
[Federal Register Volume 78, Number 179 (Monday, September 16, 2013)]
[Notices]
[Pages 56970-56977]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22397]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70356; File No. SR-NYSEArca-2013-86]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To List and Trade Shares of Franklin Short 
Duration U.S. Government ETF Under NYSE Arca Equities Rule 8.600

September 10, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on August 27, 2013, 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 shares of the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): Franklin 
Short Duration U.S. Government ETF. 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 shares (``Shares'') of the 
following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares\3\ on the Exchange: Franklin 
Short Duration U.S. Government ETF (the ``Fund'').\4\ The Shares of the 
Fund will be offered by Franklin ETF Trust (the ``Trust''). The Trust 
will be registered with the Commission as an open-end

[[Page 56971]]

management investment company.\5\ Franklin Advisers, Inc. will serve as 
the investment manager to the Fund (the ``Manager''). Franklin 
Templeton Distributors, Inc. (the ``Distributor'') will be the 
principal underwriter and distributor of the Fund's Shares. Franklin 
Templeton Services, LLC (the ``Administrator'') will serve as 
administrator for the Fund and The Bank of New York Mellon will serve 
as sub-administrator for the Fund. The Bank of New York Mellon will 
serve as the custodian and transfer agent for the Fund (``Custodian'' 
and ``Transfer Agent,'' respectively).
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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 goal 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 Securities and Exchange Commission (``Commission'') has 
previously approved listing and trading on the Exchange of a number 
of actively managed funds under Rule 8.600. See, e.g., Securities 
Exchange Act Release Nos. 57801 (May 8, 2008), 73 FR 27878 (May 14, 
2008) (SR-NYSEArca-2008-31) (order approving Exchange listing and 
trading of twelve actively-managed funds of the WisdomTree Trust); 
60460 (August 7, 2009), 74 FR 41468 (August 17, 2009) (SR-NYSEArca-
2009-55) (order approving listing and trading of Dent Tactical ETF); 
63076 (October 12, 2010), 75 FR 63874 (October 18, 2010) (SR-
NYSEArca-2010-79) (order approving listing and trading of Cambria 
Global Tactical ETF).
    \5\ The Trust will be registered under the 1940 Act. On February 
7, 2013, the Trust filed a registration statement on Form N-1A under 
the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 77a), and 
under the 1940 Act, relating to the Fund (File Nos. 333-186504 and 
811-22801) (the ``Registration Statement''). The description of the 
operation of the Trust and the Fund herein is based, in part, on the 
Registration Statement. The Trust filed an application on June 8, 
2012, and amendments to the application on October 26, 2012 and 
December 18, 2012, requesting an Order under Section 6(c) of the 
1940 Act for exemptions from various provisions of the 1940 Act and 
rules thereunder (File No. 812-14042) (``Exemptive Application''). 
The Commission has issued an order granting certain exemptive relief 
to the Trust under the 1940 Act. See Investment Company Act Release 
No. 30350 (January 15, 2013) (``Exemptive Order''). Investments made 
by the Fund will comply with the conditions set forth in the 
Exemptive Application and the Exemptive Order.
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    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 investment adviser and the broker-dealer with 
respect to access to information concerning the composition of and/or 
changes to such investment company portfolio. 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 nonpublic information regarding 
the open-end fund's portfolio.\6\ Commentary .06 to Rule 8.600 is 
similar to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule 
5.2(j)(3); however, Commentary .06 in connection with the establishment 
of a ``fire wall'' between the investment adviser and the broker-dealer 
reflects the applicable open-end fund's portfolio, not an underlying 
benchmark index, as is the case with index-based funds. The Manager is 
not registered as a broker-dealer but it is affiliated with a broker-
dealer and has represented that it has implemented a fire wall with 
respect to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio. In the 
event (a) the Manager or any sub-adviser becomes newly affiliated with 
a broker-dealer, or (b) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with a broker-dealer, they will 
