Document ID: SEC-2013-0342-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-02-15T05:00Z

[Federal Register Volume 78, Number 32 (Friday, February 15, 2013)]
[Notices]
[Pages 11245-11249]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03489]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68870; File No. SR-NYSEArca-2012-139]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change To List and Trade First Trust 
Preferred Securities and Income ETF Under NYSE Arca Equities Rule 8.600

February 8, 2013.

I. Introduction

    On December 6, 2012, 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 First 
Trust Preferred Securities and Income ETF (``Fund'') under NYSE Arca 
Equities Rule 8.600. The proposed rule change was published in the 
Federal Register on December 26, 2012.\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. 68458 (December 18, 
2012), 77 FR 76148 (``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, which governs the listing 
and trading of Managed Fund Shares on the Exchange. The Shares will be 
offered by First Trust Exchange-Traded Fund III (``Trust''), which is 
organized as a Massachusetts business trust and is registered with the 
Commission as an open-end management investment company.\4\ The 
investment adviser to the Fund is First Trust Advisors L.P. 
(``Adviser''). Stonebridge Advisors LLC will serve as investment sub-
adviser to the Fund (``Sub-Adviser'') and will provide day-to-day 
portfolio management of the Fund. First Trust Portfolios L.P. 
(``Distributor'') will be the principal underwriter and distributor of 
the Fund's Shares. Brown Brothers Harriman & Co. will serve as 
administrator, custodian, and transfer agent for the Fund. The Exchange 
states that each of the Adviser and Sub-Adviser is affiliated with a 
broker-dealer and represents that each such Adviser and Sub-Adviser has 
implemented a fire wall with respect to its respective broker-dealer 
affiliate regarding access to information concerning the composition of 
and changes to the Fund's portfolio.\5\
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On September 23, 2011, the Trust filed with the 
Commission a registration statement on Form N-1A under the 
Securities Act of 1933 and under the 1940 Act relating to the Fund 
(File Nos. 333-176976 and 811-22245) (``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. 30029 (April 10, 2012) (File No. 812-13795) 
(``Exemptive Order'').
    \5\ See Commentary .06 to NYSE Arca Equities Rule 8.600. The 
Exchange represents that, in the event (a) the Adviser or the Sub-
Adviser becomes newly affiliated with a broker-dealer, or (b) any 
new adviser or sub-adviser becomes affiliated with a broker-dealer, 
it 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 objective will be to provide current income and total 
return. Under normal market conditions,\6\ the Fund will invest at 
least 80% of its net assets (including investment borrowings) in 
preferred securities (``Preferred Securities'') and income-producing 
debt securities (``Income Securities'').\7\ The Adviser represents

[[Page 11246]]

