
[Federal Register Volume 79, Number 112 (Wednesday, June 11, 2014)]
[Notices]
[Pages 33619-33625]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-13564]



[[Page 33619]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72336; File No. SR-NYSEArca-2014-42]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
Shares of Schwab Active Short Duration Income ETF; Schwab 
TargetDuration 2-Month ETF; Schwab TargetDuration 9-Month ETF; and 
Schwab TargetDuration 12-Month ETF Under NYSEArca Equities Rule 8.600

June 5, 2014.

I. Introduction

    On April 14, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Schwab Active Short Duration Income ETF; Schwab TargetDuration 2-Month 
ETF; Schwab TargetDuration 9-Month ETF; and Schwab TargetDuration 12-
Month ETF (individually, ``Fund,'' and collectively, ``Funds'') under 
NYSE Arca Equities Rule 8.600. The proposed rule change was published 
for comment in the Federal Register on May 1, 2014.\3\ The Commission 
received no comments on the proposed rule change. This order grants 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 72028 (Apr. 25, 
2014), 79 FR 24789 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Funds 
pursuant to NYSE Arca Equities Rule 8.600, which governs the listing 
and trading of Managed Fund Shares on the Exchange. Each Fund is a 
series of the Schwab Strategic Trust (``Trust''), a statutory trust 
organized under the laws of the State of Delaware and registered with 
the Commission as an open-end management investment company.\4\ The 
Funds will be advised by Charles Schwab Investment Management, Inc. 
(``CSIM'' or ``Adviser''). The Exchange states that the Adviser is not 
a broker-dealer but is affiliated with a broker-dealer, Charles Schwab 
& Co., Inc. The Adviser has implemented and will maintain a fire wall 
with respect to its broker-dealer affiliate regarding access to 
information concerning the composition of or changes to each respective 
Fund's portfolio.\5\
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). According to the Exchange, on November 21, 
2012, the Trust filed with the Commission a registration statement 
on Form N-1A under the Securities Act of 1933 (``Securities Act'') 
and the 1940 Act relating to the Schwab Active Short Duration Income 
ETF (File Nos. 333-160595 and 811-22311) (``Short Duration 
Registration Statement''). On August 1, 2013, the Trust filed with 
the Commission a registration statement on Form N-1A under the 
Securities Act and the 1940 Act for the Schwab TargetDuration 2-
Month ETF; Schwab TargetDuration 9-Month ETF; and Schwab 
TargetDuration 12-Month ETF (File Nos. 333-160595 and 811-22311) 
(``TargetDuration Registration Statement'' and, together with the 
Short Duration Registration Statement, collectively, ``Registration 
Statements''). In addition, the Exchange states that the Adviser 
(defined herein) has obtained certain exemptive relief under the 
1940 Act. See Investment Company Act Release No. 30606 (July 23, 
2013) (File No. 812-14009). The Exchange states that each Fund will 
be offered in reliance upon the Exemptive Order issued to the 
Adviser.
    \5\ See NYSE Arca Equities Rule 8.600, Commentary .06. In the 
event (a) the Adviser becomes a registered broker-dealer or newly 
affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a 
broker-dealer, the adviser or sub-adviser will implement a fire wall 
with respect to its relevant personnel or its broker-dealer 
affiliate regarding access to information concerning the composition 
of or changes to the portfolios, and it will be subject to 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding the portfolios.
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    The Exchange has made the following representations and statements 
in describing the Funds and their respective investment strategies, 
including other portfolio holdings and investment restrictions.

Schwab Active Short Duration Income ETF \6\
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    \6\ The Adviser represents that the name of this Fund will be 
changed to the Schwab TargetDuration 6-Month ETF prior to 
commencement of listing and trading of Shares of the Fund on the 
Exchange. This change will be reflected in an amendment to the Short 
Duration Registration Statement.
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Principal Investments
    According to the Short Duration Registration Statement, the 
investment objective of the Fund is to seek a high level of current 
income consistent with preservation of capital and daily liquidity.
    To pursue its goal, it is the Fund's policy, under normal 
circumstances,\7\ to invest at least 90% of its net assets \8\ in a 
portfolio of investment-grade short-term fixed-income securities issued 
by U.S. and foreign issuers and in other short-term investments, as 
described below. The short-term fixed-income securities in which the 
Fund may invest include corporate and commercial debt instruments; \9\ 
privately-issued securities; \10\ mortgage-backed and asset-backed 
securities; \11\ variable- and floating-rate fixed-income securities; 
repurchase agreements; \12\ money market instruments, including, but 
not limited to certificates of deposit, commercial paper, promissory 
notes, and asset-backed commercial paper; obligations issued by the 
U.S. government or its agencies and instrumentalities,