implement a fire wall with respect to their relevant personnel or 
broker-dealer affiliate 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 (the ``Advisers 
Act''). As a result, the Manager 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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Fund Investments
    According to the Registration Statement, the Fund's investment goal 
is to provide a high level of current income as is consistent with 
prudent investing, while seeking preservation of capital. The Fund will 
seek to achieve its investment goal by investing, under normal market 
conditions,\7\ at least 80% of its net assets in securities issued or 
guaranteed by the U.S. government, its agencies, or instrumentalities. 
The Fund currently targets an estimated average portfolio duration\8\ 
of three (3) years or less. The Manager calculates the duration of the 
portfolio by modeling the cash flows of all the individual holdings, 
including the impact of prepayment variability and coupon adjustments 
where applicable, to determine the duration of each holding and then 
aggregating based on the size of the position. In performing this 
duration calculation, the Manager utilizes third party models as 
adjusted based on the Manager's market expectations with respect to 
interest rates, borrower-level factors affecting credit availability, 
the condition of the housing market as well as broader economic 
factors, among other things, consistent with industry practice. Because 
the Fund publishes its portfolio on a daily basis, market participants 
have the ability to assess whether the duration calculation is 
consistent with generally accepted market calculations of duration.
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    \7\ The term ``under normal market conditions'' includes, but is 
not limited to, the absence of extreme volatility or trading halts 
in the equity markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
    \8\ In comparison to maturity (which is the date on which a debt 
instrument ceases and the issuer is obligated to repay the principal 
amount), duration is a measure of the expected price volatility of a 
debt instrument as a result of changes in market rates of interest, 
based on the weighted average timing of the instrument's expected 
principal and interest payments and other factors. Duration differs 
from maturity in that it considers a security's yield, coupon 
payments, principal payments, call features and coupon adjustments 
in addition to the amount of time until the security finally 
matures. As the value of a security changes over time, so will its 
duration. Prices of securities with lower durations tend to be less 
sensitive to interest rate changes than securities with higher 
durations. In general, a portfolio of securities with a lower 
duration can be expected to be less sensitive to interest rate 
changes than a portfolio with a higher duration.
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    According to the Registration Statement, the Fund generally will 
invest a substantial portion of its assets in mortgage-backed 
securities\9\ issued or guaranteed by the U.S. government, its agencies 
or instrumentalities, including adjustable rate mortgage securities, 
but the Fund also will invest in direct obligations of the U.S. 
government (such as Treasury bonds, bills and notes) and in securities 
issued or guaranteed by the U.S. government, its agencies or 
instrumentalities, including government sponsored entities. All of the 
Fund's principal investments will be debt securities, including bonds, 
notes and debentures.
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    \9\ Mortgage-backed securities represent an interest in a pool 
of mortgage loans made by banks and other financial institutions to 
finance purchases of homes, commercial buildings and other real 
estate. The individual mortgage loans are packaged or ``pooled'' 
together for sale to investors. As the underlying mortgage loans are 
paid off, investors receive principal and interest payments. These 
securities may be fixed-rate or adjustable-rate mortgage-backed 
securities (ARMS). Further, these securities can also be categorized 
as collateralized mortgage obligations (CMOs) or real estate 
mortgage investment conduits (REMICs) where they are divided into 
multiple classes with each class being entitled to a different share 
of the principal and/or interest payments received from the pool of 
underlying assets.
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    According to the Registration Statement, the mortgage-backed

