
[Federal Register Volume 79, Number 141 (Wednesday, July 23, 2014)]
[Notices]
[Pages 42852-42863]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17265]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72636; File No. SR-BATS-2014-026]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To List and Trade Shares of Certain 
Funds of the Alpha Architect ETF Trust

July 17, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 3, 2014, BATS Exchange, Inc. (``Exchange'' or ``BATS'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to list and trade shares of certain funds 
(the ``Fund'' when discussed individually or, collectively, the 
``Funds'') of the Alpha Architect ETF Trust (the ``Trust'') under BATS 
Rule 14.11(i) (``Managed Fund Shares''). The shares of each Fund and 
the shares of the Funds collectively, as applicable, are referred to 
herein as the ``Shares.''
    The text of the proposed rule addition is available at the 
Exchange's Web site at http://www.batstrading.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 Exchange 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 these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    The Exchange proposes to list and trade the Shares under BATS Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange.\3\ The Funds will be actively managed funds. The 
Exchange proposes to list and trade Shares of the following Funds: (i) 
ValueShares U.S. Quantitative Value ETF; (ii) ValueShares International 
Quantitative Value ETF; (iii) MomentumShares U.S. Quantitative Momentum 
ETF; and (iv) MomentumShares International Quantitative Momentum ETF. 
The Shares will be offered by the Trust, which was established as a 
Delaware statutory trust on October 11, 2013. The Trust is registered 
with the Commission as an open-end investment company and has filed a 
registration statement on behalf of the Funds on Form N-1A 
(``Registration Statement'') with the Commission.\4\
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    \3\ The Commission approved BATS Rule 14.11(i) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \4\ See Registration Statement on Form N-1A for the Trust, dated 
April 25, 2014 (File Nos. 333-195493 and 811-22961). The 
descriptions of the Fund and the Shares contained herein are based, 
in part, on information in the Registration Statement. The 
Commission has issued an order granting certain exemptive relief to 
the Company under the Investment Company Act of 1940 (15 U.S.C. 80a-
1) (``1940 Act'') (the ``Exemptive Order''). See Investment Company 
Act Release No. 31018 (April 16, 2014) (File No. 812-14245).
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Description of the Shares and the Funds
    Empowered Funds, LLC is the investment adviser (``Adviser'') to the 
Funds.\5\ U.S. Bancorp Fund Services, LLC is the administrator and 
transfer agent (``Administrator,'' and ``Transfer Agent,'' 
respectively) for the Trust. U.S. Bank National Association is the 
Custodian (``Custodian'') for the Trust. Quasar Distributors, LLC 
(``Distributor'') serves as the distributor for the Trust.
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    \5\ The Adviser is an indirect subsidiary of Empirical Finance, 
LLC d/b/a Empiritrage, LLC.
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    BATS Rule 14.11(i)(7) provides that, if the investment adviser to 
the investment company issuing Managed Fund Shares is affiliated with a 
broker-dealer, such investment adviser shall erect a ``fire wall'' 
between the

[[Page 42853]]

investment adviser and the broker-dealer with respect to access to 
information concerning the composition and/or changes to such 
investment company portfolio.\6\ In addition, Rule 14.11(i)(7) further 
requires that 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. Rule 14.11(i)(7) is 
similar to BATS Rule 14.11(b)(5)(A)(i), however, Rule 14.11(i)(7) 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 a registered broker-dealer 
and is not affiliated with any broker-dealers. In the event that (a) 
the Adviser becomes registered as a 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, it 
will implement a fire wall with respect to its relevant personnel or 
such broker-dealer affiliate, as applicable, regarding access to 
information concerning the composition and/or changes to the portfolio, 
and will be subject to procedures designed to prevent the use and 
dissemination of material non-public information regarding such 
portfolio.
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    \6\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and its related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. This Rule requires investment advisers 
to adopt a code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with Rule 204A-1 under the Advisers Act. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser to provide investment advice to clients 
unless such investment adviser has (i) adopted and implemented 
written policies and procedures reasonably designed to prevent 
violation, by the investment adviser and its supervised persons, of 
the Advisers Act and the Commission rules adopted thereunder; (ii) 
implemented, at a minimum, an annual review regarding the adequacy 
of the policies and procedures established pursuant to subparagraph 
(i) above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
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ValueShares U.S. Quantitative Value ETF
    According to the Registration Statement, the Fund will seek to 
provide long-term capital appreciation. The Fund will invest, under 
normal circumstances,\7\ at least 80% of its net assets, plus any 
borrowings for investment purposes, in securities of U.S. companies. To 
achieve its objective, the Fund will invest, under normal 
circumstances, primarily in U.S. equity securities that the Adviser 
believes, based on quantitative analysis, are undervalued at the time 
of purchase and have the potential for capital appreciation. A security 
is undervalued when it trades at a price below the price at which the 
Adviser believes it would trade if the market reflected all factors 
relating to the issuer's worth. In choosing investments that are 
undervalued, the Adviser focuses on companies that it believes show 
indications of quality and financial strength but have security prices 
that are low relative to current operating earnings and/or are 
currently viewed unfavorably by equity research analysts.
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    \7\ The term ``under normal circumstances'' includes, but is not 
limited to, the absence of adverse market, economic, political, or 
other conditions, including extreme volatility or trading halts in 
the financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot, or labor 
disruption, or any similar intervening circumstance.
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    The Fund will invest primarily in the common stock of U.S. 
companies. The Fund may invest in securities of companies in any 
industry and of any market capitalization. Although the Fund generally 
expects to invest in companies with larger market capitalizations, the 
Fund may invest in small- and mid-capitalization companies. The Fund is 
an actively managed exchanged-traded fund (``ETF'') and thus does not 
seek to replicate the performance of a specific index. Rather, the 
Adviser has discretion on a daily basis to actively manage the Fund's 
portfolio in accordance with the Fund's investment objective.
    The Adviser utilizes a quantitative model to identify which 
securities the Fund might purchase and sell as well as opportune times 
for purchases and sales. While the Fund will invest in approximately 
fifty U.S. equity securities as determined by its quantitative value 
factors, the quantity of holdings in the Fund will be based on a number 
of factors, including the asset size of the Fund and the number of 
companies that satisfy the Adviser's quantitative measurements at any 
one time. The Fund's portfolio will be rebalanced to the Adviser's 
internal target allocations, developed pursuant to the Adviser's 
strategy described above, at least semi-annually.
    In the absence of normal circumstances, the Fund may temporarily 
depart from its normal investment process, provided that such departure 
is, in the opinion of the Adviser, consistent with the Fund's 
investment objective and in the best interest of the Fund. For example, 
the Fund may invest up to 100% of its assets in a temporary defensive 
manner by holding all or a substantial portion of its assets in cash, 
cash equivalents, or other quality short-term investment in response to 
adverse market, economic, or political or other conditions. Such 
temporary defensive investments generally may include short-term U.S. 
government securities, commercial paper, bank obligations, repurchase 
agreements, money market fund shares, and other money market 
instruments.
    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act. A non-diversified fund is a fund that is 
not limited by the 1940 Act with regard to the percentage of its assets 
that may be invested in the securities of a single issuer.\8\ The Fund 
will not, however, concentrate its investments in a particular industry 
or group of industries, as that term is used in the 1940 Act.\9\ 
Securities of the U.S. government (including its agencies and 
instrumentalities), tax-free securities of state or municipal 
governments and their political subdivisions (and repurchase agreements 
collateralized by government securities) and securities of other 
investment companies, whether registered or excluded from registration 
under Section 3(c) of the 1940 Act, are not considered to be issued by 
members of any industry.
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    \8\ The diversification standard is set forth in Section 5(b)(1) 
of the 1940 Act.
    \9\ See Form N-1A, Item 9. The Commission has taken the position 
that a fund is concentrated if it invests in more than 25% of the 
value of its total assets in any one industry. See, e.g., Investment 
Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 
(November 21, 1975).
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    The Fund intends to qualify each year as a regulated investment 
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended.\10\ The Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification and distribution requirements 
necessary to establish and

