
[Federal Register Volume 79, Number 180 (Wednesday, September 17, 2014)]
[Notices]
[Pages 55859-55864]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22163]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73081; File No. SR-NYSEArca-2014-20]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change, as Modified by Amendment Nos. 3 and 
5, Relating to the Listing and Trading of Shares of Reality Shares DIVS 
ETF under NYSE Arca Equities Rule 8.600

September 11, 2014.

I. Introduction

    On February 25, 2014, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of Reality Shares DIVS ETF (``Fund'') under NYSE 
Arca Equities Rule 8.600. On March 7, 2014, the Exchange filed 
Amendment No. 2 to the proposed rule change, which amended and replaced 
the proposed rule change in its entirety.\3\ The proposed rule change, 
as modified by Amendment No. 2, was published for comment in the 
Federal Register on March 17, 2014.\4\ The Commission received no 
comments on the proposal. On April 23, 2014, pursuant to Section 
19(b)(2) of the Act,\5\ the Commission designated a longer period 
within which to either approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\6\ On May 27, 2014, the Exchange 
submitted Amendment No. 3 to the proposed rule change.\7\ On June 5, 
2014, the Exchange filed Amendment No. 5 to the proposed rule 
change.\8\ On June 9, 2014, the Commission published notice of 
Amendment Nos. 3 and 5 and instituted proceedings to determine whether 
to approve or disapprove the proposed rule change, as modified by 
Amendment Nos. 3 and 5.\9\ The Commission received no comments on the 
proposal, as modified by Amendment Nos. 3 and 5. This order grants 
approval of the proposed rule change, as modified by Amendment Nos. 3 
and 5.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was filed on March 6, 2014 and withdrawn on 
March 7, 2014.
    \4\ See Securities Exchange Act Release No. 71686 (March 11, 
2014), 79 FR 14761.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ Securities Exchange Act Release No. 72000 (April 23, 2014), 
79 FR 24032 (April 29, 2014). The Commission determined that it was 
appropriate to designate a longer period within which to take action 
on the proposed rule change so that it has sufficient time to 
consider the proposed rule change. Accordingly, the Commission 
designated June 13, 2014 as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \7\ Amendment No. 3 replaced SR-NYSEArca-2014-20, as previously 
amended by Amendment No. 2, and superseded such filing in its 
entirety.
    \8\ Amendment No. 5 was technical in nature and changed the name 
of the Fund, and all related references in the filing, from 
``Reality Shares Isolated Dividend Growth ETF'' to ``Reality Shares 
DIVS ETF.'' Amendment No. 4 was filed by the Exchange on June 4, 
2014 and withdrawn on June 5, 2014.
    \9\ See Securities Exchange Act Release No. 72347, 79 FR 33964 
(June 13, 2014) (``Notice and Order'').
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II. Description of the Proposed Rule Change

    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategies, including other 
portfolio holdings and investment restrictions.\10\
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    \10\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, net asset value (``NAV'') calculation, creation 
and redemption procedures, fees, portfolio holdings disclosure 
policies, distributions, and taxes, among other information, is 
included in the Notice and the Registration Statement, as 
applicable. See Notice and Order and Registration Statement, supra 
note 9 and infra note 11, respectively.
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General