[[Page 56972]]

securities in which the Fund will substantially invest are issued or 
guaranteed by the U.S. government, its agencies or instrumentalities, 
such as Ginnie Mae and U.S. government-sponsored entities, such as 
Fannie Mae and Freddie Mac. Most mortgage-backed securities are pass-
through securities, which means they provide investors with monthly 
payments consisting of a pro rata share of both regular interest and 
principal payments as well as unscheduled prepayments on the underlying 
mortgage loans. Because prepayment rates of individual mortgage pools 
vary widely, the average life of a particular pool cannot be predicted 
accurately. Adjustable-rate mortgage-backed securities include ARMS and 
other mortgage-backed securities with interest rates that adjust 
periodically to reflect prevailing market interest rates.
    According to the Registration Statement, the Fund may invest in 
securities with various levels of credit support \10\ including, but 
not limited to, those issued or guaranteed by the Federal Home Loan 
Banks, Veterans Administration, Federal Housing Authority, Export-
Import Bank of the United States, Overseas Private Investment 
Corporation, Commodity Credit Corporation, Small Business 
Administration, U.S. Agency for International Development, Tennessee 
Valley Authority and Farm Credit System.
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    \10\ Government agency or instrumentality securities have 
different levels of credit support. For example, Ginnie Mae 
securities carry a guarantee as to the timely repayment of principal 
and interest that is backed by the full faith and credit of the U.S. 
government. However, the full faith and credit guarantee does not 
apply to the market prices and yields of the Ginnie Mae securities 
or to the net asset value (``NAV''), trading price or performance of 
the Fund, which will vary with changes in interest rates and other 
market conditions. Fannie Mae and Freddie Mac pass-through mortgage 
certificates are backed by the credit of the respective 
instrumentality and are not guaranteed by the U.S. government. Other 
securities issued by government agencies or instrumentalities, 
including government sponsored entities, may only be backed by the 
credit worthiness of the issuing institution, not the U.S. 
Government, or the issuers may have the right to borrow from the 
U.S. Treasury to meet its obligations.
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    The Fund may invest in callable agency securities, which give the 
issuer (the U.S. government agency) the right to redeem the security 
prior to maturity. The Fund may also invest in U.S. government 
inflation-indexed securities.\11\ Additionally, the Fund may invest, 
without limitation, in mortgage dollar rolls.\12\ However, the Fund 
will invest only in covered mortgage dollar rolls, meaning that the 
Fund establishes a segregated account with liquid securities equal in 
value to the securities it will repurchase. The Fund intends to enter 
into mortgage dollar rolls only with high quality securities dealers 
and banks as determined by the Manager under board approved 
counterparty review procedures.
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    \11\ Inflation-indexed securities are fixed-income securities 
that are structured to provide protection against inflation. The 
value of the security's principal or the interest income paid on the 
security is adjusted to track changes in an official inflation 
measure. The U.S. Treasury uses the Consumer Price Index for Urban 
Consumers as the inflation measure.
    \12\ In a mortgage dollar roll, the Fund will sell (or buy) 
mortgage-backed securities for delivery on a specified date and 
simultaneously contract to repurchase (or sell) substantially 
similar (same type, coupon, and maturity) securities on a future 
date. During the period between a sale and repurchase, the Fund will 
forgo principal and interest paid on the mortgage-backed securities. 
The Fund will earn or lose money on a mortgage dollar roll from any 
difference between the sale price and the future purchase price. In 
a sale and repurchase, the Fund also earns money on the interest 
earned on the cash proceeds of the initial sale.
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Other Investments
    According to the Registration Statement, when the Manager believes 
market or economic conditions are unfavorable for investors, the 
Manager may invest up to 100% of the Fund's assets in a temporary 
defensive manner by holding all or a substantial portion of its assets 
in cash, cash equivalents or other high quality short-term investments. 
Temporary defensive investments generally may include short-term U.S. 
government securities, high-grade commercial paper, bank obligations, 
repurchase agreements, money market fund shares (including shares of an 
affiliated money market fund) and other money market instruments. The 
Manager also may invest in these types of securities or hold cash while 
looking for suitable investment opportunities or to maintain 
liquidity.\13\
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    \13\ Circumstances under which the Fund may temporarily depart 
from its normal investment process include, but are not limited to, 
extreme volatility or trading halts in the equity markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance.
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Manager.\14\ 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.\15\
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    \14\ In reaching liquidity decisions, the Manager may consider 
the following factors: the frequency of trades and quotes for the 
security, the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers, and the mechanics of transfer).
    \15\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the 1933 Act).
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    The Fund may invest in other investment companies to the extent 
permitted by the 1940 Act, Commission rules thereunder and exemptions 
thereto. Section 12(d)(1)(A) of the 1940 Act requires that, as 
determined immediately after a purchase is made, (i) not more than 5% 
of the value of the Fund's total assets will be invested in the 
securities of any one investment company, (ii) not more than 10% of the 
value of the Fund's total assets will be invested in 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. Certain exceptions to these limitations may apply, and the 
Fund may also rely on any future applicable Commission rules or orders 
that provide exceptions to these limitations.
    The Fund may invest up to 20% of its net assets in securities not 
issued or guaranteed by the U.S. government, its agencies or 
instrumentalities, including mortgage backed securities. According to 
the Registration Statement, these investments may include investment 
grade debt securities.\16\ The Fund will