[[Page 42854]]

maintain RIC qualification under Subchapter M.
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    \10\ 26 U.S.C. 851.
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Other Portfolio Holdings
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser \11\ 
under the 1940 Act.\12\ The Fund will monitor its portfolio liquidity 
on an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid securities. Illiquid securities include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
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    \11\ In reaching liquidity decisions, the Adviser may consider 
factors including: 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; the nature of the 
security and the nature of the marketplace trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer); any legal or contractual 
restrictions on the ability to transfer the security or asset; 
significant developments involving the issuer or counterparty 
specifically (e.g., default, bankruptcy, etc.) or the securities 
markets generally; and settlement practices, registration 
procedures, limitations on currency conversion or repatriation, and 
transfer limitations (for foreign securities or other assets).
    \12\ 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).
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    The Fund may make secured loans of its portfolio securities; 
however, securities loans will not be made if, as a result, the 
aggregate amount of all outstanding securities loans by the Fund 
exceeds 33\1/3\% of its total assets (including the market value of 
collateral received). To the extent the Fund engages in securities 
lending, securities loans will be made to broker-dealers that the 
Adviser believes to be of relatively high credit standing pursuant to 
agreements requiring that the loans continuously be collateralized by 
cash, liquid securities, or shares of other investment companies with a 
value at least equal to the market value of the loaned securities.
    The Fund may invest in preferred stocks. Preferred stocks include 
convertible and non-convertible preferred and preference stocks that 
are senior to common stock. Preferred stocks are equity securities that 
are senior to common stock with respect to the right to receive 
dividends and a fixed share of the proceeds resulting from the issuer's 
liquidation. Some preferred stocks also entitle their holders to 
receive additional liquidation proceeds on the same basis as holders of 
the issuer's common stock, and thus represent an ownership interest in 
the issuer.
    The Fund may enter into repurchase agreements with banks and 
broker-dealers. A repurchase agreement is an agreement under which 
securities are acquired by the Fund from a securities dealer or bank 
subject to resale at an agreed upon price on a later date. The 
acquiring Fund bears a risk of loss in the event that the other party 
to a repurchase agreement defaults on its obligations and the Fund is 
delayed or prevented from exercising its rights to dispose of the 
collateral securities.
    The Fund may invest in debt securities, including obligations of 
the U.S. government, its agencies and instrumentalities, corporate debt 
securities, master-demand notes, bank certificates of deposit, time 
deposits, bankers' acceptances, commercial paper and other notes, 
inflation-indexed securities, and other debt securities. The Fund may 
invest in debt securities that are investment grade.
    The Fund may invest in the securities of other investment companies 
(including money market funds and ETFs) to the extent permitted under 
the 1940 Act, Commission rules thereunder and exemptions thereto. Under 
the 1940 Act, the Fund's investment in investment companies is limited 
to, subject to certain exceptions: (i) 3% of the total outstanding 
voting stock of any one investment company, (ii) 5% of the Fund's total 
assets with respect to any one investment company and (iii) 10% of the 
Fund's total assets of investment companies in the aggregate. The Fund 
may also invest in private investment funds, vehicles or structures.
    The Fund will not invest in options, futures or swaps. The Fund's 
investments will be consistent with its respective investment objective 
and will not be used to enhance leverage.
ValueShares International Quantitative Value ETF
    According to the Registration Statement, the Fund will seek to 
provide long-term capital appreciation. To achieve its objective, the 
Fund will invest, under normal circumstances, primarily in equity 
securities of international companies that the Adviser believes, based 
on quantitative analysis, are undervalued at the time of purchase and 
have the potential for capital appreciation. A security is undervalued 
when it trades at a price below the price at which the Adviser believes 
it would trade if the market reflected all factors relating to the 
issuer's worth. In choosing investments that are undervalued, the 
Adviser focuses on companies that it believes show indications of 
quality and financial strength but have security prices that are low 
relative to current operating earnings and/or are currently viewed 
unfavorably by equity research analysts.
    The Fund will invest primarily in the common stock of international 
companies and depositary receipts. The Fund may invest in securities of 
companies in any industry and of any market capitalization. The Fund 
may invest in foreign securities by purchasing depositary receipts, 
including American Depositary Receipts (``ADRs''), Global Depositary 
Receipts (``GDRs''), and European Depositary Receipts (``EDRs'') or 
other securities convertible into securities of issuers based in 
foreign countries (collectively, ``Depositary Receipts'').\13\ Although 
the Fund generally expects to invest in companies with larger market 
capitalizations, the Fund may invest in small- and mid-capitalization 
companies. With respect to its investments in exchange-listed common 
stocks and Depositary Receipts of non-U.S. issuers, the Fund will 
invest at least 90% of its assets invested in such

[[Page 42855]]