    The Fund will be an actively-managed exchange-traded fund 
(``ETF''). The Shares of the Fund will be offered by the Reality Shares 
ETF Trust (formerly, the ERNY Financial ETF Trust) (``Trust''). The 
Trust will be registered with the Commission as an open-end management 
investment company.\11\ Reality Shares Advisors, LLC (formerly, ERNY 
Financial Advisors, LLC) will serve as the investment adviser to the 
Fund (``Adviser'').\12\ ALPS Distributors, Inc. will be the principal 
underwriter and distributor of the Fund's Shares. The Bank of New York 
Mellon will serve as administrator, custodian, and transfer agent for 
the Fund.
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    \11\ The Trust will be registered under the Investment Company 
Act of 1940 (15 U.S.C. 80a-1) (``1940 Act''). According to the 
Exchange, on November 12, 2013, the Trust filed a registration 
statement on Form N-1A under the Securities Act of 1933 (``1933 
Act'') (15 U.S.C. 77a), and under the 1940 Act relating to the Fund, 
as amended by Pre-Effective Amendment Number 1, filed with the 
Commission on February 6, 2014 (File Nos. 333-192288 and 811-22911) 
and Pre-Effective Amendment Number 2, filed with the Commission on 
May 1, 2014 (File Nos. 333-192288 and 811-22911) (``Registration 
Statement''). According to the Exchange, the Commission has issued 
an order granting certain exemptive relief to the Trust under the 
1940 Act. Investment Company Act Release No. 30552 (June 10, 2013) 
(``Exemptive Order''). According to the Exchange, the Trust filed an 
Application for an Order under Section 6(c) of the 1940 Act for 
exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-14146), on April 5, 2013, as amended on May 
10, 2013 (``Exemptive Application''). The Exchange represents that 
investments made by the Fund will comply with the conditions set 
forth in the Exemptive Application and the Exemptive Order.
    \12\ The Exchange states that the Adviser is not registered as a 
broker-dealer and is not affiliated with any broker-dealers. In 
addition, the Exchange states that in the event (a) the Adviser or 
any sub-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, such adviser or sub-adviser will implement a fire 
wall with respect to its relevant personnel or broker-dealer 
affiliate regarding access to information concerning the composition 
and changes to the portfolio, and such adviser or sub-adviser will 
be subject to procedures designed to prevent the use and 
dissemination of material non-public information regarding the 
portfolio.
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Investment Strategies

    The Fund is actively managed by the Adviser and seeks long-term 
capital appreciation by using proprietary trading strategies designed 
to isolate and capture the growth in the level of dividends expected to 
be paid on a portfolio of large-capitalization equity securities listed 
for trading in the U.S., Europe, and Japan,\13\ while attempting to 
minimize the Fund's exposure to the price fluctuations associated with 
such securities.\14\ The Adviser believes that, over time, the level of 
expected dividends reflected in the Fund's portfolio will be highly 
correlated to the level of actual dividends paid on such large 
capitalization securities.
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    \13\ The Exchange states that the Adviser considers U.S. large 
capitalization companies to be those with market capitalizations 
within the range of market capitalizations of the companies included 
in the S&P 500 Index. The Adviser considers European large 
capitalization companies to be those with market capitalizations 
within the range of market capitalizations of the companies included 
in the Euro Stoxx 50 Index. The Adviser considers Japanese large 
capitalization companies to be those with market capitalizations 
within the range of market capitalizations of the companies included 
in the Nikkei 225 Index.
    \14\ The Exchange states that there is no guarantee that either 
the level of overall dividends paid by such companies will grow over 
time, or that the Fund's investment strategies will capture such 
growth. The Exchange represents that the Fund will include 
appropriate risk disclosure in its offering documents disclosing 
both of these risks.
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    Under normal market conditions,\15\ and as further described below, 
the

[[Page 55860]]