[[Page 33620]]

including but not limited to, obligations that are not guaranteed by 
the U.S. Treasury, such as those issued by Fannie Mae and Freddie Mac; 
and bank notes and similar demand deposits. To gain exposure to short-
term fixed-income securities, the Fund may invest in other short-term 
investments including (1) money market funds (including funds that are 
managed by the Adviser or one of its affiliates), (2) other investment 
companies,\13\ including exchange-traded funds (``ETFs''),\14\ that 
invest in securities similar to those in which the Fund may invest 
directly, and (3) cash and cash equivalents. All of these investments 
will be denominated in U.S. dollars, including those that are issued by 
foreign issuers.
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    \7\ With respect to each of the Funds, the term ``under normal 
circumstances'' includes, but is not limited to, the absence of 
extreme volatility or trading halts in the fixed-income markets or 
the financial markets generally; events or circumstances causing a 
disruption in market liquidity or orderly markets; operational 
issues causing dissemination of inaccurate market information; or 
force majeure type events such as systems failure, natural or man-
made disaster, act of God, armed conflict, act of terrorism, riot or 
labor disruption, or any similar intervening circumstance.
    \8\ Each Fund's 90% investment policy may be satisfied by the 
investments outlined in a Fund's ``Principal Investments'' section. 
Certain ``Non-Principal Investments'' of each Fund, as discussed 
below, may also be considered within a Fund's 90% investment policy 
to the extent they are investment-grade short-term fixed-income 
securities. See note 55, infra.
    \9\ The Adviser expects that, under normal market circumstances, 
each Fund will generally seek to invest in corporate bond issuances 
in developed countries that have at least $100,000,000 par amount 
outstanding and at least $200,000,000 par amount outstanding with 
respect to corporate bond issuances in emerging market countries.
    \10\ Privately-issued securities are generally issued under Rule 
144A of the Securities Act.
    \11\ Each Fund's investments in each of the following security 
types will be limited to 10% of a Fund's net assets: (1) Non-agency 
residential-mortgage-backed securities; (2) non-agency commercial-
mortgage-backed securities; and (3) non-agency asset-backed 
securities. Each Fund's aggregate investments in the following 
security types will be limited to 20% of a Fund's net assets: (1) 
Non-agency residential-mortgage-backed securities; (2) non-agency 
commercial-mortgage-backed securities; and (3) non-agency asset-
backed securities. As noted for each Fund, at least 90% of a Fund's 
net assets will be, under normal circumstances, invested in U.S. 
dollar-denominated fixed-income securities. All fixed-income 
securities, including mortgage-backed and asset-backed securities, 
purchased by a Fund will be rated A- or higher. Neither high-yield 
asset-backed securities nor high-yield mortgage-backed securities 
are included in a Fund's principal investment strategies. The 
liquidity of a security, especially in the case of asset-backed and 
mortgage-backed debt securities, is a factor in each Fund's security 
selection process. Asset-backed securities backed by a specific 
industry receivable are classified into distinct industries based on 
the underlying credit and liquidity structures. Asset-backed 
commercial paper programs backed by multiple industry receivables 
are classified within a multi-industry category. Each Fund will 
limit investments in each identified industry individually and in 
the multi-industry category to less than 25% of its net assets.
    \12\ Repurchase agreements are instruments under which a buyer 
acquires ownership of certain securities (usually U.S. government 
securities) from a seller who agrees to repurchase the securities at 
a mutually agreed-upon time and price, thereby determining the yield 
during the buyer's holding period. The period to maturity for 
repurchase agreements is generally short (from overnight to one 
week), although it may be longer. In addition, the securities 
collateralizing a repurchase agreement may have longer maturity 
periods.
    \13\ Each Fund may invest in other investment companies to the 
extent permitted by Section 12(d)(1) of the 1940 Act and rules 
thereunder or by any applicable exemption under the 1940 Act with 
respect to such investments.
    \14\ For purposes of this proposed rule change, 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). The ETFs all will be listed and traded in 
the U.S. on registered exchanges. While each Fund may invest in 
inverse ETFs, a Fund will not invest in leveraged (e.g., 2X or 3X) 
or leveraged inverse ETFs.
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    All fixed-income securities purchased by the Fund will be rated A- 
or higher by Standard & Poor's Corporation (``S&P''); will have an 
equivalent rating by another Nationally Recognized Statistical Rating 
Organization (``NRSRO''), such as Fitch Inc. (``Fitch'') or Moody's 
Investor Services, Inc. (``Moody's''); or, if unrated, will be of 
equivalent quality, as determined by the Adviser.\15\
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    \15\ In determining whether a security is of ``equivalent 
quality,'' the Adviser may consider various factors, including but 
not limited to: 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 the 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; and other structural analysis.
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    Under normal circumstances, the Fund will generally maintain a 
portfolio duration of less than six months.\16\ The Adviser may adjust 
the Fund's duration within the stated limit based on current or 
anticipated changes in interest rates.
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    \16\ Duration measures the price sensitivity of a security to 
interest rate changes. The longer the duration, the more sensitive 
the portfolio will be to a change in interest rates.
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    Additionally, under normal circumstances, the Fund generally 
expects to maintain a portfolio maturity (which is the weighted average 
maturity of all the securities held in the portfolio) of less than 
twelve months (1 year). For most security types, the security's final 
maturity date (the date on which the final principal payment of the 
security is scheduled to be paid) will be used to determine the Fund's 
portfolio maturity.\17\ The Fund will not purchase any security with a 
maturity--or, for securitized investments, a weighted average life--of 
more than twenty-four months (2 years) from the date of acquisition. 
The Adviser may adjust the Fund's maturity within the stated limit 
based on current and anticipated changes in interest rates.
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    \17\ For securitized investments such as asset-backed and 
mortgage-backed securities, the security's weighted average life 
(the weighted average time to receipt of all principal payments) 
will be used to determine a Fund's portfolio maturity, while for 
securities with embedded demand features, such as puts or calls, 
either the security's demand date or the final maturity date, 
depending on interest rates, yields, and other market conditions, 
will be used.
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    The Fund is an actively-managed fund that does not seek to track 
the performance of a specific index. The Exchange notes, however, that 
the Fund's portfolio, under normal circumstances, will meet certain 
criteria similar to those applicable to index-based, fixed-income 
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3), 
Commentary.02.\18\
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    \18\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 
governing fixed-income based Investment Company Units. Under normal 
circumstances, each Fund's portfolio will meet the following 
criteria: (i) Components that in the aggregate account for at least 
65% of the weight of the index or portfolio must each have a minimum 
original principal amount outstanding of $100 million or more (in 
contrast to the requirement in NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .02(a)(3) that 75% of the weight of the index or 
portfolio meet such requirement); (ii) no component fixed-income 
security (excluding Treasury Securities, government-sponsored entity 
and other exempted securities) will represent more than 30% of the 
weight of the portfolio, and the five highest-weighted component 
fixed-income securities (excluding Treasury Securities, government-
sponsored entity and other exempted securities) will not in the 
aggregate account for more than 65% of the weight of the portfolio); 
and (iii) the portfolio (excluding Treasury Securities, government-
sponsored-entity securities and other exempted securities) will 
include securities from a minimum of 13 non-affiliated issuers. Each 
Fund will not be required to meet the requirements of NYSE Arca 
Equities Rule 5.2(j)(3), Commentary .02(a)(3) (which relates to 
convertible security index components and removal of such components 
from an index or portfolio once the convertible security converts to 
the underlying security), and Commentary .02(a)(6) (which relates to 
reporting, numerical, or other enumerated requirements applicable to 
issuers of index component securities).
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Schwab TargetDuration 2-Month ETF