securities in exchange-listed common stocks and Depositary Receipts 
that trade in markets that are members of the Intermarket Surveillance 
Group (``ISG'') or are parties to a comprehensive surveillance sharing 
agreement with the Exchange.\14\
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    \13\ Depositary Receipts are receipts, typically issued by a 
bank or trust issuer, which evidence ownership of underlying 
securities issued by a non-U.S. issuer. For ADRs, the depository is 
typically a U.S. financial institution and the underlying securities 
are issued by a non-U.S. issuer. For other forms of Depositary 
Receipts, the depository may be a non-U.S. or a U.S. entity, and the 
underlying securities may be issued by a non-U.S. or a U.S. issuer. 
Depositary Receipts are not necessarily denominated in the same 
currency as their underlying securities. Generally, ADRs, issued in 
registered form, are designed for use in the U.S. securities 
markets, and EDRs, issued in bearer form, are designed for use in 
European securities markets. GDRs are tradable both in the United 
States and in Europe and are designed for use throughout the world.
    \14\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange notes that not all 
components of the Disclosed Portfolio for the Funds may trade on 
markets that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
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    The Fund is an actively managed ETF and thus does not seek to 
replicate the performance of a specific index. Rather, the Adviser has 
discretion on a daily basis to actively manage the Fund's portfolio in 
accordance with the Fund's investment objective.
    The Adviser utilizes a quantitative model to identify which 
securities the Fund might purchase and sell as well as opportune times 
for purchases and sales. While the Fund will invest in approximately 
fifty international equity securities as determined by its quantitative 
value factors, the quantity of holdings in the Fund will be based on a 
number of factors, including the asset size of the Fund and the number 
of companies that satisfy the Adviser's quantitative measurements at 
any one time. The Fund's portfolio will be rebalanced to the Adviser's 
internal target allocations, developed pursuant to the Adviser's 
strategy described above, at least annually.
    In the absence of normal circumstances, the Fund may temporarily 
depart from its normal investment process, provided that such departure 
is, in the opinion of Adviser, consistent with the Fund's investment 
objective and in the best interest of the Fund. For example, the Fund 
may invest up to 100% of its assets in a temporary defensive manner by 
holding all or a substantial portion of its assets in cash, cash 
equivalents, or other quality short-term investment in response to 
adverse market, economic, or political or other conditions. Such 
temporary defensive investments generally may include short-term U.S. 
government securities, commercial paper, bank obligations, repurchase 
agreements, money market fund shares, and other money market 
instruments.
    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act. A non-diversified fund is a fund that is 
not limited by the 1940 Act with regard to the percentage of its assets 
that may be invested in the securities of a single issuer.\15\ The Fund 
will not, however, concentrate its investments in a particular industry 
or group of industries, as that term is used in the 1940 Act.\16\ 
Securities of the U.S. government (including its agencies and 
instrumentalities), tax-free securities of state or municipal 
governments and their political subdivisions (and repurchase agreements 
collateralized by government securities) and securities of other 
investment companies, whether registered or excluded from registration 
under Section 3(c) of the 1940 Act, are not considered to be issued by 
members of any industry.
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    \15\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
    \16\ See supra note 9.
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    The Fund intends to qualify each year as RIC under Subchapter M of 
the Internal Revenue Code of 1986, as amended.\17\ The Fund will invest 
its assets, and otherwise conduct its operations, in a manner that is 
intended to satisfy the qualifying income, diversification and 
distribution requirements necessary to establish and maintain RIC 
qualification under Subchapter M.
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    \17\ See supra note 10.
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Other Portfolio Holdings
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser \18\ 
under the 1940 Act.\19\ The Fund will monitor its portfolio liquidity 
on an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid securities. Illiquid securities include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
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    \18\ See supra note 11.
    \19\ See supra note 12.
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    The Fund may make secured loans of its portfolio securities; 
however, securities loans will not be made if, as a result, the 
aggregate amount of all outstanding securities loans by the Fund 
exceeds 33\1/3\% of its total assets (including the market value of 
collateral received). To the extent the Fund engages in securities 
lending, securities loans will be made to broker-dealers that the 
Adviser believes to be of relatively high credit standing pursuant to 
agreements requiring that the loans continuously be collateralized by 
cash, liquid securities, or shares of other investment companies with a 
value at least equal to the market value of the loaned securities.
    The Fund may invest in preferred stocks. Preferred stocks include 
convertible and nonconvertible preferred and preference stocks that are 
senior to common stock. Preferred stocks are equity securities that are 
senior to common stock with respect to the right to receive dividends 
and a fixed share of the proceeds resulting from the issuer's 
liquidation. Some preferred stocks also entitle their holders to 
receive additional liquidation proceeds on the same basis as holders of 
the issuer's common stock, and thus represent an ownership interest in 
the issuer.
    The Fund may enter into repurchase agreements with banks and 
broker-dealers. A repurchase agreement is an agreement under which 
securities are acquired by the Fund from a securities dealer or bank 
subject to resale at an agreed upon price on a later date. The 
acquiring Fund bears a risk of loss in the event that the other party 
to a repurchase agreement defaults on its obligations and the Fund is 
delayed or prevented from exercising its rights to dispose of the 
collateral securities.
    The Fund may invest in debt securities, including obligations of 
the U.S. government, its agencies and instrumentalities, corporate debt 
securities, master-demand notes, bank certificates of deposit, time 
deposits, bankers' acceptances, commercial paper and other notes, 
inflation-indexed securities, and other debt securities. The Fund may 
invest in debt securities that are investment grade.
    The Fund may invest in the securities of other investment companies 
(including money market funds and ETFs) to the extent permitted under 
the 1940 Act, Commission rules thereunder and exemptions thereto. Under 
the 1940 Act, the Fund's investment in investment companies is limited 
to, subject to certain exceptions: (i) 3% of the total outstanding 
voting stock of any one investment company, (ii) 5% of the Fund's total 
assets with respect to any one investment company and (iii) 10% of the 
Fund's total assets of investment companies in the aggregate. The Fund 
may also invest in private investment funds, vehicles or structures.
    The Fund will not invest in options, futures or swaps. The Fund's 
investments will be consistent with its respective investment objective 
and will not be used to enhance leverage.

[[Page 42856]]

MomentumShares U.S. Quantitative Momentum ETF
    According to the Registration Statement, the Fund (together with 
the ValueShares U.S. Quantitative Value ETF, the ``U.S. Funds'') will 
seek to provide long-term capital appreciation. The Fund will invest, 
under normal circumstances, at least 80% of its net assets, plus any 
borrowings for investment purposes, in securities of U.S. companies. To 
achieve its objective, the Fund will invest, under normal 
circumstances, primarily in U.S. equity securities that the Adviser 
believes, based on quantitative analysis, have positive momentum. The 
Adviser considers a security to have positive momentum primarily if it 
has a total return performance, expressed as the magnitude of 
profitability for the security in percentage terms, over a certain 
period (e.g., the prior twelve months) that ranks it at or near the top 
of its relevant universe (i.e., U.S. equity securities that meet the 
Fund's trading volume and market liquidity criteria) at the time of 
purchase. In assessing positive momentum, the Adviser may also consider 
additional factors, such as the security's return over intermediate 
periods (e.g., the most recent quarter) or other time periods, as well 
as the characteristics of the security's return path (such as 
comparisons of the security's more recent individual monthly returns 
against less recent individual monthly returns). The criteria the 
Adviser uses for determining positive momentum may change from time to 
time.
    The Fund will invest primarily in the common stock of U.S. 
companies. The Fund may invest in securities of companies in any 
industry and of any market capitalization. Although the Fund generally 
expects to invest in companies with larger market capitalizations, the 
Fund may invest in small- and mid-capitalization companies.
    The Adviser utilizes a quantitative model to identify which 
securities the Fund might purchase and sell as well as opportune times 
for purchases and sales. While the Fund will invest in approximately 
fifty U.S. equity securities as determined by its quantitative value 
factors, the quantity of holdings in the Fund will be based on a number 
of factors, including the asset size of the Fund and the number of 
companies that satisfy the Adviser's quantitative measurements at any 
one time. The Fund's portfolio will be rebalanced to the Adviser's 
internal target allocations, developed pursuant to the Adviser's 
strategy described above, at least semi-annually.
    The Fund is an actively managed ETF and thus does not seek to 
replicate the performance of a specific index. Rather, the Adviser has 
discretion on a daily basis to actively manage the Fund's portfolio in 
accordance with the Fund's investment objective.
    In the absence of normal circumstances, the Fund may temporarily 
depart from its normal investment process, provided that such departure 
is, in the opinion of the Adviser, consistent with the Fund's 
investment objective and in the best interest of the Fund. For example, 
the Fund may invest up to 100% of its assets in a temporary defensive 
manner by holding all or a substantial portion of its assets in cash, 
cash equivalents, or other quality short-term investment in response to 
adverse market, economic, or political or other conditions. Such 
temporary defensive investments generally may include short-term U.S. 
government securities, commercial paper, bank obligations, repurchase 
agreements, money market fund shares, and other money market 
instruments.
    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act. A non-diversified fund is a fund that is 
not limited by the 1940 Act with regard to the percentage of its assets 
that may be invested in the securities of a single issuer.\20\ The Fund 
will not, however, concentrate its investments in a particular industry 
or group of industries, as that term is used in the 1940 Act.\21\ 
Securities of the U.S. government (including its agencies and 
instrumentalities), tax-free securities of state or municipal 
governments and their political subdivisions (and repurchase agreements 
collateralized by government securities) and securities of other 
investment companies, whether registered or excluded from registration 
under Section 3(c) of the 1940 Act, are not considered to be issued by 
members of any industry.
---------------------------------------------------------------------------

