
[Federal Register Volume 79, Number 38 (Wednesday, February 26, 2014)]
[Notices]
[Pages 10848-10861]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71588; File No. SR-NYSEArca-2014-10]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Adopt NYSE Arca Equities Rule 8.900, Which 
Permits the Listing and Trading of Managed Portfolio Shares, and To 
List and Trade Shares of the ActiveShares\SM\ Large-Cap Fund, 
ActiveShares\SM\ Mid-Cap Fund, and ActiveShares\SM\ Multi-Cap Fund 
Pursuant to That Rule

February 20, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on February 7, 2014, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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 adopt new NYSE Arca Equities Rule 8.900 to 
permit it to list and trade Managed Portfolio Shares, which are shares 
of actively managed exchange-traded funds (``ETFs'') for which the 
portfolio is disclosed quarterly. In addition, the Exchange proposes to 
list and trade shares of the following under proposed NYSE Arca 
Equities Rule 8.900: ActiveShares\SM\ Large-Cap Fund; ActiveShares\SM\ 
Mid-Cap Fund; and ActiveShares\SM\ Multi-Cap Fund.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.nyse.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to add new NYSE Arca Equities Rule 8.900 for 
the purpose of permitting the listing and trading, or trading pursuant 
to unlisted trading privileges (``UTP''), of Managed Portfolio Shares, 
which are securities issued by an actively managed open-end investment 
management company.\4\ The Exchange also proposes to amend NYSE Arca 
Equities Rule 7.34 (Trading Sessions) to reference securities described 
in proposed NYSE Arca Equities Rule 8.900 in Rule 7.34(a)(4)(A) 
relating to trading halts for trading pursuant to UTP during the 
Exchange's Opening Session.
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    \4\ A Managed Portfolio Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3) (``Index ETFs''), 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.
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    In addition to the above-mentioned proposed rule changes, the 
Exchange proposes to list and trade shares (``Shares'') of the 
following under proposed NYSE Arca Equities Rule 8.900: 
ActiveShares\SM\ Large-Cap Fund; ActiveShares\SM\ Mid-Cap Fund; and 
ActiveShares\SM\ Multi-Cap Fund (each a ``Fund'' and, collectively, the 
``Funds'').
Proposed Listing Rules
    Proposed Rule 8.900(a) provides that the Corporation will consider 
for trading, whether by listing or pursuant to UTP, Managed Portfolio 
Shares that meet the criteria of Rule 8.900.
    Proposed Rule 8.900(b) provides that Rule 8.900 is applicable only 
to Managed Portfolio Shares and that, except to the extent inconsistent 
with Rule 8.900, or unless the context otherwise requires, the rules 
and procedures of the Corporation's Board of Directors shall be 
applicable to the trading on the Corporation of such securities. 
Proposed Rule 8.900(b) provides further that Managed Portfolio Shares 
are included within the definition of ``security'' or ``securities'' as 
such terms are used in the Rules of the Corporation.
    Proposed Definitions. Proposed Rule 8.900(c)(1) defines the term 
``Managed Portfolio Share'' as a security that (a) is issued by a 
registered investment company (``Investment Company'') organized as an 
open-end management investment company or similar entity, that invests 
in a portfolio of securities selected by the Investment Company's 
investment adviser consistent with the Investment Company's investment 
objectives and policies; (b) is issued in any size amount for a cash 
amount equal to the next determined net asset value (``NAV''); (c) may 
be redeemed for cash by any Retail Investor (as defined below) in any 
size less than a Redemption Unit (as defined below) for a cash amount 
equal to the next determined NAV; and (d) when aggregated in a number 
of shares equal to a Redemption Unit or multiples thereof, may be 
redeemed at a holder's request, which holder will be paid though a 
blind trust established for its benefit a portfolio of securities and/
or cash with a value equal to the next determined NAV.
    Proposed Rule 8.900(c)(2) defines the term ``Retail Investor'' as 
(i) a natural person; (ii) a trust established exclusively for the 
benefit [sic] a natural person or a group of related family members; or 
(iii) a tax deferred retirement plan where investments are selected by 
a natural person purchasing for its own account.
    Proposed Rule 8.900(c)(3) defines the term ``Portfolio Indicative 
Value'' as the estimated indicative value of an Managed Portfolio Share 
based on all of the issuer's holdings as of the close of business on 
the prior business day.
    Proposed Rule 8.900(c)(4) defines the term ``Redemption Unit'' as a 
specified number of Managed Portfolio Shares used for determining 
whether a Retail Investor may redeem for cash.
    Proposed Rule 8.900(c)(5) defines the term [sic]Reporting 
Authority'' in respect of a particular series of Managed Portfolio 
Shares as a reporting service designated by the issuer and acceptable 
to the Corporation or by the exchange

[[Page 10849]]

that lists a particular series of Managed Portfolio Shares (if the 
Corporation is trading such series pursuant to UTP) as the official 
source for calculating and reporting information relating to such 
series, including, but not limited to, the Portfolio Indicative Value, 
NAV, or other information relating to the issuance, redemption or 
trading of Managed Portfolio Shares. A series of Managed Portfolio 
Shares may have more than one Reporting Authority, each having 
different functions.
    Proposed Rule 8.900(d) sets forth initial and continued listing 
criteria applicable to Managed Portfolio Shares. Proposed Rule 
8.900(d)(1) provides that, for each series of Managed Portfolio Shares, 
the Corporation will establish a minimum number of Managed Portfolio 
Shares required to be outstanding at the time of commencement of 
trading on the Corporation. In addition, the Corporation will obtain a 
representation from the issuer of each series of Managed Portfolio 
Shares that the NAV per share for the series will be calculated daily 
and that the NAV will be made available to all market participants at 
the same time.\5\
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    \5\ NYSE Arca Equities Rule 7.34(a)(5) (``Trading Halts of 
Derivative Securities Products Listed on the NYSE Arca 
Marketplace)'' provides that, with respect to Derivative Securities 
Products listed on the NYSE Arca Marketplace for which a net asset 
value is disseminated, if the Exchange becomes aware that the a net 
asset value is not being disseminated to all market participants at 
the same time, it will halt trading in the affected Derivative 
Securities Product on the NYSE Arca Marketplace until such time as 
the a net asset value is available to all market participants.
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    Proposed Rule 8.900(d)(2) provides that each series of Managed 
Portfolio Shares will be listed and traded subject to application of 
the following continued listing criteria. Proposed Rule 8.900(d)(2)(A) 
provides that the Portfolio Indicative Value for Managed Portfolio 
Shares will be widely disseminated by one or more major market data 
vendors at least every 15 seconds during Core Trading Session.
    Proposed Rule 8.900(d)(2)(B) provides that the Corporation will 
consider the suspension of trading in or removal from listing of a 
series of Managed Portfolio Shares under any of the following 
circumstances: (i) if, following the initial twelve-month period after 
commencement of trading on the Exchange of a series of Managed 
Portfolio Shares, there are fewer than 50 beneficial holders of the 
series of Managed Portfolio Shares for 30 or more consecutive trading 
days; (ii) if the value of the Portfolio Indicative Value is no longer 
calculated or made available to all market participants at the same 
time; (iii) if the Investment Company issuing the Managed Portfolio 
Shares has failed to file any filings required by the Commission or if 
the Corporation is aware that the Investment Company is not in 
compliance with the conditions of any exemptive order or no-action 
relief granted by the Commission to the Investment Company with respect 
to the series of Managed Portfolio Shares; or (iv) if such other event 
shall occur or condition exists which, in the opinion of the 
Corporation, makes further dealings on the Corporation inadvisable.
    Proposed Rule 8.900(d)(2)(C) provides that, if the Portfolio 
Indicative Value of a series of Managed Portfolio Shares is not being 
disseminated as required, the Corporation may halt trading during the 
day in which the interruption to the dissemination of the Portfolio 
Indicative Value occurs. If the interruption to the dissemination of 
the Portfolio Indicative Value persists past the trading day in which 
it occurred, the Corporation will halt trading no later than the 
beginning of the trading day following the interruption. If a series of 
Managed Portfolio Shares is trading on the Corporation pursuant to UTP, 
the Corporation will halt trading in that series as specified in Rule 
7.34(a). In addition, if the Exchange becomes aware that the NAV with 
respect to a series of Managed Portfolio Shares is not disseminated to 
all market participants at the same time, it will halt trading in such 
series until such time as the NAV is available to all market 
participants.
    Proposed Rule 8.900(d)(2)(D) provides that, upon termination of an 
Investment Company, the Corporation requires that Managed Portfolio 
Shares issued in connection with such entity be removed from 
Corporation listing.
    Proposed Rule 8.900(d)(2)(E) provides that voting rights shall be 
as set forth in the applicable Investment Company prospectus. Proposed 
Rule 8.600(e) relates to limitation of Corporation liability.
    Proposed Rule 8.900(e), which relates to limitation of corporation 
liability, provides that neither the Corporation, the Reporting 
Authority, nor any agent of the Corporation shall have any liability 
for damages, claims, losses or expenses caused by any errors, 
omissions, or delays in calculating or disseminating any current 
portfolio value; the current value of the portfolio of securities 
required to be deposited to the open-end management investment company 
in connection with issuance of Managed Portfolio Shares; the amount of 
any dividend equivalent payment or cash distribution to holders of 
Managed Portfolio Shares; NAV; or other information relating to the 
purchase, redemption, or trading of Managed Portfolio Shares, resulting 
from any negligent act or omission by the Corporation, the Reporting 
Authority or any agent of the Corporation, or any act, condition, or 
cause beyond the reasonable control of the Corporation, its agent, or 
the Reporting Authority, including, but not limited to, an act of God; 
fire; flood; extraordinary weather conditions; war; insurrection; riot; 
strike; accident; action of government; communications or power 
failure; equipment or software malfunction; or any error, omission, or 
delay in the reports of transactions in one or more underlying 
securities.
    Proposed Commentary .01 to NYSE Arca Equities Rule 8.900 provides 
that the Corporation will file separate proposals under Section 19(b) 
of the Act before the listing and trading of Managed Portfolio Shares. 
Proposed Commentary .02 to NYSE Arca Equities Rule 8.900 provides that 
transactions in Managed Portfolio Shares will occur during the trading 
hours specified in NYSE Arca Equities Rule 7.34(a).
    Proposed Commentary .03 to NYSE Arca Equities Rule 8.900 provides 
that the Exchange will implement written surveillance procedures for 
Managed Portfolio Shares.
    Proposed Commentary .04 to NYSE Arca Equities Rule 8.900 provides 
that Authorized Participants (as described further below) redeeming 
Managed Portfolio Shares will sign an agreement with the applicable 
fund requiring the establishment of a blind trust for the benefit of 
such Authorized Participant that will receive all consideration from 
the issuer in a redemption, which blind trust will be bound not to 
disclose the consideration received in a redemption except as required 
by law and will liquidate any securities received in a redemption in 
accordance with standing instructions for the Authorized Participant.
    Proposed Commentary .05 to NYSE Arca Equities Rule 8.900 provides 
that, if the investment adviser to the Investment Company issuing 
Managed Portfolio 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 and/or changes to such Investment Company 
portfolio. Personnel who make decisions on the Investment Company's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material nonpublic information regarding 
the applicable Investment Company portfolio.