that initially at least 50% of the Fund's net assets invested in 
Preferred Securities and 50% of the Income Securities held by the Fund 
will be exchange-listed.\8\ However, the Fund reserves the right to 
reduce the percentage of assets that are exchange-listed. Preferred 
Securities held by the Fund generally pay fixed or adjustable-rate 
distributions to investors and have preference over common stock in the 
payment of distributions and the liquidation of a company's assets, but 
are generally junior to all forms of the company's debt, including both 
senior and subordinated debt. For purposes of the 80% test set forth 
above, Income Securities consist of both foreign and domestic debt 
instruments, including corporate bonds, high yield bonds, convertible 
securities, and contingent convertible capital securities. In addition, 
for purposes of the 80% test set forth above, securities of other open-
end funds, closed-end funds, or exchange-traded funds (``ETFs'') 
registered under the 1940 Act \9\ that invest primarily in Preferred 
Securities or Income Securities will be deemed to be Preferred 
Securities or Income Securities, respectively. The Adviser represents 
that at least 80% of the Preferred Securities and Income Securities 
held by the Fund will have a minimum original principal amount 
outstanding of $100 million or more. In addition, the Fund's portfolio 
will comprise a minimum of 13 non-affiliated issuers.
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    \6\ The term ``under normal market conditions'' includes, but is 
not limited to, the absence of extreme volatility or trading halts 
in the equity markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption, or any similar intervening 
circumstance.
    \7\ The Exchange states that the risks and potential rewards of 
investing in the Fund may at times be similar to the risks and 
potential rewards of investing in both equity funds and bond funds. 
Certain of the Preferred Securities in which the Fund will invest 
will be traditional preferred stocks that issue dividends that 
qualify for the dividend received deduction under which 
``qualified'' domestic corporations are able to exclude a percentage 
of the dividends received from their taxable income. Certain of the 
Preferred Securities in which the Fund will invest will be preferred 
stock that does not issue dividends that qualify for the dividends 
received deduction for eligible investors (``non-DRD preferred 
stock'') that do not qualify for the dividends received deduction or 
issue qualified dividend income. As described in the Registration 
Statement, hybrid preferred securities, another type of Preferred 
Securities, are typically junior and fully subordinated liabilities 
of an issuer or the beneficiary of a guarantee that is junior and 
fully subordinated to the other liabilities of the guarantor.
    \8\ The foreign equity securities, including preferred, hybrid-
preferred, and contingent convertible capital, securities in which 
the Fund may invest will be limited to securities that trade in 
markets that are members of the Intermarket Surveillance Group 
(``ISG''), which includes all U.S. national securities exchanges and 
certain foreign exchanges, or are parties to a comprehensive 
surveillance sharing agreement with the Exchange.
    \9\ For purposes of this filing, ETFs, which will be listed on a 
national securities exchange, include the following: 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). The Fund may invest in the securities of ETFs 
in excess of the limits imposed under the 1940 Act pursuant to 
exemptive orders obtained by certain ETFs and their sponsors from 
the Commission. The Exchange states that the Fund will not invest in 
leveraged, inverse, or leveraged inverse ETFs.
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    As stated above, the Fund may invest in a variety of debt 
securities, including corporate debt securities.\10\ The broad category 
of corporate debt securities includes debt issued by U.S. and non-U.S. 
companies of all kinds, including those with small-, mid-, and large-
capitalizations.\11\ Corporate debt may carry fixed or floating rates 
of interest.
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    \10\ As described in the Registration Statement, corporate debt 
securities are fixed-income securities issued by businesses to 
finance their operations. Notes, bonds, debentures, and commercial 
paper are the most common types of corporate debt securities, with 
the primary difference being their maturities and secured or 
unsecured status. Certain debt securities held by the Fund may 
include debt instruments that are similar in many respects to 
preferred securities.
    \11\ Under normal market conditions, at least 80% of the Fund's 
investments in U.S. corporate bonds must have $100 million or more 
par amount outstanding to be considered as an eligible investment 
and a non-U.S. corporate bond must have $200 million or more par 
amount outstanding and significant par value traded to be considered 
as an eligible investment. Economic and other conditions may, from 
time to time, lead to a decrease in the average par amount 
outstanding of bond issuances.
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    Initially, the Fund will invest at least 80% of the Fund's net 
assets in Income Securities of issuing firms (``issuers'') that have a 
long-term issuer credit rating of investment grade at the time of the 
investment. However, the Fund reserves the right to reduce the 
percentage of assets invested in investment grade issuers. ``Investment 
grade'' is defined as those issuers that have a long-term credit rating 
of ``BBB-'' or higher by Standard & Poor's Rating Group, a division of 
McGraw Hill Companies, Inc. (``S&P''); ``Baa3'' or higher by Moody's 
Investors Service, Inc. (``Moody's''); or a comparable rating by 
another nationally recognized statistical rating organization 
(``NRSRO''). The Fund may also invest in securities that are unrated by 
an NRSRO if such securities are of comparable credit quality. 
Comparable credit quality of securities that are unrated by an NRSRO 
will be determined by the Sub-Adviser based on fundamental credit 
analysis of the unrated issuer and comparable NRSRO-rated peer issuers 
of the same industry sector. On a best efforts basis, the Sub-Adviser 
will attempt to make a rating determination based on publicly available 
data. Factors taken into consideration in determining the comparable 
credit quality of the unrated issuer will be company leverage, capital 
structure, liquidity, funding, sustainability of cash flows, earnings 
quality, market position, and asset quality. In the event that a 
security is rated by multiple NRSROs and receives divergent ratings, 
the Fund will treat the issuer as being rated in the highest rating 
category received from an NRSRO.
    Initially, the Fund may invest up to 20% of the Fund's net assets 
in Income Securities issued by below-investment-grade issuers if such 
securities have acceptable credit quality and attractive relative 
value. However, the Fund reserves the right to increase the percentage 
of assets invested in below-investment-grade securities. ``Below 
investment grade'' is defined as those issuers that have a long-term 
credit rating of ``BBB - or lower by ``S&P,'' ``Baa3'' or lower by 
Moody's, or a comparable rating by another NRSRO. The Fund may also 
invest in securities that are unrated by an NRSRO if such securities 
are of comparable credit quality as determined by the Sub-Adviser.
    The Fund intends to invest at least 25% of its assets in securities 
of financial companies. Financial companies include, but are not 
limited to, companies involved in activities such as banking, mortgage 
finance, consumer finance, specialized finance, investment banking and 
brokerage, asset management and custody, corporate lending, insurance 
and financial investment, and real estate, including but not limited to 
real estate investment trusts.