    \20\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
    \21\ See supra note 9.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a RIC under Subchapter M 
of the Internal Revenue Code of 1986, as amended.\22\ The Fund will 
invest its assets, and otherwise conduct its operations, in a manner 
that is intended to satisfy the qualifying income, diversification and 
distribution requirements necessary to establish and maintain RIC 
qualification under Subchapter M.
---------------------------------------------------------------------------

    \22\ See supra note 10.
---------------------------------------------------------------------------

Other Portfolio Holdings
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser \23\ 
under the 1940 Act.\24\ The Fund will monitor its portfolio liquidity 
on an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid securities. Illiquid securities include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
---------------------------------------------------------------------------

    \23\ See supra note 11.
    \24\ See supra note 12.
---------------------------------------------------------------------------

    The Fund may make secured loans of its portfolio securities; 
however, securities loans will not be made if, as a result, the 
aggregate amount of all outstanding securities loans by the Fund 
exceeds 33\1/3\% of its total assets (including the market value of 
collateral received). To the extent the Fund engages in securities 
lending, securities loans will be made to broker-dealers that the 
Adviser believes to be of relatively high credit standing pursuant to 
agreements requiring that the loans continuously be collateralized by 
cash, liquid securities, or shares of other investment companies with a 
value at least equal to the market value of the loaned securities.
    The Fund may invest in preferred stocks. Preferred stocks include 
convertible and non-convertible preferred and preference stocks that 
are senior to common stock. Preferred stocks are equity securities that 
are senior to common stock with respect to the right to receive 
dividends and a fixed share of the proceeds resulting from the issuer's 
liquidation. Some preferred stocks also entitle their holders to 
receive additional liquidation proceeds on the same basis as holders of 
the issuer's common stock, and thus represent an ownership interest in 
the issuer.
    The Fund may enter into repurchase agreements with banks and 
broker-dealers. A repurchase agreement is an agreement under which 
securities are acquired by the Fund from a securities dealer or bank 
subject to resale at an agreed upon price on a later date. The 
acquiring Fund bears a risk of loss in the

[[Page 42857]]

event that the other party to a repurchase agreement defaults on its 
obligations and the Fund is delayed or prevented from exercising its 
rights to dispose of the collateral securities.
    The Fund may invest in debt securities, including obligations of 
the U.S. government, its agencies and instrumentalities, corporate debt 
securities, master-demand notes, bank certificates of deposit, time 
deposits, bankers' acceptances, commercial paper and other notes, 
inflation-indexed securities, and other debt securities. The Fund may 
invest in debt securities that are investment grade.
    The Fund may invest in the securities of other investment companies 
(including money market funds and ETFs) to the extent permitted under 
the 1940 Act, Commission rules thereunder and exemptions thereto. Under 
the 1940 Act, the Fund's investment in investment companies is limited 
to, subject to certain exceptions: (i) 3% of the total outstanding 
voting stock of any one investment company, (ii) 5% of the Fund's total 
assets with respect to any one investment company and (iii) 10% of the 
Fund's total assets of investment companies in the aggregate. The Fund 
may also invest in private investment funds, vehicles or structures.
    The Fund will not invest in options, futures or swaps. The Fund's 
investments will be consistent with its respective investment objective 
and will not be used to enhance leverage.
MomentumShares International Quantitative Momentum ETF
    According to the Registration Statement, the Fund (together with 
the ValueShares International Quantitative Value ETF, the 
``International Funds'') will seek to provide long-term capital 
appreciation. To achieve its objective, the Fund will invest, under 
normal circumstances, primarily in equity securities of international 
companies that the Adviser believes, based on quantitative analysis, 
have positive momentum. The Adviser considers a security to have 
positive momentum primarily if it has a total return performance, 
expressed as the magnitude of profitability for the security in 
percentage terms, over a certain period (e.g., the prior twelve months) 
that ranks it at or near the top of its relevant universe (i.e., 
international equity securities that meet the Fund's trading volume and 
market liquidity criteria) at the time of purchase. In assessing 
positive momentum, the Adviser may also consider additional factors, 
such as the security's return over intermediate periods (e.g., the most 
recent quarter) or other time periods, as well as the characteristics 
of the security's return path (such as comparisons of the security's 
more recent individual monthly returns against less recent individual 
monthly returns). The criteria the Adviser uses for determining 
positive momentum may change from time to time.
    The Fund will invest primarily in the common stock of international 
companies and depositary receipts. The Fund may invest in securities of 
companies in any industry and of any market capitalization. The Fund 
may invest in foreign securities by purchasing depositary receipts, 
including ADRs, GDRs, and EDRs or other securities convertible into 
securities of issuers based in foreign countries. Although the Fund 
generally expects to invest in companies with larger market 
capitalizations, the Fund may invest in small- and mid-capitalization 
companies. With respect to its investments in exchange-listed common 
stocks and Depositary Receipts of non-U.S. issuers, the Fund will 
invest at least 90% of its assets invested in such securities in 
exchange-listed common stocks and Depositary Receipts that trade in 
markets that are members of the ISG or are parties to a comprehensive 
surveillance sharing agreement with the Exchange.
    The Fund is an actively managed ETF and thus does not seek to 
replicate the performance of a specific index. Rather, the Adviser has 
discretion on a daily basis to actively manage the Fund's portfolio in 
accordance with the Fund's investment objective.
    The Adviser utilizes a quantitative model to identify which 
securities the Fund might purchase and sell as well as opportune times 
for purchases and sales. While the Fund will invest in approximately 
fifty international equity securities as determined by its quantitative 
value factors, the quantity of holdings in the Fund will be based on a 
number of factors, including the asset size of the Fund and the number 
of companies that satisfy the Adviser's quantitative measurements at 
any one time. The Fund's portfolio will be rebalanced to the Adviser's 
internal target allocations, developed pursuant to the Adviser's 
strategy described above, at least annually.
    In the absence of normal circumstances, the Fund may temporarily 
depart from its normal investment process, provided that such departure 
is, in the opinion of the Adviser, consistent with the Fund's 
investment objective and in the best interest of the Fund. For example, 
the Fund may invest up to 100% of its assets in a temporary defensive 
manner by holding all or a substantial portion of its assets in cash, 
cash equivalents, or other quality short-term investment in response to 
adverse market, economic, or political or other conditions. Such 
temporary defensive investments generally may include short-term U.S. 
government securities, commercial paper, bank obligations, repurchase 
agreements, money market fund shares, and other money market 
instruments.
    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act. A non-diversified fund is a fund that is 
not limited by the 1940 Act with regard to the percentage of its assets 
that may be invested in the securities of a single issuer.\25\ The Fund 
will not, however, concentrate its investments in a particular industry 
or group of industries, as that term is used in the 1940 Act.\26\ 
Securities of the U.S. government (including its agencies and 
instrumentalities), tax-free securities of state or municipal 
governments and their political subdivisions (and repurchase agreements 
collateralized by government securities) and securities of other 
investment companies, whether registered or excluded from registration 
under Section 3(c) of the 1940 Act, are not considered to be issued by 
members of any industry.
---------------------------------------------------------------------------