[[Page 10850]]

Other Rules
    The Exchange proposes to amend NYSE Arca Equities Rule 7.34(a)(4) 
to include Managed Portfolio Shares under ``Derivative Securities 
Products'' for purposes of Rule 7.34(a)(4) relating to trading halts 
for trading pursuant to UTP of Derivative Securities Products on the 
Exchange.\6\
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    \6\ The Exchange will propose applicable NYSE Arca Equities 
listing fees for Managed Portfolio Shares in the NYSE Arca Equities 
Schedule of Fees and Charges via a separate proposed rule change.
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Key Features of Managed Portfolio Shares
    While funds issuing Managed Portfolio Shares will be actively-
managed and, to that extent, will be similar to Managed Fund Shares, 
Managed Portfolio Shares differ from Managed Fund Shares in the 
following important respects. First, in contrast to Managed Fund 
Shares, which are actively-managed funds listed and traded under NYSE 
Arca Equities Rule 8.600 \7\ and for which a ``Disclosed Portfolio'' is 
required to be disseminated at least once daily,\8\ the portfolio for 
an issue of Managed Portfolio Shares will be disclosed quarterly in 
accordance with normal disclosure requirements otherwise applicable to 
open-end investment companies registered under the 1940 Act.\9\ Second, 
in connection with the redemption of shares in Redemption Unit size, 
the delivery of any portfolio securities in kind will generally be 
effected through a blind trust for the benefit of the redeeming 
Authorized Participant and the blind trust will liquidate the portfolio 
securities without disclosing the identity of such securities to the 
Authorized Participant. Third, as with traditional open-end investment 
companies, retail investors will be able to redeem shares for cash 
directly from a fund on any day and in any size less than a Redemption 
Unit at the fund's NAV, as described in more detail below. Fourth, 
investors will be able to purchase shares for cash directly from a fund 
in any amount on any day a fund determines its NAV, as described in 
more detail below. Investors may choose to purchase shares directly 
from a fund if they want to assure that they will not purchase shares 
at a premium.
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    \7\ The Commission has previously approved listing and trading 
on the Exchange of a number of issues of Managed Fund Shares 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 of Dent Tactical ETF); 63076 (October 12, 2010), 75 FR 63874 
(October 18, 2010) (SR-NYSEArca-2010-79) (order approving Exchange 
listing and trading of Cambria Global Tactical ETF); 63802 (January 
31, 2011), 76 FR 6503 (February 4, 2011) (SR-NYSEArca-2010-118) 
(order approving Exchange listing and trading of the SiM Dynamic 
Allocation Diversified Income ETF and SiM Dynamic Allocation Growth 
Income ETF).
    \8\ NYSE Arca Equities Rule 8.600(c)(2) defines the term 
``Disclosed Portfolio'' as the identities and quantities of the 
securities and other assets held by the Investment Company that will 
form the basis for the Investment Company's calculation of net asset 
value at the end of the business day. NYSE Arca Equities Rule 
8.600(d)(2)(B)(i) requires that the Disclosed Portfolio will be 
disseminated at least once daily and will be made available to all 
market participants at the same time.
    \9\ A mutual fund is required to file with the Commission its 
complete portfolio schedules for the second and fourth fiscal 
quarters on Form N-SAR under the 1940 Act, and is required to file 
its complete portfolio schedules for the first and third fiscal 
quarters on Form N-Q under the 1940 Act, within 60 days of the end 
of the quarter. Form N-Q requires funds to file the same schedules 
of investments that are required in annual and semi-annual reports 
to shareholders. These forms are available to the public on the 
Commission's Web site at www.sec.gov.
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    For each series of Managed Portfolio Shares, an estimated value, 
defined in the proposed rules as the ``Portfolio Indicative Value,'' 
(``PIV'') that reflects an estimated intraday value of a fund's 
portfolio will be disseminated. The PIV will be based upon all of a 
fund's holdings as of the close of the prior business day and will be 
widely disseminated by one or more major market data vendors at least 
every 15 seconds during the Exchange's Core Trading Session (normally, 
9:30 a.m. to 4:00 p.m., Eastern Time). The dissemination of the PIV 
will allow investors to determine the estimated intra-day value of the 
underlying portfolio of a series of Managed Portfolio Shares on a daily 
basis and will provide a close estimate of that value throughout the 
trading day. The PIV should not be viewed as a ``real-time'' update of 
the NAV per share of each fund because the PIV may not be calculated in 
the same manner as the NAV, which will be computed once a day, 
generally at the end of the business day. Unlike the PIV, which will be 
based on consolidated last sale information, the NAV per share will be 
based on the closing price on the primary market for each portfolio 
security. If there is no closing price for a particular portfolio 
security, such as when it [sic] the subject of a trading halt, a fund 
will use fair value pricing. That fair value pricing will be carried 
over to the next day's PIV until the first trade in that stock is 
reported.
    The Exchange, after consulting with various Lead Market Makers that 
trade ETFs on the Exchange, believes that market makers will be able to 
make efficient and liquid markets priced near the PIV as long as an 
accurate PIV is disseminated every 15 seconds and market makers have 
knowledge of a fund's means of achieving its investment objective, even 
without daily disclosure of a fund's underlying portfolio. The Exchange 
believes that market makers will employ risk-management techniques such 
as ``statistical arbitrage'', which is currently used throughout the 
financial services industry, to make efficient markets in exchange-
traded products.\10\ This ability should permit market makers to make 
efficient markets in an issue of Managed Portfolio Shares without 
knowledge of a fund's underlying portfolio.
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    \10\ Statistical arbitrage enables a trader to construct an 
accurate proxy for another instrument, allowing it to hedge the 
other instrument or buy or sell the instrument when it is cheap or 
expensive in relation to the proxy. Statistical analysis permits 
traders to discover correlations based purely on trading data 
without regard to other fundamental drivers. These correlations are 
a function of differentials, over time, between one instrument or 
group of instruments and one or more other instruments. Once the 
nature of these price deviations have been quantified, a universe of 
securities is searched in an effort to, in the case of a hedging 
strategy, minimize the differential. Once a suitable hedging proxy 
has been identified, a trader can minimize portfolio risk by 
executing the hedging basket. The trader then can monitor the 
performance of this hedge throughout the trade period making 
correction [sic] where warranted.
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    The Exchange understands that traders use statistical analysis to 
derive correlations between different sets of instruments to identify 
opportunities to buy or sell one set of instruments when it is 
mispriced relative to the others. For Managed Portfolio Shares, market 
makers will initially use the knowledge of a fund's means of achieving 
its investment objective, as described in the applicable fund 
registration statement, to construct a hedging proxy for a fund to 
manage a market maker's quoting risk in connection with trading fund 
shares. Market makers will then conduct statistical arbitrage between 
their hedging proxy (for example, the Russell 1000 Index) and shares of 
a fund, buying and selling one against the other over the course of the 
trading day,[sic] They will evaluate how their proxy performed in 
comparison to the price of a fund's shares, and use that analysis as 
well as knowledge of risk metrics, such as volatility and turnover, to 
enhance their proxy calculation to make it a more efficient hedge.
    Market makers have indicated to the Exchange that, after the first 
few days of trading, there will be sufficient data to run a statistical 
analysis which will lead to spreads being tightened substantially 
around the PIV. This is similar to certain other existing exchange 
traded products (for example, ETFs that invest