[[Page 56973]]

not invest in non-investment grade debt securities. The Fund may also 
lend a portfolio of securities up to 33\1/3\% of the value of its total 
assets (measured at the time of the most recent loan). In exchange, the 
Fund will receive cash collateral from a borrower at least equal to the 
value of the security loaned by the Fund. Cash collateral typically 
consists of any combination of cash, securities issued by the U.S. 
government and its agencies and instrumentalities, and irrevocable 
letters of credit. Such securities will only be loaned to parties that 
meet creditworthiness standards approved by the Fund's board. The Fund 
may also invest in multi-class pass-through securities, when-issued, 
delayed delivery and to-be-announced transactions; callable securities; 
Franklin Templeton money market funds; repurchase agreements; U.S. 
Treasury rolls; unrated debt securities deemed by the Manager to be of 
comparable quality to investment grade debt securities; variable rate 
securities; and zero coupon, deferred interest and pay-in-kind bonds.
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    \16\ Debt securities that are rated Baa or higher by Moody's, 
BBB or higher by S&P, or unrated securities deemed by the Manager to 
be of comparable quality, are considered to be ``investment grade.''
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    The Fund will not invest in equity securities other than possible 
investments in shares of other investment companies as noted above.
    The Fund will be classified as a ``diversified'' investment company 
under the 1940 Act.\17\
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    \17\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
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    The Fund will not invest more than 25% of the Fund's net assets in 
securities of issuers in any one industry (other than securities issued 
or guaranteed by the U.S. government or any of its agencies or 
instrumentalities or securities of other investment companies, whether 
registered or excluded from registration under Section 3(c) of the 1940 
Act).\18\
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    \18\ 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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    Additionally, the Fund will not purchase the securities of any one 
issuer (other than the U.S. government or any of its agencies or 
instrumentalities or securities of other investment companies, whether 
registered or excluded from registration under Section 3(c) of the 1940 
Act) if immediately after such investment (i) more than 5% of the value 
of the Fund's total assets would be invested in such issuer or (ii) 
more than 10% of the outstanding voting securities of such issuer would 
be owned by the Fund, except that up to 25% of the value of the Fund's 
total assets may be invested without regard to such 5% and 10% 
limitations.
    The Fund intends to qualify for and to elect treatment as a 
separate regulated investment company (``RIC'') under Subchapter M of 
the Internal Revenue Code.\19\
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    \19\ 26 U.S.C. 851 et seq.
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    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. The Exchange represents 
that, for initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 \20\ under the Act, as provided by NYSE Arca 
Equities Rule 5.3. A minimum of 100,000 Shares for the Fund will be 
outstanding at the commencement of trading on the Exchange. The 
Exchange will obtain a representation from the issuer of the Shares 
that the NAV 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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    \20\ 17 CFR 240.10A-3.
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Investments in Derivatives
    Consistent with the Exemptive Order, to pursue its investment goal, 
the Fund may invest in interest rate, fixed income index, bond and U.S. 
Treasury futures contracts. The use of these derivative transactions 
may allow the Fund to obtain net long or short exposures to selected 
interest rates or durations. These derivatives may be used to hedge 
risks associated with the Fund's other portfolio investments. The Fund 
expects that no more than 20% of the value of the Fund's net assets 
will be invested in derivative instruments.
    The Fund will not invest in options, futures contracts or swap 
agreements other than as set forth in the preceding paragraph. The 
Fund's investments will be consistent with its investment goal and will 
not be used to enhance leverage.
Creation and Redemption of Shares
    According to the Registration Statement, the Fund will issue and 
redeem Shares on a continuous basis at NAV in aggregations of 50,000 
Shares (``Creation Units'').
    The consideration for purchase of Creation Units of the Fund will 
consist of (i) a specified all-cash payment (the ``Cash Deposit'') or 
(ii) a designated portfolio of securities (including any portion of 
such securities for which cash may be substituted) (the ``Deposit 
Securities''), together with the deposit of a specified cash payment 
(the ``Cash Component''). The Cash Component will be equal to the 
difference between the NAV of the Shares (per Creation Unit) and the 
market value of the Deposit Securities. Together, the Deposit 
Securities and the Cash Component or, alternatively, the Cash Deposit, 
constitute the ``Fund Deposit,'' which will be applicable to creation 
requests received in proper form. The Fund Deposit represents the 
minimum initial and subsequent investment amount for a Creation Unit of 
the Fund.
    The Manager will make available through the National Securities 
Clearing Corporation (``NSCC'') on each business day prior to the 
opening of business on the Exchange, the list of names and the required 
number or par value of each Deposit Security and the amount of the Cash 
Component (or Cash Deposit) to be included in the current Fund Deposit 
(based on information as of the end of the previous business day for 
the Fund). Such Fund Deposit is applicable to purchases of Creation 
Units of Shares until such time as the next-announced Fund Deposit is 
made available.
    To be eligible to place orders with the Distributor and to create a 
Creation Unit of the Fund, an entity must be: (i) a broker-dealer or 
other participant in the clearing process through the Continuous Net 
Settlement System of the NSCC (the ``Clearing Process''), a clearing 
agency that is registered with the Commission, or (ii) a Depositary 
Trust Company (``DTC'') Participant, and must have executed an 
agreement with the Distributor, with respect to creations and 
redemptions of Creation Units. An entity that satisfies these 
requirements is known as an ``Authorized Participant.'' Creation Units 
may be purchased only by or through an Authorized Participant.
    To initiate an order for a Creation Unit, an Authorized Participant 
must submit to the Distributor or its agent an irrevocable order to 
purchase Shares, in proper form, before 4:00 p.m., Eastern time (the 
``Cut-off Time'') on any business day to receive that day's NAV. Once 
the Fund has accepted an order, upon the next determination of the NAV 
of the Shares, the Fund will confirm the issuance of a Creation Unit, 
against receipt of payment, at such NAV. Except as provided in the 
Registration Statement, a Creation Unit will not be issued until the 
transfer of good title to the Fund of the Deposit Securities and the 
payment of the Cash Component (or Cash Deposit) have been completed. A 
standard creation transaction fee will be imposed to offset the 
transfer and other transaction costs associated with the issuance of 
Creation Units.

