
whose condition will be continually monitored by the Sub-Adviser. In 
addition, the value of the collateral underlying the repurchase 
agreement will always be at least equal to the repurchase price, 
including any accrued interest earned on the repurchase agreement. It 
is the current policy of the Fund not to invest in repurchase 
agreements that do not mature within seven days if any such investment, 
together with any other illiquid assets held by the Fund, amount to 
more than 15% of the Fund's net assets.
    The Fund may enter into reverse repurchase agreements as part of 
the Fund's investment strategy. Reverse repurchase agreements involve 
sales by the Fund of portfolio assets concurrently with an agreement by 
the Fund to repurchase the same assets at a later date at a fixed 
price. Generally, the effect of such a transaction is that the Fund can 
recover all or most of the cash invested in the portfolio securities 
involved during the term of the reverse repurchase agreement, while the 
Fund will be able to keep the interest income associated with those 
portfolio securities.
    The Fund may engage in short sales transactions in which the Fund 
sells a security it does not own.
    The Fund may invest in mortgage-related securities that are equity 
securities issued by agencies or instrumentalities of the U.S. 
government or by private originators of, or investors in, mortgage 
loans, including savings and loan associations, homebuilders, mortgage 
banks, commercial banks, investment banks, partnerships, trusts, and 
special purpose entities of the foregoing.\25\
---------------------------------------------------------------------------

    \25\ With respect to its mortgage-related securities holdings 
that are equity securities, the Fund will invest only in such 
securities that trade in markets that are members of the ISG or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange.
---------------------------------------------------------------------------

    The Fund, from time to time, in the ordinary course of business, 
may purchase securities on a when-issued, delayed-delivery or forward 
commitment basis (i.e., delivery and payment can take place between a 
month and 120 days after the date of the transaction).
    The Fund may invest in U.S. Treasury zero-coupon bonds. These 
securities are U.S. Treasury bonds which have been stripped of their 
unmatured interest coupons, the coupons themselves, and receipts or 
certificates representing interests in such stripped debt obligations 
and coupons. Interest is not paid in cash during the term of these 
securities, but is accrued and paid at maturity.
Investment Restrictions
    According to the Registration Statement, the Fund may 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 depositary receipt.\26\
---------------------------------------------------------------------------

    \26\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act. See note 20, supra, regarding depositary 
receipts that the Fund may hold.
---------------------------------------------------------------------------

    (ii) 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.\27\
---------------------------------------------------------------------------

    \27\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975). According to the Registration Statement, 
mortgage-related securities that are issued or guaranteed by the 
U.S. government, its agencies or instrumentalities, are not subject 
to the Fund's industry concentration restrictions by virtue of the 
exclusion from that test available to all U.S. government 
securities. The assets underlying such securities may be represented 
by a portfolio of residential or commercial mortgages (including 
both whole mortgage loans and mortgage participation interests that 
may be senior or junior in terms of priority of repayment) or 
portfolios of mortgage pass-through securities issued or guaranteed 
by Ginnie Mae, Fannie Mae or Freddie Mac. Mortgage loans underlying 
a mortgage-related security may in turn be insured or guaranteed by 
the FHA or the VA.
---------------------------------------------------------------------------

    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser or Sub-
Adviser,\28\ in accordance with Commission guidance, CMO residuals and 
demand instruments with a demand notice exceeding seven days. 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 securities. Illiquid securities include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.\29\
---------------------------------------------------------------------------

    \28\ In reaching liquidity decisions, the Adviser or Sub-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).
    \29\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also Investment Company Act 
Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) 
(Statement Regarding ``Restricted Securities''); Investment Company 
Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) 
(Revisions of Guidelines to Form N-1A). A fund's portfolio security 
is illiquid if it cannot be disposed of in the ordinary course of 
business within seven days at approximately the value ascribed to it 
by the fund. See Investment Company Act Release No. 14983 (March 12, 
1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 
under the 1940 Act); Investment Company Act Release No. 17452 (April 
23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under 
the Securities Act).
---------------------------------------------------------------------------

    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 or interpretation thereof. The 
Trust has entered into agreements with several unaffiliated ETFs that 
permit, pursuant to a Commission order,

[[Page 70376]]

the Fund to purchase shares of those ETFs beyond the Section 12(d)(1) 
limits described above. The Fund will only make such investments in 
conformity with the requirements of Subchapter M of the Internal 
Revenue Code of 1986 (the ``Internal Revenue Code'').\30\
---------------------------------------------------------------------------

