
[Federal Register Volume 77, Number 164 (Thursday, August 23, 2012)]
[Notices]
[Pages 51081-51088]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-20713]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67682; File No. SR-NYSEArca-2012-82]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to the Listing and Trading of 
FlexShares Ready Access Variable Income Fund Under NYSE Arca Equities 
Rule 8.600

August 17, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that, on August 7, 2012, NYSE Arca, Inc. (``Exchange'' 
or ``NYSE Arca'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

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

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

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

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

1. Purpose
    The Exchange proposes to list and trade the following Managed Fund 
Shares (``Shares'') \3\ under NYSE Arca Equities Rule 8.600: FlexShares 
Ready Access Variable Income Fund (``Fund'').\4\ The Shares will be 
offered by FlexShares Trust (``Trust''), a statutory trust organized 
under the laws of Maryland and registered with the Commission as an 
open-end management investment company.\5\
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    \3\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index, or 
combination thereof.
    \4\ The Commission has previously approved the listing and 
trading on the Exchange of other actively managed funds under Rule 
8.600. See, e.g., Securities Exchange Act Release Nos. 60981 
(November 10, 2009), 74 FR 59594 (November 18, 2009) (SR-NYSEArca-
2009-79) (order approving Exchange listing and trading of five fixed 
income funds of the PIMCO ETF Trust); 61365 (January 15, 2010), 75 
FR 4124 (January 26, 2010) (SR-NYSEArca-2009-114) (order approving 
Exchange listing and trading of Grail McDonnell Fixed Income ETFs).
    \5\ The Trust is registered under the 1940 Act. On June 28, 
2012, the Trust filed with the Commission a post-effective amendment 
to Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a) 
(``1933 Act'') and the 1940 Act relating to the Fund (File Nos. 333-
173967 and 811-22555) (``Registration Statement''). The description 
of the operation of the Trust and the Fund herein is based, in part, 
on the Registration Statement. In addition, the Commission has 
issued an order granting certain exemptive relief to the Trust under 
the 1940 Act. See Investment Company Act Release No. 30068 (May 22, 
2012) (File No. 812-13868) (``Exemptive Order'').
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    The investment adviser to the Fund will be Northern Trust 
Investments, Inc. (``Investment Adviser''). Foreside Fund Services, LLC 
will serve as the distributor for the Fund (``Distributor''). J.P. 
Morgan Chase Bank, N.A. will serve as the administrator, custodian, and 
transfer agent for the Fund (``Transfer Agent'').
    Commentary .06 to Rule 8.600 provides that, if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the

[[Page 51082]]