Principal Investments
    According to the TargetDuration Registration Statement, the 
investment objective of the Fund is to seek current income consistent 
with preservation of capital and daily liquidity.
    To pursue its goal, it is the Fund's policy, under normal 
circumstances,\19\ to invest at least 90% of its net assets \20\ in a 
portfolio of investment-grade short-term fixed-income securities issued 
by U.S. and foreign issuers and in other short-term investments. The 
fixed-income securities in which the Fund may invest include corporate 
and commercial debt instruments; \21\ privately-issued securities; \22\ 
mortgage-backed and asset-backed securities; \23\ variable- and 
floating-rate fixed-income securities; repurchase agreements; \24\ 
money market instruments, including, but not limited to certificates of 
deposit, commercial paper, promissory notes, and asset-backed 
commercial paper; obligations issued by the U.S. government or its 
agencies and instrumentalities, including but not limited to, 
obligations that are not guaranteed by the U.S. Treasury, such as those 
issued by Fannie Mae and Freddie Mac; and bank notes and similar demand 
deposits. To gain exposure to short-term fixed-income securities, the 
Fund may invest in other short-term investments including (1) money 
market funds (including funds that are managed by the Adviser or one of 
its affiliates), (2) other investment companies,\25\ including 
ETFs,\26\ that invest in securities similar to those in which the Fund 
may invest directly, and (3) cash and cash equivalents. All of these 
investments will be denominated in U.S. dollars, including those that 
are issued by foreign issuers.
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    \19\ See note 7, supra.
    \20\ See note 8, supra.
    \21\ See note 9, supra.
    \22\ See note 10, supra.
    \23\ See note 11, supra.
    \24\ See note 12, supra.
    \25\ See note 13, supra.
    \26\ See note 14, supra.
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    All fixed-income securities purchased by the Fund will be rated A- 
or higher by S&P hold an equivalent rating by another NRSRO such as 
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of 
equivalent quality.\27\
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    \27\ See note 15, supra.
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    Under normal circumstances, the Fund will generally maintain a 
portfolio duration of less than two months.\28\ The Adviser may adjust 
the Fund's duration within the stated limit based on current and 
anticipated changes in interest rates.
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    \28\ See note 16, supra.
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    Additionally, under normal circumstances, the Fund generally 
expects to maintain a portfolio maturity (which is the weighted average 
maturity