[[Page 10851]]

in foreign securities that do not trade during U. S. trading hours), in 
which spreads may be generally wider in the early days of trading and 
then narrow as market makers gain more confidence in their real-time 
hedges.
Description of the Funds and the Trust
    The Shares of each Fund will be issued by Precidian ETFs Trust 
(``Trust''), a statutory trust organized under the laws of the State of 
Delaware and registered with the Commission as an open-end management 
investment company.\11\ The investment adviser to the Trust will be 
Precidian Funds LLC (the ''Adviser''). JPMorgan Chase Bank, N.A. (the 
``Transfer Agent'', ``Administrator'', or ``Custodian'') will serve as 
the Funds' transfer agent, administrator and custodian. Foreside Fund 
Services, LLC (``Distributor'') will serve as the distributor of the 
Shares.
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    \11\ The Trust will be registered under the 1940 Act. On January 
22, 2014, 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 Funds (File Nos. 333-171987 
and 811-22524) (the ``Registration Statement''). The Trust filed an 
Application for an Order under Section 6(c) of the 1940 Act for 
exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-14116), dated July 18, 2013 (``Exemptive 
Application''). The Shares will not be listed on the Exchange until 
an order (``Exemptive Order'') under the 1940 Act has been issued by 
the Commission with respect to the Exemptive Application. 
Investments made by the Funds will comply with the conditions set 
forth in the Exemptive Order. The description of the operation of 
the Trust and the Funds herein is based, in part, on the 
Registration Statement and the Exemptive Application.
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    As noted above, proposed Commentary .05 to Rule 8.900 provides 
that, if the investment adviser to the investment company issuing 
Managed Portfolio 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 and/or changes to such investment company 
portfolio.\12\ In addition, proposed Commentary .05 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. Proposed Commentary .05 to Rule 8.900 is similar 
to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule 5.2(j)(3); 
however, Commentary .05 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 Adviser is 
not registered as a broker-dealer or affiliated with a broker-dealer.
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    \12\ 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 Adviser and its related personnel will be 
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 
violations, 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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    In the event (a) the Adviser or any sub-adviser becomes registered 
as a broker-dealer or 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, it will implement a fire wall 
with respect to its relevant personnel or its broker-dealer affiliate 
regarding access to information concerning the composition and/or 
changes to the portfolio, and will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding such portfolio.
    The portfolio for each Fund will consist primarily of stocks in the 
Russell 3000 Index and shares issued by other exchange-traded funds 
(``ETFs'') that invest primarily in shares of issuers in the Russell 
3000 Index (which consists of stocks included in the Russell 1000 Index 
and the Russell 2000 Index).\13\ All exchange-listed equity securities 
in which the Funds will invest will be listed and traded on U.S. 
national securities exchanges.
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    \13\ For purposes of this filing, ETFs include Investment 
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); 
Portfolio Depositary Receipts (as described in NYSE Arca Equities 
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca 
Equities Rule 8.600). All ETFs will be listed and traded on a U.S. 
national securities exchange. The Funds will invest in the 
securities of ETFs registered under the 1940 Act consistent with the 
requirements of Section 12(d)(1) of the 1940 Act, or any rule, 
regulation or order of the Commission or interpretation thereof.
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Description of the Funds
The ActiveShares\SM\ Large Cap Fund
    According to the Registration Statement, the Fund's investment 
objective will be long-term capital appreciation. The Fund will seek to 
achieve its objective by taking long and possibly short positions in 
equity securities or groups of equities that the Fund's portfolio 
managers believe will provide long term capital appreciation. The Fund 
normally will invest at least 80% of its net assets (plus borrowings 
for investment purposes) in stocks included in the Russell 1000 Index 
and ETFs that primarily invest in stocks in the Russell 1000 Index.
    The Fund will target an overall net equity market exposure of 
between 70% to 130%. However, at times the portfolio managers may 
reduce market exposure to less than 70%.
    The Fund will purchase securities that the portfolio managers 
believe are undervalued and sell short securities that the portfolio 
managers believe are overvalued. Under normal market conditions,\14\ 
the Fund's net long equity market exposure will not exceed 130% and its 
net short equity market exposure will not exceed 30%; however, the 
portfolio managers may at times exceed these percentages. The Fund may 
hold a substantial portion of its total assets in cash or cash 
equivalents when it holds significant short positions.\15\
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    \14\ The terms ``normally'' and ``under normal market 
conditions'' include, but are 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.
    \15\ According to the Registration Statement, with respect to 
each of the Funds, selling securities short will allow a Fund to 
more fully exploit insights into securities that a Fund's portfolio 
managers expect to underperform. Short sales generally involve the 
sale of a security that a Fund does not own in hopes of purchasing 
the same security at a later date at a lower price. To make delivery 
to the buyer, a Fund may borrow the security. If so, a Fund is 
obligated to return the security to the lender, which is 
accomplished by a later purchase of the security by a Fund.
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    The Fund may use ETFs to manage the Fund's overall equity market 
and sector exposures. In particular, the portfolio managers may take 
long and short positions in ETFs to increase/decrease equity market/
sector exposures in place of using individual equity securities. The 
ETFs in which the Fund will invest are registered investment companies 
that seek to track the performance of an underlying index. These 
underlying indexes include not only broad-based market indexes but

[[Page 10852]]

more specific indexes as well, including those relating to particular 
sectors, markets, regions or industries.
    The Fund will use a variety of proprietary and non-proprietary 
[sic] analytical methodologies including ``bottom-up'' fundamental 
analysis, macro-economic data, technical analysis, and quantitative 
analysis to determine the ratio of long to short positions. It also 
will use these tools to determine whether a particular stock or group 
of stocks is under-valued or over-valued and, therefore, whether to 
purchase or sell those securities. In reviewing companies, the Fund 
will apply the characteristics identified above on a case-by-case basis 
as the order of importance varies depending on the type of business or 
industry and the company being reviewed.
The ActiveShares\SM\ Mid-Cap Fund
    According to the Registration Statement, the Fund's investment 
objective will be long-term capital appreciation. The Fund will seek to 
achieve its objective by taking long and possibly short positions in 
equity securities or groups of equities that the Fund's portfolio 
managers believe will provide long term capital appreciation. The Fund 
will invest primarily in securities included in the Russell 3000 Index 
and ETFs that primarily invest in stocks in the Russell 3000 Index.
    The Fund will target an overall net equity market exposure of 
between 70% to 130%. However, at times the Fund's portfolio managers 
may reduce market exposure to less than 70%.
    The Fund will purchase securities that the portfolio managers 
believe are undervalued and sell short securities that the portfolio 
managers believe are overvalued. Under normal market conditions, the 
Fund's net long equity market exposure will not exceed 130% and its net 
short equity market exposure will not exceed 30%; however, the 
portfolio managers may at times exceed these percentages. The Fund may 
hold a substantial portion of its total assets in cash or cash 
equivalents when it holds significant short positions.
    The Fund may use ETFs to manage the Fund's overall equity market 
and sector exposures. In particular, the Fund's portfolio managers may 
take long and short positions in ETFs to increase/decrease equity 
market/sector exposures in place of using individual equity securities. 
The ETFs in which the Fund will invest are registered investment 
companies that seek to track the performance of an underlying index. 
These underlying indexes include not only broad-based market indexes 
but more specific indexes as well, including those relating to 
particular sectors, markets, regions or industries.
    The Fund will use a variety of proprietary and non-propriety [sic] 
analytical methodologies including ``bottom-up'' fundamental analysis, 
macro-economic data, technical analysis, and quantitative analysis to 
determine the ratio of long to short positions. It also will use these 
tools to determine whether a particular stock or group of stocks is 
under-valued or over-valued and, therefore, whether to purchase or sell 
those securities. In reviewing companies, the Fund will apply the 
characteristics identified above on a case-by-case basis as the order 
of importance varies depending on the type of business or industry and 
the company being reviewed.
Other Investments
    While each Fund, under normal market conditions, will invest 
primarily in stocks included in the Russell 3000 Index and ETFs, as 
described above, each Fund may invest its remaining assets in other 
securities and financial instruments, as described below.
    According to the Registration Statement, each Fund may enter into 
repurchase agreements. A repurchase agreement is an instrument under 
which the purchaser (i.e., a Fund) acquires the security and the seller 
agrees, at the time of the sale, to repurchase the security at a 
mutually agreed upon time and price, thereby determining the yield 
during the purchaser's holding period. Repurchase agreements may be 
construed to be collateralized loans by the purchaser to the seller 
secured by the securities transferred to the purchaser.
    Each Fund 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. Generally the effect of such 
transactions is that the Fund can recover all or most of the cash 
invested in the portfolio securities involved during the term of the 
reverse repurchase agreement, while in many cases the Fund is able to 
keep some of the interest income associated with those securities.
    Each Fund may invest a portion of its assets in high-quality money 
market instruments on an ongoing basis rather than in other 
investments, when it would be more efficient or less expensive for the 
Fund to do so, or as cover for other financial instruments held by a 
Fund, for liquidity purposes, or to earn interest. Money market 
instruments in which a Fund may invest include: (1) Short-term 
obligations issued by the U.S. government; (2) negotiable certificates 
of deposit (``CDs''), fixed time deposits and bankers' acceptances of 
U.S. and foreign banks and similar institutions; (3) 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 Ratings Group, Inc., a 
division of The McGraw-Hill Companies, Inc., or, if unrated, of 
comparable quality as determined by the Adviser; \16\ and (4) money 
market mutual funds.
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    \16\ In determining whether a security is of ``comparable 
quality,'' the Adviser will consider, for example, whether the 
issuer of the security has issued other rated securities; whether 
the obligations under the security are guaranteed by another entity 
and the rating of such guarantor (if any); whether and (if 
applicable) how the security is collateralized; other forms of 
credit enhancement (if any); the security's maturity date; liquidity 
features (if any); relevant cash flow(s); valuation features; other 
structural analysis; macroeconomic analysis; and sector or industry 
analysis.
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    Each Fund may invest in the securities of other investment 
companies (including money market funds) to the extent allowed by law.
Investment Restrictions
    A Fund may not, with respect to 75% of its total assets, purchase 
securities of any issuer (except securities issued or guaranteed by the 
U.S. government, its agencies or instrumentalities or shares of 
investment companies) if, as a result, more than 5% of its total assets 
would be invested in the securities of such issuer; or (ii) acquire 
more than 10% of the outstanding voting securities of any one issuer 
(and for purposes of this policy, the issuer of the underlying security 
will be deemed to be the issuer of any respective depositary receipt.) 
\17\
---------------------------------------------------------------------------