investment adviser and the broker-dealer with respect to access to 
information concerning the composition and/or changes to such 
investment company portfolio.\6\ In addition, Commentary .06 further 
requires that personnel who make decisions on the open-end fund's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material, non-public information regarding 
the open-end fund's portfolio. The Investment Adviser is affiliated 
with a broker-dealer and has implemented a ``fire wall'' with respect 
to such broker-dealer regarding access to information concerning the 
composition and/or changes to the Fund's portfolio. If a sub-adviser 
that is also affiliated with a broker-dealer is hired for the Fund, 
such sub-adviser will implement a fire wall with respect to such 
broker-dealer regarding access to information concerning the 
composition and/or changes to the portfolio. In the event (a) the 
Investment Adviser or any sub-adviser becomes newly affiliated with a 
broker-dealer, or (b) any new manager, 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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    \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, the Investment 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.
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    The Fund will not be an index fund. The Fund will be actively 
managed and will not seek to replicate the performance of a specified 
index.
    According to the Registration Statement, the Fund will seek maximum 
current income consistent with the preservation of capital and 
liquidity. The Fund will seek to achieve its investment objective by 
investing under normal circumstances \7\ at least 65% of its total 
assets in a non-diversified portfolio \8\ of fixed income instruments, 
including bonds, debt securities, and other similar instruments issued 
by U.S. and non-U.S. public and private sector entities.\9\ Such 
issuers include, without limitation, U.S. and non-U.S. governments and 
their subdivisions, agencies, instrumentalities, or sponsored 
enterprises, U.S. state and local governments, international agencies 
and supranational entities, and U.S. and non-U.S. private-sector 
entities, such as corporations and banks. The average portfolio 
duration \10\ of the Fund will vary based on The Northern Trust Company 
Investment Policy Committee's forecast for interest rates and will 
normally not exceed one year. The dollar-weighted average portfolio 
maturity of the Fund is normally not expected to exceed two years.
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    \7\ The term ``under normal circumstances'' 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.
    \8\ According to the Registration Statement, the Fund will be 
``non-diversified'' under the 1940 Act and may invest more of its 
assets in fewer issuers than ``diversified'' funds. The 
diversification standard is set forth in Section 5(b)(1) of the 1940 
Act (15 U.S.C. 80a-5(b)(1)).
    \9\ According to the Registration Statement, ``fixed income 
instruments'' includes, but is not limited to: securities issued or 
guaranteed by the U.S. Government, its agencies, or government 
sponsored enterprises; corporate debt securities, including 
corporate commercial paper; mortgage-backed and other asset-backed 
securities; inflation-indexed bonds issued both by governments and 
corporations; bank capital and trust preferred securities; fixed and 
variable rate loan participations and assignments; bank certificates 
of deposit, fixed time deposits and bankers' acceptances; repurchase 
agreements on fixed income instruments; and reverse repurchase 
agreements on fixed income instruments.
    \10\ According to the Registration Statement, duration measures 
the price sensitivity of a fixed-income security to changes in 
interest rates. Interest rate changes have a greater effect on the 
price of fixed-income securities with longer durations.
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    According to the Registration Statement, the Fund will invest in 
debt securities that are, at the time of investment, rated within the 
top four rating categories by a Nationally Recognized Statistical 
Rating Organization (``NRSRO'') or of comparable quality as determined 
by the Investment Adviser.\11\ Subsequent to its purchase by the Fund, 
a rated security may cease to be rated or its rating may be reduced 
below investment grade or a security may no longer be considered to be 
investment grade. In such case, the Fund is not required to dispose of 
the security. The Investment Adviser will determine what action, 
including potential sale, is in the best interest of the Fund.
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    \11\ In determining whether a security is of ``comparable 
quality,'' the Investment Adviser may consider, for example, whether 
the issuer of the security has issued other rated securities, 
whether the obligations under the security are guaranteed by another 
entity and the rating of such guarantor (if any), whether and (if 
applicable) how the security is collateralized, other forms of 
credit enhancement (if any), the security's maturity date, liquidity 
features (if any), relevant cash flow(s), valuation features, other 
structural analysis, macroeconomic analysis, and sector or industry 
analysis.
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    The Fund may invest, without limitation, in fixed income 
instruments of foreign issuers in developed and emerging markets,\12\ 
including, without limitation, debt securities of emerging-market 
foreign governments in the following regions: Asia and Pacific, Central 
and South America, Eastern Europe, Africa, and the Middle East. Within 
these regions, the Fund may invest in countries such as Brazil, Chile, 
China, Columbia, Czech Republic, Egypt, Hungary, India, Indonesia, 
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South 
Africa, South Korea, Taiwan, Thailand, and Turkey, although this list 
may change as market developments occur and may include additional 
emerging market countries that conform to selected ratings, liquidity, 
and other criteria. Notwithstanding the foregoing, the Fund will not 
invest more than 20% of its total assets in fixed income

[[Page 51083]]