[[Page 33621]]

of all the securities held in the portfolio) of less than four months. 
For most security types, the security's final maturity date (the date 
on which the final principal payment of the security is scheduled to be 
paid) will be used to determine the Fund's portfolio maturity.\29\ The 
Fund will not purchase any security with a maturity--or, for 
securitized investments, a weighted average life--of more than eighteen 
months (1.5 years) from the date of acquisition. The Adviser may adjust 
the Fund's maturity within the stated limit based on current and 
anticipated changes in interest rates.
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    \29\ See note 17, supra.
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    The Fund is an actively-managed fund that does not seek to track 
the performance of a specific index. The Exchange notes, however, that 
the Fund's portfolio, under normal circumstances, will meet certain 
criteria similar to those applicable to index-based, fixed-income 
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .02.\30\
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    \30\ See note 18, supra.
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Schwab TargetDuration 9-Month ETF

Principal Investments
    According to the TargetDuration Registration Statement, the 
investment objective of the Fund is to seek a high level of current 
income consistent with preservation of capital.
    To pursue its goal, it is the Fund's policy, under normal 
circumstances,\31\ to invest at least 90% of its net assets \32\ in a 
portfolio of investment-grade short-term fixed-income securities issued 
by U.S. and foreign issuers and in other short-term investments. The 
fixed-income securities in which the Fund may invest include corporate 
and commercial debt instruments; \33\ privately-issued securities; \34\ 
mortgage-backed and asset-backed securities; \35\ variable- and 
floating-rate fixed-income securities; repurchase agreements,\36\ money 
market instruments, including, but not limited to certificates of 
deposit, commercial paper, promissory notes, and asset-backed 
commercial paper; obligations issued by the U.S. government or its 
agencies and instrumentalities, including but not limited to, 
obligations that are not guaranteed by the U.S. Treasury, such as those 
issued by Fannie Mae and Freddie Mac; and bank notes and similar demand 
deposits. To gain exposure to short-term fixed-income securities, the 
Fund may invest in other short-term investments including (1) money 
market funds (including funds that are managed by the Adviser or one of 
its affiliates), (2) other investment companies,\37\ including 
ETFs,\38\ that invest in securities similar to those in which the Fund 
may invest directly, and (3) cash and cash equivalents. All of these 
investments will be denominated in U.S. dollars, including those that 
are issued by foreign issuers.
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    \31\ See note 7, supra.
    \32\ See note 8, supra.
    \33\ See note 9, supra.
    \34\ See note 10, supra.
    \35\ See note 11, supra.
    \36\ See note 12, supra.
    \37\ See note 13, supra.
    \38\ See note 14, supra.
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    All fixed-income securities purchased by the Fund will be rated A- 
or higher by S&P hold an equivalent rating by another NRSRO such as 
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of 
equivalent quality.\39\
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    \39\ See note 15, supra.
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    Under normal circumstances, the Fund will generally maintain a 
portfolio duration of less than nine months.\40\ The Adviser may adjust 
the Fund's duration within the stated limit based on current and 
anticipated changes in interest rates.
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    \40\ See note 16, supra.
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    Additionally, under normal circumstances, the Fund generally 
expects to maintain a portfolio maturity (which is the weighted average 
maturity of all the securities held in the portfolio) of less than 
eighteen months (1.5 years). For most security types, the security's 
final maturity date (the date on which the final principal payment of 
the security is scheduled to be paid) will be used to determine the 
Fund's portfolio maturity.\41\ The Fund will not purchase any security 
with a maturity--or, for securitized investments, a weighted average 
life--of more than thirty months (2.5 years) from the date of 
acquisition. The Adviser may adjust the Fund's maturity within the 
stated limit based on current and anticipated changes in interest 
rates.
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    \41\ See note 17, supra.
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    The Fund is an actively-managed fund that does not seek to track 
the performance of a specific index. The Exchange notes, however, that 
the Fund's portfolio, under normal circumstances, will meet certain 
criteria similar to those applicable to index-based, fixed-income 
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .02.\42\
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    \42\ See note 18, supra.
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Schwab TargetDuration 12-Month ETF