    \17\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
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    A Fund may not invest 25% or more of its total assets in the 
securities of one or more issuers conducting their principal business 
activities in the same industry or group of industries. This limitation 
does not apply to investments in securities issued or guaranteed by the 
U.S. government, its agencies or instrumentalities, or shares of 
investment companies. A Fund will not invest 25% or more of its total 
assets in any investment company that so concentrates.\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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    Each Fund may invest up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at

[[Page 10853]]

the time of investment),\19\ consistent with Commission guidance. Each 
Fund will monitor its portfolio liquidity on an ongoing basis to 
determine whether, in light of current circumstances, an adequate level 
of liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of a Fund's 
net assets are invested in illiquid assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.\20\
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    \19\ In reaching liquidity decisions, the Adviser may consider 
the following factors: the frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers and the mechanics of transfer).
    \20\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    According to the Registration Statement, each Fund will seek to 
qualify for treatment as a Regulated Investment Company (``RIC'') under 
the Internal Revenue Code.\21\
---------------------------------------------------------------------------

    \21\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Shares of each Fund will conform to the initial and continued 
listing criteria under proposed Rule 8.900. The Funds will not invest 
in options, futures, forwards or swaps.
    Each Fund's investments will be consistent with its investment 
objective and will not be used to enhance leverage. While a Fund may 
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X, 
-2X, 3X or -3X) ETFs. The Funds will not invest in non-U.S. equity 
securities.
Creations and Redemptions
Placement of Purchase Orders
    Each Fund will issue Shares through the Distributor on a continuous 
basis at NAV. The Exchange represents that the issuance of Shares will 
operate in a manner substantially similar to that of other ETFs and, in 
particular, certain fixed-income ETFs that issue shares solely for 
settlement in cash. However, Shares may be issued in any amount rather 
than only in a specified block size.
    Each Fund will issue Shares only at the NAV per Share next 
determined after an order in proper form is received. The Trust will 
sell and redeem Shares on each such day and will not suspend the right 
of redemption or postpone the date of payment or satisfaction upon 
redemption for more than seven days, other than as provided by Section 
22(d) of the 1940 Act (each such day, a ``Business Day'').
    Shares may be purchased from a Fund by any Depository Trust Company 
(``DTC'') Participant for its own account or for the account of a 
customer. Purchase orders will not be limited to any specified size but 
may be in any whole share amount. Since Shares will be paid for in 
cash, settlement will be through the normal continuous net settlement 
process. The Distributor will furnish acknowledgements to those placing 
such orders that the orders have been accepted, but the Distributor may 
reject any order which is not submitted in proper form, as described in 
a Fund's prospectus or Statement of Additional Information (``SAI''). 
Purchases of Shares will be settled in cash for an amount equal to the 
applicable NAV per Share purchased plus applicable transaction fees, as 
discussed below.
    The NAV of each Fund is expected to be determined once each 
Business Day at a time determined by the Trust's Board of Directors 
(``Board''), currently anticipated to be as of the close of the regular 
trading session on the New York Stock Exchange (``NYSE'') (ordinarily 
4:00 p.m. Eastern time) (the ``Valuation Time''). Each Fund will 
establish a cut-off time (``Order Cut-Off Time'') for purchase orders 
in proper form. To initiate a purchase of Shares, a DTC participant 
must submit to the Distributor an irrevocable order to purchase such 
Shares after the most recent prior Valuation Time but not later than 
the Order Cut-Off Time. The Order Cut-Off Time for a Fund may be its 
Valuation Time, or may be prior to the Valuation Time if the Board 
determines that an earlier Order Cut-Off Time for purchase of Shares is 
necessary and is in the best interests of Fund shareholders. It is 
anticipated that the Funds may adopt Order Cut-Off Times prior to their 
Valuation Time in order to make arrangements for any securities 
borrowing transactions consistent with a Fund's investment strategy 
that may be necessary in light of creation of Shares and in a manner 
consistent with orderly portfolio management. An early Order Cut-Off 
Time will allow the Adviser to net creations and redemptions and 
facilitate borrowing securities in an efficient manner.
Transaction Fees
    The Trust may impose purchase or redemption transaction fees 
(``Transaction Fees'') in connection with the purchase or redemption of 
Shares from the Funds. The exact amounts of any such Transaction Fees 
will be determined by the Adviser but will not exceed 2%. The purpose 
of the Transaction Fees is to protect the continuing shareholders 
against possible dilutive transactional expenses, including operational 
processing and brokerage costs, associated with establishing and 
liquidating portfolio positions, including short positions, in 
connection with the purchase and redemption of Shares. The Adviser 
believes that imposing Transaction Fees will best respond to market 
needs and help to defray certain costs that would otherwise be borne by 
the Trust, such as custodian transaction fees and various other Fund 
overhead costs and fund accounting costs.
    From time to time and for such periods as the Adviser in its sole 
discretion may determine, the Transaction Fees for the purchase or 
redemption of Shares may be increased, decreased or otherwise modified. 
Such Transaction Fees will be limited to amounts that will have been 
determined by the Adviser to be appropriate and will take into account 
transaction and operational processing costs associated with the recent 
purchases and sales of the equity securities held by the Trust. In all 
cases, such Transaction Fees will be limited in accordance with then-
existing requirements of the Commission applicable to management 
investment companies offering redeemable securities.
Purchases of Shares--Secondary Market
    Only DTC Participants and their customers will be able to acquire 
Shares at NAV directly from a Fund through the Distributor. The entire 
required cash payment must be transferred in the manner set forth in a 
Fund's SAI by the specified time on the third DTC settlement day 
following the day it is transmitted (the ``Transmittal Date''). These 
investors and others will also be able to purchase Shares in secondary 
market transactions at prevailing market prices. Each Fund will reserve 
the right to reject any purchase order at any time.

[[Page 10854]]