instruments of foreign issuers in emerging markets.\13\
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    \12\ According to the Investment Adviser, while there is no 
universally accepted definition of what constitutes an ``emerging 
market,'' in general, emerging market countries are characterized by 
developing commercial and financial infrastructure with significant 
potential for economic growth and increased capital market 
participation by foreign investors. The Investment Adviser will look 
at a variety of commonly-used factors when determining whether a 
country is an ``emerging'' market. In general, the Investment 
Adviser will consider a country to be an emerging market if:
    (1) It is either (a) classified by the World Bank in the lower 
middle or upper middle income designation for one of the past 3 
years (i.e., per capita gross national product of less than U.S. 
$9,385), or (b) classified by the World Bank as high income in each 
of the last three years, but with a currency that has been primarily 
traded on a non-delivered basis by offshore investors (e.g., Korea 
and Taiwan);
    (2) the country's debt market is considered relatively 
accessible by foreign investors in terms of capital flow and 
settlement considerations; and
    (3) the country has issued the equivalent of $5 billion in local 
currency sovereign debt.
    The criteria used to evaluate whether a country is an ``emerging 
market'' will change from time to time based on economic and other 
events.
    \13\ The Fund may invest more than 25% of its total assets in 
fixed income securities and instruments of issuers in a single 
developed market country.
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    Foreign debt securities include direct investments in non-U.S. 
dollar-denominated debt securities traded primarily outside of the 
United States and dollar-denominated debt securities of foreign 
issuers. The Fund will invest in non-U.S. corporate bonds that the 
Investment Adviser deems to be sufficiently liquid at the time of 
investment.\14\ Foreign government obligations may include debt 
obligations of supranational entities, including international 
organizations (such as the European Coal and Steel Community and the 
International Bank for Reconstruction and Development, also known as 
the World Bank) and international banking institutions and related 
government agencies. The Fund also may invest in foreign time deposits 
and other short-term instruments. The Fund may invest a portion of its 
assets in the obligations of foreign banks and foreign branches of 
domestic banks.
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    \14\ The Fund will invest only in non-U.S. corporate bonds that 
the Investment Adviser deems to be sufficiently liquid at time of 
investment. Generally, a corporate bond must have $200 million (or 
an equivalent value if denominated in a currency other than U.S. 
dollars) 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. Therefore, 
although the Fund does not intend to do so, the Fund may invest up 
to 20% of its net assets in corporate bonds with less than $200 
million par amount outstanding, including up to 5% of its assets in 
corporate bonds with less than $100 million par amount outstanding, 
if (i) the Investment Adviser deems such security to be sufficiently 
liquid based on its analysis of the market for such security (based 
on, for example, broker-dealer quotations or its analysis of the 
trading history of the security or the trading history of other 
securities issued by the issuer), (ii) such investment is consistent 
with the Fund's goal of seeking maximum current income consistent 
with the preservation of capital and liquidity, and (iii) such 
investment is deemed by the Investment Adviser to be in the best 
interest of the Fund.
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    The Fund may invest, without limitation, in mortgage- or asset-
backed securities, other structured securities, including 
collateralized mortgage obligations (``CMOs''), and also including to-
be-announced transactions (or ``TBA Transactions'').\15\ A TBA 
Transaction is a method of trading mortgage-backed securities.\16\ 
However, the Fund will not invest more than 10% of its total assets in 
non-agency \17\ mortgage- or asset-backed securities.
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    \15\ According to the Registration Statement, in addition to 
credit and market risk, asset-backed securities may involve 
prepayment risk because the underlying assets (loans) may be prepaid 
at any time. Prepayment (or call) risk is the risk that an issuer 
will exercise its right to pay principal on an obligation held by 
the Fund (such as a mortgage-backed security) earlier than expected. 
This may happen during a period of declining interest rates. Under 
these circumstances, the Fund may be unable to recoup all of its 
initial investment and will suffer from having to reinvest in lower 
yielding securities. The loss of higher yielding securities and the 
reinvestment at lower interest rates can reduce the Fund's income, 
total return, and share price. The value of these securities also 
may change because of actual or perceived changes in the 
creditworthiness of the originator, the service agent, the financial 
institution providing the credit support, or the counterparty. Like 
other fixed-income securities, when interest rates rise, the value 
