
[Federal Register Volume 78, Number 15 (Wednesday, January 23, 2013)]
[Notices]
[Pages 4955-4960]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01223]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68667; File No. SR-NYSEArca-2012-109]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
Shares of the U.S. Equity High Volatility Put Write Index Fund Under 
NYSE Arca Equities Rule 5.2(j)(3)

January 16, 2013.

I. Introduction

    On September 27, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the U.S. Equity High Volatility Put Write Index Fund 
(``Fund'') under NYSE Arca Equities Rule 5.2(j)(3). The proposed rule 
change was published in the Federal Register on October 18, 2012.\3\ 
The Commission received no comments on the proposal. On November 29, 
2012, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to either approve the proposed 
rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ 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. 68044 (October 12, 
2012), 77 FR 64160 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 68319 (November 29, 
2012), 77 FR 72429 (December 5, 2012). The Commission determined 
that it was appropriate to designate a longer period within which to 
take action on the proposed rule change so that it has sufficient 
time to consider the proposed rule change. Accordingly, the 
Commission designated January 16, 2013 as the date by which it 
should approve, disapprove, or institute proceedings to determine 
whether to disapprove the proposed rule change.
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the Fund 
under Commentary .01 to NYSE Arca Equities Rule 5.2(j)(3), which 
governs the listing and trading of Investment Company Units. The Shares 
will be issued by the ALPS ETF Trust (``Trust'').\6\ ALPS Advisors, 
Inc. will be the Fund's investment adviser (``Adviser''), and Rich 
Investment Solutions, LLC will be the Fund's investment sub-adviser 
(``Sub-Adviser''). The Adviser is affiliated with a broker-dealer and 
will implement and maintain procedures designed to prevent the use and 
dissemination of material, non-public information regarding the Fund's 
portfolio. The Sub-Adviser is not affiliated with a broker-dealer. In 
the event (a) the Sub-Adviser becomes newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser becomes affiliated with a 
broker-dealer, it will implement and maintain procedures designed to 
prevent the use and dissemination of material, non-public information 
regarding the Fund's portfolio.
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    \6\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On May 3, 2012, the Trust filed with the 
Commission an amendment to its registration statement on Form N-1A 
(``Registration Statement'') under the Securities Act of 1933 and 
under the 1940 Act relating to the Fund (File Nos. 333-148826 and 
811-22175). 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. 28262 (May 1, 2008) (File No. 
812-13430).
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    The Bank of New York Mellon (``BNY'') will serve as custodian, fund 
accounting agent, and transfer agent for the Fund. ALPS Distributors, 
Inc. will be the Fund's distributor (``Distributor''). NYSE Arca will 
be the ``Index Provider'' for the Fund. NYSE Arca is not affiliated 
with the Trust, the Adviser, the Sub-Adviser, or the Distributor. NYSE 
Arca is affiliated with a broker-dealer and will implement a fire wall 
and maintain procedures designed to prevent the use and dissemination 
of material, non-public information regarding the Index.
Description of the Fund
    The Fund will seek investment results that correspond generally to 
the performance, before the Fund's fees and expenses, of the NYSE Arca 
U.S. Equity High Volatility Put Write Index (``Index''). The Index 
measures the return of a hypothetical portfolio consisting of U.S. 
exchange traded put options which have been sold on each of 20 stocks 
and a cash position calculated as described below. The 20 stocks on 
which options are sold (``written'') are those 20 stocks from a 
selection of the largest capitalized (over $5 billion in market 
capitalization) stocks which also have listed options and which have 
the highest volatility, as determined by the Index Provider. The Sub-
Adviser will seek a correlation over time of 0.95 or better between the 
Fund's performance and the performance of the Index. A figure of 1.00 
would represent perfect correlation.
    The Exchange submitted this proposed rule change because the Index 
for the Fund does not meet all of the ``generic'' listing requirements 
of Commentary .01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) applicable 
to the listing of Investment Company Units based upon an index of ``US 
Component Stocks.'' \7\ Specifically, Commentary .01(a)(A) to NYSE Arca 
Equities Rule 5.2(j)(3) \8\ sets forth the requirements to be met by 
components of an index or portfolio of US Component Stocks. As 
described further below, the Index consists of U.S. exchange-traded put 
options. The Exchange has represented that the Shares will conform to 
the initial and continued listing criteria under NYSE Arca Equities 
Rules 5.2(j)(3) and 5.5(g)(2), except that the Index is comprised of 
put options, which are not NMS Stocks as defined in Rule 600 of 
Regulation NMS.
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    \7\ NYSE Arca Equities Rule 5.2(j)(3) provides that the term 
``US Component Stock'' shall mean an equity security that is 
registered under Sections 12(b) or 12(g) of the Exchange Act or an 
American Depositary Receipt, the underlying equity security of which 
is registered under Sections 12(b) or 12(g) of the Exchange Act.
    \8\ Commentary .01(a)(A) to NYSE Arca Equities Rule 5.2(j)(3) 
states, in relevant part, that the components of an index of US 
Component Stocks, upon the initial listing of a series of Investment 
Company Units pursuant to Rule 19b-4(e) under the Exchange Act, 
shall be NMS Stocks as defined in Rule 600 of Regulation NMS under 
the Exchange Act. See 17 CFR 242.600(b)(47) (defining ``NMS Stock'' 
as any NMS Security other than an option).
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Index Methodology and Construction
    The Index consists of at least 20 exchange-listed put options 
(``Index Components''), selected in accordance with NYSE Arca's rules-
based methodology for the Index. In selecting the stocks underlying the 
Index Components, the Index Provider begins with the universe of all 
U.S. exchange-listed stocks, and then screens for those stocks that 
meet the following criteria: (1) Minimum market capitalization of at 
least $5 billion; (2) minimum trading volume of at least 50 million 
shares during the preceding 6 months; (3) minimum average daily trading 
volume of one million shares during the preceding 6 months; (4) minimum 
average daily trading value of at least $10 million during the 
preceding 6 months; (5) share price of $10 or higher; (6) the 
availability of U.S. exchange-listed options. The Index is

