Document ID: SEC-2014-0357-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-03-04T05:00Z

[Federal Register Volume 79, Number 42 (Tuesday, March 4, 2014)]
[Notices]
[Pages 12257-12261]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04682]

[[Page 12257]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71617; File No. SR-NYSEArca-2013-135]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change To List and Trade Shares of db-X 
Ultra-Short Duration Fund and db-X Managed Municipal Bond Fund Under 
NYSE Arca Equities Rule 8.600

February 26, 2014.

I. Introduction

    On December 27, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the db-X Ultra-Short Duration Fund and db-X Managed 
Municipal Bond Fund (each a ``Fund,'' and collectively ``Funds'') under 
NYSE Arca Equities Rule 8.600. The proposed rule change was published 
for comment in the Federal Register on January 15, 2014.\3\ 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\ See Securities Exchange Act Release No. 71269 (January 9, 
2014), 79 FR 2725 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Funds 
pursuant to NYSE Arca Equities Rule 8.600, which governs the listing 
and trading of Managed Fund Shares on the Exchange. Each Fund is a 
series of the DBX ETF Trust (``Trust''), a statutory trust organized 
under the laws of the State of Delaware and registered with the 
Commission as an open-end management investment company.\4\ The Funds 
will be managed by DBX Advisors LLC (``Adviser''). Deutsche Investment 
Management Americas Inc. will be the investment sub-adviser for the 
Funds (``Sub-Adviser''). ALPS Distributors, Inc. will be the Funds' 
distributor (``Distributor''). The Bank of New York Mellon will be the 
administrator, custodian and fund accounting and transfer agent for 
each Fund. The Exchange states that the Adviser and Sub-Adviser are not 
broker-dealers, but both the Adviser and Sub-Adviser are affiliated 
with a broker-dealer, and each has implemented and will maintain a fire 
wall with respect to such broker-dealer affiliate regarding access to 
information concerning the composition and/or changes to the respective 
Fund's portfolio.\5\
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    \4\ The Trust is registered under the 1940 Act. The Exchange 
states that on December 19, 2012, the Trust filed with the 
Commission an amendment to its registration statement on Form N-1A 
under the Securities Act of 1933 (``Securities Act'') and the 1940 
Act relating to the Funds (File Nos. 333-170122 and 811-22487) 
(``Registration Statement''). The Trust has also filed an Amended 
and Restated Application for an Order under Section 6(c) of the 1940 
Act for exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-14004), dated October 29, 2013 (``Exemptive 
Application''). See Investment Company Act Release No. 30770 
(October 29, 2013), 78 FR 66086 (November 4, 2013). The Exchange 
represents that the Shares will not be listed on the Exchange until 
an order (``Exemptive Order'') under the 1940 Act has been issued by 
the Commission with respect to the Exemptive Application. The 
Exchange also represents that investments made by the Funds will 
comply with the conditions set forth in the Exemptive Order.
    \5\ See NYSE Arca Equities Rule 8.600, Commentary .06. In the 
event (a) the Adviser or Sub-Adviser becomes a registered broker-
dealer or 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 portfolios, and will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding such portfolios.
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    The Exchange has made the following representations and statements 
in describing the Funds and their respective investment strategies, 
including other portfolio holdings and investment restrictions.