Fund will invest substantially all of its assets in (i) a combination 
of exchange-listed options contracts on large capitalization equity 
indexes and exchange-listed options contracts on exchange traded funds 
(``ETFs'') \16\ designed to track the performance of large 
capitalization equity securities listed for trading in the U.S., 
Europe, or Japan, as well as (ii) derivatives, including swaps, 
exchange-listed futures contracts, and forward contracts, designed to 
capture the growth of the level of dividends expected to be paid on 
large capitalization equity securities listed for trading in the U.S., 
Europe, and Japan. In addition to the investments described above, the 
Fund may also buy and sell over-the counter (``OTC'') options on 
indexes of large-capitalization U.S., European, and Japanese equity 
securities listed for trading in the U.S., Europe, and Japan, such as 
the S&P 500 Index, the Euro Stoxx 50 Index, and the Nikkei 225 Index, 
and listed and OTC options on the securities, or any group of 
securities, issued by large capitalization U.S., European, and Japanese 
companies.\17\
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    \15\ The term ``under normal market conditions'' includes, but 
is not limited to, the absence of extreme volatility or trading 
halts in the equity markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
    \16\ 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 the Fund may invest in 
inverse ETFs, it may not invest in leveraged or inverse leveraged 
(e.g., 2X, -2X, 3X or -3X) ETFs.
    \17\ The Fund will transact only with OTC options dealers that 
have in place an International Swaps and Derivatives Association 
(``ISDA'') agreement with the Fund.
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    The Fund will buy (i.e., hold a ``long'' position in) and sell 
(i.e., hold a ``short'' position in) put and call options.\18\ The Fund 
will invest in a combination of put and call options designed to allow 
the Fund to isolate its exposure to the growth of the level of 
dividends expected to be paid on a portfolio of securities issued by 
large capitalization companies listed for trading in the United States, 
Europe, and Japan, while minimizing the Fund's exposure to changes in 
the trading price of such securities. The Fund may invest up to 80% of 
its assets through options transactions.
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    \18\ A put option gives the purchaser of the option the right to 
sell, and the issuer of the option the obligation to buy, the 
underlying security or instrument on a specified date or during a 
specified period of time. A call option on a security gives the 
purchaser of the option the right to buy, and the writer of the 
option the obligation to sell, the underlying security or instrument 
on a specified date or during a specified period of time.
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    The prices of index and ETF options reflect the market trading 
prices of the securities included in the applicable index or securities 
held by the applicable ETF, as well as market expectations regarding 
the level of dividends to be paid on such indexes or ETFs during the 
term of the option. A significant portion of the Fund's portfolio 
holdings will consist of multiple corresponding near-term and long-term 
put and call option combinations on the same reference assets (e.g., 
options on the S&P 500 Index or options on S&P 500 ETFs) with the same 
strike price. Because option prices reflect both stock price and 
dividend expectations, they can be used in combination to isolate 
either price exposure or dividend expectations. The use of near-term 
and long-term put and call option combinations on the same reference 
asset with the same strike price, but with different maturities, is 
designed to gain exposure to the level of dividends expected to be paid 
on a portfolio of large-capitalization equity securities listed for 
trading in the U.S., Europe, and Japan, while attempting to minimize 
the Fund's exposure to the price fluctuations associated with these 
securities.
    Once established, this portfolio construction of option 
combinations will accomplish two goals. First, the use of corresponding 
buy or sell positions on near and long-term options at the same strike 
price is designed to neutralize underlying stock price movements. In 
other words, the corresponding ``buy'' and ``sell'' positions on the 
same reference asset are designed to net against each other and 
eliminate the impact that changes to the stock price of the reference 
asset would otherwise have on the value of the Fund Shares. Second, by 
minimizing the impact of price fluctuations through the construct of 
the near- and long-term contract combinations, the strategy is designed 
to isolate market expectations for dividends implied between expiration 
dates of the near-term and long-term option contracts.
    The Fund may invest in exchange-listed futures contracts and 
forward contracts based on indexes of large-capitalization U.S., 
European, and Japanese equity securities listed for trading in the 
U.S., Europe, or Japan, such as the S&P 500 Index, the Euro Stoxx 50 
Index, and the Nikkei 225 Index, and the securities, or any group of 
securities, issued by large capitalization U.S., European, and Japanese 
companies.\19\ The Fund's use of listed futures contracts and forward 
contracts will be designed to allow the Fund to isolate its exposure to 
the growth of the level of the dividends expected to be paid on a 
portfolio of securities of large capitalization U.S., European, and 
Japanese companies, while minimizing the Fund's exposure to changes in 
the trading price of such securities. As with option contracts, the 
prices of equity index futures contracts and forward contracts reflect 
the market trading prices of the securities included in the applicable 
index, as well as market expectations regarding the level of dividends 
to be paid on such indexes during the term of such futures or forward 
contract. Therefore, as with option contracts, long and short positions 
in near-dated and far-dated futures and forward contracts can be used 
in combination to isolate either price exposure or dividend 
expectations. For example, as with option contracts, the use of long 
and short positions in near-dated and far-dated futures and forward 
contracts can be used to gain exposure to the level of dividends 
expected to be paid on a portfolio of securities, while attempting to 
minimize the Fund's exposure to the price fluctuations associated with 
such securities. In addition, the Fund may invest in listed dividend 
futures contracts. Listed dividend futures contracts are available for 
certain indices (such as EURO STOXX 50 Index Dividend Futures and 
Nikkei 225 Dividend Index Futures). These futures contracts provide 
direct exposure to the level of implied dividends in the designated 
index, without exposure to the price of the securities included in the 
index. The Fund also may invest in Eurodollar futures contracts to 
manage or hedge exposure to interest rate fluctuations. The Fund may 
invest up to 80% of its assets through futures contracts and forward 
transactions.
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    \19\ A listed futures contract is a standardized contract traded 
on a recognized exchange in which two parties agree to exchange 
either a specified financial asset or the cash equivalent of said 
asset at a specified future date and price. A forward contract 
involves the obligation to purchase or sell either a specified 
financial asset or the cash equivalent of said asset at a future 
date at a price set at the time of the contract.
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    The Fund may enter into dividend and total return swap transactions 
(including equity swap transactions) based on indexes of large-
capitalization U.S., European, and Japanese equity securities listed 
for trading in the U.S., Europe, and Japan, such as the S & P 500 
Index, the Euro Stoxx 50 Index, and the Nikkei 225 Index, and 
securities, or any group of securities, issued by large