[[Page 56974]]

    Shares of the Fund may be redeemed by Authorized Participants only 
in Creation Units at their NAV next determined after receipt of a 
redemption request in proper form by the Distributor and only on a 
business day. The Manager will make available through the NSCC, prior 
to the opening of business on the Exchange on each business day, the 
designated portfolio of securities (including any portion of such 
securities for which cash may be substituted) that will be applicable 
to redemption requests received in proper form on that day (``Fund 
Securities''), and an amount of cash equal to the difference between 
the NAV of the Shares being redeemed, as next determined after the 
receipt of a redemption request in proper form, and the value of Fund 
Securities.
    According to the Registration Statement, such Fund Securities and 
the corresponding cash amount will be applicable, in order to effect 
redemptions of Creation Units of the Fund, until such time as the next 
announced composition of the Fund Securities and cash amount is made 
available. Fund Securities received on redemption may not be identical 
to Deposit Securities that are applicable to creations of Creation 
Units.
    When partial or full cash redemptions of Creation Units are 
available or specified, they will be effected in essentially the same 
manner as in-kind redemptions. In the case of partial or full cash 
redemption, the Authorized Participant receives the cash equivalent of 
the Fund Securities it would otherwise receive through an in-kind 
redemption, plus the same cash amount to be paid to an in-kind 
redeemer.
    Redemption requests for Creation Units of the Fund must be 
submitted to the Distributor by or through an Authorized Participant. 
An Authorized Participant must submit an irrevocable request to redeem 
Shares generally before 4:00 p.m., Eastern time on any business day, in 
order to receive that day's NAV. A standard redemption transaction fee 
will be imposed to offset transfer and other transaction costs that may 
be incurred by the Fund.
    The right of redemption may be suspended or the date of payment 
postponed with respect to the Fund: (i) For any period during which the 
Exchange is closed (other than customary weekend and holiday closings); 
(ii) for any period during which trading on the Exchange is suspended 
or restricted; (iii) for any period during which an emergency exists as 
a result of which disposal of the Fund's portfolio securities or 
determination of its NAV is not reasonably practicable; or (iv) in such 
other circumstance as is permitted by the Commission.
    Detailed descriptions of the Fund's procedures for creating and 
redeeming Shares, transaction fees and expenses, dividends, 
distributions, taxes, risks, and reports to be distributed to 
beneficial owners of the Shares can be found in the Registration 
Statement or on the Web site for the Fund (www.franklintempleton.com), 
as applicable.
Determination of Net Asset Value
    According to the Registration Statement, the Fund will calculate 
the NAV per Share each business day normally as of the close of regular 
trading on the New York Stock Exchange (``NYSE''), normally 4:00 p.m. 
Eastern time. The Fund will not calculate the NAV on days the NYSE is 
closed for trading. The NAV of the Fund will be determined by deducting 
the Fund's liabilities from the total assets of the portfolio. The NAV 
per Share will be determined by dividing the total NAV of the Fund by 
the number of Shares outstanding.
    When determining its NAV, the Fund will value cash and receivables 
at their realizable amounts, and will record interest as accrued and 
dividends on the ex-dividend date. The Fund will generally utilize two 
independent pricing services to assist in determining a current market 
value for each security.
    According to the Registration Statement, generally, trading in 
corporate bonds, U.S. government securities and money market 
instruments is substantially completed each day at various times before 
the close of the NYSE. The value of these securities as of such times 
generally is used in computing the NAV. Occasionally, events affecting 
the values of these securities may occur between the times at which the 
values are determined and the close of the NYSE. The Fund will rely on 
third-party pricing vendors to monitor for events materially affecting 
the value of these securities during this period. If an event occurs, 
the third-party pricing vendors will provide revised values to the 
Fund, which will be incorporated into the calculation of the Fund's 
NAV.
    The Fund will have procedures, approved by the board of trustees, 
to determine the fair value of individual securities and other assets 
for which market prices are not readily available or which may not be 
reliably priced. According to the Registration Statement, some methods 
for valuing these securities may include: fundamental analysis 