db-X Ultra-Short Duration Fund--Principal Investments

    The investment objective of the db-X Ultra-Short Duration Fund will 
be to seek to provide current income consistent with total return. 
Under normal market conditions,\6\ the Fund will seek to achieve its 
investment objective by investing at least 65% of its net assets in 
debt securities. Debt securities will include: (1) Debt securities of 
U.S. and foreign government agencies and instrumentalities, and U.S. 
Government obligations (including U.S. agency mortgage pass-through 
securities, as described below); (2) U.S. and foreign corporate debt 
securities, mortgage-backed and asset-backed securities, adjustable 
rate loans that have a senior right to payment (``senior loans''), 
money market instruments, and fixed and other floating-rate debt 
securities; and (3) taxable municipal and tax-exempt municipal 
bonds.\7\ Under normal market conditions, the Fund currently does not 
intend to hold more than 10% of its total assets in non-U.S. dollar 
denominated debt securities.
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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 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.
    \7\ The Fund normally will target an average portfolio duration 
(a measure of sensitivity to interest rate changes) of no longer 
than one year.
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    The Fund may invest in investment-grade (rated BBB- or higher by 
Standard & Poor's Ratings Services, Inc. (``S&P'') and Fitch, Inc. 
(``Fitch'') or Baa3 or higher by Moody's Investors Service, Inc. 
(``Moody's'') or, if unrated, determined by the Fund's Adviser and/or 
Sub-Adviser to be of comparable quality\8\) and non-investment grade 
(rated BB+ or lower by S&P and Fitch or Ba1 or lower by Moody's or, if 
unrated, determined by the Fund's Adviser and/or Sub-Adviser to be of 
comparable quality) debt securities of U.S. and foreign issuers, 
including issuers located in countries with new or emerging securities 
markets.\9\ The Fund's investments in non-investment grade debt 
securities, including non-investment grade senior loans and other non-
investment grade floating-rate debt securities, will be limited to 50% 
of its total assets.
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    \8\ In determining whether a security is of ``comparable 
quality,'' the Adviser or 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.
    \9\ Generally, with respect to at least 75% of the Fund's 
portfolio, a corporate bond of a developed market issuer must have 
$100 million or more par amount outstanding to be considered as an 
eligible investment and a corporate bond of an emerging market 
issuer must have $200 million or more par amount outstanding to be 
considered as an eligible investment.
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    The senior loans in which the Fund will invest generally will be 
loans rated by a Nationally Recognized Statistical Rating Organization 
(``NRSRO'') registered with the Commission. However, the Fund also may 
invest in senior loans that: (i) May not be rated by a NRSRO, or listed 
on any national exchange; or (ii) are not secured by collateral.
    The Fund may invest in mortgage-backed and asset-backed securities. 
Mortgage-backed securities are mortgage-related securities issued or 
guaranteed by the U.S. Government, its agencies and instrumentalities, 
or

[[Page 12258]]

issued by non-government entities. Mortgage-related securities 
represent pools of mortgage loans assembled for sale to investors by 
various government agencies such as Government National Mortgage 
Association (``GNMA'') and government-related organizations such as 
Federal National Mortgage Association (``FNMA'') and Federal Home Loan 
Mortgage Corporation (``FHLMC''), as well as by non-government issuers 
such as commercial banks, savings and loan institutions, mortgage 
bankers, and private mortgage insurance companies. Other asset-backed 
securities are structured like mortgage-backed securities, but instead 
of mortgage loans or interests in mortgage loans, the underlying assets 
may include items such as motor vehicle installment sales or 
installment loan contracts, leases of various types of real and 
personal property, and receivables from credit card agreements and from 
sales of personal property. Asset-backed securities typically have no 
U.S. Government backing. The Fund will limit investments in mortgage-
backed and asset-backed securities issued or guaranteed by non-
government entities to 15% of the Fund's net assets.
    The Fund may invest a portion of its assets in U.S. agency mortgage 
pass-through securities. The term ``U.S. agency mortgage pass-through 
security'' refers to a category of pass-through securities backed by 
pools of mortgages and issued by one of several U.S. government-
sponsored enterprises: GNMA, FNMA, or FHLMC.
    The Fund may invest a portion of its assets in various types of 
U.S. Government obligations. U.S. Government obligations are a type of 
bond. U.S. Government obligations include securities issued or 
guaranteed as to principal and interest by the U.S. Government, its 
agencies, or instrumentalities.\10\ Payment of principal and interest 
on U.S. Government obligations (i) may be backed by the full faith and 
credit of the United States (as with U.S. Treasury obligations and GNMA 
certificates) or (ii) may be backed solely by the issuing or 
guaranteeing agency or instrumentality itself (as with FNMA, FHLMC, and 
Federal Home Loan Bank).
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    \10\ U.S. Government obligations include, but are not limited 
to, mortgage-backed and asset-backed securities that are issued or 
guaranteed by the U.S. government, as well as U.S. agency mortgage 
pass-through securities, as described above.
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db-X Managed Municipal Bond Fund--Principal Investments