    \30\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    According to the Registration Statement, the Fund will seek to 
qualify for treatment as a Regulated Investment Company (``RIC'') under 
the Internal Revenue Code.\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.
Creation and Redemption of Shares
    The Trust will issue and sell Shares of the Fund in Creation Unit 
size aggregations of 25,000 Shares or more on a continuous basis 
through the Distributor, at their NAV next determined after receipt, on 
any business day. The consideration for purchase of a Creation Unit of 
the Fund generally will consist of an in-kind deposit of a designated 
portfolio of securities--the ``Deposit Securities''--per each Creation 
Unit constituting a substantial replication, or a representation, of 
the securities included in the Fund's portfolio and an amount of cash--
the Cash Component--computed as described below. Together, the Deposit 
Securities and the Cash Component constitute the ``Fund Deposit,'' 
which represents the minimum initial and subsequent investment amount 
for a Creation Unit of the Fund. The Cash Component is an amount equal 
to the difference between the NAV of the shares (per Creation Unit) and 
the market value of the Deposit Securities. If the Cash Component is a 
positive number (i.e., the NAV per Creation Unit exceeds the market 
value of the Deposit Securities), the Cash Component shall be such 
positive amount. If the Cash Component is a negative number (i.e., the 
NAV per Creation Unit is less than the market value of the Deposit 
Securities), the Cash Component shall be such negative amount and the 
creator will be entitled to receive cash from the Fund in an amount 
equal to the Cash Component. The Cash Component serves the function of 
compensating for any differences between the NAV per Creation Unit and 
the market value of the Deposit Securities.
    The Administrator, through the National Securities Clearing 
Corporation (``NSCC''), will make available on each business day, 
immediately prior to the opening of business on the Exchange (currently 
9:30 a.m., Eastern Time), the list of the names and the required 
quantity or number of shares of each Deposit Security to be included in 
the current Fund Deposit (based on information at the end of the 
previous business day) for the Fund. Such Fund Deposit will be 
applicable, subject to any adjustments as described below, in order to 
effect creations of Creation Units of the Fund until such time as the 
next-announced composition of the Deposit Securities is made available.
    The identity and number of shares or quantity of the Deposit 
Securities required for a Fund Deposit for the Fund may change as 
rebalancing adjustments and corporate action events occur from time to 
time. In addition, the Trust reserves the right to permit or require 
the substitution of an amount of cash--i.e., a ``cash in lieu'' 
amount--to be added to the Cash Component to replace any Deposit 
Security which may not be available in sufficient quantity for delivery 
or which may not be eligible for transfer (as discussed in the 
Registration Statement), or which may not be eligible for trading by an 
Authorized Participant or the investor for which it is acting. The 
Trust also reserves the right to offer an ``all cash'' option for 
creations of Creation Units for the Fund.
    In addition to the list of names and numbers of securities 
constituting the current Deposit Securities of a Fund Deposit, the 
Administrator, through the NSCC, also will make available on each 
business day, the estimated Cash Component, effective through and 
including the previous business day, per outstanding Creation Unit of 
the Fund.
    Shares may be redeemed only in Creation Units at their NAV next 
determined after receipt of a redemption request in proper form by the 
Fund through the Administrator and only on a business day. The Trust 
will not redeem Shares in amounts less than Creation Units. Beneficial 
owners must accumulate enough Shares in the secondary market to 
constitute a Creation Unit in order to have such Shares redeemed by the 
Trust.
    With respect to the Fund, the Administrator, through the NSCC, will 
make available immediately prior to the opening of business on the 
Exchange (currently 9:30 a.m., Eastern Time) on each business day, the 
``Fund Securities'' that will be applicable (subject to possible 
amendment or correction) to redemption requests received in proper form 
on that day. Fund Securities received on redemption may not be 
identical to Deposit Securities which are applicable to creations of 
Creation Units.
    For the Fund, unless cash redemptions are available or specified 
for the Fund, the redemption proceeds for a Creation Unit generally 
will consist of Fund Securities--as announced by the Administrator on 
the business day of the request for redemption received in proper 
form--plus cash in an amount equal to the difference between the NAV of 
the Shares being redeemed, as next determined after receipt of a 
request in proper form, and the value of the Fund Securities (the 
``Cash Redemption Amount''), less a redemption transaction fee 
described in the Registration Statement. In the event that the Fund 
Securities have a value greater than the NAV of the Shares, a 
compensating cash payment equal to the differential is required to be 
made by or through an Authorized Participant by the redeeming 
shareholder.
    If it is not possible to effect deliveries of the Fund Securities, 
the Trust may in its discretion exercise its option to redeem such 
Shares in cash, and the redeeming beneficial owner will be required to 
receive its redemption proceeds in cash. In addition, an investor may 
request a redemption in cash which the Fund may, in its sole 
discretion, permit. In either case, the investor will receive a cash 
payment equal to the NAV of its Shares based on the NAV of Shares of 
the Fund next determined after the redemption request is received in 
proper form (minus a redemption transaction fee and additional charge 
for requested cash redemptions specified above, to offset the Trust's 
brokerage and other transaction costs associated with the disposition 
of Fund Securities). The Fund may also, in its sole discretion, upon 
request of a shareholder, provide such redeemer a portfolio of 
securities which differs from the exact composition of the Fund 
Securities but does not differ in NAV.
    The Trust also reserves the right to offer an ``all cash'' option 
for redemptions of Creation Units for the Fund. The Adviser represents 
that, to the extent the Trust effects the redemption of Shares in cash, 
such transactions will be effected in the same manner for all 
Authorized Participants.
Net Asset Value
    The net asset value (``NAV'') per Share of the Fund will be 
computed by dividing the value of the net assets of the Fund (i.e., the 
value of its total assets less total liabilities) by the total number 
of Shares of the Fund outstanding, rounded to the nearest cent. 
Expenses and fees, including