[[Page 4956]]

reconstituted/rebalanced every two months (i.e., six times a year).
    Stocks meeting the above criteria are then sorted in descending 
order based upon the two month implied volatility as measured on 
Bloomberg using the field labeled 2M--PUT--IMP--VOL--50DELTA--DFLT, 
which is derived from at-the-money listed put options on each of such 
stocks.\9\ The 20 stocks with the highest volatility are selected for 
inclusion. The industry sector of each stock is also noted, and the 
Index will not allow more than 10 of the 20 stocks to be from any one 
industry sector.
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    \9\ The Adviser represents that Bloomberg defines implied 
volatility as Delta Ivol, which is volatility as expressed in delta. 
Delta values range from 0 to 100, with 50 delta as the theoretical 
at-the-money strike. A delta of less than 50 is considered out-of-
the-money, while a delta of greater than 50 is considered in-the-
money.
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    Each listed put option included in the Index will be an ``American-
style'' option (i.e., an option which can be exercised at the strike 
price at any time prior to its expiration) and have a 60-day term. The 
strike price (i.e., the price at which a put option can be exercised) 
of each put option included in the Index must be as close as possible 
to 85% of the closing price of the option's underlying stock price as 
of the beginning of each 60-day period.\10\ The listed put options 
included in the Index can be exercised at any time prior to their 
expiration, but the Index will reflect the value of each such option 
throughout the 60-day period as if the option is not exercised until 
its expiration. Each such option will automatically be deemed exercised 
on its expiration date if its underlying stock price is below its 
strike price. If the stock underlying the put option closes below the 
option's strike price, a cash settlement payment in an amount equal to 
the difference between the strike price and the closing price of the 
stock is deemed to be made, and the Index value is correspondingly 
reduced. If the underlying stock does not close below its strike price, 
then the option expires worthless and the entire amount of the premium 
payment is retained within the Index.\11\
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    \10\ The Adviser represents that a specific percentage cannot be 
indicated because options are listed by an exchange in pre-defined 
increments (i.e., 1, 1.5, or 2 increments) around the market price 
of the stock, rounded to the nearest dollar.
    \11\ The Adviser anticipates that it may take approximately 
three business days (i.e., each day the New York Stock Exchange 
(``NYSE'') is open) for additions and deletions to the Index to be 
reflected in the portfolio composition of the Fund.
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    The Exchange has provided the following example. Suppose a stock 
``ABC'' trades at $50 per share at the start of the 60-day period, and 
a listed put option with a term of 60 days was sold with a strike price 
of $42.50 per share for a premium of $2 per share:
     Settlement at or above the strike price: If at the end of 
60 days the ABC stock closed at or above the strike price of $42.50, 
then the option would expire worthless, and the Index's value would 
reflect the retention of the $2 per share premium. The Index's value 
thus would be increased by $2 per share on the ABC option position.
     Settlement below the strike price: If at the end of 60 
days ABC closed at $35, then the option would automatically be deemed 
exercised on its expiration date. The Index's value would change as if 
the Index had put (i.e., would buy) ABC at the strike price of $42.50 
and would sell ABC immediately at the closing price of $35. As a 
result, the Index's value would be reduced by $7.50 per share. However, 
the Index's value would also reflect the retention of the $2 per share 
premium, so the net loss to the Index's value would be $5.50 per share 
on the ABC option position.