    The investment objective of the db-X Managed Municipal Bond Fund 
will be to seek to provide current income consistent with total return.
    Under normal market conditions,\11\ the Fund will invest at least 
80% of net assets, plus the amount of any borrowings for investment 
purposes, in securities issued by municipalities across the United 
States (and including the Commonwealth of Puerto Rico and U.S. 
territories such as the U.S. Virgin Islands and Guam) whose income is 
free from regular federal income tax.
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    \11\ See supra note 6.
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    Although the Fund may adjust duration of its holdings over a wider 
range, it generally intends to keep it between five and nine years.
    The Fund may buy municipal securities of all maturities. These may 
include revenue bonds (which are backed by revenues from a particular 
source) and general obligation bonds (which are typically backed by the 
issuer's ability to levy taxes). They may also include municipal lease 
obligations and investments representing an interest therein.
    The Fund will normally invest at least 65% of total assets in 
municipal securities of top credit quality (rated AAA+ through A- by 
S&P and Fitch or Aaa1 through A3 by Moody's or, if unrated, determined 
by the Fund's Adviser and/or Sub-Adviser to be of comparable quality). 
The Fund may invest up to 10% of total assets in high yield debt 
securities (commonly referred to as ``junk'' bonds) rated BB+ or lower 
by S&P and Fitch or Ba1 or lower by Moody's or, if unrated, determined 
by the Fund's Adviser and/or Sub-Adviser to be of comparable 
quality.\12\
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    \12\ See supra note 8.
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Other Investments

    While each Fund, under normal market conditions, will invest 
primarily in debt securities, each Fund may invest its remaining assets 
in other securities and financial instruments, as described below.
    The db-X Managed Municipal Bond Fund may invest a portion of its 
assets in various types of U.S. Government obligations. U.S. Government 
obligations are a type of bond. U.S. Government obligations include 
securities issued or guaranteed as to principal and interest by the 
U.S. Government, its agencies or instrumentalities. Payment of 
principal and interest on U.S. Government obligations (i) may be backed 
by the full faith and credit of the United States (as with U.S. 
Treasury obligations and GNMA certificates) or (ii) may be backed 
solely by the issuing or guaranteeing agency or instrumentality itself 
(as with FNMA, FHLMC, and Federal Home Loan Bank).
    The db-X Ultra-Short Duration Fund generally intends to use 
interest rate swaps, and/or small amounts of currency forwards, which 
are types of derivatives (a contract whose value is based on, for 
example, indices, currencies, or securities) for duration management 
(e.g., reducing the sensitivity of a Fund's portfolio to interest rate 
changes). In addition, the Fund generally may use: (i) Credit default 
swaps based on one or more issues of debt securities or on an index or 
indexes of debt securities to increase the Fund's income, to gain 
exposure to a bond issuer's credit quality characteristics without 
directly investing in the bond, or to hedge the risk of default on 
bonds held in the Fund's portfolio; and (ii) total return swaps based 
on one or more issues of debt securities or on an index or indexes of 
debt securities, or interest rate swaps, to seek to enhance potential 
gains.
    The db-X Managed Municipal Bond Fund generally may use interest 
rate swaps or U.S. Treasury futures.
    Investments in derivative instruments by the Funds will be made in 
accordance with the 1940 Act and consistent with each Fund's investment 
objective and policies. To limit the potential risk associated with 
transactions in derivatives, the Funds will segregate or ``earmark'' 
assets determined to be liquid by the Adviser in accordance with 
procedures established by the Trust's Board of Directors (``Board'') 
and in accordance with the 1940 Act (or, as permitted by applicable 
regulation, enter into certain offsetting positions) to cover its 
obligations under derivative instruments. These procedures have been 
adopted consistent with Section 18 of the 1940 Act and related 
Commission guidance. In addition, the Funds will include appropriate 
risk disclosure in their offering documents, including leveraging risk. 
Leveraging risk is the risk that certain transactions of the Funds, 
including the Funds' use of derivatives, may give rise to leverage, 
causing the Funds' Shares to be more volatile than if they had not been 
leveraged.
    The db-X Ultra Short-Duration Fund may invest in convertible 
securities traded on an exchange or over-the counter (``OTC''). 
Convertible securities include bonds, debentures, notes, preferred 
stocks, and other securities that may be converted into a prescribed 
amount of common stock or other equity securities at a specified price 
and time. The holder of convertible securities is entitled to receive 
interest paid or

[[Page 12259]]

accrued on debt, or dividends paid or accrued on preferred stock, until 
the security matures or is converted.
    Each Fund may invest in the securities of other investment 
companies (including money market funds and exchange-listed ETFs) to 
the extent permitted under the 1940 Act.
    The Funds will not invest in leveraged or leveraged inverse ETFs.