of an asset-backed security generally will decline. Credit supports 
generally apply only to a fraction of a security's value. However, 
when interest rates decline, the value of an asset-backed security 
with prepayment features may not increase as much as that of other 
fixed-income securities. In addition, non-mortgage asset-backed 
securities involve certain risks not presented by mortgage-backed 
securities. Primarily, these securities do not have the benefit of 
the same security interest in the underlying collateral. If the 
issuer of the security has no security interest in the related 
collateral, there is the risk that the Fund could lose money if the 
issuer defaults.
    \16\ In a TBA Transaction, the buyer and seller agree upon 
general trade parameters such as agency, settlement date, par 
amount, and price. The actual pools delivered generally are 
determined two days prior to the settlement date.
    \17\ ``Non-agency'' securities are financial instruments that 
have been issued by an entity that is not a government-sponsored 
agency, such as the Federal National Mortgage Association (``Fannie 
Mae''), Federal Home Loan Mortgage Corporation (``Freddie Mac''), 
Federal Home Loan Banks, or the Government National Mortgage 
Association (``Ginnie Mae'').
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    The Fund may invest in variable and floating rate instruments. 
Variable and floating rate instruments have interest rates that 
periodically are adjusted either at set intervals or that float at a 
margin tied to a specified index rate. These instruments include 
variable amount master demand notes, long-term variable and floating 
rate bonds where the Fund obtains at the time of purchase the right to 
put the bond back to the issuer or a third party at par at a specified 
date, and leveraged inverse floating rate instruments (``inverse 
floaters''). Some variable and floating rate instruments have interest 
rates that periodically are adjusted as a result of changes in 
inflation rates.
    According to the Registration Statement, because there is no active 
secondary market for certain variable and floating rate instruments, 
they may be more difficult to sell if the issuer defaults on its 
payment obligations or during periods when the Fund is not entitled to 
exercise its demand rights. In addition, variable and floating rate 
instruments are subject to changes in value based on changes in market 
interest rates or changes in the issuer's or guarantor's 
creditworthiness.
    According to the Registration Statement, the Fund may borrow money 
and enter into reverse repurchase agreements in amounts not exceeding 
one-fourth of the value of its total assets (including the amount 
borrowed). To the extent consistent with its investment objective and 
strategies, the Fund may enter into repurchase agreements with 
financial institutions such as banks and broker-dealers that are deemed 
to be creditworthy by the Investment Adviser and may invest a portion 
of its assets in custodial receipts.
Other Investments
    According to the Registration Statement, the Fund may engage in 
forward foreign currency transactions for hedging purposes in order to 
protect against uncertainty in the level of future foreign currency 
exchange rates, to facilitate local settlements, or to protect against 
currency exposure in connection with its distributions to 
shareholders.\18\ The Fund, however, does not expect to engage in 
currency transactions for speculative purposes (e.g., for potential 
income or capital gain). A forward currency exchange contract is an 
obligation to exchange one currency for another on a future date at a 
specified exchange rate.
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    \18\ According to the Registration Statement, liquid assets 
equal to the amount of the Fund's assets that could be required to 
consummate forward contracts will be segregated except to the extent 
the contracts are otherwise ``covered.'' The segregated assets will 
be valued at market or fair value. If the market or fair value of 
such assets declines, additional liquid assets will be segregated 
daily so that the value of the segregated assets will equal the 
amount of such commitments by the Fund. A forward contract to sell a 
foreign currency is ``covered'' if the Fund owns the currency (or 
securities denominated in the currency) underlying the contract, or 
holds a forward contract (or call option) permitting the Fund to buy 
the same currency at a price that is (i) no higher than the Fund's 
price to sell the currency or (ii) greater than the Fund's price to 
sell the currency provided the Fund segregates liquid assets in the 
amount of the difference. A forward contract to buy a foreign 
currency is ``covered'' if the Fund holds a forward contract (or 
call option) permitting the Fund to sell the same currency at a 
price that is (i) as high as or higher than the Fund's price to buy 
the currency or (ii) lower than the Fund's price to buy the currency 
provided the Fund segregates liquid assets in the amount of the 
difference.
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    According to the Registration Statement, to the extent consistent 
with its investment policies, the Fund may hold up to 15% of its net 
assets in securities that are illiquid (calculated at the time of 
investment), including Rule 144A Securities and master demand 
notes.\19\ The aggregate value of all of the