    The Index's value is equal to the value of the options positions 
comprising the Index, plus a cash position. The options positions are 
equally weighted in the Index and the Fund's portfolio, meaning that 1/
20th of the net asset value (``NAV'') of Shares of the Fund will be 
invested in each option position at the beginning of the applicable 60-
day period. The cash position starts at a base of 1,000. The cash 
position is increased by option premiums generated by the option 
positions comprising the Index and interest on the cash position at an 
annual rate equal to the three month Treasury-bill (``T-Bill'') rate. 
The cash position is decreased by cash settlement on options which 
finish in-the-money (i.e., where the closing price of the underlying 
stock at the end of the 60-day period is below the strike price). The 
cash position is also decreased by a deemed cash distribution paid 
following each 60-day period, currently targeted at the rate of 1.5% of 
the value of the Index. However, if the option premiums generated 
during the period are less than 1.5%, the deemed distribution will be 
reduced by the amount of the shortfall.
Primary Investments
    The Fund under normal circumstances \12\ will invest at least 80% 
of its total assets in component securities that comprise the Index 
(i.e., the Fund's option positions) and in T-Bills. The Fund will seek 
to track the performance of the Index by selling listed 60-day put 
options in proportion to their weightings in the Index. By selling an 
option, the Fund will receive premiums from the buyer of the option, 
which will increase the Fund's return if the option is not exercised 
and thus expires worthless. However, if the option's underlying stock 
declines below the strike price, the option will finish in-the-money, 
and the Fund will be required to buy the underlying stock at the strike 
price, effectively paying the buyer the difference between the strike 
price and the closing price. Therefore, by writing a put option, the 
Fund will be exposed to the amount by which the price of the underlying 
stock is less than the strike price. As the seller of a listed put 
option, the Fund will incur an obligation to buy the underlying 
instrument from the purchaser of the option at the option's strike 
price, upon exercise by the option purchaser. If a listed put option 
sold by the Fund is exercised prior to the end of a 60-day period, the 
Fund will buy the underlying stock at the time of exercise and at the 
strike price, and will hold the stock until the end of the 60-day 
period.
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    \12\ The term ``under normal circumstances'' includes, but is 
not limited to, the absence of extreme volatility or trading halts 
in the equities or options 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.
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    Each put option sold by the Fund will be covered through 
investments in three month T-Bills at least equal to the Fund's maximum 
liability under the option (i.e., the strike price).
    Every 60 days, the options included within the Index are exercised 
or expire and new option positions are established, and the Fund will 
enter into new option positions accordingly and sell any underlying 
stocks it owns as a result of the Fund's prior option positions having 
been exercised. This 60-day cycle likely will cause the Fund to have 
frequent and substantial portfolio turnover.\13\
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    \13\ If the Fund receives additional inflows (and issues more 
Shares accordingly in large numbers known as ``Creation Units'') 
during a 60-day period, the Fund will sell additional listed put 
options which will be exercised or expire at the end of such 60-day 
period. Conversely, if the Fund redeems Shares in Creation Unit size 
during a 60-day period, the Fund will terminate the appropriate 
portion of the options it has sold accordingly.
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Secondary Investment Strategies
    The Fund may invest its remaining assets in money market 
instruments,\14\