Principal Investments
    According to the TargetDuration Registration Statement, the 
investment objective of the Fund is to seek maximum current income 
consistent with preservation of capital.
    To pursue its goal, it is the Fund's policy, under normal 
circumstances,\43\ to invest at least 90% of its net assets \44\ in a 
portfolio of investment-grade short-term fixed-income securities issued 
by U.S. and foreign issuers and in other short-term investments. The 
fixed-income securities in which the Fund may invest include corporate 
and commercial debt instruments; \45\ privately-issued securities,\46\ 
mortgage-backed and asset-backed securities; \47\ variable- and 
floating-rate fixed-income securities; repurchase agreements; \48\ 
money market instruments, including, but not limited to certificates of 
deposit, commercial paper, promissory notes, and asset-backed 
commercial paper; obligations issued by the U.S. government or its 
agencies and instrumentalities, including but not limited to, 
obligations that are not guaranteed by the U.S. Treasury, such as those 
issued by Fannie Mae and Freddie Mac; and bank notes and similar demand 
deposits. To gain exposure to short-term fixed-income securities, the 
Fund may invest in other short-term investments including (1) money 
market funds (including funds that are managed by the Adviser or one of 
its affiliates), (2) other investment companies,\49\ including 
ETFs,\50\ that invest in securities similar to those in which the Fund 
may invest directly, and (3) cash and cash equivalents. All of these 
investments will be denominated in U.S. dollars, including those that 
are issued by foreign issuers.
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    \43\ See note 7, supra.
    \44\ See note 8, supra.
    \45\ See note 9, supra.
    \46\ See note 10, supra.
    \47\ See note 11, supra.
    \48\ See note 12, supra.
    \49\ See note 13, supra.
    \50\ See note 14, supra.
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    All fixed-income securities purchased by the Fund will be rated A- 
or higher by S&P hold an equivalent rating by another NRSRO such as 
Fitch or Moody's; or, if unrated, be determined by the Adviser to be of 
equivalent quality.\51\
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    \51\ See note 15, supra.
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    Under normal circumstances, the Fund will generally maintain a 
portfolio duration of less than twelve months (1 year).\52\ The Adviser 
may adjust the Fund's duration within the stated limit based on current 
and anticipated changes in interest rates.
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    \52\ See note 16, supra.
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    Additionally, under normal circumstances, the Fund generally 
expects to maintain a portfolio maturity

[[Page 33622]]