Other Investments of the Fund

    While the Fund, under normal market conditions, will invest at 
least 80% of its net assets (including investment borrowings) in 
Preferred Securities and Income Securities, the Fund also may invest 
the remainder of its assets in other investments, as described below.
    Normally, the Fund may invest up to 15% of its net assets in 
securities with maturities of less than one year or cash equivalents, 
or it may hold cash. The percentage of the Fund invested in such 
holdings will vary and depend on several factors, including market 
conditions. For temporary defensive purposes and during periods of high 
cash inflows or outflows, the Fund may depart from its principal 
investment strategies and invest part or all of its assets in these 
securities or it may hold cash. During such periods, the Fund may not 
be able to achieve its investment objective. The Fund may adopt a 
defensive strategy when the Sub-Adviser or the Adviser believes 
securities in which the Fund normally invests have elevated risks due 
to political or economic factors and in other extraordinary 
circumstances.
    The Fund may also invest in U.S. government securities \12\ or 
short-term

[[Page 11247]]

debt securities to keep cash on hand fully invested or for temporary 
defensive purposes. The use of temporary investments is not a part of 
the principal investment strategy of the Fund. Short-term debt 
securities are securities from issuers having a long-term debt rating 
of at least A by S&P, Moody's, or Fitch, Inc. and having a maturity of 
one year or less. Short-term debt securities are defined to include, 
without limitation, the following:
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    \12\ U.S. government securities include U.S. Treasury 
obligations and securities issued or guaranteed by various agencies 
of the U.S. government, or by various instrumentalities which have 
been established or sponsored by the U.S. government. U.S. treasury 
obligations are backed by the ``full faith and credit'' of the U.S. 
government. Securities issued or guaranteed by federal agencies and 
U.S. government sponsored instrumentalities may or may not be backed 
by the full faith and credit of the U.S. government.
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    (1) U.S. government securities, including bills, notes, and bonds 
differing as to maturity and rates of interest, which are either issued 
or guaranteed by the U.S. treasury or by U.S. government agencies or 
instrumentalities.
    (2) Certificates of deposit issued against funds deposited in a 
bank or savings and loan association. Such certificates are for a 
definite period of time, earn a specified rate of return, and are 
normally negotiable. If such certificates of deposit are non-
negotiable, they will be considered illiquid securities and be subject 
to the Fund's 15% restriction on investments in illiquid securities.
    (3) Bankers' acceptances, which are short-term credit instruments 
used to finance commercial transactions.
    (4) Repurchase agreements, which involve purchases of debt 
securities. In such an action, at the time the Fund purchases the 
security, it simultaneously agrees to resell and redeliver the security 
to the seller, who also simultaneously agrees to buy back the security 
at a fixed price and time.
    (5) Bank time deposits, which are monies kept on deposit with banks 
or savings and loan associations for a stated period of time at a fixed 
rate of interest.
    (6) Commercial paper, which are short-term unsecured promissory 
notes, including variable rate master demand notes issued by 
corporations to finance their current operations. Master demand notes 
are direct lending arrangements between the Fund and a corporation. 
There is no secondary market for the notes, and they will be considered 
illiquid securities and be subject to the Fund's 15% restriction on 
investments in illiquid securities. However, they are redeemable by the 
Fund at any time. The Fund's Sub-Adviser will consider the financial 
condition of the corporation (e.g., earning power, cash flow, and other 
liquidity ratios) and will continuously monitor the corporation's 
ability to meet all of its financial obligations, because the Fund's 
liquidity might be impaired if the corporation were unable to pay 
principal and interest on demand. The Fund may only invest in 
commercial paper rated A-2 or higher by S&P, Prime-2 or higher by 
Moody's, or F2 or higher by Fitch, Inc.
    The Fund may also invest in senior loans, second lien loans, loan 
participations, payment-in-kind securities, zero coupon bonds, bank 
certificates of deposit, fixed-time deposits, bankers' acceptances, 
U.S. government securities, or fixed income securities issued by non-
U.S. governments denominated in U.S. dollars.
    The Fund may invest in warrants. Warrants acquired by the Fund 
entitle it to buy common stock from the issuer at a specified price and 
time. They do not represent ownership of the securities but only the 
right to buy them. Warrants are subject to the same market risks as 
stocks, but may be more volatile in price. The Fund's investment in 
warrants will not entitle it to receive dividends or exercise voting 
rights and will become worthless if the warrants cannot be profitably 
exercised before their expiration date.
    The Fund may invest in other pooled investment vehicles and 
business development companies that are exchange listed and that invest 
primarily in securities of the types in which the Fund may invest 
directly.
    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 (1) non-negotiable certificates of deposit and master demand 
notes, (2) Rule 144A securities, and (3) senior loans, second lien 
loans, and loan participation interests. 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.
    The Fund will be classified as ``non-diversified'' under the 1940 
Act and as a result may invest a relatively high percentage of its 
assets in a limited number of issuers. The Fund will only be limited as 
to the percentage of its assets which may be invested in the securities 
of any one issuer by the diversification requirements imposed by the 
Internal Revenue Code of 1986, as amended (``Code''). Other than 
financial companies, the Fund may not invest 25% or more of the value 
of its total assets in securities of issuers in any one industry or 
group of industries. This restriction does not apply to obligations 
issued or guaranteed by the U.S. government, its agencies, or 
instrumentalities. In addition, the Fund intends to qualify annually 
and to elect to be treated as a regulated investment company under the 
Code.
    Consistent with the Exemptive Order, the Fund will not invest in 
options contracts, futures contracts, or swap agreements. The Fund will 
not take short positions in securities. The Fund's investments will be 
consistent with the Fund's investment objective and will not be used to 
enhance leverage.
    The Exchange represents that that the Shares will conform to the 
initial and continued listing criteria under NYSE Arca Equities Rule 
8.600. The Exchange further represents that, for initial and/or 
continued listing, the Fund will be in compliance with Rule 10A-3 under 
the Act,\13\ 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 net asset value (``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.
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    \13\ 17 CFR 240.10A-3.
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    Additional information regarding the Trust, the Fund, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes, among other things, is included in the Notice 
and Registration Statement.\14\
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    \14\ 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 \15\ and the rules and regulations thereunder applicable to a 
national securities exchange.\16\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\17\ 
which requires, among other things, that the Exchange's rules be 
designed to promote just and equitable principles of trade, to remove