[[Page 4957]]

including repurchase agreements \15\ or other funds which invest 
exclusively in money market instruments, convertible securities, and 
structured notes (notes on which the amount of principal repayment and 
interest payments are based on the movement of one or more specified 
factors, such as the movement of a particular stock or stock index). 
Furthermore, the Fund may invest in one or more financial instruments, 
including but not limited to futures contracts, swap agreements,\16\ 
forward contracts, and options on securities (other than options in 
which the Fund principally will invest), indices, and futures 
contracts.\17\ Swaps, options (other than options in which the Fund 
principally will invest), and futures contracts \18\ may be used by the 
Fund in seeking performance that corresponds to the Index and in 
managing cash flows.\19\
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    \14\ The Fund may invest a portion of its assets in high-quality 
money market instruments on an ongoing basis to provide liquidity. 
The instruments in which the Fund may invest include: (i) Short-term 
obligations issued by the U.S. Government; (ii) negotiable 
certificates of deposit (``CDs''), fixed time deposits, and bankers' 
acceptances of U.S. and foreign banks and similar institutions; 
(iii) commercial paper rated at the date of purchase ``Prime-1'' by 
Moody's Investors Service, Inc. or ``A-1+'' or ``A-1'' by Standard & 
Poor's or, if unrated, of comparable quality as determined by the 
Adviser; and (iv) money market mutual funds. CDs are short-term 
negotiable obligations of commercial banks. Time deposits are non-
negotiable deposits maintained in banking institutions for specified 
periods of time at stated interest rates. Banker's acceptances are 
time drafts drawn on commercial banks by borrowers, usually in 
connection with international transactions. The Fund will not invest 
in money market instruments as part of a temporary defensive 
strategy to protect against potential stock market declines.
    \15\ Repurchase agreements are agreements pursuant to which 
securities are acquired by the Fund from a third party with the 
understanding that they will be repurchased by the seller at a fixed 
price on an agreed date. These agreements may be made with respect 
to any of the portfolio securities in which the Fund is authorized 
to invest. Repurchase agreements may be characterized as loans 
secured by the underlying securities. The Fund may enter into 
repurchase agreements with (i) member banks of the Federal Reserve 
System having total assets in excess of $500 million and (ii) 
securities dealers (``Qualified Institutions''). The Adviser will 
monitor the continued creditworthiness of Qualified Institutions. 
The Fund also may enter into reverse repurchase agreements, which 
involve the sale of securities with an agreement to repurchase the 
securities at an agreed-upon price, date, and interest payment and 
have the characteristics of borrowing.
    \16\ Swap agreements are contracts between parties in which one 
party agrees to make periodic payments to the other party 
(``counterparty'') based on the change in market value or level of a 
specified rate, index, or asset. In return, the counterparty agrees 
to make periodic payments to the first party based on the return of 
a different specified rate, index, or asset. Swap agreements will 
usually be done on a net basis, the Fund receiving or paying only 
the net amount of the two payments. The net amount of the excess, if 
any, of the Fund's obligations over its entitlements with respect to 
each swap will be accrued on a daily basis and an amount of cash or 
highly liquid securities having an aggregate value at least equal to 
the accrued excess will be maintained in an account at the Trust's 
custodian bank.
    \17\ As an example of the use of such financial instruments, the 
Fund may use total return swaps on one or more Index Components in 
order to achieve exposures that are similar to those of the Index.