Redemption
    Beneficial Owners may sell their Shares in the secondary market. 
Alternatively, investors that own enough Shares to constitute a 
Redemption Unit (currently, 50,000 Shares) or multiples thereof may 
redeem those Shares through the Distributor, which will act as the 
Trust's agent for redemption. The size of a Redemption Unit will be 
subject to change. Redemption orders for Redemption Units or multiples 
thereof must be placed by or through an Authorized Participant. A 
Beneficial Owner that is an individual, a trust exclusively for the 
benefit of an individual or group of related family members or a tax 
deferred retirement plan directed by an individual would be treated as 
a ``Retail Owner''. Any entity other than a trust or retirement plan 
exclusively for the benefit of individuals would be treated as an 
institutional investor. Retail Investors that wish to redeem Shares in 
less than Redemption Unit size may redeem those Shares directly from 
the Fund as described below under ``Retail Redemption Facility.''
Authorized Participant Redemption
    The Shares may be redeemed to a Fund in Redemption Unit size or 
multiples thereof as described below. Redemption orders of Redemption 
Units must be placed by or through an Authorized Participant (``AP 
Redemption Order''). Each Fund will establish an Order Cut-Off Time for 
redemption orders of Redemption Units in proper form. Redemption Units 
of the Fund will be redeemable at their NAV per Share next determined 
after receipt of a request for redemption by the Trust in the manner 
specified below before the Order Cut-Off Time. To initiate an AP 
Redemption Order, an Authorized Participant must submit to the 
Distributor an irrevocable order to redeem such Redemption Unit after 
the most recent prior Valuation Time but not later than the Order Cut-
Off Time. The Order Cut-Off Time for a Fund may be its Valuation Time, 
or may be prior to the Valuation Time if the Board determines that an 
earlier Order Cut-Off Time for redemption of Redemption Units is 
necessary and is in the best interests of Fund shareholders. An earlier 
Order Cut-Off Time is primarily necessary because of the redemption 
process for the Funds. It is contemplated that Authorized Participants 
will instruct the trustee of its blind trust to liquidate redemption 
securities in market on close orders on the date of redemption so that 
Authorized Participants can realize redemption proceeds as close to the 
Fund's NAV on the redemption date as possible. In order to allow the 
Adviser sufficient time to identify the redemption securities, transfer 
the redemption basket of portfolio securities to the blind trusts and 
permit the trustee adequate time to process liquidation transactions in 
accordance with the Authorized Participant's instructions, it will 
likely be necessary to employ an Order Cut-Off Time prior to that time 
to allow such actions to take place. It is anticipated that all Funds 
will adopt Order Cut-Off Times for redemptions prior to their Valuation 
Time in order to facilitate the timely identification and notice to the 
trustee of the blind trusts (as described below) of securities to be 
redeemed in-kind.
    Consistent with the provisions of Section 22(e) of the 1940 Act and 
Rule 22e-2 thereunder, the right to redeem will not be suspended, nor 
payment upon redemption delayed, except for: (1) Any period during 
which the NYSE is closed other than customary weekend and holiday 
closings, (2) any period during which trading on the NYSE is 
restricted, (3) any period during which an emergency exists as a result 
of which disposal by a Fund of securities owned by it is not reasonably 
practicable or it is not reasonably practicable for a Fund to determine 
its NAV, and (4) for such other periods as the Commission may by order 
permit for the protection of shareholders.
    Redemptions other than Retail Redemptions will occur primarily in-
kind, although redemption payments may also be made partly or wholly in 
cash.\22\ The Participant Agreement signed by each Authorized 
Participant will require establishment of a blind trust to receive 
distributions of securities in-kind upon redemption.\23\ Each 
Authorized Participant will be required to appoint the Custodian as 
trustee of its blind trust in order to facilitate orderly processing of 
redemptions. While the Fund will generally distribute securities in-
kind, the Adviser may determine from time to time that it is not in the 
Fund's best interests to distribute securities in-kind, but rather to 
sell securities and/or distribute cash. For example, the Adviser may 
distribute cash to facilitate orderly portfolio management in 
connection with rebalancing or transitioning a portfolio in line with 
its investment objective, or if there is substantially more creation 
than redemption activity during the period immediately preceding a 
redemption request, or as necessary or appropriate in accordance with 
applicable laws and regulations. In this manner, the Fund can use in-
kind redemptions to reduce the unrealized capital gains that may, at 
times, exist in a Fund by distributing low cost lots of each security 
that a Fund needs to dispose of to maintain its desired portfolio 
exposures. Shareholders of a Fund would benefit from the in-kind 
redemptions through the reduction of the unrealized capital gains in a 
Fund that would otherwise have to be realized and, eventually, 
distributed to shareholders.
---------------------------------------------------------------------------

    \22\ It is anticipated that any portion of a Fund's NAV 
attributable to appreciated short positions will be paid in cash, as 
securities sold short are not susceptible to in-kind settlement. The 
value of other positions not susceptible to in-kind settlement may 
also be paid in cash.
    \23\ The terms of each blind trust will be set forth as an 
exhibit to the applicable Participant Agreement, which will be 
signed by each Authorized Participant. The terms of the blind trust 
will provide that the trust be formed under either New York or 
Massachusetts State law; the Custodian will act as trustee of the 
blind trusts; and the trustee will be paid by the Authorized 
Participant a fee negotiated by the Adviser on behalf of Authorized 
Participants.
---------------------------------------------------------------------------

    The redemption basket will consist of the same securities for all 
Authorized Participants on any given day subject to the Adviser's 
ability to make minor adjustments to address odd lots, fractional 
shares, tradeable sizes or other situations.
    After receipt of an AP Redemption Order, the Custodian will 
typically deliver securities to the blind trust (which securities are 
determined by the Adviser) with a value approximately equal to the 
value of the Shares \24\ tendered for redemption at the Cut-Off time. 
The Custodian will make delivery of the securities by appropriate 
entries on its books and records transferring ownership of the 
securities to the blind trust, subject to delivery of the Shares 
redeemed. The trustee of the blind trust will in turn liquidate, hedge 
or otherwise manage the securities based on instructions from the 
Authorized Participant.\25\ If the trustee is instructed

[[Page 10855]]

to sell all securities received at the close on the redemption date, 
the trustee will pay the liquidation proceeds net of expenses plus or 
minus any cash balancing amount to the Authorized Participant through 
DTC.\26\ The redemption securities that the blind trust receives may 
mirror the portfolio holdings of a Fund pro rata or, if the Adviser 
determines to reduce one or more portfolio exposures through an in-kind 
distribution, may constitute only a portion of the holdings that would 
not be proportionate to the overall portfolio holdings of a Fund. To 
the extent a Fund distributes portfolio securities through an in-kind 
distribution to more than one blind trust for the benefit of that 
trust's Authorized Participant, each Fund expects to distribute a pro 
rata portion of the portfolio securities selected for distribution to 
each redeeming Authorized Participant.
---------------------------------------------------------------------------

    \24\ If the NAV of the Shares redeemed differs from the value of 
the securities delivered to the applicable blind trust, the Fund or 
the blind trust will pay a cash balancing amount to compensate for 
the difference between the value of the securities delivered and the 
NAV.
    \25\ Because an Authorized Participant would not know the 
holdings of its blind trust, it is anticipated that such 
instructions would be generic standing instructions to the trustee. 
Although an Authorized Participant could, in its sole discretion, 
provide different standing instructions, it is expected that, in 
order to realize proceeds from a redemption at a value as close as 
possible to the redemption's NAV, all Authorized Participants will 
likely instruct the trustee of the blind trust to sell all 
securities received in kind as redemption proceeds at the close of 
the market on the date of redemption. For this reason, an Order Cut-
Off Time for redemptions will be necessary so that the Adviser is 
able to identify securities to be redeemed in-kind to the Custodian 
prior to the close of the market on the redemption date.
    \26\ Under applicable provisions of the Internal Revenue Code, 
the Authorized Participant is expected to be deemed a ``substantial 
owner'' of the blind trust because it receives distributions from 
the blind trust. As a result, all income, gain or loss realized by 
the blind trust will be directly attributed to the Authorized 
Participant. In a redemption, the Authorized Participant will have a 
basis in the distributed securities equal to the fair market value 
at the time of the distribution and any gain or loss realized on the 
sale of those Shares will be taxable income to the Authorized 
Participant.
---------------------------------------------------------------------------