Investment Restrictions

    Each Fund will be classified as ``non-diversified'' under the 1940 
Act.\13\
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    \13\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
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    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser,\14\ 
consistent with Commission guidance. Each 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 such Fund's net assets are 
held in illiquid assets. Illiquid assets include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.\15\
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    \14\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers, and the mechanics of transfer).
    \15\ 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).
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    While each of the Funds will be actively-managed and not tied to an 
index, under normal market conditions, each Fund's respective portfolio 
will meet certain criteria for index-based, fixed income ETFs contained 
in NYSE Arca Equities Rule 5.2(j)(3), Commentary .02.\16\
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    \16\ 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) include the 
following: (i) Components that in the aggregate account for at least 
75% of the weight of the index or portfolio must have a minimum 
original principal amount outstanding of $100 million or more (Rule 
5.2(j)(3), Commentary.02(a)(2)); (ii) no component fixed-income 
security (excluding Treasury Securities and government-sponsored 
entity securities) will represent more than 30% of the weight of the 
index or portfolio, and the five highest weighted component fixed-
income securities will 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 (iii) an underlying index or portfolio 
(excluding one consisting entirely of exempted securities) must 
include securities from a minimum of 13 non-affiliated issuers (Rule 
5.2(j)(3), Commentary.02(a)(5)). The db-X Managed Municipal Bond 
Fund will meet the criteria in Rule 5.2(j)(3) as referenced above 
except for the criteria in Rule 5.2(j)(3), Commentary .02(a)(2).
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    With respect to qualification as a regulated investment company 
(``RIC''), each Fund intends to maintain the required level of 
diversification and otherwise conduct its operations so as to qualify 
as a RIC for purposes of Subchapter M of the Internal Revenue Code of 
1986, as amended.\17\
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    \17\ 26 U.S.C. 851.
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    With respect to each of the Funds, such Fund's investments will be 
consistent with the Fund's investment objective.
    The Funds will not invest in equity securities other than 
convertible securities and securities issued by other investment 
companies, including money market funds and ETFs. The Funds will not 
invest in non-U.S. equity securities.
    Additional information regarding the Trust, the Funds, 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, as applicable.\18\
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    \18\ See Notice and Registration Statement, supra notes 3 and 4, 
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\19\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\ 
which requires, among other things, that the Exchange's rules be 
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 a national 
market system, and, in general, to protect investors and the public 
interest. The Commission notes that the Funds and the Shares must 
comply with the requirements of NYSE Arca Equities Rule 8.600 for the 
Shares to be listed and traded on the Exchange.
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    \19\ 15 U.S.C. 78f.
    \20\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \21\ 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,\22\ which sets forth Congress's finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. In addition, the Portfolio 
Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), of 
Shares of each Fund will be widely disseminated at least every 15 
seconds during the Exchange's Core Trading Session by one or more major 
market data vendors.\23\ On each business day, before commencement of 
trading in Shares in the Core Trading Session on the Exchange, each 
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 
such Fund's calculation of net asset value (``NAV'') at the end of the 
business day.\24\ NAV per Share of each Fund will be calculated as of 
the close of the regular trading session on the New York Stock Exchange 
(ordinarily 4:00 p.m. Eastern Time) on each day the New York Stock 
Exchange is open. A basket composition

[[Page 12260]]

