Document ID: SEC-2014-1128-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-07-09T04:00Z

[Federal Register Volume 79, Number 131 (Wednesday, July 9, 2014)]
[Notices]
[Pages 39016-39019]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15962]

[[Page 39016]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72523; File No. SR-NYSEArca-2014-37]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, Relating to Listing and Trading of the Shares of iShares 2020 
S&P AMT-Free Municipal Series Under NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .02

July 2, 2014.

I. Introduction

    On May 2, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca''), 
through its wholly-owned subsidiary NYSE Arca Equities, Inc. (``NYSE 
Arca Equities'' or ``Corporation''), 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 iShares 2020 S&P AMT-Free Municipal Series 
(``Fund''). On May 14, 2014, the Exchange filed Amendment No. 1 to the 
proposed rule change, which amended and replaced the proposed rule 
change in its entirety.\3\ The proposed rule change, as modified by 
Amendment No. 1 thereto, was published for comment in the Federal 
Register on May 21, 2014.\4\ The Commission received no comments on the 
proposed rule change. 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\ In Amendment No. 1, the Exchange: (a) Clarified that the net 
asset value (``NAV'') of the Fund normally will be determined once 
each business day as of the regularly scheduled close of business of 
the New York Stock Exchange (``NYSE'') (normally, 4:00 p.m. Eastern 
time) on each day the NYSE is open for trading; (b) provided 
additional information describing the NAV calculation pertaining to 
money market funds; (c) clarified that a common identifier such as 
CUSIP or ISIN (if applicable) will be included in the Disclosed 
Portfolio (as defined herein); and (d) made certain technical edits 
correcting typographical and other similar types of clerical errors.
    \4\ See Securities Exchange Act Release No. 72172 (May 15, 
2014), 79 FR 29241 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund pursuant 
to NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, which governs the 
listing and trading of Investment Company Units (``Units'') based on 
fixed income securities indexes. The Fund is a series of the iShares 
Trust (``Trust'').\5\ Blackrock Fund Advisors (``BFA'') is the 
investment adviser for the Fund.\6\
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    \5\ See Post-Effective Amendment No. 1004 to the Trust's 
registration statement on Form N-1A under the Securities Act of 1933 
and the Investment Company Act of 1940 (``1940 Act''), dated 
December 16, 2013 (File Nos. 333-92935 and 811-09729) 
(``Registration Statement''). According to the Exchange, the Trust 
has obtained certain exemptive relief from the Commission under the 
1940 Act. See Investment Company Act Release No. 27608 (December 21, 
2006) (File No. 812-13208).
    \6\ 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, BFA and its related personnel are subject to 
the provisions of Rule 204A-1 under the Advisers Act, which requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of their relationship with their clients as well as 
compliance with other applicable securities laws. Accordingly, 
investment advisers must have procedures designed to prevent the 
communication and misuse of non-public information, 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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    According to the Exchange, the Fund will seek investment results 
that correspond generally to the price and yield performance, before 
fees and expenses, of the S&P AMT-Free Municipal Series 2020 Index\TM\ 
(``Index'').\7\ The Fund will not seek to return any pre-determined 
amount at maturity.