[[Page 70377]]

without limitation, the management, administration and distribution 
fees, are accrued daily and taken into account for purposes of 
determining NAV per Share.
    In calculating NAV, the Fund will generally value its portfolio 
investments at market prices. In computing the Fund's NAV, the Fund's 
securities holdings will be valued based on their last readily 
available market price. Price information on listed securities, 
including ETFs, ETNs, exchange-traded pooled vehicles, ADRs, equity-
related financial instruments and other exchange-traded products, REITs 
and mortgage-related securities, will be taken from the exchange where 
the security is primarily traded. Other portfolio securities and assets 
for which market quotations are not readily available or determined to 
not represent the current fair value will be valued based on fair value 
as determined in good faith in accordance with procedures adopted by 
the Trust's Board of Trustees and in accordance with the 1940 Act.
    The Fund will have an approved pricing matrix at the time of 
launch. The matrix will be based on pre-determined rules for pricing 
logic (such as mean) and valuation point (such as market close). Third 
party pricing sources will be used. For assets such as options, 
futures, swaps, in general, Bloomberg will be the primary source and 
Reuters the secondary source.
    Spot currency transactions and non-exchange-traded derivatives, 
including forwards, swaps, and certain options will normally be valued 
on the basis of quotes obtained from brokers and dealers or pricing 
services using data reflecting the earlier closing of the principal 
markets for those assets. Prices obtained from independent pricing 
services use information provided by market makers or estimates of 
market values obtained from yield data relating to investments or 
securities with similar characteristics. Exchange-traded options will 
be valued at market closing price.
    Futures and options on futures will be valued at the settlement 
price determined by the applicable exchange.
    Unsponsored ADRs will be valued on the basis of the market closing 
price on the exchange where the stock of the foreign issuer that 
underlies the ADR is listed.
    Domestic and foreign fixed income securities generally trade in the 
over-the-counter market rather than on a securities exchange. The Fund 
will generally value these portfolio securities by relying on 
independent pricing services. The Fund's pricing services will use 
valuation models or matrix pricing to determine current value. In 
general, pricing services use information with respect to comparable 
bond and note transactions, quotations from bond dealers or by 
reference to other securities that are considered comparable in such 
characteristics as rating, interest rate, maturity date, option 
adjusted spread models, prepayment projections, interest rate spreads 
and yield curves. Matrix price is an estimated price or value for a 
fixed-income security. Matrix pricing is considered a form of fair 
value pricing.
    The Administrator will calculate NAV and NAV per Share once each 
business day as of the regularly scheduled close of normal trading on 
the New York Stock Exchange, LLC (the ``NYSE'') (normally, 4:00 p.m., 
Eastern Time).
Availability of Information
    The Fund's Web site (www.advisorshares.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Fund's Web 
site will include additional quantitative information updated on a 
daily basis, including, for the Fund, (1) daily trading volume, the 
prior business day's reported closing price, NAV and mid-point of the 
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask 
Price''),\32\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. 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 that will 
form the basis for the Fund's calculation of NAV at the end of the 
business day.\33\
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    \32\ The Bid/Ask Price of the Fund will be determined using the 
mid-point of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \33\ Under accounting procedures 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 Fund's Web site will disclose for each 
portfolio security and other financial instrument of the Fund the 
following information: Ticker symbol (if applicable); name and, when 
available, the individual identifier (CUSIP) of the security and/or 
financial instrument; number of shares (if applicable) and dollar value 
of securities and financial instruments held in the portfolio; and 
percentage weighting of the security and financial instrument in the 
portfolio. The Web site information will be publicly available at no 
charge.
    In addition, a basket composition file, which includes the security 
names and share quantities (as applicable) 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 NSCC. The basket will represent one Creation Unit of 
the Fund.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports will be available free upon request from the Trust, and those 
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or 
downloaded from the Commission's Web site at www.sec.gov. 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. Quotation and last-sale information for the 
Shares and U.S. exchange-listed equity securities, including ETFs, 
ETNs, exchange-traded pooled vehicles, ADRs, equity-related financial 
instruments and other exchange-traded products, REITs and mortgage-
related securities, will be available via the Consolidated Tape 
Association (``CTA'') high-speed line, and will be available from the 
national securities exchange on which they are listed. Information 
regarding unsponsored ADRs will be available from major market data 
vendors. Intra-day and closing price information relating to the fixed 
income and equities investments of the Fund, as well as Fund 
investments in spot currencies and derivatives, including futures, 
forwards, options, options on futures and swaps, will be available from 
major market data vendors and from securities and futures exchanges, as 
applicable. Information relating to U.S. exchange-listed options will 
be available via the Options Price Reporting Authority. In addition, 
the Portfolio Indicative Value, as defined in NYSE Arca Equities Rule 
8.600(c)(3), will be widely disseminated