file disclosing each Fund's securities, which will include the security 
names and share quantities required to be delivered in exchange for 
Fund Shares, together with estimates and actual cash components, will 
be publicly disseminated daily prior to the opening of the New York 
Stock Exchange 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. 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. Intra-day and closing price information 
regarding debt securities, including debt securities of U.S. and 
foreign government agencies and instrumentalities, U.S. Government 
obligations (including U.S. agency mortgage pass-through securities), 
U.S. and foreign corporate debt securities, mortgage-backed and asset-
backed securities, senior loans, fixed and other floating-rate debt 
securities, money market instruments, taxable municipal bonds, and tax-
exempt municipal bonds will be available from major market data 
vendors. Price information regarding U.S. Treasury futures will be 
available from the applicable exchange and from major market data 
vendors. Price information regarding currency forwards will be 
available from major market data vendors. Major market data vendors 
provide intra-day and end-of-day prices for credit default swaps, 
interest rate swaps, and total return swaps. Price information for 
exchange-traded equity investments, including ETFs and exchange-traded 
convertible securities, will be available from the applicable exchange 
or major market data vendors. Price information for convertible 
securities traded OTC and other investment company securities, 
including money market funds, also will be available from major market 
data vendors. Each Fund's Web site will include a form of the 
prospectus for each respective Fund and additional data relating to NAV 
and other applicable quantitative information.
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    \22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \23\ According to the Exchange, several major market data 
vendors widely disseminate Portfolio Indicative Values taken from 
the CTA or other data feeds.
    \24\ On a daily basis, the Adviser or Sub-Adviser will disclose 
on the Funds' Web site for each portfolio security and financial 
instrument of each Fund the following information: ticker symbol (if 
applicable); name of security and 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.
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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, with respect to each Fund, the 
Exchange will obtain a representation from the issuer of the respective 
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.\25\ In addition, 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 each Fund may be halted. The 
Exchange may halt trading in the Shares if trading is not occurring in 
the securities and/or the financial instruments comprising the 
Disclosed Portfolio of a Fund, or if other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.\26\ Further, the Commission notes that the 
Reporting Authority that provides the Disclosed Portfolio of each Fund 
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.\27\ The Commission 
notes that the Financial Industry Regulatory Authority (``FINRA''), on 
behalf of the Exchange,\28\ will communicate as needed regarding 
trading in the Shares, exchange-traded investment company securities, 
exchange-traded convertible securities, and exchange-traded futures 
with other markets and other entities that are members of the 
Intermarket Surveillance Group (``ISG''), and FINRA, on behalf of the 
Exchange, may obtain trading information regarding trading in such 
securities and financial instruments from such markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares, exchange-traded investment company securities, 
exchange-traded convertible securities, and exchange-traded futures 
from markets and other entities that are members of ISG or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement. FINRA, on behalf of the Exchange, is able to access, as 
needed, trade information for certain fixed income securities held by 
the Funds reported to FINRA's Trade Reporting and Compliance Engine 
(``TRACE''). The Exchange states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees. The Exchange also states that the Adviser and Sub-Adviser 
are not broker-dealers, but both the Adviser and Sub-Adviser are 
affiliated with a broker-dealer, and each has implemented and will 
maintain a fire wall with respect to such broker-dealer affiliate 
regarding access to information concerning the composition and/or 
changes to the respective Fund's portfolio.\29\
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    \25\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \26\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing 
additional considerations for the suspension of trading in or 
removal from listing of Managed Fund Shares on the Exchange). 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 each Fund. Trading in Shares of either 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.
    \27\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
    \28\ The Exchange states that, while 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.
    \29\ See supra note 5. 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, Sub-Adviser, and 
their related personnel are subject to the provisions of Rule 204A-1 
under the Advisers Act relating to codes of ethics. This Rule 
requires investment advisers to adopt a code of ethics that reflects 
the fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares of each Fund 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 represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by FINRA on 
behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws and that these 
procedures are adequate to properly monitor Exchange trading of

[[Page 12261]]

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 Units (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 Portfolio Indicative Value will not be calculated or publicly 
disseminated; (d) how information regarding the Portfolio Indicative 
Value 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, each Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\30\ as provided by 
NYSE Arca Equities Rule 5.3.
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    \30\ 17 CFR 240.10A-3.
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    (6) Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance.
    (7) A minimum of 100,000 Shares of each Fund will be outstanding at 
the commencement of trading on the Exchange.
    (8) With respect to each of the Funds, such Fund's investments will 
be consistent with the Fund's investment objective. Investments in 
derivative instruments by the Funds will be made in accordance with the 
1940 Act and consistent with each Fund's investment objective and 
policies. To limit the potential risk associated with transactions in 
derivatives, the Funds will segregate or ``earmark'' assets determined 
to be liquid by the Adviser in accordance with procedures established 
by the Trust's Board and in accordance with the 1940 Act (or, as 
permitted by applicable regulation, enter into certain offsetting 
positions) to cover its obligations under derivative instruments.
    (9) The Funds will not invest in equity securities other than 
convertible securities and securities issued by other investment 
companies, including money market funds and ETFs. The Funds will not 
invest in non-U.S. equity securities. The Funds will not invest in 
leveraged or leveraged inverse ETFs.

This approval order is based on all of the Exchange's representations 
and description of the Funds, 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 \31\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \31\ 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,\32\ that the proposed rule change (SR-NYSEArca-2013-135) be, and 
it hereby is, approved.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04682 Filed 3-3-14; 8:45 am]
BILLING CODE 8011-01-P