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    \7\ The Exchange represents that the Index is sponsored by 
Standard & Poor's Financial Services LLC (``S&P'' or ``Index 
Provider''), which is independent of the Fund and BFA. The Index 
Provider determines the composition and relative weightings of the 
securities in the Index and publishes information regarding the 
market value of the Index. The Index Provider is not a broker-dealer 
or affiliated with a broker-dealer, and has implemented procedures 
designed to prevent the use and dissemination of material, non-
public information regarding the Index.
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    According to the Exchange, the Index measures the performance of 
investment-grade U.S. municipal bonds maturing in 2020. As of February 
28, 2014, there were 1,427 issues in the Index. The Index includes 
municipal bonds primarily from issuers that are state or local 
governments or agencies such that the interest on the bonds is exempt 
from U.S. federal income taxes and the federal alternative minimum tax 
(``AMT''). Each bond must have a rating of at least BBB- by S&P, Baa3 
by Moody's Investors Service, Inc. (``Moody's''), or BBB- by Fitch, 
Inc. and must have a minimum maturity par amount of $2 million to be 
eligible for inclusion in the Index. To remain in the Index, bonds must 
maintain a minimum par amount greater than or equal to $2 million as of 
each rebalancing date. All bonds in the Index will mature between June 
1 and August 31 of 2020. When a bond matures in the Index, an amount 
representing its value at maturity will be included in the Index 
throughout the remaining life of the Index, and any such amount will be 
assumed to earn a rate equal to the performance of the S&P's Weekly 
High Grade Index, which consists of Moody's Investment Grade-1 
municipal tax-exempt notes that are not subject to federal AMT. The 
Exchange states that, by August 31, 2020, the Index is expected to 
consist entirely of cash carried in this manner. The Index is a market 
value weighted index and is rebalanced after the close on the last 
business day of each month.
    The Exchange represents that the Index for the Fund does not meet 
all of the ``generic'' listing requirements of Commentary .02(a) to 
NYSE Arca Equities Rule 5.2(j)(3) applicable to the listing of Units 
based on fixed income securities indexes. Specifically, the Index does 
not meet the requirement set forth in Commentary .02(a)(2), which 
provides that 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. Contrary 
to this requirement, as of February 28, 2014, only 6.25% of the weight 
of the Index components has a minimum original principal amount 
outstanding of $100 million or more.
    The Exchange represents that the Fund generally will invest at 
least 80% of its assets in the securities of the Index, except during 
the last months of the Fund's operations. The Fund may at times invest 
up to 20% of its assets in cash and cash equivalents (including money 
market funds affiliated with BFA), as well as in municipal bonds not 
included in the Index, but which BFA believes will help the Fund track 
the Index. For example, the Fund may invest in municipal bonds not 
included in the Index in order to reflect prospective changes in the 
Index (such as Index reconstitutions, additions, and deletions). The 
Fund will generally hold municipal bond securities issued by state and 
local municipalities whose interest payments are exempt from U.S. 
federal income tax, the federal AMT and, effective beginning in 2013, a 
federal Medicare contribution tax of 3.8% on ``net investment income,'' 
including dividends, interest, and capital gains. In addition, the Fund 
may invest any cash assets in one or more affiliated municipal money 
market