    \25\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
    \26\ See supra note 9.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a RIC under Subchapter M 
of the Internal Revenue Code of 1986, as amended.\27\ The Fund will 
invest its assets, and otherwise conduct its operations, in a manner 
that is intended to satisfy the qualifying income, diversification and 
distribution requirements necessary to establish and maintain RIC 
qualification under Subchapter M.
---------------------------------------------------------------------------

    \27\ See supra note 10.
---------------------------------------------------------------------------

Other Portfolio Holdings
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser \28\ 
under the 1940 Act.\29\ The Fund will monitor its portfolio liquidity 
on an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15%

[[Page 42858]]

of the Fund's net assets are held in illiquid securities. Illiquid 
securities include securities subject to contractual or other 
restrictions on resale and other instruments that lack readily 
available markets as determined in accordance with Commission staff 
guidance.
---------------------------------------------------------------------------

    \28\ See supra note 11.
    \29\ See supra note 12.
---------------------------------------------------------------------------

    The Fund may make secured loans of its portfolio securities; 
however, securities loans will not be made if, as a result, the 
aggregate amount of all outstanding securities loans by the Fund 
exceeds 33\1/3\% of its total assets (including the market value of 
collateral received). To the extent the Fund engages in securities 
lending, securities loans will be made to broker-dealers that the 
Adviser believes to be of relatively high credit standing pursuant to 
agreements requiring that the loans continuously be collateralized by 
cash, liquid securities, or shares of other investment companies with a 
value at least equal to the market value of the loaned securities.
    The Fund may invest in preferred stocks. Preferred stocks include 
convertible and non-convertible preferred and preference stocks that 
are senior to common stock. Preferred stocks are equity securities that 
are senior to common stock with respect to the right to receive 
dividends and a fixed share of the proceeds resulting from the issuer's 
liquidation. Some preferred stocks also entitle their holders to 
receive additional liquidation proceeds on the same basis as holders of 
the issuer's common stock, and thus represent an ownership interest in 
the issuer.
    The Fund may enter into repurchase agreements with banks and 
broker-dealers. A repurchase agreement is an agreement under which 
securities are acquired by the Fund from a securities dealer or bank 
subject to resale at an agreed upon price on a later date. The 
acquiring Fund bears a risk of loss in the event that the other party 
to a repurchase agreement defaults on its obligations and the Fund is 
delayed or prevented from exercising its rights to dispose of the 
collateral securities.
    The Fund may invest in debt securities, including obligations of 
the U.S. government, its agencies and instrumentalities, corporate debt 
securities, master-demand notes, bank certificates of deposit, time 
deposits, bankers' acceptances, commercial paper and other notes, 
inflation-indexed securities, and other debt securities. The Fund may 
invest in debt securities that are investment grade.
    The Fund may invest in the securities of other investment companies 
(including money market funds and ETFs) to the extent permitted under 
the 1940 Act, Commission rules thereunder and exemptions thereto. Under 
the 1940 Act, the Fund's investment in investment companies is limited 
to, subject to certain exceptions: (i) 3% of the total outstanding 
voting stock of any one investment company, (ii) 5% of the Fund's total 
assets with respect to any one investment company and (iii) 10% of the 
Fund's total assets of investment companies in the aggregate. The Fund 
may also invest in private investment funds, vehicles or structures.
    The Fund will not invest in options, futures or swaps. The Fund's 
investments will be consistent with its respective investment objective 
and will not be used to enhance leverage.
Net Asset Value
    According to the Registration Statement, the net asset value 
(``NAV'') of each Fund will be calculated each business day as of the 
close of regular trading on the New York Stock Exchange (``NYSE''), 
generally 4:00 p.m. Eastern Time (the ``NAV Calculation Time''), on 
each day that the NYSE is open for trading, based on prices at the NAV 
Calculation Time. NAV per Share is calculated by dividing the Fund's 
net assets by the number of Fund Shares outstanding. Each Fund's net 
assets are valued primarily on the basis of market quotations.
    Each Fund calculates its NAV per Share by taking the current market 
value of its total assets, subtracting any liabilities, and dividing 
that amount by the total number of Shares owned by shareholders. When 
calculating the NAV of a Fund's Shares, expenses are accrued and 
applied daily and equity securities held by the Fund are valued at 
their market value when reliable market quotations are readily 
available. Equity securities are valued primarily on the basis of 
market quotations reported on stock exchanges and other securities 
markets around the world. If an equity security is listed on a national 
exchange, the security is valued at the closing price or, if the 
closing price is not readily available, the mean of the closing bid and 
ask prices. Both market quotations and indicative bids are obtained 
from outside pricing services approved and monitored pursuant to a 
policy approved by the Board of Trustees of the Trust (the ``Board'').
    If a market price is not readily available or is deemed not to 
reflect market value, a Fund will determine the price of the security 
held by the Fund based on a determination of the security's fair value 
pursuant to policies and procedures approved by the Board. In addition, 
a Fund may use fair valuation to price securities that trade on a 
foreign exchange, if any, when a significant event has occurred after 
the foreign exchange closes but before the time at which the Fund's NAV 
is calculated. Foreign exchanges typically close before the time at 
which Fund Share prices are calculated, and may be closed altogether on 
some days when a Fund is open. Such significant events affecting a 
foreign security, in the event a Fund holds foreign securities, may 
include, but are not limited to: Corporate actions, earnings 
announcements, litigation or other events impacting a single issuer; 
governmental action that affects securities in one sector or country; 
natural disasters or armed conflicts affecting a country or region; or 
significant domestic or foreign market fluctuations. If a Fund holds 
foreign securities, it would use various criteria, including an 
evaluation of U.S. market moves after the close of foreign markets, in 
determining whether a foreign security's market price is readily 
available and reflective of market value and, if not, the fair value of 
the security.
    To the extent a Fund has holdings of foreign or other securities 
that may trade infrequently, fair valuation may be used more frequently 
than for other funds. Fair valuation may have the effect of reducing 
stale pricing arbitrage opportunities presented by the pricing of Fund 
Shares. However, when a Fund uses fair valuation to price securities, 
it may value those securities higher or lower than another fund would 
have priced the security. Also, the use of fair valuation may cause the 
Shares' NAV performance to diverge from the Shares' market price and 
from the performance of various benchmarks used to compare a Fund's 
performance because benchmarks generally do not use fair valuation 
techniques. Because of the judgment involved in fair valuation 
decisions, there can be no assurance that the value ascribed to a 
particular security is accurate.
    Repurchase agreements are generally valued at par. Other short-term 
instruments will generally be valued at the last available bid price 
received from independent pricing services. In determining the value of 
a fixed income investment, pricing services may use certain information 
with respect to transactions in such investments, quotations from 
dealers, pricing matrixes, market transactions in comparable 
investments, various relationships observed in the market between 
investments, and calculated yield measures. In certain circumstances, 
short-term instruments may be valued on the basis of amortized cost.