[[Page 70378]]

at least every 15 seconds during the Core Trading Session by one or 
more major market data vendors.\34\ The dissemination of the Portfolio 
Indicative Value, together with the Disclosed Portfolio, will allow 
investors to determine the value of the underlying portfolio of the 
Fund on a daily basis and will provide a close estimate of that value 
throughout the trading day.
---------------------------------------------------------------------------

    \34\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Portfolio Indicative Values taken from CTA or other data feeds.
---------------------------------------------------------------------------

    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes is included in the Registration Statement. All 
terms relating to the Fund that are referred to, but not defined in, 
this proposed rule change are defined in the Registration Statement.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund.\35\ 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. These may include: (1) The 
extent to which trading is not occurring in the securities and/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. Trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of the Fund may be 
halted.
---------------------------------------------------------------------------

    \35\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

Trading Rules
    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. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. Eastern Time in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca 
Equities Rule 8.600(d)(2)(B)(ii), the Adviser, as the Reporting 
Authority, will 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 Fund's portfolio. 
The Exchange represents that, for initial and/or continued listing, the 
Fund will be in compliance with Rule 10A-3 under the Act,\36\ 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. The 
Exchange will obtain a representation from the issuer of the Shares 
that the NAV per Share will be calculated daily and that the NAV and 
the Disclosed Portfolio as defined in NYSE Arca Equities Rule 
8.600(c)(2) will be made available to all market participants at the 
same time.
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    \36\ 17 CFR 240.10A-3.
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Surveillance

    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\37\ The Exchange represents that 
these procedures are adequate to properly monitor Exchange trading of 
the Shares in all trading sessions and to deter and detect violations 
of Exchange rules and applicable federal securities laws.
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    \37\ 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.
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    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, underlying exchange-traded equity 
securities (including, without limitation, ETFs, ETNs, exchange-traded 
pooled vehicles, ADRs, equity-related financial instruments and other 
exchange-traded products, REITs, and mortgage-related securities), 
futures, options on futures, and exchange-traded options with other 
markets and other entities that are members of the ISG, and FINRA, on 
behalf of the Exchange, may obtain trading information regarding 
trading in the Shares, underlying exchange-traded equity securities, 
futures, options on futures, and exchange-traded options from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, underlying exchange-traded 
equity securities (including, without limitation, ETFs, ETNs, exchange-
traded pooled vehicles, ADRs, equity-related financial instruments and 
other exchange-traded products, REITs, and mortgage-related 
securities), futures, options on futures, and exchange-traded options 
from markets and other entities that are members of ISG or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement.\38\ 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 (``TRACE'').
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    \38\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed 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.
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    With respect to its investments in equity securities (including 
Equity Financial Instruments), each Fund will invest at least 90% of 
its assets invested in such securities that trade in markets that are 
members of the ISG or are parties to a comprehensive surveillance 
sharing agreement with the Exchange. In addition, the Exchange also has 
a general policy prohibiting the distribution of material, non-public 
information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
(``Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Bulletin will discuss the 
following: (1) The procedures for purchases and redemptions of Shares 
in Creation Unit aggregations (and that Shares are not individually 
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty 
of due diligence