[[Page 51084]]

Fund's illiquid securities, Rule 144A Securities, master demand notes, 
fixed and variable rate loan participations and assignments, inverse 
floaters, and long-term variable and floating rate bonds where the Fund 
obtains at the time of purchase the right to put the bond back to the 
issuer or a third party at par at a specified date shall not exceed 15% 
of the Fund's total assets. 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.
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    \19\ 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), 
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 
ETF. 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 
1933 Act).
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    The Fund may purchase and sell securities on a when-issued, delayed 
delivery or forward commitment basis. The Fund also may, without 
limitation, seek to obtain market exposure to the securities in which 
it primarily invests by entering into a series of purchase and sale 
contracts (such as buy backs or mortgage dollar rolls).
    The Fund may temporarily hold cash and cash-like instruments or 
invest in short-term obligations pending investment or to meet 
anticipated redemption requests. The Fund also may hold up to 100% of 
its total assets in cash or cash-like instruments or invest in short-
term obligations as a temporary measure mainly designed to limit the 
Fund's losses in response to adverse market, economic, or other 
conditions. The Fund may not achieve its investment objective when it 
holds cash or cash-like instruments, or invests its assets in short-
term obligations or otherwise makes temporary investments. The Fund 
also may miss investment opportunities and have a lower total return 
during these periods.
    According to the Registration Statement, the Fund may not purchase 
or sell physical commodities unless acquired as a result of ownership 
of securities or other instruments.
    According to the Registration Statement, the Fund may not 
concentrate its investments (i.e., invest 25% or more of its total 
assets in the securities of a particular industry or industry 
group).\20\ For purposes of this limitation, securities of the U.S. 
government (including its agencies and instrumentalities), repurchase 
agreements collateralized by U.S. government securities, and securities 
of state or municipal governments and their political subdivisions are 
not considered to be issued by members of any industry.
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    \20\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
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    The Fund may invest in the securities of other investment 
companies. Such investments will be limited so that, as determined 
after a purchase is made, either: (a) not more than 3% of the total 
outstanding stock of such investment company will be owned by the Fund, 
the Trust as a whole, and its affiliated persons (as defined in the 
1940 Act); or (b) (i) not more than 5% of the value of the total assets 
of the Fund will be invested in the securities of any one investment 
company, (ii) not more than 10% of the value of its total assets will 
be invested in the aggregate securities of investment companies as a 
group, and (iii) not more than 3% of the outstanding voting stock of 
any one investment company will be owned by the Fund. These limits will 
not apply to the investment of uninvested cash balances in shares of 
registered or unregistered money market funds whether affiliated or 
unaffiliated. The foregoing exemption, however, only applies to an 
unregistered money market fund that (i) limits its investments to those 
in which a money market fund may invest under Rule 2a-7 of the 1940 
Act, and (ii) undertakes to comply with all the other provisions of 
Rule 2a-7.
    Investments by the Fund in other investment companies, including 
exchange-traded funds (``ETFs''),\21\ will be subject to the 
limitations of the 1940 Act except as expressly permitted by Commission 
orders. The Fund also may invest in other types of U.S. exchange-traded 
products, such as Exchange-Traded Notes.\22\
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    \21\ For purposes of this proposed rule change, ETFs are 
securities registered under the 1940 Act such as those listed and 
traded on the Exchange under NYSE Arca Equities Rules 5.2(j)(3), 
8.100, and 8.600.
    \22\ For purposes of this proposed rule change, Exchange Traded 
Notes are securities registered under the 1933 Act such as those 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(6).
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    The Fund intends to qualify as a regulated investment company under 
Subchapter M of Subtitle A, Chapter 1, of the Internal Revenue 
Code.\23\
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    \23\ 26 U.S.C. 851. According to the Registration Statement, to 
qualify for treatment as a regulated investment company, the Fund 
must meet three tests each year. First, the Fund must derive with 
respect to each taxable year at least 90% of its gross income from 
dividends, interest, certain payments with respect to securities 
loans, gains from the sale or other disposition of stock or 
securities or foreign currencies, other income derived with respect 
to the Fund's business of investing in stock, securities or 
currencies, or net income derived from interests in qualified 
publicly traded partnerships. Second, generally, at the close of 
each quarter of the Fund's taxable year, at least 50% of the value 
of the Fund's assets must consist of cash and cash items, U.S. 
government securities, securities of other regulated investment 
companies, and securities of other issuers as to which (a) the Fund 
has not invested more than 5% of the value of its total assets in 
securities of the issuer and (b) the Fund does not hold more than 
10% of the outstanding voting securities of the issuer, and no more 
than 25% of the value of the Fund's total assets may be invested in 
the securities of (1) any one issuer (other than U.S. government 
securities and securities of other regulated investment companies), 
(2) two or more issuers that the Fund controls and which are engaged 
in the same or similar trades or businesses, or (3) one or more 
qualified publicly traded partnerships. Third, the Fund must 
distribute an amount equal to at least the sum of 90% of its 
investment company taxable income (net investment income and the 
excess of net short-term capital gain over net long-term capital 
loss), before taking into account any deduction for dividends paid, 
and 90% of its tax-exempt income, if any, for the year.
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    The Fund will not invest in any non-U.S registered equity 
securities. The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage. That is, 
while the Fund will be permitted to borrow as permitted under the 1940 
Act, the Fund's investments will not be used to seek performance that 
is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Fund's 
benchmark (i.e., the Citigroup 3-Month Treasury Bill Index).
    Consistent with the Exemptive Order, the Fund will not invest in 
options contracts, futures contracts, or swap agreements.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca 
Equities Rule 8.600(d)(2)(B)(ii), the Investment Adviser will implement 
and maintain, or be subject to, procedures designed to prevent the use 
and dissemination of material, non-public information regarding the 
actual components of the Fund's portfolio. The Exchange represents 
that, for initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\24\ 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