[[Page 11248]]

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 Fund and 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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    \15\ 15 U.S.C. 78f.
    \16\ 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\18\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. In addition, information 
regarding the intra-day value of the Shares (``indicative optimized 
portfolio value'' or ``IOPV''), which is the Portfolio Indicative 
Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be 
widely disseminated by one or more major market data vendors at least 
every 15 seconds during the Core Trading Session.\19\ On each business 
day, before commencement of trading in Shares in the Core Trading 
Session on the Exchange, the Fund will disclose on its Web site the 
Disclosed Portfolio, as defined in NYSE Arca Equities Rule 8.600(c)(2), 
that will form the basis for the Fund's calculation of NAV at the end 
of the business day.\20\ The Fund's NAV will be determined as of the 
close of trading (normally 4:00 p.m., Eastern Time) on each day the New 
York Stock Exchange (``NYSE'') is open for business.\21\ A basket 
composition file, which includes the security names and share 
quantities required to be delivered in exchange for the Fund's Shares, 
together with estimates and actual cash components, will be publicly 
disseminated daily prior to the opening of the NYSE via the National 
Securities Clearing Corporation. 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, 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 intra-day, 
closing, and settlement prices of the portfolio securities and other 
instruments also will be readily available from the national securities 
exchanges trading such securities, automated quotation systems, 
published or other public sources, or on-line information services such 
as Bloomberg or Reuters. The Fund's Web site will also include a form 
of the prospectus for the Fund, information relating to NAV (updated 
daily), and other quantitative and trading information.
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    \18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \19\ According to the Exchange, several major market data 
vendors display and/or make widely available IOPVs published on the 
CTA or other data feeds.
    \20\ 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 and financial instrument; number of shares or dollar value 
of securities and financial instruments held in the portfolio; and 
percentage weighting of the security and financial instrument in the 
portfolio.
    \21\ The Exchange states that the price of a non-U.S. security 
that is primarily traded on a non-U.S. exchange shall be updated, 
using the last sale price, every 15 seconds throughout the trading 
day, provided, that upon the closing of such non-U.S. exchange, the 
closing price of the security, after being converted to U.S. 
dollars, will be used. Furthermore, in calculating the IOPV of the 
Fund's Shares, exchange rates may be used throughout the day (9:00 
a.m. to 4:15 p.m., Eastern Time) that may differ from those used to 
calculate the NAV per Share of the Fund and consequently may result 
in differences between the NAV and the IOPV.
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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 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.\22\ 
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.\23\ 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.\24\ The Exchange 
states that it has a general policy prohibiting the distribution of 
material, non-public information by its employees. Moreover, the 
Exchange states that the Adviser and Sub-Adviser are each affiliated 
with a broker-dealer, and represents that each such Adviser and Sub-
Adviser has implemented a fire wall with respect to its respective 
broker-dealer affiliate regarding access to information concerning the 
composition and/or changes to the Fund's portfolio.\25\ The Exchange 
further represents that it is able to obtain information via the ISG 
from other exchanges that are ISG members, including all U.S. national 
securities exchanges, or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.\26\
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    \22\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \23\ See NYSE Arca Equities Rules 8.600(d)(2)(C) and 
8.600(d)(2)(D). 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.
    \24\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
    \25\ 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 its related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. This Rule requires investment advisers 
to adopt a code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with Rule 204A-1 under the Advisers Act. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser to provide investment advice to clients 
unless such investment adviser has (i) adopted and implemented 
written policies and procedures reasonably designed to prevent 
violation, by the investment adviser and its supervised persons, of 
the Advisers Act and the Commission rules adopted thereunder; (ii) 
implemented, at a minimum, an annual review regarding the adequacy 
of the policies and procedures established pursuant to subparagraph 
(i) above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
    \26\ As noted above, the foreign equity securities, including 
preferred, hybrid-preferred, and contingent convertible capital, 
securities in which the Fund may invest will be limited to 
securities that trade in markets that are members of ISG, which 
includes all U.S. national securities exchanges and certain foreign 
exchanges, or are parties to a comprehensive surveillance sharing 
agreement with the Exchange. See supra note 8. In addition, ETFs in 
which the Fund may invest will be listed on a national securities 
exchange. See supra note 9.
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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