[[Page 42859]]

    For more information regarding the valuation of Fund investments in 
calculating the Fund's NAV, see the Registration Statement.
The Shares
    According to the Registration Statement, the Fund will issue and 
redeem Shares on a continuous basis at NAV in aggregations of 50,000 
Shares (``Creation Units''). The consideration for a Creation Unit of a 
Fund will be the ``Fund Deposit,'' which will consist of the basket of 
securities to be deposited to purchase Creation Units of the Fund (the 
``In-Kind Creation Basket''). The Fund Deposit will consist of the In-
Kind Creation Basket and an amount of cash consisting of a ``Balancing 
Amount'' (as described below) and a transaction fee calculated in 
connection with creations (together with the Balancing Amount, the 
``Cash Component''), or a Cash Component that includes an all cash 
payment (``Cash Value'').
    In addition to the In-Kind Creation Basket, a purchaser will 
typically pay to the Fund a ``Balancing Amount'' reflecting the 
difference, if any, between the NAV of a Creation Unit and the market 
value of the securities in the In-Kind Creation Basket. If the NAV per 
Creation Unit exceeds the market value of the securities in the In-Kind 
Creation Basket, the purchaser will pay the Balancing Amount to the 
Fund. By contrast, if the NAV per Creation Unit is less than the market 
value of the securities in the In-Kind Creation Basket, the Fund will 
pay the Balancing Amount to the purchaser. The Balancing Amount ensures 
that the consideration paid by an investor for a Creation Unit is 
exactly equal to the value of the Creation Unit.
    A portfolio composition file, to be sent via the National 
Securities Clearing Corporation (``NSCC''), will be made available on 
each business day, prior to the opening of business on the Exchange 
(currently 9:30 a.m., Eastern time), a list of the names and the 
required number of shares of each security in the In-Kind Creation 
Basket to be included in the current Fund Deposit for the Fund (based 
on information about the Fund's portfolio at the end of the previous 
business day). In addition, on each business day, the estimated Cash 
Component or Cash Value, effective through and including the previous 
business day, will be made available through NSCC.
    The In-Kind Creation Basket is applicable for purchases of Creation 
Units of the Fund until such time as the next-announced In-Kind 
Creation Basket is made available. The Fund reserves the right to 
accept a nonconforming (i.e., custom) Fund Deposit. In addition, the 
composition of the In-Kind Creation Basket may change as, among other 
things, corporate actions and investment decisions by the Adviser are 
implemented for the Fund's portfolio.
    All purchase orders must be placed by or through an ``Authorized 
Participant.'' An Authorized Participant must be either a broker-dealer 
or other participant in the Continuous Net Settlement System 
(``Clearing Process'') of the NSCC or a participant in The Depository 
Trust Company (``DTC'') with access to the DTC system, and must execute 
an agreement with the Distributor that governs transactions in the 
Fund's Creation Units. In-kind portions of purchase orders will be 
processed through the Clearing Process when it is available.
    Fund Shares may be redeemed only in Creation Units at their NAV 
next determined after receipt of a redemption request in proper form by 
the Fund through the Distributor and only on a business day. The 
redemption proceeds for a Creation Unit will consist of the basket of 
securities a shareholder will receive upon redemption of a Creation 
unit (the ``In-Kind Redemption Basket'') and an amount of cash 
consisting of a Balancing Amount and a transaction fee (the ``Cash 
Redemption Amount''), or, in certain circumstances, the Cash Value, in 
all instances equal to the value of a Creation Unit. In addition, 
investors may incur brokerage and other costs in connection with 
assembling a Creation Unit.
    The redemption proceeds for a Creation Unit generally consist of 
the In-Kind Redemption Basket and a Cash Redemption Amount (``Fund 
Redemption''), which consists of a Balancing Amount and a Transaction 
Fee. In lieu of the In- Kind Redemption Basket and Balancing Amount, 
Creation Units may be redeemed consisting solely of cash in an amount 
equal to the NAV of a Creation Unit (the ``Cash Value''). In such 
instances, information about the Cash Value of a Creation Unit also 
will be published. The Fund reserves the right to accept a 
nonconforming (i.e., custom) Fund Redemption.\30\
---------------------------------------------------------------------------

    \30\ As stated in the Exemptive Application, the Fund may, in 
certain circumstances, allow cash creations or partial cash 
creations but not redemptions (or vice versa) if: (a) There is a 
Balancing Amount; (b) the Fund announces before the open of trading 
that all purchases, all redemptions or all purchases and redemptions 
on that day will be made entirely in cash; (c) upon receiving a 
purchase or redemption order from an Authorized Participant the Fund 
determines to require the purchase or redemption to be made entirely 
in cash because, among other things, it would benefit the Fund and 
its investors; (d) the Fund requires all Authorized Participants 
purchasing or redeeming Shares on that day to deposit or receive (as 
applicable) cash in lieu of some or all of the In-Kind Creation 
Basket or In-Kind Redemption Basket, respectively, solely because 
(i) certain instruments therein are not eligible for transfer 
through either the NSCC Process or DTC Process (as described in the 
Exemptive Application) or (ii) such instruments are not eligible for 
trading due to local (foreign) trading or transfer restrictions or 
the like; or (e) the Fund permits an Authorized Participant to 
deposit or receive (as applicable) cash in lieu of some or all of 
the In-Kind Creation Basket or In-Kind Redemption Basket, 
respectively, solely because (i) certain instruments therein are, in 
the case of the purchase of a Creation Unit, not available in 
sufficient quantity, (ii) such instruments are not eligible for 
trading by an Authorized Participant or the investor on whose behalf 
the Authorized Participant is acting, or (iii) an investor would be 
subject to unfavorable income tax treatment based on receipt of 
redemption proceeds in kind. According to the Registration 
Statement, an additional variable charge for cash or partial cash 
creations, and cash or partial cash redemptions, may also be imposed 
to compensate the Fund for the costs associated with buying the 
applicable securities.
---------------------------------------------------------------------------