[[Page 51085]]

Exchange. The Exchange will obtain a representation from the issuer of 
the Shares that the net asset value (``NAV'') \25\ per Share will be 
calculated daily and that the NAV and the Disclosed Portfolio, as 
defined in NYSE Arca Equities Rule 8.600(c)(2), will be made available 
to all market participants at the same time.
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    \24\ 17 CFR 240.10A-3.
    \25\ The NAV of the Fund is generally determined once daily 
Monday through Friday generally as of the regularly scheduled close 
of business of the New York Stock Exchange (``NYSE'') (normally 4:00 
p.m., Eastern Time (``E.T.'')) on each day that the NYSE is open for 
trading. The NAV of the Fund is calculated by dividing the value of 
the net assets of the Fund (i.e., the value of its total assets less 
total liabilities) by the total number of outstanding Shares of the 
Fund, generally rounded to the nearest cent. For more information 
regarding the valuation of Fund investments in calculating the 
Fund's NAV, see the Registration Statement.
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    Creations and Redemptions of Shares
    According to the Registration Statement, prior to trading in the 
secondary market, Shares of the Fund will be ``created'' at NAV by 
authorized participants only in block-size ``Creation Units'' of 50,000 
Shares or multiples thereof, provided, however, that from time to time 
the Fund may change the number of Shares (or multiples thereof) 
required for each Creation Unit, if the Fund determines that such 
change would be in the best interests of the Fund. A creation 
transaction, which is subject to acceptance by the Transfer Agent, 
generally will take place when an authorized participant deposits into 
the Fund cash and/or a designated portfolio of instruments 
approximating the holdings of the Fund in exchange for a specified 
number of Creation Units. Similarly, Shares can be redeemed only in 
Creation Units, for cash and/or in-kind for a portfolio of instruments 
held by the Fund (``Fund Securities''). Purchases and redemptions of 
Creation Units may be made in whole or in part on a cash basis, rather 
than in-kind, under certain circumstances.
    Except when aggregated in Creation Units, Shares will not be 
redeemable by the Fund. The prices at which creations and redemptions 
occur will be based on the next calculation of NAV after an order is 
received in a form described in the authorized participant agreement.
    With respect to the Fund, the Investment Adviser will make 
available through the National Securities Clearing Corporation 
(``NSCC'') prior to the opening of business on the Exchange (currently 
9:30 a.m., E.T.) on each business day, the Fund Securities that will be 
applicable (subject to possible correction) to redemption requests 
received in proper form on that day. Unless cash redemptions are 
specified for the Fund, the redemption proceeds for a Creation Unit 
will generally consist of the Fund Securities as announced by the 
Investment Adviser through the NSCC on the business day of the request 
for redemption, plus cash in an amount equal to the difference between 
the NAV of the Shares being redeemed, as next determined after a 
receipt of a request in proper form, and the value of the Fund 
Securities, less the redemption transaction fee described in the 
Registration Statement (``Cash Redemption Amount''). In the event that 
the Fund Securities have a value greater than the NAV of the Fund 
Shares, a compensating cash payment equal to such difference will be 
required to be made by or through an authorized participant by the 
redeeming shareholder.
    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 is included in the Registration Statement. All 
terms relating to the Fund that are referred to but not defined in this 
proposed rule change are defined in the Registration Statement.
Availability of Information
    The Trust's Web site (www.flexshares.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Trust's Web 
site will include additional quantitative information updated on a 
daily basis, including, for the Fund, (1) daily trading volume, the 
prior business day's NAV, last reported closing price and the mid-point 
of the bid/ask spread at the time of calculation of such NAV (``Bid/Ask 
Price''),\26\ and a calculation of the premium and discount of the Bid/
Ask Price or closing price against the NAV (as appropriate), and (2) 
data in chart format displaying the frequency distribution of discounts 
and premiums of the daily Bid/Ask Price or closing price against the 
NAV, within appropriate ranges, for each of the four previous calendar 
quarters.
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    \26\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
---------------------------------------------------------------------------