[[Page 55861]]

capitalization U.S., European, and Japanese companies.\20\ In a typical 
swap transaction, one party agrees to make periodic payments to another 
party (``counterparty'') based on the change in market value or level 
of a specified rate, index, or asset. In return, the counterparty 
agrees to make periodic payments to the first party based on the return 
of a different specified rate, index, or asset. Swap transactions are 
usually done on a net basis, the Fund receiving or paying only the net 
amount of the two payments. In a typical dividend swap transaction, the 
Fund would pay the swap counterparty a premium and would be entitled to 
receive the value of the actual dividends paid on the subject index 
during the term of the swap contract. In a typical total return swap, 
the Fund might exchange long or short exposures to the return of the 
underlying securities or an underlying index to isolate the value of 
the dividends paid on the underlying securities or index constituents. 
The Fund also may engage in interest rate swap transactions. In a 
typical interest rate swap transaction one stream of future interest 
payments is exchanged for another. Such transactions often take the 
form of an exchange of a fixed payment for a variable payment based on 
a future interest rate. The Fund intends to use interest rate swap 
transactions to manage or hedge exposure to interest rate fluctuations. 
The Fund may invest up to 80% of its assets through swap 
transactions.\21\
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    \20\ The Fund will transact only with swap dealers that have in 
place an ISDA agreement with the Fund.
    \21\ Where practicable, the Fund intends to invest in swaps 
cleared through a central clearing house (``Cleared Swaps''). 
Currently, only certain of the interest rate swaps in which the Fund 
intends to invest are Cleared Swaps, while the dividend and total 
return swaps (including equity swaps) in which the Fund may invest 
are currently not Cleared Swaps.
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    The Fund will attempt to limit counterparty risk by entering into 
non-cleared swap, forward, and option contracts only with 
counterparties the Adviser believes are creditworthy and by limiting 
the Fund's exposure to each counterparty. The Adviser will monitor the 
creditworthiness of each counterparty and the Fund's exposure to each 
counterparty on an ongoing basis.\22\
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    \22\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, the Adviser will 
evaluate each approved counterparty using various methods of 
analysis, such as, for example, the counterparty's liquidity in the 
event of default, the counterparty's reputation, the Adviser's past 
experience with the counterparty, and the counterparty's share of 
market participation.
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    The Fund's investments in swaps, futures contracts, forward 
contracts, and options will be consistent with the Fund's investment 
objective and with the requirements of the 1940 Act.\23\
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    \23\ To limit the potential risk associated with such 
transactions, the Fund will segregate or ``earmark'' assets 
determined to be liquid by the Adviser in accordance with procedures 
established by the Trust's Board of Trustees and in accordance with 
the 1940 Act (or, as permitted by applicable regulation, enter into 
certain offsetting positions) to cover its obligations arising from 
such transactions. These procedures have been adopted consistent 
with Section 18 of the 1940 Act and related Commission guidance. In 
addition, the Fund will include appropriate risk disclosure in its 
offering documents, including leveraging risk. Leveraging risk is 
the risk that certain transactions of the Fund, including the Fund's 
use of derivatives, may give rise to leverage, causing the Fund to 
be more volatile than if it had not been leveraged. To mitigate 
leveraging risk, the Adviser will segregate or ``earmark'' liquid 
assets or otherwise cover the transactions that may give rise to 
such risk.
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Other Investments and Investment Restrictions