    The Adviser would be free to select redemption securities that do 
not represent an exact slice of a Fund's portfolio on any given day, so 
long as each Authorized Participant redeeming on a given day receives 
the same set of redemption securities on such day. Authorized 
Participants will advise the Fund of any securities they are restricted 
from receiving. If the Authorized Participant would receive a security 
that it is restricted from receiving, the Fund will deliver cash equal 
to the value of that security.
    The Adviser might choose to select redemption securities that do 
not represent an exact slice of a Fund's portfolio in order to 
effectively implement changes to a Fund's portfolio composition, take 
advantage of tax strategies or address corporate actions. The Adviser 
represents that this freedom will benefit Beneficial Owners because the 
Adviser can use redemption events to liquidate unwanted positions 
without incurring brokerage charges or taxable gains. To address odd 
lots, fractional shares, tradeable sizes or other situations where 
dividing securities is not practical or possible, the Adviser may make 
minor adjustments to the pro rata portion of portfolio securities 
selected for distribution to each redeeming Authorized Participant on 
such Business Day.
    The Trust will accept an AP Redemption Order in proper form. An AP 
Redemption Order is subject to acceptance by the Trust and must be 
preceded or accompanied by an irrevocable commitment to deliver the 
requisite number of Shares. At the time of settlement, an Authorized 
Participant will initiate a delivery of the Shares versus subsequent 
payment against the proceeds, if any, of the sale of portfolio 
securities distributed to the applicable blind trust plus or minus any 
cash balancing amounts, and less the expenses of liquidation. The 
Trust, on behalf of a Fund, will maintain a security interest in the 
assets of a blind trust and, under applicable documentation, will be 
entitled to such assets in the event an Authorized Participant fails to 
make timely delivery of redeemed Shares.
Retail Redemption Facility
    Retail Investors may submit orders to redeem Shares at NAV directly 
with a Fund as described below (``Retail Redemption Facility''). Retail 
Investors will be able to place orders to redeem Shares in less than 
Redemption Unit size by instructing their broker to submit an order to 
redeem Shares directly from the Fund (``Retail Redemption Order''). The 
Retail Redemption Order will be submitted to the ``Redemption Agent'' 
by the Retail Investor's broker if the broker is a DTC Participant or 
by its clearing firm if it is not a DTC Participant. Redemption 
proceeds in connection with any Retail Redemption Order will be 
distributed in cash. Retail Investors may decide to redeem their Shares 
for cash if they want to make sure they receive the NAV and do not want 
to risk selling their Shares in the secondary market at a discount. 
Investors that are not Retail Investors can only redeem with the Fund 
in Redemption Unit size or larger.
    On each Business Day, a Fund will process all Retail Redemption 
Orders received at the NAV of the Fund next calculated following 
submission of the Retail Redemption Order in proper form. The date the 
Retail Redemption Order is received in proper form will be the 
redemption date with respect to those Shares (the ``Redemption Date''). 
Each Fund will establish a cut-off time for Retail Redemption Orders in 
proper form, which may be earlier than the time of calculation of the 
NAV in order to facilitate the timely submission of such orders to the 
Redemption Agent for processing the order at NAV on each applicable 
Redemption Date. All instructions from Retail Investors to their broker 
to submit a Retail Redemption Order in proper form will be processed by 
the Redemption Agent and submitted through DTC as long as it is 
received prior to the cut-off time, resulting in an aggregated 
redemption order received by the Transfer Agent from DTC on that 
Business Day. Any redemption instructions submitted by a DTC 
Participant on behalf of Retail Investors and received in proper form 
by the Transfer Agent/Redemption Agent shall be irrevocable. Only 
Retail Redemption Orders for an amount of Shares smaller than a 
Redemption Unit will be considered in proper form.
    The date of payment upon redemption will not exceed seven days 
after the Redemption Date, other than as provided by Section 22(d) of 
the 1940 Act. The cash proceeds from any Retail Redemption Order 
received are generally expected to be delivered through DTC to the 
applicable DTC Participant's account at DTC. The DTC Participant will 
in turn deposit the proceeds in the Beneficial Owner's account or the 
account of the financial institution carrying the account of the 
Beneficial Owner.
Net Asset Value
    The NAV per Share of a Fund will be computed by dividing the value 
of the net assets of a Fund (i.e., the value of its total assets less 
total liabilities) by the total number of Shares of a Fund outstanding, 
rounded to the nearest cent. Expenses and fees, including, without 
limitation, the management, administration and distribution fees, will 
be accrued daily and taken into account for purposes of determining 
NAV. Interest and investment income on the Trust's assets accrue daily 
and will be included in the Fund's total assets. The NAV per Share for 
a Fund will be calculated by the Administrator and determined as of the 
close of the regular trading session on the New York Stock Exchange 
(``NYSE'') (ordinarily 4:00 p.m., E.T.) on each day that the NYSE is 
open. The NAV that is published will be rounded to the nearest cent; 
however, for purposes of determining the price of Shares in creations 
and redemption, the NAV will be calculated to five decimal places. The 
Shares of the Funds will not be priced on days on which the NYSE is 
closed for trading.
    Shares of exchange-listed equity securities will be valued at 
market value, which will generally be determined using the last 
reported official closing or last trading price on the exchange or 
market on which the securities are primarily traded at the

[[Page 10856]]

time of valuation. Repurchase and reverse repurchase agreements will be 
valued based on price quotations or other equivalent indications of 
value provided by a third-party pricing service. Money market 
instruments (as described above) will be valued based on price 
quotations or other equivalent indications of value provided by a 
third-party pricing service.
    When last sale prices and market quotations are not readily 
available, are deemed unreliable or do not reflect material events 
occurring between the close of local markets and the time of valuation, 
investments will be valued using fair value pricing as determined in 
good faith by the Adviser under procedures established by and under the 
general supervision and responsibility of the Trust's Board of 
Trustees. Investments that may be valued using fair value pricing 
include, but are not limited to: (1) Securities that are not actively 
traded; (2) securities of an issuer that becomes bankrupt or enters 
into a restructuring; and (3) securities whose trading has been halted 
or suspended.
    The frequency with which each Fund's investments will be valued 
using fair value pricing will primarily be a function of the types of 
securities and other assets in which the respective Fund will invest 
pursuant to its investment objective, strategies and limitations. If 
the Funds invest in open-end management investment companies registered 
under the 1940 Act (other than ETFs), they may rely on the NAVs of 
those companies to value the shares they hold of them. Those companies 
may also use fair value pricing under some circumstances.
    Valuing the Funds' investments using fair value pricing involves 
the consideration of a number of subjective factors and thus the prices 
for those investments may differ from current market valuations. 
Accordingly, fair value pricing could result in a difference between 
the prices used to calculate NAV and the prices used to determine a 
Fund's Portfolio Indicative Value (``PIV''), as described below, which 
could result in the market prices for Shares deviating from NAV.
Availability of Information
    The Funds' Web site (www.precidianfunds.com), which will be 
publicly available prior to the public offering of Shares, will include 
a form of the prospectus for each Fund that may be downloaded. The 
Funds' Web site will include additional quantitative information 
updated on a daily basis, including, for each Fund, (1) daily trading 
volume, the prior Business Day's reported closing price, NAV and mid-
point of the bid/ask spread at the time of calculation of such NAV (the 
``Bid/Ask Price''),\27\ and a calculation of the premium and discount 
of the Bid/Ask Price against the NAV, and (2) data in chart format 
displaying the frequency distribution of discounts and premiums of the 
daily Bid/Ask Price against the NAV, within appropriate ranges, for 
each of the four previous calendar quarters.
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    \27\ The Bid/Ask Price of a 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 a Fund's NAV. The records relating to 
Bid/Ask Prices will be retained by each Fund and its service 
providers.
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    As noted above, a mutual fund is required to file with the 
Commission its complete portfolio schedules for the second and fourth 
fiscal quarters on Form N-SAR under the 1940 Act, and is required to 
file its complete portfolio schedules for the first and third fiscal 
quarters on Form N-Q under the 1940 Act, within 60 days of the end of 
the quarter. Form N-Q requires funds to file the same schedules of 
investments that are required in annual and semi-annual reports to 
shareholders. The Trust's SAI and each Fund's shareholder reports will 
be available free upon request from the Trust. These documents and 
forms 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. Updated price information for the securities 
included in the Russell 1000, Russell 2000 and Russell 3000 Indexes, 
and for other U.S. exchange-listed equity securities is available 
through major market data vendors or securities exchanges trading such 
securities. Information relating to Russell 1000, Russell 2000 and 
Russell 3000 Index components is available at www.russell.com. The 
intraday, closing and settlement prices of money market instruments (as 
described above), repurchase agreements and reverse repurchase 
agreements will be readily available from published or other public 
sources, or major market data vendors such as Bloomberg and Thomson 
Reuters. The NAV of any investment company security investment will be 
readily available on the Web site of the relevant investment company 
and from major market data vendors. 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 
(``PIV''), as defined in NYSE Arca Equities Rule 8.900(c)(3) and as 
described further below, will be widely disseminated by one or more 
major market data vendors at least every 15 seconds during the 
Exchange's Core Trading Session.
Dissemination of the Portfolio Indicative Value
    The PIV, which is approximate [sic] value of each Fund's 
investments on a per Share basis, will be disseminated every 15 seconds 
during the Exchange's Core Trading Session. The PIV should not be 
viewed as a ``real-time'' update of NAV because the PIV may not be 
calculated in the same manner as NAV, which is computed once per day.
    An independent third party calculator will calculate the PIV for 
each Fund during the Exchange's Core Trading Session by dividing the 
``Estimated Fund Value'' (as described below) as of the time of the 
calculation by the total number of outstanding Shares of that Fund. 
``Estimated Fund Value'' is the sum of the estimated amount of cash 
held in a Fund's portfolio, the estimated amount of accrued interest 
owed to a Fund and the estimated value of the securities held in the 
Fund's portfolio, minus the estimated amount of a Fund's liabilities.
    The Funds will provide the independent third party calculator with 
information to calculate the PIV, but the Funds will not be involved in 
the actual calculation of the PIV.\28\
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    \28\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available PIVs 
published on CTA or other data feeds. Dissemination of the PIV will 
allow investors to determine the value of the underlying portfolio 
of a Fund throughout the trading day.
---------------------------------------------------------------------------

    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, distributions 
and taxes will be included in the Registration Statement. All terms 
relating to the Funds 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 Funds.\29\ Trading in Shares of the

[[Page 10857]]

Funds 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) If the PIV applicable to a Fund's Shares is not being disseminated 
as required; (2) the extent to which trading is not occurring in the 
securities and/or the financial instruments comprising the holdings of 
a Fund; or (3) 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 8.900(d)(2)(C), which sets forth circumstances under which Shares 
of the Funds may be halted.
---------------------------------------------------------------------------

    \29\ 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 a.m. to 8 p.m., E.T. in accordance 
with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late Trading 
Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.900. The Exchange represents 
that, for initial and/or continued listing, each Fund will be in 
compliance with Rule 10A-3 under the Act,\30\ as provided by NYSE Arca 
Equities Rule 5.3. A minimum of 100,000 Shares of each Fund will be 
outstanding at the commencement of trading on the Exchange. The 
Exchange will obtain a representation from the issuer of the Shares of 
each Fund that the NAV per Share of each Fund will be calculated daily 
and will be made available to all market participants at the same time.
---------------------------------------------------------------------------