[[Page 39017]]

funds. In the last months of operation, as the bonds held by the Fund 
mature, the proceeds will not be reinvested in bonds but instead will 
be held in cash and cash equivalents, including without limitation AMT-
free tax-exempt municipal notes, variable rate demand notes and 
obligations, tender option bonds, and municipal commercial paper. These 
cash equivalents may not be included in the Index. According to the 
Exchange, on or about August 31, 2020, the Fund will wind up and 
terminate, and its net assets will be distributed to then-current 
shareholders.
    Additional information regarding the Trust, the Fund, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings, distributions, and taxes, among 
other things, is included in the Notice and Registration Statement, as 
applicable.\8\
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    \8\ See Notice and Registration Statement, supra notes 4 and 5, 
respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \9\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\10\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\11\ which 
requires, among other things, that the Exchange's rules be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The Commission notes that the Fund and the Shares must comply 
with the applicable requirements of NYSE Arca Equities Rules 5.2(j)(3) 
and 5.5(g)(2) to be listed and traded on the Exchange.
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    \9\ 15 U.S.C. 78f.
    \10\ 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).
    \11\ 17 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\12\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. The current value of the 
Index will be widely disseminated by one or more major market data 
vendors \13\ at least once per day, as required by NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .02(b)(ii). In addition, an Intraday 
Indicative Value (``IIV'') for the Shares of the Fund will be 
disseminated by one or more major market data vendors and updated at 
least every 15 seconds during the Core Trading Session (9:30 a.m. to 
4:00 p.m. Eastern Time).\14\ 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. Quotation 
information for investment company securities (excluding exchange-
traded funds) may be obtained through nationally recognized pricing 
services through subscription agreements or from brokers and dealers 
who make markets in such securities. Price information regarding 
municipal bonds, AMT-free tax-exempt municipal notes, variable rate 
demand notes and obligations, tender option bonds, and municipal 
commercial paper is available from third party pricing services and 
major market data vendors. On each business day, before commencement of 
trading in Shares in the Core Trading Session on the Exchange, the Fund 
will disclose on its Web site the portfolio that will form the basis 
for the Fund's calculation of NAV at the end of the business day.\15\ 
The Web site for the Fund also will include the prospectus for the Fund 
and additional data relating to NAV and other applicable quantitative 
information. The NAV of the Fund normally will be determined once each 
business day as of the regularly scheduled close of business of the 
NYSE (normally, 4:00 p.m. Eastern time) on each day the NYSE is open 
for trading.\16\
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    \12\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \13\ The Exchange further states that the components of the 
Index and their percentage weighting will be available from major 
market data vendors.
    \14\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02(c). 
According to the Exchange, several major market data vendors display 
and/or make widely available IIVs taken from the CTA or other data 
feeds. See Notice, supra note 4, at n.13.
    \15\ On a daily basis, the Fund will disclose for each portfolio 
security or other financial instrument of the Fund the following 
information on the Fund's Web site: Ticker symbol (if applicable), 
name of security and financial instrument, a common identifier such 
as CUSIP or ISIN (if applicable), number of shares (if applicable), 
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.
    \16\ For purposes of calculating NAV of the Shares, the Fund 
will value fixed income portfolio securities, including municipal 
bonds, AMT-free tax-exempt municipal notes, variable rate demand 
notes and obligations, tender option bonds, and municipal commercial 
paper using prices provided directly from independent third-party 
pricing services, which may use matrix pricing and valuation models 
to derive values or from one or more broker-dealers or market 
makers. Certain short-term debt securities may be valued on the 
basis of amortized cost. Shares of municipal money market funds will 
be valued at NAV.
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    The Commission 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 
Exchange states that the Index Provider is not a broker-dealer or 
affiliated with a broker-dealer, and has implemented procedures 
designed to prevent the use and dissemination of material, non-public 
information regarding the Index.\17\ Prior to the commencement of 
trading, the Exchange will inform its Equity Trading Permit Holders in 
an Information Bulletin of the special characteristics and risks 
associated with trading the Shares. With respect to trading halts, if 
the Exchange becomes aware that the NAV is not being disseminated to 
all market participants at the same time, it will halt trading in the 
Shares until such time as the NAV is available to all market 
participants. In addition, the Exchange may consider all relevant 
factors in exercising its discretion to halt or suspend trading in the 
Shares of the Funds. Trading may be halted because of market conditions 
or for reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable. The Exchange represents that, if the IIV or the 
Index value is not being disseminated as required, the Exchange may 
halt trading during the day in which the interruption to the 
dissemination of the IIV or Index value occurs. If the interruption to 
the dissemination of the IIV or Index value persists past the trading 
day in which it occurred, the Exchange will halt trading. Moreover, 
trading in Shares of the Funds 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. Further, trading in the

[[Page 39018]]