    In addition to the investments described above, the Fund may invest 
up to 20% of its net assets in high-quality, short-term debt securities 
and money market instruments.\24\ Debt securities and money market 
instruments include shares of fixed income or money market mutual 
funds, commercial paper, certificates of deposit, bankers' acceptances, 
U.S. Government securities (including securities issued or guaranteed 
by the U.S. government or its authorities, agencies, or 
instrumentalities), repurchase agreements\25\ and bonds that are rated 
BBB or higher.
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    \24\ The Fund may invest in shares of money market mutual funds 
to the extent permitted by the 1940 Act.
    \25\ The Fund may enter into repurchase agreements with banks 
and broker-dealers. A repurchase agreement is an agreement under 
which securities are acquired by a 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.
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    The Fund will not purchase the securities of issuers conducting 
their principal business activity in the same industry if, immediately 
after the purchase and as a result thereof, the value of the Fund's 
investments in that industry would equal or exceed 25% of the current 
value of the Fund's total assets, provided that this restriction does 
not limit the Fund's: (i) Investments in securities of other investment 
companies, (ii) investments in securities issued or guaranteed by the 
U.S. government, its agencies or instrumentalities, or (iii) 
investments in repurchase agreements collateralized by U.S. Government 
securities.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance.\26\ 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 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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    \26\ 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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    The Fund may buy and sell individual large-capitalization equity 
securities listed for trading in the U.S., Europe, and Japan.
    The Fund may invest in the securities of other investment companies 
(including money market funds) to the extent permitted under the 1940 
Act.
    The Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns. The Fund's investments will 
not be used to seek performance that is the multiple or inverse 
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based 
securities benchmark index (as defined in Form N-1A).\27\
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    \27\ The Fund's broad-based securities benchmark index will be 
identified in a future amendment to the Registration Statement 
following the Fund's first full calendar year of performance.
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    The Trust's Exemptive Order does not place any limit on the amount 
of derivatives in which the Fund can invest (other than adherence to 
the requirements of the 1940 Act and the rules thereunder).

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment Nos. 3 and 5,

[[Page 55862]]