    On each business day, before commencement of trading in Shares in 
the Core Trading Session (9:30 a.m., E.T. to 4:00 p.m., E.T.) on the 
Exchange, the Fund will disclose on www.flexshares.com the identities 
and quantities of the Fund's portfolio holdings that will form the 
basis for the Fund's calculation of NAV at the end of the business 
day.\27\
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    \27\ Under accounting procedures followed by the Fund, trades 
made on the prior business day (``T'') will be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Fund 
will be able to disclose at the beginning of the business day the 
portfolio that will form the basis for the NAV calculation at the 
end of the business day.
---------------------------------------------------------------------------

    On a daily basis, the Fund will disclose on www.flexshares.com for 
each portfolio security and other financial instrument of the Fund the 
following information: Ticker symbol (if applicable), name of 
securities and financial instruments, number of shares or dollar value 
of securities and financial instruments held in the portfolio, and 
percentage weighting of the securities and financial instruments in the 
portfolio. The Web site information will be publicly available at no 
charge. In addition, price information for the debt securities, fixed 
income instruments, and other investments, including forwards and 
securities of other investment companies, held by the Fund will be 
available through major market data vendors and/or the securities 
exchange on which they are listed and traded.
    In addition, a basket composition file, which includes the security 
names and share quantities, if applicable, required to be delivered in 
exchange for Fund Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the NYSE via the NSCC. The basket represents one Creation Unit of the 
Fund. The NAV of the Fund will normally be determined as of the close 
of the regular trading session on the NYSE (ordinarily 4:00 p.m., E.T.) 
on each business day.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports are available free upon request from the Trust, and those 
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or 
downloaded from the Commission's Web site at www.sec.gov. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last-sale information for the 
Shares will be available via the

[[Page 51086]]

Consolidated Tape Association (``CTA'') high-speed line.
    In addition, 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.\28\ The dissemination of the Portfolio Indicative 
Value, together with the Disclosed Portfolio, will allow investors to 
determine the value of the underlying portfolio of the Fund on a daily 
basis and will provide a close estimate of that value throughout the 
trading day.
---------------------------------------------------------------------------

    \28\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Portfolio Indicative Values published on CTA or other data feeds.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund.\29\ Trading in Shares of the Fund 
will be halted if the circuit breaker parameters in NYSE Arca Equities 
Rule 7.12 have been reached. Trading also may be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. These may include: (1) The 
extent to which trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Fund; 
or (2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. Trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of the Fund may be 
halted.
---------------------------------------------------------------------------

    \29\ See NYSE Arca Equities Rule 7.12, Commentary .04.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
Surveillance
    The Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products (which include Managed 
Fund Shares) to monitor trading in the Shares. The Exchange represents 
that these procedures are adequate to properly monitor Exchange trading 
of the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws.
    The Exchange's current trading surveillance focuses on detecting 
securities trading outside their normal patterns. When such situations 
are detected, surveillance analysis follows and investigations are 
opened, where appropriate, to review the behavior of all relevant 
parties for all relevant trading violations.
    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 in place a comprehensive 
surveillance sharing agreement.\30\
---------------------------------------------------------------------------