[[Page 11249]]

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 applicable to derivative 
products, which include Managed Fund Shares, 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 (``ETP'') Holders in an Information Bulletin 
of the special characteristics and risks associated with trading the 
Shares. Specifically, the Information Bulletin will discuss the 
following: (a) The procedures for purchases and redemptions of Shares 
in Creation Unit aggregations (and that Shares are not individually 
redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty 
of due diligence on its ETP Holders to learn the essential facts 
relating to every customer prior to trading the Shares; (c) the risks 
involved in trading the Shares during the Opening and Late Trading 
Sessions when an updated IOPV will not be calculated or publicly 
disseminated; (d) how information regarding the IOPV is disseminated; 
(e) the requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (f) trading information.
    (5) For initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act,\27\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \27\ See 17 CFR 240.10A-3.
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    (6) Initially, at least 50% of the Fund's net assets invested in 
Preferred Securities and Income Securities will be exchange-listed.\28\ 
In addition, at least 80% of the Preferred Securities and Income 
Securities held by the Fund will have a minimum original principal 
amount outstanding of $100 million or more. Specifically with respect 
to corporate bonds, under normal market conditions, at least 80% of the 
Fund's investments in U.S. corporate bonds must have $100 million or 
more par amount outstanding to be considered as an eligible investment, 
and a non-U.S. corporate bond must have $200 million or more par amount 
outstanding and significant par value traded to be considered as an 
eligible investment. Further, the Fund's portfolio will comprise a 
minimum of 13 non-affiliated issuers.
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    \28\ See supra note 26 and accompanying text.
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    (7) The Fund will invest at least 80% of its net assets in Income 
Securities of issuing firms having a long-term issuer credit rating of 
investment grade at the time of investment.
    (8) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities, including non-negotiable certificates of 
deposit and master demand notes; Rule 144A securities; and senior 
loans, second lien loans, and loan participation interests.
    (9) The Fund will not: (a) Take short positions in securities; and 
(b) pursuant to the terms of the Exemptive Order, invest in options 
contracts, futures contracts, or swap agreements. In addition, the 
Fund's investments will be consistent with its investment objective and 
will not be used to enhance leverage.
    (10) 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 all of the Exchange's representations 
and description of the Fund, including those set forth above and in the 
Notice.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \29\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \29\ 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,\30\ that the proposed rule change (SR-NYSEArca-2012-139) be, and 
it hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03489 Filed 2-14-13; 8:45 am]
BILLING CODE 8011-01-P