(earnings multiple, etc.), matrix pricing, discounts from market prices 
of similar securities, or discounts applied due to the nature and 
duration of restrictions on the disposition of the securities.
    Mortgage pass-through securities, other mortgage-backed securities, 
CMOs and asset-backed securities generally trade in the over-the-
counter market rather than on a securities exchange. The Fund 
predominantly values these portfolio securities by relying on 
independent pricing services, but may also utilize quotations from bond 
dealers and information with respect to bond and note transactions when 
prices are not readily available from or reliably priced by such 
independent pricing services, all in accordance with valuation 
procedures approved by the Fund's board. The Fund's pricing services 
will use valuation models or matrix pricing to determine current value. 
In general, they will use information with respect to comparable bond 
and note transactions, quotations from bond dealers or by reference to 
other securities that are considered comparable in such characteristics 
as rating, interest rate, maturity date, option adjusted spread models, 
prepayment projections, interest rate spreads and yield curves. Matrix 
pricing is considered a form of fair value pricing.
    The Fund will not invest in equity securities other than possible 
investments in shares of other investment companies as noted above. 
Redeemable securities issued by open-end investment companies are 
valued on any given business day using the respective closing NAVs of 
such companies for purchase and/or redemption orders placed on that day 
in accordance with valuation procedures approved by the Fund's board. 
For securities that are traded on an exchange, the Fund will value 
those securities at the last quoted sale price of the day in accordance 
with valuation procedures approved by the Fund's board.
Availability of Information
    The Fund's Web site (www.franklintempleton.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 
Fund's Web site will include additional quantitative information 
updated on a daily basis, including, for the Fund, (1) the prior 
business day's NAV and the market closing price or mid-point of the 
bid/ask spread at the time of calculation of such

[[Page 56975]]

NAV (the ``Bid/Ask Price''),\21\ and a calculation of the premium or 
discount of the market closing price or Bid/Ask Price against the NAV, 
and (2) a table showing the number of days the Market Price (as defined 
by the Commission in Form N-1A) \22\ of the Fund shares was greater 
than the Fund's NAV and the number of days it was less than the Fund's 
NAV (i.e., premium or discount) for the most recently completed 
calendar year, and the most recently completed calendar quarters since 
that year (or the life of the Fund, if shorter). 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.\23\
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    \21\ The Bid/Ask Price of the Fund will be determined using the 
mid-point 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.
    \22\ The Commission has defined ``Market Price'' in Form N-1A as 
the ``last reported sale price at which Exchange-Traded Fund shares 
trade on the principal U.S. market on which the Fund's Shares are 
traded during a regular trading session or, if it more accurately 
reflects the current market value of the Fund's Shares at the time 
the Fund uses to calculate its net asset value, a price within the 
range of the highest bid and lowest offer on the principal U.S. 
market on which the Fund's Shares are traded during a regular 
trading session.''
    \23\ Under accounting procedures to be 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 Manager will disclose for each portfolio 
security or other financial instrument of the Fund the following 
information on the Fund's Web site: Ticker symbol (if applicable), name 
of security or financial instrument, number of shares or dollar value 
of securities and financial instruments held in the portfolio, and 
percentage weighting of the security and financial instrument in the 
portfolio. The Web site information will be publicly available at no 
charge.
    In addition, for in-kind creations, a basket composition file, 
which will include the security names and share quantities to deliver 
in exchange for Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the Exchange via the NSCC. The basket will represent one Creation Unit 
of the Fund.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's 
Form N-CSR and Form N-SAR, filed twice a year. The Trust's SAI and 
Shareholder Reports will be 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 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 at least every 15 seconds during the Core Trading Session 
by one or more major market data vendors.\24\ 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.
---------------------------------------------------------------------------