[[Page 70379]]

on its ETP Holders to learn the essential facts relating to every 
customer prior to trading the Shares; (3) the risks involved in trading 
the Shares during the Opening and Late Trading Sessions when an updated 
Portfolio Indicative Value will not be calculated or publicly 
disseminated; (4) how information regarding the Portfolio Indicative 
Value is disseminated; (5) 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 (6) trading 
information.
    In addition, the Bulletin will reference that the Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. The 
Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m. Eastern Time each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \39\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \39\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. FINRA, on behalf of the Exchange, 
will communicate as needed regarding trading in the Shares, underlying 
exchange-traded equity securities (including, without limitation, ETFs, 
ETNs, exchange-traded pooled vehicles, ADRs, equity-related financial 
instruments and other exchange-traded products, REITs, and mortgage-
related securities), futures, options on futures, and exchange-traded 
options with other markets and other entities that are members of the 
ISG, and FINRA, on behalf of the Exchange, may obtain trading 
information regarding trading in the Shares, underlying exchange-traded 
equity securities, futures, options on futures, and exchange-traded 
options from such markets and other entities. In addition, the Exchange 
may obtain information regarding trading in the Shares, underlying 
exchange-traded equity securities (including, without limitation, ETFs, 
ETNs, exchange-traded pooled vehicles, ADRs, equity-related financial 
instruments and other exchange-traded products, REITs, and mortgage-
related securities), futures, options on futures, and exchange-traded 
options with other markets and other entities that are members of the 
ISG or 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 TRACE. 
With respect to its investments in equity securities (including Equity 
Financial Instruments), each Fund will invest at least 90% of its 
assets invested in such securities that trade in markets that are 
members of the ISG or are parties to a comprehensive surveillance 
sharing agreement with the Exchange. The Fund will utilize cleared 
swaps if available, to the extent practicable, and not enter into any 
swap agreement unless the Adviser believes that the other party to the 
transaction is creditworthy. Swaps utilized by the Fund will be backed 
by collateral of the Fund's assets, as required. Neither the Adviser 
nor the Sub-Adviser is registered as a broker-dealer or is affiliated 
with a broker-dealer. The Fund may invest up to 10% of the net assets 
in privately issued (non-GSE mortgage-related securities, including 
commercial mortgage-backed securities, CMOs, and ARMBSs). The Fund may 
hold up to an aggregate amount of 15% of its net assets in illiquid 
securities, including Rule 144A securities deemed illiquid by the 
Adviser or Sub-Adviser, CMO residuals, and demand instruments with a 
demand notice exceeding seven days. The Fund will not invest in 
leveraged or inverse leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs. The 
Fund's investment portfolio will meet certain criteria for index-based, 
fixed income ETFs contained in NYSEArca Equities Rule 5.2(j)(3), 
Commentary .02, as described above. The Fund's investments will be 
consistent with the Fund's investment objective and will not be used to 
enhance leverage.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. Quotation and last-sale 
information for the Shares will be available via the CTA high-speed 
line. In addition, the Portfolio Indicative Value will be widely 
disseminated by the Exchange at least every 15 seconds during the Core 
Trading Session. The Fund's Web site will include a form of the 
prospectus for the Fund that may be downloaded, as well as additional 
quantitative information updated on a daily basis. 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 that will form the basis for the Fund's calculation 
of NAV at the end of the business day. On a daily basis, the Fund will 
disclose for each portfolio security or other financial instrument of 
the Fund the following information: ticker symbol, name and, when 
available, the individual identifier (CUSIP) of the security and/or 
financial instrument; number of shares or dollar value of securities 
and financial instruments held in the portfolio; and percentage 
weighting of the security and/or financial instrument in the portfolio. 
Moreover, 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. Trading 
in Shares of the Fund will be halted if the circuit breaker parameters 
in NYSE Arca Equities Rule 7.12 have been reached or because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. Trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
circumstances under which Shares of the Fund may be halted. In 
addition, as noted above, investors will have ready access to 
information regarding the Fund's holdings, the Portfolio Indicative 
Value, the Disclosed Portfolio, and quotation and last-sale information 
for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that

[[Page 70380]]

will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures that are adequate to properly monitor 
trading in the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws. In 
addition, as noted above, investors will have ready access to 
information regarding the Fund's holdings, the Portfolio Indicative 
Value, the Disclosed Portfolio, and quotation and last-sale information 
for the Shares.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded product that 
primarily holds fixed income securities and that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days after 
publication (i) as the Commission may designate if it finds such longer 
period to be appropriate and publishes its reasons for so finding or 
(ii) as to which the self-regulatory organization consents, the 
Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2013-121 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2013-121. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2013-121 and should 
be submitted on or before December 16, 2013.
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    \40\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-28162 Filed 11-22-13; 8:45 am]
BILLING CODE 8011-01-P