is consistent with the requirements of Section 6 of the Act \28\ and 
the rules and regulations thereunder applicable to a national 
securities exchange.\29\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\30\ which 
requires, among other things, that the Exchange's rules be designed 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 Fund and the Shares must comply 
with the initial and continued listing requirements of NYSE Arca 
Equities Rule 8.600 to be listed and traded on the Exchange.
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    \28\ 15 U.S.C. 78f.
    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \30\ 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,\31\ which sets forth Congress' 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 (``PIV''), as defined in NYSE Arca Equities Rule 
8.600(c)(3), will be widely disseminated at least every 15 seconds 
during the Core Trading Session by one or more major market data 
vendors.\32\ On each business day, before commencement of trading in 
Shares in the Core Trading Session on the Exchange, the Fund will 
disclose on its Web site the Disclosed Portfolio (as such term is 
defined in NYSE Arca Equities Rule 8.600(c)(2)) that will form the 
basis for the Fund's calculation of NAV at the end of the business 
day.\33\ In addition, a portfolio composition file, which includes the 
security names and share quantities required to be delivered in 
exchange for a Creation Unit of the Fund, together with estimates and 
actual cash components, will be publicly disseminated daily prior to 
the opening of the New York Stock Exchange, LLC (``NYSE'') via the 
National Securities Clearing Corporation. The NAV of the Fund will be 
calculated once each business day as of the regularly scheduled close 
of trading on the NYSE (normally, 4:00 p.m., Eastern Time).\34\ 
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. The intra-day, closing, and settlement prices of 
the portfolio securities and other Fund investments, including ETFs, 
futures, and exchange-traded equities and options, will be readily 
available from the national securities exchanges trading such 
securities, automated quotation systems, published or other public 
sources, and, with respect to OTC options, swaps, and forwards, from 
third party pricing sources, or on-line information services such as 
Bloomberg or Reuters. Price information regarding investment company 
securities other than ETFs will be available from on-line information 
services and from the Web site for the applicable investment company 
security. The intra-day, closing, and settlement prices of debt 
securities and money market instruments will be readily available from 
published and other public sources or on-line information services. The 
Fund's Web site will include a form of the prospectus for the Fund and 
additional data relating to NAV and other applicable quantitative 
information.
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    \31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \32\ According to the Exchange, several major market data 
vendors display or make widely available Portfolio Indicative Values 
published on CTA or other data feeds.
    \33\ On a daily basis, the Fund will disclose on the Fund's Web 
site the following information regarding each portfolio holding, as 
applicable to the type of holding: Ticker symbol, CUSIP number or 
other identifier, if any; a description of the holding (including 
the type of holding, such as the type of swap); the identity of the 
security, commodity, index or other asset or instrument underlying 
the holding, if any; for options, the option strike price; quantity 
held (as measured by, for example, par value, notional value or 
number of shares, contracts or units); maturity date, if any; coupon 
rate, if any; effective date, if any; market value of the holding; 
and the percentage weighting of the holding in the Fund's portfolio. 
The Web site information will be publicly available at no charge.
    \34\ The Fund will calculate its NAV by: (i) Taking the current 
market value of its total assets; (ii) subtracting any liabilities; 
and (iii) dividing that amount by the total number of Shares 
outstanding. According to the Exchange, the Trust will generally 
value exchange-listed equity securities (which include common stocks 
and ETFs) and exchange-listed options on such securities at market 
closing prices. Market closing price is generally determined on the 
basis of last reported sales prices, or if no sales are reported, 
based on the midpoint between the last reported bid and ask. The 
Trust will generally value listed futures at the settlement price 
determined by the applicable exchange. Non-exchange-traded 
derivatives, such as forwards, OTC options, and swap transactions, 
will normally be valued on the basis of quotations or equivalent 
indication of value supplied by an independent pricing service or 
major market makers or dealers. Investment company securities (other 
than ETFs) will be valued at NAV. Debt securities and money market 
instruments generally will be valued based on prices provided by 
independent pricing services, which may use valuation models or 
matrix pricing to determine current value. The Trust generally will 
use amortized cost to value debt securities and money market 
instruments that have a remaining maturity of 60 days or less. In 
the event that current market valuations are not readily available 
or the Trust or Adviser believes such valuations do not reflect 
current market value, the Trust's procedures require that a 
security's fair value be determined. In determining such value the 
Trust or the Adviser may consider, among other things, (i) price 
comparisons among multiple sources, (ii) a review of corporate 
actions and news events, and (iii) a review of relevant financial 
indicators (e.g., movement in interest rates, market indices, and 
prices from the Fund's index providers). In these cases, the Fund's 
NAV may reflect certain portfolio securities' fair values rather 
than their market prices. Fair value pricing involves subjective 
judgments and it is possible that the fair value determination for a 
security is materially different than the value that could be 
realized upon the sale of the security.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The 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. Trading in Shares of a Fund will be 
halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached or because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable,\35\ and trading in the Shares will be subject to NYSE Arca 
Equities Rule 8.600(d)(2)(D), which sets forth additional circumstances 
under which trading in the Shares of a Fund may be halted. The Exchange 
states that it has a general policy prohibiting the distribution of 
material, non-public information by its employees. Consistent with NYSE 
Arca Equities Rule 8.600(d)(2)(B)(ii), the Reporting Authority must 
implement and maintain, or be subject to, procedures

[[Page 55863]]