    \30\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

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.\31\ The Exchange represents that 
these procedures are adequate to properly monitor Exchange trading of 
the Shares in all trading sessions and to deter and detect violations 
of Exchange rules and federal securities laws applicable to trading on 
the Exchange.
---------------------------------------------------------------------------

    \31\ 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 
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, underlying stocks and ETFs 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 such securities from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, underlying stocks and ETFs 
from markets and other entities that are members of ISG or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement.\32\
---------------------------------------------------------------------------

    \32\ For a list of the current members of ISG, see 
www.isgportal.org.
---------------------------------------------------------------------------

    The Funds' Adviser will make available to FINRA and the Exchange 
the portfolio holdings of each Fund in order to facilitate the 
performance of the surveillances referred to above.
    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 
and the differing rights of Retail Investors and others to redeem 
shares; (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 PIV will not be calculated or publicly disseminated; (4) how 
information regarding the PIV 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 Funds are 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., E.T. each trading day.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\33\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\34\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f(b).
    \34\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 8.900 is designed to 
prevent fraudulent and manipulative acts and practices in that the 
proposed rules relating to listing and trading of Managed Portfolio 
Shares provide specific initial and continued listing criteria required 
to be met by such securities. Proposed Rule 8.900(d) sets forth initial 
and continued listing criteria applicable to Managed Portfolio Shares. 
Proposed Rule 8.900(d)(1) provides that, for each series of Managed 
Portfolio Shares, the Corporation will establish a minimum number of 
Managed Portfolio Shares required to be outstanding at the time of 
commencement of trading. In addition, the Corporation will obtain a 
representation from the issuer of each series of Managed Portfolio 
Shares that the NAV per share for the series will be calculated daily 
and that the NAV will be made available to all market participants at 
the same time. Proposed Rule 8.900(d)(2) provides that each

[[Page 10858]]

series of Managed Portfolio Shares will be listed and traded subject to 
application of the specified continued listing criteria, as described 
above. Proposed Rule 8.900(d)(2)(A) provides that the PIV for Managed 
Portfolio Shares will be widely disseminated by one or more major 
market data vendors at least every 15 seconds during the Exchange's 
Core Trading Session. Proposed Rule 8.900(d)(2)(C) provides that, if 
the PIV of a series of Managed Portfolio Shares is not being 
disseminated as required, the Corporation may halt trading during the 
day in which the interruption to the dissemination of the PIV occurs. 
If the interruption to the dissemination of the PIV persists past the 
trading day in which it occurred, the Corporation will halt trading no 
later than the beginning of the trading day following the interruption. 
If a series of Managed Portfolio Shares is trading on the Corporation 
pursuant to UTP, the Corporation will halt trading in that series as 
specified in Rule 7.34(a). In addition, if the Exchange becomes aware 
that the NAV with respect to a series of Managed Portfolio Shares is 
not disseminated to all market participants at the same time, it will 
halt trading in such securities until such time as the NAV is available 
to all market participants. Proposed Commentary .05 to NYSE Arca 
Equities Rule 8.900 provides that, if the investment adviser to the 
Investment Company issuing Managed Portfolio 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 and/or changes to such 
Investment Company portfolio. Personnel who make decisions on the 
Investment Company's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of material 
nonpublic information regarding the applicable Investment Company 
portfolio.
    With respect to the proposed listing and trading of Shares of the 
Funds, 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 
8.900. Price information for the exchange-listed equity securities held 
by the Funds will be available through major market data vendors or 
securities exchanges listing and trading such securities. All exchange-
listed equity securities held by the Funds will be listed on national 
securities exchanges. The listing and trading of such securities is 
subject to rules of the exchanges on which they are listed and traded, 
as approved by the Commission. The Funds will primarily hold securities 
in the Russell 3000 Index or ETFs that invest primarily in the Russell 
3000 Index. Further, the Funds will not invest in options, futures or 
swaps. A Fund's investments will be consistent with its respective 
investment objective and will not be used to enhance leverage. The 
Funds will not invest in non-U.S. issues. FINRA, on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares 
and underlying stocks and ETFs with other markets and other entities 
that are members of the ISG, and FINRA, on behalf of the Exchange, may 
obtain trading information regarding trading such securities from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares, underlying stocks and ETFs 
from markets and other entities that are members of ISG or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement.
    The Exchange, after consulting with various Lead Market Makers that 
trade ETFs on the Exchange, believes that market makers will be able to 
make efficient and liquid markets priced near the PIV as long as an 
accurate PIV is disseminated every 15 seconds and market makers have 
knowledge of a fund's means of achieving its investment objective, even 
without daily disclosure of a fund's underlying portfolio. The Exchange 
believes that market makers will employ risk-management techniques such 
as ``statistical arbitrage'', which is currently used throughout the 
financial services industry, to make efficient markets in exchange 
traded products.\35\ This ability should permit market makers to make 
efficient markets in Fund Shares without knowledge of a fund's 
underlying portfolio.
---------------------------------------------------------------------------

    \35\ See note 10, supra.
---------------------------------------------------------------------------

    The Exchange understands that traders use statistical analysis to 
derive correlations between different sets of instruments to identify 
opportunities to buy or sell one set of instruments when it is 
mispriced relative to the others. For Managed Portfolio Shares, market 
makers will initially use the knowledge of a fund's means of achieving 
its investment objective, as described in the applicable fund 
registration statement, to construct a hedging proxy for a fund to 
manage a market maker's quoting risk in connection with trading fund 
shares. Market makers will then conduct statistical arbitrage between 
their hedging proxy (for example, the Russell 1000 Index) and shares of 
a fund, buying and selling one against the other over the course of the 
trading day. Eventually, at the end of each day, they will evaluate how 
their proxy performed in comparison to the price of a fund's shares, 
and use that analysis as well as knowledge of risk metrics, such as 
volatility and turnover, to enhance their proxy calculation to make it 
a more efficient hedge.
    Market makers have indicated to the Exchange that, after the first 
few days of trading, there will be sufficient data to run a statistical 
analysis which will lead to spreads being tightened substantially 
around PIV. This is similar to certain other existing exchange traded 
products (for example, ETFs that invest in foreign securities that do 
not trade during U.S. trading hours), in which spreads may be generally 
wider in the early days of trading and then narrow as market makers 
gain more confidence in their real-time hedges.
    The Lead Market Makers also indicated that, as with some other new 
exchange-traded products, spreads may be generally wider in the early 
days of trading and would tend to narrow as market makers gain more 
confidence in the accuracy of their hedges and their ability to adjust 
these hedges in real-time relative to the published PIV and gain an 
understanding of the applicable market risk metrics such as volatility 
and turnover, and as natural buyers and sellers enter the market. Other 
relevant factors cited by Lead Market Makers were that a fund's 
investment objectives are clearly disclosed in the applicable 
prospectus, the existence of quarterly portfolio disclosure, and the 
ability to create shares in any size.
    The Commission's concept release regarding ``Actively Managed 
Exchange-Traded Funds'' highlighted several issues that could impact 
the Commission's willingness to authorize the operation of an actively-
managed ETF, including whether effective arbitrage of the ETF shares 
exists.\36\ The Concept Release identifies the transparency of a fund's 
portfolio and the liquidity of the securities in a fund's portfolio as 
central to effective arbitrage. However, certain existing ETFs with 
portfolios of foreign securities have shown their ability to trade 
efficiently in the secondary market at approximately their NAV even 
though they do not provide opportunities for riskless

[[Page 10859]]

arbitrage transactions during much of the trading day.\37\ Such ETFs 
have been shown to have pricing characteristics very similar to ETFs 
that can be arbitraged in this manner. For example, index-based ETFs 
containing securities that trade during different trading hours than 
the ETF, such as ETFs that hold Asian stocks, have demonstrated 
efficient pricing characteristics notwithstanding the inability of 
market professionals to engage in ``riskless arbitrage'' with respect 
to the underlying portfolio for most, or even all, of the U.S. trading 
day when Asian markets are closed. Pricing for shares of such ETFs is 
efficient because market professionals are still able to hedge their 
positions with offsetting, correlated positions in derivative 
instruments during the entire trading day.
---------------------------------------------------------------------------

    \36\ See Investment Company Act Release No. 25258 (November 8, 
2001) (the ``Concept Release'').
    \37\ The Adviser represents that the mechanics of arbitrage and 
hedging differ. Prior Rule 10a-1 and Regulation T under the Act both 
describe arbitrage as either buying and selling the same security in 
two different markets or buying and selling two different 
securities, one of which is convertible into the other. This is also 
known as a ``riskless arbitrage'' transaction in that the 
transaction is risk free since it generally consists of buying an 
asset at one price and simultaneously selling that same asset at a 
higher price, thereby generating a profit on the difference. 
Hedging, on the other hand, involves managing risk by purchasing or 
selling a security or instrument that will track or offset the value 
of another security or instrument. Arbitrage and hedging are both 
used to manage risk; however, they involve different trading 
strategies.
---------------------------------------------------------------------------