(which is the weighted average maturity of all the securities held in 
the portfolio) of less than twenty-four months (2 years). For most 
security types, the security's final maturity date (the date on which 
the final principal payment of the security is scheduled to be paid) 
will be used to determine the Fund's portfolio maturity.\53\ The Fund 
will not purchase any security with a maturity--or, for securitized 
investments, a weighted average life--of more than thirty-six months (3 
years) from the date of acquisition. The Adviser may adjust the Fund's 
maturity within the stated limit based on current and anticipated 
changes in interest rates.
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    \53\ See note 17, supra.
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    The Fund is an actively-managed fund that does not seek to track 
the performance of a specific index. The Exchange notes, however, that 
the Fund's portfolio, under normal circumstances, will meet certain 
criteria similar to those applicable to index-based, fixed-income 
exchange-traded funds contained in NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .02.\54\
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    \54\ See note 18, supra.
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Non-Principal Investments \55\
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    \55\ Certain investments have been identified as ``Non-Principal 
Investments'' within the Registration Statements given the limited 
extent to which these investments are expected to constitute each 
Fund's portfolio. These non-principal investments, however, may be 
considered within a Fund's 90% investment policy to the extent they 
are investment-grade short-term fixed-income securities.
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    As part of each Fund's non-principal investment strategies, a Fund 
may invest in other securities such as Build America Bonds; \56\ 
capital and trust preferred securities; \57\ fixed-income securities 
with put features; sinking funds; \58\ and zero-coupon, step-coupon, 
and pay-in-kind securities.\59\ Also as part of each Fund's non-
principal investment strategies, a Fund may borrow money in accordance 
with the 1940 Act as outlined in a Fund's Registration Statement.
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    \56\ Build America Bonds offer an alternative form of financing 
to state and local governments whose primary means for accessing the 
capital markets has historically been through the issuance of tax-
free municipal bonds. Issuance of Build America Bonds ceased on 
December 31, 2010. Outstanding Build America Bonds will continue to 
be eligible for the federal interest-rate subsidy, which continues 
for the life of the bonds.
    \57\ Capital securities are certain subordinated securities and 
generally rank senior to common stock and preferred stock in an 
issuer's capital structure, but have a lower security claim than the 
issuer's corporate bonds. Trust preferred securities have 
characteristics similar to other capital securities. They are issued 
by a special purpose trust subsidiary backed by subordinated debt of 
the corporate parent.
    \58\ Sinking funds are generally established by bond issuers to 
set aside a certain amount of money to cover timely repayment of 
bondholders' principal raised through a bond issuance. By creating a 
sinking fund, the issuer is able to spread repayment of principal to 
numerous bondholders while reducing reliance on its then-current 
cash flows. A sinking fund also may allow the issuer to annually 
repurchase certain of its outstanding bonds from the open market or 
repurchase certain of its bonds at a call price named in a bond's 
sinking fund provision. This call provision allows bonds to be 
prepaid or called prior to a bond's maturity.
    \59\ Zero-coupon, step-coupon, and pay-in-kind securities are 
fixed-income securities that do not make regular cash interest 
payments throughout the period prior to maturity. Zero-coupon and 
step-coupon securities are sold at a deep discount to their face 
value. A zero-coupon security pays no interest to its holders during 
its life. Step-coupon securities are debt securities that, instead 
of having a fixed coupon for the life of the security, have coupon 
or interest payments that may increase or decrease to pre-determined 
rates at future dates. Pay-in-kind securities pay interest through 
the issuance of additional securities. To continue to qualify as a 
``regulated investment company'' or ``RIC'' under the Internal 
Revenue Code of 1986, as amended, and to avoid excise tax, each Fund 
may be required to distribute a portion of such discount value and 
income and may be required to dispose of other portfolio securities, 
which may occur in periods of adverse market prices, in order to 
generate cash to meet these distribution requirements.
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    A Fund may not hold more than 15% of its net assets in illiquid 
assets, including Rule 144A securities \60\ except for Rule 144A 
securities deemed liquid by the Adviser, based on criteria for 
liquidity established by the Board, consistent with Commission 
guidance.\61\ 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 held in illiquid assets. Illiquid 
assets include securities subject to contractual or other restrictions 
on resale and other instruments that lack readily available markets as 
determined in accordance with Commission staff guidance.
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    \60\ Rule 144A securities are securities that, while privately 
placed, are eligible for purchase and resale pursuant to Rule 144A 
of the Securities Act.
    \61\ 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).
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    Furthermore, a Fund may not concentrate investments in a particular 
industry or group of industries, as concentration is defined under the 
1940 Act, the rules or regulations thereunder, or any exemption 
therefrom, as such statute, rules, or regulations may be amended or 
interpreted from time to time.
    Each Fund will not invest in options, futures, swaps, or other 
derivatives or in non-U.S. equity securities. A Fund's investments will 
be consistent with its investment objective and will not be used to 
enhance leverage.
    Additional information regarding the Trust, the Funds, and the 
Shares of each Fund, including investment strategies, risks, creation 
and redemption procedures, fees, portfolio holdings, disclosure 
policies, distributions, and taxes, among other things, is included in 
the Notice and Registration Statements, as applicable.\62\
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    \62\ See Notice and Registration Statements, supra notes 3 and 
4, respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \63\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\64\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\65\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The Commission notes that the Funds and the Shares must 
comply with the requirements of NYSE Arca Equities Rule 8.600 for the 
Shares to be listed and traded on the Exchange.
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    \63\ 15 U.S.C. 78f.
    \64\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \65\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\66\ which sets forth Congress's finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. In addition, the Portfolio 
Indicative Value, as defined in NYSE Arca Equities

[[Page 33623]]