    The right of redemption may be suspended or the date of payment 
postponed: (i) for any period during which the NYSE is closed (other 
than customary weekend and holiday closings); (ii) for any period 
during which trading on the NYSE is suspended or restricted; (iii) for 
any period during which an emergency exists as a result of which 
disposal of the Shares or determination of the Fund's NAV is not 
reasonably practicable; or (iv) in such other circumstances as 
permitted by the Commission.
    For an order involving a Creation Unit to be effectuated at the 
Fund's NAV on a particular day, it must be received by the Distributor 
by or before the deadline for such order (``Order Cut-Off Time''). The 
Order Cut-Off Time for creation and redemption orders for the Fund is 
generally expected to be 4:00 p.m. Eastern time for In-Kind Creation 
and Redemption Baskets, and earlier in the day for Cash Value 
transactions. On days when the Exchange or the bond markets close 
earlier than normal, the Fund may require orders to create or to redeem 
Creation Units be placed earlier in the day. In-Kind Creation and 
Redemption Baskets are expected to be accepted until the close of 
regular trading on the Exchange on each business day, which is usually 
4:00 p.m. Eastern time. A standard redemption transaction fee will be 
imposed to offset transfer and other transaction costs that may be 
incurred by the Fund.
    Additional information regarding the Shares and the Funds, 
including investment strategies, risks, creation and redemption 
procedures, fees and expenses, portfolio holdings disclosure

[[Page 42860]]

policies, distributions, taxes and reports to be distributed to 
beneficial owners of the Shares can be found in the Registration 
Statement, on the Web site for the ValueShares U.S. Quantitative Value 
ETF and ValueShares International Quantitative Value ETF at 
www.valueshares.com or on the Web site for the MomentumShares U.S. 
Quantitative Momentum ETF and MomentumShares International Quantitative 
Momentum ETF at www.momentumshares.com, as applicable.
Availability of Information
    The Funds' Web sites, which will be publicly available prior to the 
public offering of Shares, will include a form of the prospectus for 
each applicable Fund that may be downloaded. The Web sites will include 
additional quantitative information updated on a daily basis, 
including, for each applicable Fund: (1) the prior business day's NAV 
and the market closing price or mid-point of the bid/ask spread at the 
time of calculation of such NAV (the ``Bid/Ask Price''),\31\ and a 
calculation of the premium or discount of the market closing price or 
Bid/Ask Price against the NAV; and (2) a table showing the number of 
days the Market Price (as defined by the Commission in Form N-1A) \32\ 
of the Fund Shares was greater than the Fund's NAV and the number of 
days it was less than the Fund's NAV (i.e., premium or discount) for 
the most recently completed calendar year, and the most recently 
completed calendar quarters since that year (or of the life of the 
Fund, if shorter). Daily trading volume information will be available 
in the financial section of newspapers, through subscription services 
such as Bloomberg, Thomson Reuters, and International Data Corporation, 
which can be accessed by authorized participants and other investors, 
as well as through other electronic services, including major public 
Web sites. On each business day, before commencement of trading in 
Shares during Regular Trading Hours on the Exchange, the Fund will 
disclose on its Web site the identities and quantities of the portfolio 
of securities and other assets (the ``Disclosed Portfolio'') held by 
the Fund that will form the basis for the Fund's calculation of NAV at 
the end of the business day.\33\ The Disclosed Portfolio will include, 
as applicable, the names, quantity, percentage weighting and market 
value of securities and other assets held by the Fund and the 
characteristics of such assets. The Web site and information will be 
publicly available at no charge.
---------------------------------------------------------------------------

    \31\ The Bid/Ask Price of the Fund will be determined using the 
highest bid and the lowest offer on the Exchange as of the time of 
calculation of the Fund's NAV. The records relating to Bid/Ask 
Prices will be retained by the Fund or its service providers.
    \32\ The Commission has defined ``Market Price'' in Form N-1A as 
the ``last reported sale price at which Exchange-Traded Fund shares 
trade on the principal U.S. market on which the Fund's Shares are 
traded during a regular trading session or, if it more accurately 
reflects the current market value of the Fund's Shares at the time 
the Fund uses to calculate its net asset value, a price within the 
range of the highest bid and lowest offer on the principal U.S. 
market on which the Fund's Shares are traded during a regular 
trading session.''
    \33\ Under accounting procedures to be followed by each Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
each Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.
---------------------------------------------------------------------------

    In addition, for each Fund, an estimated value, defined in BATS 
Rule 14.11(i)(3)(C) as the ``Intraday Indicative Value,'' that reflects 
an estimated intraday value of the Fund's portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value will be based 
upon the current value for the components of the Disclosed Portfolio 
and will be updated and widely disseminated by one or more major market 
data vendors at least every 15 seconds during the Exchange's Regular 
Trading Hours.\34\ In addition, the quotations of certain of each 
Fund's holdings may not be updated during U.S. trading hours if such 
holdings do not trade in the United States or if updated prices cannot 
be ascertained.
---------------------------------------------------------------------------

    \34\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Intraday Indicative Values published via the Consolidated Tape 
Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of each Fund on a daily basis and provide a 
close estimate of that value throughout the trading day.
    Intraday, executable price quotations on U.S. and non-U.S. 
securities as well as other assets are available from major broker-
dealer firms and for exchange-traded assets, including exchange-listed 
common stock, Depositary Receipts, and investment companies, such 
intraday information is available directly from the applicable listing 
exchange. All such intraday price information is available through 
subscription services, such as Bloomberg, Thomson Reuters and 
International Data Corporation, which can be accessed by authorized 
participants and other investors.
    Information regarding market price and volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. The previous 
day's closing price and trading volume information for the Shares will 
be published daily in the financial section of newspapers. Quotation 
and last sale information for the Shares will be available on the 
facilities of the CTA.
Initial and Continued Listing
    The Shares will be subject to BATS Rule 14.11(i), which sets forth 
the initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and/or continued 
listing, each Fund must be in compliance with Rule 10A-3 under the 
Act.\35\ A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. The Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time.
---------------------------------------------------------------------------