Shares will be subject to NYSE Arca Equities Rule 7.34, which sets 
forth additional circumstances under which Shares of the Funds may be 
halted. The Exchange states that it 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. The Exchange may obtain 
information via the Intermarket Surveillance Group (``ISG'') from other 
exchanges that are members of ISG or with which the Exchange has 
entered into a comprehensive surveillance sharing agreement.
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    \17\ See supra note 7 and accompanying text.
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    Based on the Exchange's representations, the Commission believes 
that the Index is sufficiently broad-based and liquid to deter 
potential manipulation. As of February 28, 2014, there were 1,427 
issues in the Index. As of the same date, 76.77% of the weight of the 
Index components was comprised of individual maturities that were part 
of an entire municipal bond offering with a minimum original principal 
amount outstanding of $100 million or more for all maturities of the 
offering.\18\ In addition, the total dollar amount outstanding of 
issues in the Index was approximately $12.06 billion, and the average 
dollar amount outstanding of issues in the Index was approximately 
$8.46 million. Further, the most heavily weighted component represents 
1.21% of the weight of the Index, and the five most heavily weighted 
components represent 5.39% of the weight of the Index.\19\ In addition, 
the average daily notional trading volume for Index components for the 
period December 31, 2012, to December 31, 2013, was $49 million, and 
the sum of the notional trading volumes for the same period was 
approximately $12.4 billion. As of March 17, 2014, 61.14% of the Index 
weight consisted of issues with a rating of AA/Aa2 or higher. The 
Commission notes that the Fund shares similar characteristics of other 
exchange-traded funds, the shares of which are currently listed and 
trading on the Exchange.\20\
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    \18\ According to the Exchange, when bonds are close substitutes 
for one another, pricing vendors can use executed trade information 
from all similar bonds as pricing inputs for an individual security. 
This can make individual securities more liquid, because valuations 
for a single security are better estimators of actual trading prices 
when they are informed by trades in a large group of closely related 
securities. As a result, securities are more likely to trade at 
prices close to their valuation when they need to be sold. See 
Notice, supra note 4, at n.11.
    \19\ Commentary .02(a)(4) to NYSE Arca Equities Rule 5.2(j)(3) 
provides that no component fixed-income security (excluding Treasury 
Securities and GSE Securities, as defined therein) shall represent 
more than 30% of the weight of the index or portfolio, and the five 
most heavily weighted component fixed-income securities in the index 
or portfolio shall not in the aggregate account for more than 65% of 
the weight of the index or portfolio.
    \20\ The Commission previously has approved a proposed rule 
change relating to listing and trading on the Exchange of Units 
based on similar municipal bond indexes. See Securities Exchange Act 
Release No. 67985 (October 4, 2012), 77 FR 61804 (October 11, 2012) 
(SR-NYSEArca-2012-92) (order approving proposed rule change relating 
to the listing and trading of shares of the iShares 2018 S&P AMT-
Free Municipal Series and iShares 2019 S&P AMT-Free Municipal Series 
under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02).
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    In support of this proposal, the Exchange has made representations, 
including:
    (1) Except for Commentary .02(a)(2) to NYSE Arca Equities Rule 
5.2(j)(3), the Shares of the Funds currently satisfy all of the generic 
listing standards under NYSE Arca Equities Rule 5.2(j)(3).
    (2) The continued listing standards under NYSE Arca Equities Rules 
5.2(j)(3) and 5.5(g)(2) applicable to Units shall apply to the Shares.
    (3) The Shares will comply with all other requirements applicable 
to Units including, but not limited to, requirements relating to the 
dissemination of key information, such as the value of the Index and 
IIV, rules governing the trading of equity securities, trading hours, 
trading halts, surveillance, and the Information Bulletin to Equity 
Trading Permit Holders (each as described in more detail in the Notice 
and Registration Statement, as applicable), as set forth in Exchange 
rules applicable to Units and prior Commission orders approving the 
generic listing rules applicable to the listing and trading of Units.
    (4) 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.\21\ 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 federal securities laws applicable to trading on 
the Exchange.
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    \21\ According to the Exchange, 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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    (5) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares with other markets or other entities 
that are members of ISG, and FINRA may obtain trading information 
regarding trading in the Shares from such markets or entities. FINRA 
also can access data obtained from the Municipal Securities Rulemaking 
Board relating to municipal bond trading activity for surveillance 
purposes in connection with trading in the Shares. 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. The Exchange 
also may obtain information regarding trading in the Shares from 
markets or other entities that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement.
    (6) For initial and continued listing of the Shares, the Trust is 
required to comply with Rule 10A-3 under the Act.\22\
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    \22\ See 17 CFR 240.10A-3.
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    (7) The Fund generally will invest at least 80% of its assets in 
the securities of the Index.
    (8) Over time the Fund's tracking error \23\ will not exceed 5%.
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    \23\ According to the Exchange, tracking error is the difference 
between the performance (return) of the Fund's portfolio and that of 
the Index.
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    (9) The Fund may at times invest up to 20% of its assets in cash 
and cash equivalents (including money market funds affiliated with 
BFA), as well as in municipal bonds not included in the Index, but 
which BFA believes will help the Fund track the Index.
    (10) On or about August 31, 2020, the Fund will wind up and 
terminate, and its net assets will be distributed to the then-current 
shareholders.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Funds.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1 thereto, is consistent with 
Section 6(b)(5) of the Act \24\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \24\ 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,\25\ that the proposed rule change (SR-NYSEArca-2014-37), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

[[Page 39019]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15962 Filed 7-8-14; 8:45 am]
BILLING CODE 8011-01-P