Rule 8.600(c)(3), of the Shares of each Fund will be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Core Trading Session.\67\ On each day that the 
Exchange is open for business (normally from 9:30 a.m. until 4:00 p.m. 
Eastern Time) (``Business Day''), before commencement of the Core 
Trading Session, the Adviser will disclose on each Fund's Web site the 
Disclosed Portfolio, as defined in NYSE Arca Equities Rule 8.600(c)(2), 
that will form the basis for each Fund's calculation of net asset value 
(``NAV'') at the end of the Business Day.\68\ Each Fund will calculate 
its NAV at the close of the regular trading session of each Business 
Day using the values of the respective Fund's portfolio securities.\69\ 
A basket composition file disclosing each Fund's securities, which will 
include the security names and share quantities required to be 
delivered in exchange for Fund Shares, together with estimates and 
actual cash components, will be publicly disseminated daily prior to 
the opening of the New York Stock Exchange via the National Securities 
Clearing Corporation. Information regarding market price and trading 
volume of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services. Information regarding the previous day's closing price and 
trading volume information for the Shares will be published daily in 
the financial section of newspapers or will be available via the 
respective newspapers' Web sites and other such sources. Intra-day and 
closing price information regarding corporate and commercial debt 
instruments; privately-issued securities; mortgage-backed and asset-
backed securities; variable- and floating-rate fixed-income securities; 
repurchase agreements; money market instruments; obligations issued by 
the U.S. government or its agencies and instrumentalities; bank notes 
and similar demand deposits; Build America Bonds; fixed-income 
securities with put features; sinking funds; capital and trust-
preferred securities; and step-coupons will be available from major 
market data vendors. Price information for ETFs and exchange-traded 
capital and trust-preferred securities will be available from the 
applicable exchange or major market-data vendors. Price information for 
other investment company securities (including money market funds) will 
be available from major market-data vendors. The Funds' Web site will 
include a form of the prospectus for each Fund, which may be 
downloaded, and additional data relating to NAV and other applicable 
quantitative information.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \67\ According to the Exchange, several major market-data 
vendors widely disseminate PIVs taken from CTA or other data feeds. 
The Exchange further notes that the PIV's approximate value 
generally will be determined by using current market quotations or 
price quotations obtained from broker-dealers that may trade in the 
portfolio securities held by a Fund. The PIV will be based upon the 
current value for the components of a Fund's Disclosed Portfolio, as 
defined in NYSE Arca Equities Rule 8.600(c)(2).
    \68\ On a daily basis, the Adviser will disclose for each 
portfolio security and financial instrument of each Fund the 
following information: Ticker symbol (if applicable); name of 
security and financial instrument; number of shares, if applicable, 
and dollar value of securities and financial instruments held in the 
portfolio; and percentage weighting of the security and financial 
instrument in the portfolio. The Web site information will be 
publicly available at no charge.
    \69\ The Exchange represents that, when valuing fixed-income 
securities with remaining maturities of more than 60 days, each Fund 
will use the value of the security provided by independent pricing 
services. The pricing services may value fixed-income securities at 
an evaluated price by employing methodologies that use actual market 
transactions, broker-supplied valuations, or other methodologies 
designed to identify the market value for such securities. When 
valuing fixed-income securities with remaining maturities of 60 days 
or less, each Fund may use the security's amortized cost, which 
approximates the security's market value. Corporate and commercial 
debt instruments; privately-issued securities; mortgage-backed and 
asset-backed securities; variable- and floating-rate fixed-income 
securities; repurchase agreements; money market instruments; 
obligations issued by the U.S. government or its agencies and 
instrumentalities; bank notes and similar demand deposits; Build 
America Bonds; fixed-income securities with put features; sinking 
funds; over-the-counter capital and trust-preferred securities; and 
step-coupons will be valued based on price quotations or other 
equivalent indications of value provided by a third-party pricing 
service. Any such third-party pricing service may use a variety of 
methodologies to value some or all of a Fund's debt securities to 
determine the market price. For example, the prices of securities 
with characteristics similar to those held by each Fund may be used 
to assist with the pricing process. In addition, the pricing service 
may use proprietary pricing models. A Fund's debt securities may be 
valued at the mean between the last available bid and ask prices for 
such securities or, if such prices are not available, at prices for 
securities of comparable maturity, quality, and type. Short-term 
securities for which market quotations are not readily available 
will be valued at amortized cost, which approximates market value. 
ETFs and exchange-traded capital and trust preferred 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 security is primarily traded at the 
time of valuation. Investment company securities, including money 
market funds, (other than ETFs) will be valued at NAV.
---------------------------------------------------------------------------

    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares of each Fund that the NAV 
per Share will be calculated daily and that the NAV and the Disclosed 
Portfolio will be made available to all market participants at the same 
time.\70\ The Exchange may halt trading in the Shares if trading is not 
occurring in the securities or the financial instruments constituting 
the Disclosed Portfolio of a Fund, or if other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.\71\ In addition, trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
circumstances under which Shares of each Fund may be halted. Further, 
the Commission notes that the Reporting Authority that provides the 
Disclosed Portfolio of each Fund must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the actual components of the 
portfolio.\72\ The Commission further notes that the Financial Industry 
Regulatory Authority (``FINRA''), on behalf of the Exchange, will 
communicate as needed regarding trading in the Shares, ETFs, exchange-
traded capital and trust-preferred securities, and other exchange-
listed assets, as applicable, with other markets and other entities 
that are members of the Intermarket Surveillance Group (``ISG''), and 
FINRA, on behalf of the Exchange,\73\ may obtain trading information 
regarding trading in the Shares, ETFs, exchange-traded capital and 
trust-preferred securities, and other exchange-listed assets, as 
applicable, from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares, ETFs, 
exchange-traded capital and trust-preferred securities, and other 
exchange-listed assets, as applicable, from markets and other entities 
that are