    \18\ The Fund may utilize U.S. listed exchange-traded futures. 
In connection with its management of the Trust, the Adviser has 
claimed an exclusion from registration as a commodity pool operator 
under the Commodity Exchange Act (``CEA''). Therefore, it is not 
subject to the registration and regulatory requirements of the CEA, 
and there are no limitations on the extent to which the Fund may 
engage in non-hedging transactions involving futures and options 
thereon, except as set forth in the Registration Statement.
    \19\ Swaps, options (other than options in which the Fund 
principally will invest), and futures contracts will not be included 
in the Fund's investment, under normal market circumstances, of at 
least 80% of its total assets in component securities that comprise 
the Index and in T-Bills, as described above.
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    The Fund may invest up to 20% of its net assets in investments not 
included in its Index, but which the Adviser believes will help the 
Fund track the Index. For example, there may be instances in which the 
Adviser may choose to purchase (or sell) securities not in the Index 
which the Adviser believes are appropriate to substitute for one or 
more Index Components in seeking to replicate, before fees and 
expenses, the performance of the Index.
    The Fund may borrow money from a bank up to a limit of 10% of the 
value of its assets, but only for temporary or emergency purposes. The 
Fund may not invest 25% of its total assets in the securities of 
issuers conducting their principal business activities in the same 
industry or group of industries (excluding the U.S. government or any 
of its agencies or instrumentalities). Nonetheless, to the extent the 
Fund's Index is concentrated in a particular industry or group of 
industries, the Fund's investments will exceed this 25% limitation to 
the extent that it is necessary to gain exposure to Index Components to 
track its Index.
    The Fund may invest in the securities of other investment companies 
(including money market funds). Under the 1940 Act, the Fund's 
investment in investment companies is limited to, subject to certain 
exceptions, (i) 3% of the total outstanding voting stock of any one 
investment company, (ii) 5% of the Fund's total assets with respect to 
any one investment company, and (iii) 10% of the Fund's total assets of 
investment companies in the aggregate.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment). 
The Fund will monitor its portfolio liquidity on an ongoing basis to 
determine whether, in light of current circumstances, an adequate level 
of liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid securities. Illiquid securities include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
    The Fund intends to qualify for and to elect to be treated as a 
separate regulated investment company under Subchapter M of the 
Internal Revenue Code of 1986, as amended. The Fund's investments will 
be consistent with the Fund's investment objective and will not be used 
to enhance leverage. The Fund will not invest in non-U.S. equity 
securities.
    Additional information regarding the Trust, the Fund, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes, among other things, is included in the Notice 
and Registration Statement, as applicable.\20\
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    \20\ See Notice and Registration Statement, supra notes 3 and 6.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \21\ and the rules and regulations thereunder applicable to a 
national securities exchange.\22\ In particular, the Commission finds 
that the proposed rule change is consistent with the requirements of 
Section 6(b)(5) of the Act,\23\ 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 foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Commission notes that the Fund and the Shares must 
comply with the applicable requirements of NYSE Arca Equities