    \30\ For a list of the current members of ISG, see http://www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit Holders (``ETP Holders'') in an Information 
Bulletin (``Bulletin'') of the special characteristics and risks 
associated with trading the Shares. Specifically, the Bulletin will 
discuss the following: (1) The procedures for purchases and redemptions 
of Shares in Creation Unit aggregations (and that Shares are not 
individually redeemable); (2) NYSE Arca Equities Rule 9.2(a), which 
imposes a duty of due diligence on its ETP Holders to learn the 
essential facts relating to every customer prior to trading the Shares; 
(3) the risks involved in trading the Shares during the Opening and 
Late Trading Sessions when an updated Portfolio Indicative Value will 
not be calculated or publicly disseminated; (4) how information 
regarding the Portfolio Indicative Value is disseminated; (5) the 
requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (6) trading information.
    In addition, the Bulletin will reference that the Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Exchange Act. 
The Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(5) \31\ that an exchange have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market, 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. The Exchange may obtain information 
via ISG from other exchanges that are members of ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement.
    According to the Registration Statement, the Fund will invest under 
normal circumstances at least 65% of its total assets in a non-
diversified portfolio of fixed income investments. The Fund will invest 
in debt securities that are considered to be investment grade at the 
time of investment. The Fund will not invest in options contracts, 
futures contracts, or swap agreements. The Fund will not invest in any 
non-U.S registered equity securities. The aggregate value of all of the 
Fund's illiquid securities, Rule 144A Securities, master demand notes, 
fixed and variable rate loan participations and assignments, inverse 
floaters, and long-term variable and floating rate bonds where the Fund 
obtains at the time of purchase the right to put the bond back to the 
issuer or a third party at par at a specified date shall not exceed 15% 
of

[[Page 51087]]

the Fund's total assets. The Fund will invest only in non-U.S. 
corporate bonds that the Investment Adviser deems to be sufficiently 
liquid at time of investment. Generally, a corporate bond must have 
$200 million (or an equivalent value if denominated in a currency other 
than U.S. dollars) or more par amount outstanding and significant par 
value traded to be considered as an eligible investment. The Fund will 
not invest more than 20% of its total assets in fixed income 
instruments of foreign issuers in emerging markets. The Fund's 
investments will be consistent with the Fund's investment objective and 
will not be used to enhance leverage.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. Moreover, the Portfolio 
Indicative Value will be widely disseminated by one or more major 
market data vendors at least every 15 seconds during the Exchange's 
Core Trading Session. On each business day, before commencement of 
trading in Shares in the Core Trading Session on the Exchange, the Fund 
will disclose on its Web site the Disclosed Portfolio that will form 
the basis for the Fund's calculation of NAV at the end of the business 
day. 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 
quotation and last-sale information will be available via the CTA high-
speed line. Price information for the debt securities, fixed income 
instruments, and other investments, including forwards and securities 
of other investment companies, held by the Fund will be available 
through major market data vendors and/or the securities exchange on 
which they are listed and traded. The Web site for the Fund will 
include a form of the prospectus for the Fund and additional data 
relating to NAV and other applicable quantitative information. 
Moreover, prior to the commencement of trading, the Exchange will 
inform its ETP Holders in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares. Trading 
in Shares of the Fund will be halted if the circuit breaker parameters 
in NYSE Arca Equities Rule 7.12 have been reached or because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable, and trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
circumstances under which Shares of the Fund may be halted. In 
addition, as noted above, investors will have ready access to 
information regarding the Fund's holdings, the Portfolio Indicative 
Value, the Disclosed Portfolio, and quotation and last-sale information 
for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. The Investment Adviser is affiliated 
with a broker-dealer and has implemented a ``fire wall'' with respect 
to such broker-dealer regarding access to information concerning the 
composition and/or changes to the Fund's portfolio. In addition, the 
Fund's Reporting Authority will implement and maintain, or be subject 
to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the actual components of the 
Fund's portfolio.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2012-82 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2012-82. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549-1090, on official business days between 10:00 
a.m. and 3:00 p.m. Copies of the filing will also be available for 
inspection and copying at the NYSE's principal office and on its 
Internet Web site at www.nyse.com. All comments received will be posted

[[Page 51088]]

without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2012-82 and should be submitted on or before 
September 13, 2012.
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-20713 Filed 8-22-12; 8:45 am]
BILLING CODE 8011-01-P