[[Page 33624]]

members of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.\74\ FINRA, on behalf of the Exchange, 
is able to access, as needed, trade information reported to FINRA's 
Trade Reporting and Compliance Engine (``TRACE'') for certain fixed-
income securities held by the Funds.
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    \70\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \71\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing 
additional considerations for the suspension of trading in or 
removal from listing of Managed Fund Shares on the Exchange). With 
respect to trading halts, the Exchange may consider all relevant 
factors in exercising its discretion to halt or suspend trading in 
the Shares of each Fund. Trading in Shares of either Fund will be 
halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
    \72\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii).
    \73\ The Exchange states that, while FINRA surveils trading on 
the Exchange pursuant to a regulatory services agreement, the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
    \74\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for each Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    The Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. The 
Exchange also states that CSIM is not a broker-dealer but is affiliated 
with a broker-dealer, Charles Schwab & Co., Inc., and that CSIM has 
implemented and will maintain a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the 
composition of or changes to the portfolios.\75\
---------------------------------------------------------------------------

    \75\ See supra note 5. An investment adviser to an open-end fund 
is required to be registered under the Investment Advisers Act of 
1940 (``Advisers Act''). As a result, the Adviser and its related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
---------------------------------------------------------------------------

    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares of each Fund will conform to the initial and 
continued listing criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by FINRA on 
behalf of the Exchange, that are designed to detect violations of 
Exchange rules and applicable federal securities laws and that these 
procedures are adequate to properly monitor Exchange trading of 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.
    (4) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
of the special characteristics and risks associated with trading the 
Shares. Specifically, the Information Bulletin will discuss the 
following: (a) The procedures for purchases and redemptions of Shares 
in Creation Units (and that Shares are not individually redeemable); 
(b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due 
diligence on its ETP Holders to learn the essential facts relating to 
every customer prior to trading the Shares; (c) the risks involved in 
trading the Shares during the Opening and Late Trading Sessions when an 
updated Portfolio Indicative Value will not be calculated or publicly 
disseminated; (d) how information regarding the Portfolio Indicative 
Value is disseminated; (e) the requirement that ETP Holders deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (f) trading 
information.
    (5) For initial and continued listing, each Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\76\ as provided by 
NYSE Arca Equities Rule 5.3.
---------------------------------------------------------------------------

    \76\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (6) The Adviser expects that, under normal market circumstances, 
each Fund will generally seek to invest in corporate bond issuances in 
developed countries that have at least $100,000,000 par amount 
outstanding and at least $200,000,000 par amount outstanding with 
respect to corporate bond issuances in emerging market countries.
    (7) Each Fund's investments in each of the following security types 
will be limited to 10% of a Fund's net assets: (a) Non-agency 
residential-mortgage-backed securities; (b) non-agency commercial-
mortgage-backed securities; and (c) non-agency asset-backed securities. 
Each Fund's aggregate investments in the following security types will 
be limited to 20% of a Fund's net assets: (a) Non-agency residential-
mortgage-backed securities; (b) non-agency commercial-mortgage-backed 
securities; and (c) non-agency asset-backed securities.
    (8) At least 90% of a Fund's net assets will be, under normal 
circumstances, invested in U.S. dollar-denominated fixed-income 
securities. All fixed-income securities, including mortgage-backed and 
asset-backed securities, purchased by a Fund will be rated A- or 
higher. Neither high-yield asset-backed securities nor high-yield 
mortgage-backed securities are included in a Fund's principal 
investment strategies.
    (9) Each Fund's portfolio, under normal circumstances, will meet 
certain criteria similar to those applicable to index-based, fixed-
income exchange-traded funds contained in NYSE Arca Equities Rule 
5.2(j)(3), Commentary.02.\77\
---------------------------------------------------------------------------

    \77\ See note 18, supra.
---------------------------------------------------------------------------

    (10) A Fund may not hold more than 15% of its net assets in 
illiquid assets, including Rule 144A securities, except for Rule 144A 
securities deemed liquid by the Adviser, based on criteria for 
liquidity established by the Board, consistent with Commission 
guidance.
    (11) A minimum of 100,000 Shares of each Fund will be outstanding 
at the commencement of trading on the Exchange.
    (12) With respect to each of the Funds, the Fund's investments will 
be consistent with the Fund's investment objective and will not be used 
to enhance leverage. While each Fund may invest in inverse ETFs, a Fund 
will not invest in leveraged (e.g., 2X or 3X) or leveraged inverse 
ETFs.
    (13) Each Fund will not invest in options, futures, swaps, or other 
derivatives, or in non-U.S. equity securities.

This approval order is based on all of the Exchange's representations 
and description of the Funds, including those set forth above and in 
the Notice.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \78\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

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

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\79\ that the proposed rule change (SR-NYSEArca-2014-42) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 78s(b)(2).


[[Page 33625]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\80\
---------------------------------------------------------------------------

    \80\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-13564 Filed 6-10-14; 8:45 am]
BILLING CODE 8011-01-P