[[Page 4958]]

Rules 5.2(j)(3) and 5.5(g)(2) to be listed and traded on the Exchange.
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    \21\ 15 U.S.C. 78f.
    \22\ 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).
    \23\ 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,\24\ 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, and for the put options 
held by the Fund, will be available from the U.S. options exchanges on 
which they are listed and traded. The Index value will be published by 
one or more major market data vendors every 15 seconds during the NYSE 
Arca Core Trading Session (9:30 a.m. to 4:00 p.m., Eastern Time). 
Pricing information for the Index Components is available from the U.S. 
options exchanges on which such components are listed and traded, and a 
list of the Index Components, with percentage weightings, will be 
available on the Exchange's Web site. In addition, an Intraday 
Indicative Value (``IIV'') for the Shares will be calculated \25\ and 
widely disseminated at least every 15 seconds during the NYSE Arca Core 
Trading Session by one or more major market data vendors.\26\ The 
Fund's portfolio holdings, including information regarding its options 
positions, will be disclosed each day on the Fund's Web site, which Web 
site information will be publicly available at no charge.\27\ The 
Fund's NAV per Share will be determined once daily as of the close of 
the New York Stock Exchange (``NYSE'') (normally 4:00 p.m., Eastern 
Time) on each day the NYSE is open for trading. BNY, through the 
National Securities Clearing Corporation, will make available on each 
business day, prior to the opening of business on NYSE Arca (currently 
9:30 a.m. Eastern Time), the amount of cash to be deposited in exchange 
for a Creation Unit \28\ and the amount of cash that will be paid by 
the Fund in respect of redemption requests. Information regarding 
market price and trading volume of the Shares will be continually 
available on a real-time basis throughout the day on brokers' computer 
screens and other electronic services, and information regarding the 
previous day's closing price and trading volume information for the 
Shares will be published daily in the financial section of newspapers. 
The Fund's Web site will also include a form of the prospectus for the 
Fund, information relating to NAV (updated daily), and other 
quantitative and trading information.
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    \24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \25\ The Exchange will calculate the IIV by dividing the 
``Estimated Fund Value'' (as defined below) as of the time of the 
calculation by the total number of outstanding Shares. ``Estimated 
Fund Value'' is the sum of the estimated amount of cash held in the 
Fund's portfolio, the estimated amount of accrued interest owing to 
the Fund, and the estimated value of the securities held in the 
Fund's portfolio, minus the estimated amount of liabilities. The IIV 
will be calculated based on the same portfolio holdings disclosed on 
the Fund's Web site.
    \26\ See NYSE Arca Equities Rule 5.2(j)(3), Commentaries 
.01(b)(2) and .01(c). According to the Exchange, several major 
market data vendors widely disseminate IIVs taken from the CTA or 
other data feeds. See Notice, supra note 3, at 64164.
    \27\ On a daily basis, the Adviser will disclose for each 
portfolio security and other financial instrument of the Fund the 
following information on the Fund's Web site: Ticker symbol (if 
applicable), name of security and financial instrument, number of 
shares or dollar value of financial instruments held in the 
portfolio, and percentage weighting of the security and financial 
instrument in the portfolio.
    \28\ Creation Units (100,000 Shares) of the Fund generally will 
be sold for cash only, calculated based on the NAV per Share, 
multiplied by the number of Shares representing a Creation Unit, 
plus a transaction fee.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV will be 
calculated daily and will be made available to all market participants 
at the same time.\29\ If the IIV, the Index value, or the value of the 
Index Components is not being disseminated as required, the Exchange 
may halt trading during the day in which the disruption occurs. If the 
interruption to the dissemination of the applicable IIV, Index value, 
or value of the Index Components persists past the trading day in which 
it occurred, the Exchange will halt trading no later than the beginning 
of the trading day following the interruption.\30\ In addition, if the 
Exchange becomes aware that the NAV is not being disseminated to all 
market participants at the same time, it will halt trading in the 
Shares on the Exchange until such time as the NAV is available to all 
market participants. The Exchange states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees. The Exchange states that the Index Provider is affiliated 
with a broker-dealer and will implement a firewall and maintain 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the Index. The Exchange further states 
that the Adviser is affiliated with a broker-dealer and will implement 
and maintain procedures designed to prevent the use and dissemination 
of material, non-public information regarding the Index.\31\ The 
Commission notes that the Exchange would be able to obtain information 
with respect to the options comprising the Index and which will be held 
by the Fund because such options will be listed and traded on U.S. 
options markets that are members of the Intermarket Surveillance Group 
(``ISG'').
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    \29\ See NYSE Arca Equities Rule 5.2(j)(3)(A)(v).
    \30\ 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. 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 Fund's portfolio; or 
(2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present.
    \31\ The Commission also notes that an investment adviser to an 
open-end fund is required to be registered under the Investment 
Advisers Act of 1940 (``Advisers Act''). As a result, the Adviser 
and Sub-Adviser and their 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 Commission notes that, prior to the commencement of trading, 
the Exchange will inform its Equity Trading Permit Holders (``ETP 
Holders'') of the suitability requirements of NYSE Arca Equities Rule 
9.2(a) in an Information Bulletin.\32\ Specifically, the Exchange

[[Page 4959]]