    The real-time dissemination of a fund's PIV, together with the 
right of Authorized Participants to create and redeem each day at the 
NAV, will be sufficient for market participants to value and trade 
shares in a manner that will not lead to significant deviations between 
the shares' Bid/Ask Price and NAV. In addition, with respect to Shares 
of the Funds, the Retail Redemption Facility will permit retail 
shareholders holding amounts smaller than a Redemption Unit to redeem 
at NAV on any day the Exchange is open in the event there is any 
negative variance between the NAV of a Fund's Shares and the secondary 
market price of Shares at the Valuation Time.
    The pricing efficiency with respect to trading a series of Managed 
Portfolio Shares will not generally rest on the ability of market 
participants to arbitrage between the shares and a fund's portfolio, 
but rather on the ability of market participants to assess a fund's 
underlying value accurately enough throughout the trading day in order 
to hedge positions in shares effectively. Professional traders will buy 
shares that they perceive to be trading at a price less than that which 
will be available at a subsequent time, and sell shares they perceive 
to be trading at a price higher than that which will be available at a 
subsequent time. It is expected that, as part of their normal day-to-
day trading activity, market makers assigned to shares by the Exchange, 
off-exchange market makers, firms that specialize in electronic 
trading, hedge funds and other professionals specializing in short-
term, non-fundamental trading strategies will assume the risk of being 
``long'' or ``short'' shares through such trading and will hedge such 
risk wholly or partly by simultaneously taking positions in correlated 
assets \38\ or by netting the exposure against other, offsetting 
trading positions--much as such firms do with existing ETFs and other 
equities. Disclosure of a fund's investment objective and principal 
investment strategies in its prospectus and SAI, along with the 
dissemination of the PIV every 15 seconds, should permit professional 
investors to engage easily in this type of hedging activity.\39\
---------------------------------------------------------------------------

    \38\ Price correlation trading is used throughout the financial 
industry. It is used to discover both trading opportunities to be 
exploited, such as currency pairs and statistical arbitrage, as well 
as for risk mitigation such as dispersion trading and beta hedging. 
These correlations are a function of differentials, over time, 
between one or multiple securities pricing. Once the nature of these 
price deviations have been quantified, a universe of securities is 
searched in an effort to, in the case of a hedging strategy, 
minimize the differential. Once a suitable hedging basket has been 
identified, a trader can minimize portfolio risk by executing the 
hedging basket. The trader then can monitor the performance of this 
hedge throughout the trade period, making corrections where 
warranted.
    \39\ With respect to trading in Shares of the Funds, market 
participants manage risk in a variety of ways. It is expected that 
market participants will be able to determine how to trade Shares at 
levels approximating the PIV without taking undue risk by gaining 
experience with how various market factors (e.g., general market 
movements, sensitivity of the PIV to intraday movements in interest 
rates or commodity prices, etc.) affect PIV, and by finding hedges 
for their long or short positions in Shares using instruments 
correlated with such factors. The Adviser expects that market 
participants will initially determine the PIV's correlation to a 
major large capitalization equity benchmark with active derivative 
contracts, such as the Russell 1000 Index, and the degree of 
sensitivity of the PIV to changes in that benchmark. For example, 
using hypothetical numbers for illustrative purposes, market 
participants should be able to determine quickly that price 
movements in the Russell 1000 Index predict movements in a Fund's 
PIV 95% of the time (an acceptably high correlation) but that the 
PIV generally moves approximately half as much as the Russell 1000 
Index with each price movement. This information is sufficient for 
market participants to construct a reasonable hedge--buy or sell an 
amount of futures, swaps or ETFs that track the Russell 1000 equal 
to half the opposite exposure taken with respect to Shares. Market 
participants will also continuously compare the intraday performance 
of their hedge to a Fund's PIV. If the intraday performance of the 
hedge is correlated with the PIV to the expected degree, market 
participants will feel comfortable they are appropriately hedged and 
can rely on the PIV as appropriately indicative of a Fund's 
performance.
---------------------------------------------------------------------------

    With respect to trading of Shares of the Funds, the ability of 
market participants to buy and sell Shares at prices near the PIV is 
dependent upon their assessment that the PIV is a reliable, indicative 
real-time value for a Fund's underlying holdings. Market participants 
are expected to accept the PIV as a reliable, indicative real-time 
value because (1) the PIV will be calculated and disseminated based on 
a Fund's actual portfolio holdings (rather than a proxy portfolio), (2) 
the securities in which the Funds plan to invest are generally highly 
liquid and actively traded and therefore generally have accurate real 
time pricing available, and (3) market participants will have a daily 
opportunity to evaluate whether the PIV at or near the close of trading 
is indeed predictive of the actual NAV. Because there is less risk of 
variability between the current PIV and the NAV nearer to the Valuation 
Time, it is expected that the bid/ask spread for Shares will initially 
tend to be less as the market approaches the close and market 
participants have a very high degree of certainty that they can trade 
at a level that reflects the current value of a Fund's holdings. It is 
also expected, however, that market participants will quickly be able 
to determine, after gaining experience with how various market factors 
(e.g., general market movements, sensitivity or correlations of the PIV 
to intraday movements in interest rates or commodity prices, other 
benchmarks, etc.) affect PIV, how best to hedge long or short positions 
taken in Shares in a manner that will permit them to provide a Bid/Ask 
Price for Shares that is near to the PIV throughout the day. The 
ability of market participants to accurately hedge their positions 
should serve to minimize any divergence between the secondary market 
price of the Shares and the PIV, as well as create liquidity in the 
Shares.
    The real-time dissemination of a Fund's PIV, together with the 
ability of Authorized Participants to create and redeem each day at the 
NAV, will be crucial for market participants to value and trade Shares 
in a manner that will not lead to significant deviations between the 
Shares' Bid/Ask Price and NAV.\40\ In addition, the Retail Redemption 
Facility will permit retail shareholders holding amounts smaller than a 
Redemption Unit to redeem at NAV on any day the Exchange is open in the 
event there is any negative variance between NAV of a Fund's

[[Page 10860]]

Shares and the secondary market price of Shares at the Valuation Time.
---------------------------------------------------------------------------

    \40\ The statements in the Statutory Basis section of this 
filing relating to pricing efficiency, arbitrage, and activities of 
market participants, including market makers and Authorized 
Participants, are based on representations by the Adviser and review 
by the Exchange.
---------------------------------------------------------------------------

    In a typical index-based ETF, it is necessary for Authorized 
Participants to know what securities must be delivered in a creation or 
will be received in a redemption. For Managed Portfolio Shares, 
however, Authorized Participants do not need to know the securities 
comprising the portfolio of a Fund since creations are for cash and 
redemptions are handled through the blind trust mechanism. The use of 
cash for creations, and in-kind redemption through a blind trust, will 
preserve the integrity of the active investment strategy and eliminate 
the potential for ``free riding'', while still providing investors with 
the advantages of the ETF structure.
    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 an 
issue of Managed Portfolio Shares that the NAV per share of a fund will 
be calculated daily and that the NAV and will be made available to all 
market participants at the same time. Investors can also obtain a 
fund's SAI, shareholder reports, and its Form N-CSR and Form N-SAR. A 
fund's SAI and shareholder reports will be available free upon request 
from the applicable fund, 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. In addition, with respect to the Funds, a large amount of 
information will be publicly available regarding the Funds and the 
Shares, thereby promoting market transparency. Quotation and last sale 
information for the Shares will be available via the CTA high-speed 
line. Information regarding the intra-day value of the Shares of the 
Fund, which is the PIV as defined in proposed NYSE Arca Equities Rule 
8.900(c)(3), will be widely disseminated every 15 seconds throughout 
the Exchange's Core Trading Session by one or more major market data 
vendors. The Web site for the Funds will include a form of the 
prospectus for the Funds that may be downloaded, and additional data 
relating to NAV and other applicable quantitative information, updated 
on a daily basis. 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 a 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. Trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.900(d)(2)(C), which sets forth 
circumstances under which Shares of the Funds may be halted. In 
addition, as noted above, investors will have ready access to the PIV, 
and quotation and last sale information for the Shares. The Shares will 
conform to the initial and continued listing criteria under proposed 
Rule 8.900. The Funds will not invest in options, futures, forwards or 
swaps. Each Fund's investments will be consistent with its investment 
objective and will not be used to enhance leverage. While a Fund may 
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X, 
-2X, 3X or -3X) ETFs. The Funds will not invest in non-U.S. equity 
securities.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the PIV and quotation 
and last sale information for the Shares.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes the 
proposed rule change would permit listing and trading of another type 
of actively-managed ETF that has characteristics different from 
existing actively-managed and index ETFs, and would introduce 
additional competition among various ETF products to the benefit of 
investors.

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 up to 90 days after 
publication (i) as the Commission may designate 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-2014-10 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-2014-10. 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 Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of

[[Page 10861]]

10:00 a.m. and 3:00 p.m. Copies of the filing also will 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-2014-10 and should 
be submitted on or before March 19, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04130 Filed 2-25-14; 8:45 am]
BILLING CODE 8011-01-P