    \24\ Currently, it is the Exchange's understanding that several 
major market data vendors widely disseminate Portfolio Indicative 
Values taken from CTA or other data feeds.
---------------------------------------------------------------------------

    The intra-day, closing and settlement prices of the portfolio 
securities and other Fund investments will also be readily available 
from the national securities exchanges trading such securities, 
automated quotation systems, published or other public sources, or on-
line information services such as Bloomberg or Reuters.
    Additional information regarding the Trust 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.
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.\25\ 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.
---------------------------------------------------------------------------

    \25\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

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. Eastern time 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 represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\26\ 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.
---------------------------------------------------------------------------

    \26\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and

[[Page 56976]]

investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations. FINRA, on 
behalf of the Exchange, will communicate as needed regarding trading in 
the Shares with other markets and other entities that are members of 
the Intermarket Surveillance Group (``ISG'') and FINRA, on behalf of 
the Exchange, may obtain trading information regarding trading in the 
Shares from such markets and other entities. In addition, the Exchange 
may obtain information regarding trading in the Shares from markets and 
other entities that are members of ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement.\27\
---------------------------------------------------------------------------

    \27\ For a list of the current members of ISG, see 
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 (``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 Act. The 
Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m. Eastern time each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \28\ 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.
---------------------------------------------------------------------------

    \28\ 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 Shares will be subject to the existing trading 
surveillances, administered by FINRA on behalf of the Exchange, which 
are designed to detect violations of Exchange rules and applicable 
federal securities laws. The Manager is not registered as a broker-
dealer but it is affiliated with a broker-dealer and has represented 
that it has implemented a fire wall with respect to its broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to the portfolio.
    FINRA, on behalf of 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.
    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 at least every 15 seconds 
during the Core Trading Session by one or more major market data 
vendors. On each business day, before commencement of trading in Shares 
on a national securities exchange, the Fund will disclose on its Web 
site 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 that business day. The intra-day, closing and settlement prices of 
the portfolio securities and other Fund investments will also be 
readily available from the national securities exchanges trading such 
securities, automated quotation systems, published or other public 
sources, or on-line information services such as Bloomberg or Reuters. 
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. The Web site for the Fund will include 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. Under normal market conditions, at least 
80% of the Fund's net assets will be invested in securities issued or 
guaranteed by the U.S. government, its agencies, or instrumentalities. 
As noted above, the Shares will be subject to the existing trading 
surveillances, administered by FINRA on behalf of the Exchange, which 
are designed to detect violations of Exchange rules and applicable 
federal securities laws and FINRA, on behalf of the Exchange, may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the

[[Page 56977]]

Exchange has entered into a comprehensive surveillance sharing 
agreement. In addition, as noted above, investors will have ready 
access to information regarding the Fund's holdings, the Portfolio 
Indicative Value and quotation and last sale information for the 
Shares. The Fund may invest up to 15% of its net assets in illiquid 
securities (calculated at the time of investment), including Rule 144A 
securities deemed illiquid by the Manager. The Fund expects that no 
more than 20% of the value of the Fund's net assets will be invested in 
derivative instruments as discussed above. Such derivative investments 
will be consistent with the Fund's investment goal and will not be used 
to enhance leverage.

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 purpose of the Act. The Exchange notes that the 
proposed rule change 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.

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-2013-86 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-2013-86. 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 on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted 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-2013-86 and should 
be submitted on or before October 7, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22397 Filed 9-13-13; 8:45 am]
BILLING CODE 8011-01-P