will remind ETP Holders that, in recommending transactions in these 
securities, they must have a reasonable basis to believe that (1) the 
recommendation is suitable for a customer given reasonable inquiry 
concerning the customer's investment objectives, financial situation, 
needs, and any other information known by such member, and (2) the 
customer can evaluate the special characteristics, and is able to bear 
the financial risks, of an investment in the Shares. In connection with 
the suitability obligation, the Information Bulletin will also provide 
that members must make reasonable efforts to obtain the following 
information: (a) The customer's financial status; (b) the customer's 
tax status; (c) the customer's investment objectives; and (d) such 
other information used or considered to be reasonable by such member or 
registered representative in making recommendations to the customer.
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    \32\ NYSE Arca Equities Rule 9.2(a) provides that an ETP Holder, 
before recommending a transaction in any security, must have 
reasonable grounds to believe that the recommendation is suitable 
for the customer based on any facts disclosed by the customer as to 
its other security holdings and as to its financial situation and 
needs. Further, the rule provides, with a limited exception, that 
prior to the execution of a transaction recommended to a non-
institutional customer, the ETP Holder must make reasonable efforts 
to obtain information concerning the customer's financial status, 
tax status, investment objectives, and any other information that 
such ETP Holder believes would be useful to make a recommendation.
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    As described above, the Fund will seek to track the performance of 
the Index by selling listed 60-day put options in proportion to their 
weightings in the Index. If the option's underlying stock declines 
below the strike price, the option will finish in-the-money and the 
Fund will be required to buy the underlying stock at the strike price, 
effectively paying the buyer the difference between the strike price 
and the closing price. Therefore, by writing a put option, the Fund is 
exposed to the amount by which the price of the underlying stock is 
less than the strike price. FINRA has issued a regulatory notice 
relating to sales practice procedures applicable to recommendations to 
customers by FINRA members of reverse convertibles, as described in 
FINRA Regulatory Notice 10-09 (February 2010) (``FINRA Regulatory 
Notice'').\33\ While the Fund will not invest in reverse convertibles, 
the Fund's options strategies may raise issues similar to those raised 
in the FINRA Regulatory Notice. Therefore, the Exchange has represented 
that the Information Bulletin will state that ETP Holders that carry 
customer accounts should follow the FINRA Regulatory Notice with 
respect to suitability.
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    \33\ NASD Rule 2310 relating to suitability, referenced in the 
FINRA Regulatory Notice, has been superseded by FINRA Rule 2111. See 
FINRA Regulatory Notice 12-25 (May 2012).
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    As disclosed in the Registration Statement, the Fund is designed 
for investors who seek to obtain income through selling put options on 
select equity securities which the Index Provider determines to have 
the highest volatility. Because of the high volatility of the stocks 
underlying the put options sold by the Fund, it is possible that the 
value of such stocks will decline in sufficient magnitude to trigger 
the exercise of the put options and cause a loss which may outweigh the 
income from selling such put options. Accordingly, the Exchange has 
stated that the Fund should be considered as a speculative trading 
instrument and is not necessarily appropriate for investors who seek to 
avoid or minimize their exposure to stock market volatility. The 
Exchange has represented that the Information Bulletin regarding the 
Fund will provide information regarding the suitability of an 
investment in the Shares, as stated in the Registration Statement.
    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 will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2), except 
that the Index is comprised of U.S. exchange-listed options.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance procedures applicable to derivative 
products, which include Investment Company Units, 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. All Index Components are listed and traded on 
U.S. options exchanges, which are members of ISG.
    (4) 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. 
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 IIV will 
not be calculated or publicly disseminated; (d) how information 
regarding the IIV 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. The Information Bulletin will also advise ETP 
Holders of their suitability obligations with respect to recommended 
transactions to customers in the Shares, and will state that ETP 
Holders that carry customer accounts should follow the FINRA Regulatory 
Notice with respect to suitability.
    (5) The Index will consist of at least 20 equally-weighted 
exchange-listed put options, selected in accordance with NYSE Arca's 
rules-based methodology, and the Fund, under normal circumstances, will 
invest at least 80% of its total assets in the Index Components and in 
T-Bills.
    (6) The stocks underlying the Index Components must be U.S. 
exchange listed and must meet the following additional criteria: (1) 
Minimum market capitalization of at least $5 billion; (2) minimum 
trading volume of at least 50 million shares during the preceding 6 
months; (3) minimum average daily trading volume of one million shares 
during the preceding 6 months; (4) minimum average daily trading value 
of at least $10 million during the preceding 6 months; (5) share price 
of $10 or higher; and (6) the availability of U.S. exchange-listed 
options.
    (7) The Sub-Adviser will seek a correlation over time of 0.95 or 
better between the Fund's performance and the performance of the Index. 
A figure of 1.00 would represent perfect correlation.
    (8) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities. In addition, the Fund's investments will 
be consistent with the Fund's investment objective and will not be used 
to enhance leverage. The Fund will not invest in non-U.S. equity 
securities.
    (9) Swaps, options (other than options in which the Fund 
principally will invest), and futures contracts will not be included in 
the Fund's investment, under normal market circumstances, of at least 
80% of its total assets in component securities that comprise the Index 
and in T-Bills.
    (10) A minimum of 100,000 Shares of the Fund will be outstanding as 
of the start of trading on the Exchange.

[[Page 4960]]

    (11) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act,\34\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \34\ 17 CFR 240.10A-3.
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    The Commission further notes that the Fund and the Shares must 
comply with all other requirements as set forth in Exchange rules 
applicable to Investment Company Units and prior Commission releases 
relating to, and orders approving, the listing rules (and amendments 
thereto) applicable to the listing and trading of Investment Company 
Units. This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \35\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \35\ 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,\36\ that the proposed rule change (SR-NYSEArca-2012-109) be, and 
it hereby is, approved.
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    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01223 Filed 1-22-13; 8:45 am]
BILLING CODE 8011-01-P