    \35\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

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 a Fund. The Exchange will halt trading in the 
Shares under the conditions specified in BATS Rule 11.18. Trading may 
be halted because of market conditions or for reasons that, in the view 
of the Exchange, make trading in the Shares inadvisable. These may 
include: (1) the extent to which trading is not occurring in the 
securities and/or the financial instruments composing the Disclosed 
Portfolio of a Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(i)(4)(B)(iv), which sets forth circumstances under which Shares 
of a Fund may be halted.
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. BATS will allow 
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BATS Rule 11.11(a), the 
minimum

[[Page 42861]]

price variation for quoting and entry of orders in Managed Fund Shares 
traded on the Exchange is $0.01, with the exception of securities that 
are priced less than $1.00, for which the minimum price variation for 
order entry is $0.0001.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Managed Fund Shares. The 
Exchange may obtain information regarding trading in the Shares and the 
underlying shares in equity securities via the ISG, from other 
exchanges that are members or affiliates of the ISG, or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement. Additionally, not more than 10% of the net assets of each 
Fund, in the aggregate, will be invested in (1) unlisted or unsponsored 
Depositary Receipts; (2) Depositary Receipts not listed on an exchange 
that is a member of ISG or a party to a comprehensive surveillance 
sharing agreement with the Exchange; or (3) unlisted common stocks or 
common stocks not listed on an exchange that is a member of the ISG or 
a party to a comprehensive surveillance sharing agreement with the 
Exchange. The Exchange prohibits the distribution of material non-
public information by its employees.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) BATS Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Intraday Indicative Value is disseminated; (4) the risks involved 
in trading the Shares during the Pre-Opening \36\ and After Hours 
Trading Sessions \37\ when an updated Intraday Indicative Value will 
not be calculated or publicly disseminated; (5) the requirement that 
members deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction; 
and (6) trading information.
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    \36\ The Pre-Opening Session is from 8 a.m. to 9:30 a.m. Eastern 
Time.
    \37\ The After Hours Trading Session is from 4 p.m. to 5 p.m. 
Eastern Time.
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    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Fund. Members purchasing Shares from a Fund for 
resale to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act.
    In addition, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of a Fund and the applicable NAV Calculation Time 
for those Shares. The Information Circular will disclose that 
information about the Shares of a Fund will be publicly available on 
the Fund's Web site. In addition, the Information Circular will 
reference that the Trust is subject to various fees and expenses 
described in the Fund's Registration Statement.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \38\ in general and Section 6(b)(5) of the Act \39\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \38\ 15 U.S.C. 78f.
    \39\ 15 U.S.C. 78f(b)(5).
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    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 BATS Rule 14.11(i). The 
Exchange believes that its surveillance procedures are adequate to 
properly monitor the trading of the Shares on the Exchange during all 
trading sessions and to deter and detect violations of Exchange rules 
and the applicable federal securities laws. If the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser to the 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. The 
Adviser is not a registered broker-dealer and is not affiliated with 
any broker-dealers. The Exchange may obtain information regarding 
trading in the Shares and the underlying shares in exchange-listed 
common stocks, Depositary Receipts, and investment companies via the 
ISG, from other exchanges that are members or affiliates of the ISG, or 
with which the Exchange has entered into a comprehensive surveillance 
sharing agreement, to the extent that the securities are listed on such 
exchanges, as further discussed below.\40\
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    \40\ See supra note 14.
---------------------------------------------------------------------------

    According to the Registration Statement, the U.S. Funds expect that 
they will have at least 80% of their assets invested in securities of 
U.S. companies. Similarly, the International Funds expect that they 
will have at least 90% of their assets invested in securities listed on 
exchanges that are members or affiliates of the ISG. The Funds will not 
concentrate their investments in a particular industry or group of 
industries, as that term is defined in the 1940 Act.\41\ The Funds' 
investments will be consistent with their respective investment 
objective and will not be used to enhance leverage. Each Fund also may 
invest its net assets in money market instruments at the discretion of 
the Adviser. The U.S. Funds will not invest in non-U.S. equity 
securities.
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    \41\ See supra note 9.
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    Additionally, each Fund may hold up to an aggregate amount of 15% 
of its net assets in illiquid securities (calculated at the time of 
investment), including Rule 144A securities. 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 that Fund's net assets are 
held in illiquid securities. Illiquid securities include

[[Page 42862]]

securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Funds and the Shares, 
thereby promoting market transparency. Moreover, the Intraday 
Indicative Value will be disseminated by one or more major market data 
vendors at least every 15 seconds during Regular Trading Hours. On each 
business day, before commencement of trading in Shares during Regular 
Trading Hours, the Funds will disclose on its Web site the Disclosed 
Portfolio that will form the basis for each Fund's calculation of NAV 
at the end of the business day. Pricing information will be available 
on each Fund's Web site including: (1) The prior business day's NAV and 
the market closing price or the Bid/Ask Price,\42\ and a calculation of 
the premium or discount of the market closing price or Bid/Ask Price 
against the NAV; and (2) a table showing the number of days the Market 
Price (as defined by the Commission in Form N-1A) \43\ of the Fund 
Shares was greater than the Fund's NAV and the number of days it was 
less than the Fund's NAV (i.e., premium or discount) for the most 
recently completed calendar year, and the most recently completed 
calendar quarters since that year (or of the life of the Fund, if 
shorter). Additionally, information regarding market price and trading 
of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services, and quotation and last sale information for the Shares will 
be available on the facilities of the CTA. The Web site for a Fund will 
include a form of the prospectus for the Fund and additional data 
relating to NAV and other applicable quantitative information. Trading 
in Shares of a Fund will be halted under the conditions specified in 
BATS Rule 11.18. Trading may also be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. Finally, trading in the Shares will 
be subject to BATS Rule 14.11(i)(4)(B)(iv), which sets forth 
circumstances under which Shares of the Funds may be halted. In 
addition, as noted above, investors will have ready access to 
information regarding each Fund's holdings, the Intraday Indicative 
Value, the Disclosed Portfolio, and quotation and last sale information 
for the Shares.
---------------------------------------------------------------------------

    \42\ See supra note 31.
    \43\ See supra note 32.
---------------------------------------------------------------------------

    Intraday, executable price quotations on the assets held by the 
Funds are available from major broker-dealer firms and for exchange-
traded assets, including exchange-listed common stock, Depositary 
Receipts, and investment companies, such intraday information is 
available directly from the applicable listing exchange. Such intraday 
price information is available through subscription services, such as 
Bloomberg, Thomson Reuters and International Data Corporation, which 
can be accessed by authorized participants and other investors.
    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 
additional types of actively-managed exchange-traded products 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 each Fund's holdings, 
the Intraday Indicative Value, the Disclosed Portfolio, and quotation 
and last sale information for the Shares.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of 
additional actively-managed exchange-traded products that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) by order approve 
or disapprove such 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 proposal 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 No. SR-BATS-2014-026 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-BATS-2014-026. 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 changes 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

[[Page 42863]]

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 10:00 a.m. and 3:00 p.m. Copies of 
such filing will also be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File No. SR-BATS-2014-026 and should be submitted on or before August 
13, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17265 Filed 7-22-14; 8:45 am]
BILLING CODE 8011-01-P