designed to prevent the use and dissemination of material, non-public 
information regarding the actual components of the Fund's portfolio. In 
addition, the Exchange states that the Adviser is not registered as a 
broker-dealer and is not affiliated with a broker-dealer.\36\ The 
Exchange represents that trading in the Shares will be subject to the 
existing trading surveillances, administered by the Financial Industry 
Regulatory Authority (``FINRA'') on behalf of the Exchange, which are 
designed to detect violations of Exchange rules and applicable federal 
securities laws.\37\ The Exchange further represents that these 
procedures are adequate to properly monitor Exchange-trading of the 
Shares in all trading sessions and to deter and detect violations of 
Exchange rules and federal securities laws applicable to trading on the 
Exchange. Moreover, prior to the commencement of trading, the Exchange 
states that it will inform its Equity Trading Permit Holders in an 
Information Bulletin of the special characteristics and risks 
associated with trading the Shares.
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    \35\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities and/or the financial instruments 
composing the Disclosed Portfolio of the Fund; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance 
of a fair and orderly market are present. With respect to trading 
halts, the Exchange may consider all relevant factors in exercising 
its discretion to halt or suspend trading in the Shares of the Fund.
    \36\ See supra note 12. The Exchange states that an investment 
adviser to an open-end fund is required to be registered under the 
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the 
Adviser and 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.
    \37\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
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    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 the following:
    (1) The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600, which governs Managed 
Fund Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, exchange-listed equity securities, 
ETFs, futures contracts, and exchange-traded options contracts with 
other markets and other entities that are members of the Intermarket 
Surveillance Group (``ISG''), and FINRA, on behalf of the Exchange, may 
obtain trading information regarding trading in the Shares, exchange-
listed equity securities, ETFs, futures contracts, and exchange-traded 
options contracts from such markets and other entities. In addition, 
the Exchange may obtain information regarding trading in the Shares, 
exchange-listed equity securities, ETFs, futures contracts, and 
exchange-traded options contracts from markets and other entities that 
are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. FINRA, on behalf of the 
Exchange, will be able to access, as needed, trade information for 
certain fixed income securities held by the Fund reported to FINRA's 
Trade Reporting and Compliance Engine (``TRACE'').
    (4) Prior to the commencement of trading, the Exchange will inform 
its members 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 unit aggregations (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 PIV will not be 
calculated or publicly disseminated (d) how information regarding the 
PIV 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, the Fund will be in 
compliance with Rule 10A-3 under the Act,\38\ as provided by NYSE Arca 
Equities Rule 5.3.
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    \38\ 17 CFR 240.10A-3.
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    (6) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, 
consistent with Commission guidance. 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 assets.
    (7) Not more than 10% of the assets of the Fund in the aggregate 
invested in exchange-traded equity securities shall consist of equity 
securities whose principal market is not a member of ISG or is a market 
with which the Exchange does not have a comprehensive surveillance 
sharing agreement. In addition, not more than 10% of the net assets of 
the Fund in the aggregate invested in futures contracts or exchange-
traded options shall consist of futures contracts or options whose 
principal market is not a member of ISG or is a market with which the 
Exchange does not have a comprehensive surveillance sharing agreement.
    (8) Where practicable, the Fund intends to invest in Cleared Swaps.
    (9) The Fund will attempt to limit counterparty risk by entering 
into non-cleared swap, forward, and option contracts only with 
counterparties the Adviser believes are creditworthy and by limiting 
the Fund's exposure to each counterparty. The Adviser will monitor the 
creditworthiness of each counterparty and the Fund's exposure to each 
counterparty on an ongoing basis. The Fund will seek, where possible, 
to use counterparties, as applicable, whose financial status is such 
that the risk of default is reduced; however, the risk of losses 
resulting from default is still possible. The Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition to 
information provided by credit agencies, the Adviser will evaluate each 
approved counterparty using various methods of analysis, such as, for 
example, the counterparty's liquidity in the event of default, the 
counterparty's reputation, the Adviser's past experience with the 
counterparty, and the counterparty's share of market participation.
    (10) The Fund's investments in swaps, futures contracts, forward 
contracts, and options will be consistent with the Fund's investment 
objective

[[Page 55864]]

and with the requirements of the 1940 Act. To limit the potential risk 
associated with such transactions, the Fund will segregate or 
``earmark'' assets determined to be liquid by the Adviser in accordance 
with procedures established by the Trust's Board of Trustees and in 
accordance with the 1940 Act (or, as permitted by applicable 
regulation, enter into certain offsetting positions) to cover its 
obligations arising from such transactions. These procedures have been 
adopted consistent with Section 18 of the 1940 Act and related 
Commission guidance. In addition, the Fund will include appropriate 
risk disclosure in its offering documents, including leveraging risk. 
Leveraging risk is the risk that certain transactions of the Fund, 
including the Fund's use of derivatives, may give rise to leverage, 
causing the Fund to be more volatile than if it had not been leveraged. 
To mitigate leveraging risk, the Adviser will segregate or ``earmark'' 
liquid assets or otherwise cover the transactions that may give rise to 
such risk.
    (11) The Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns. The Fund's investments will 
not be used to seek performance that is the multiple or inverse 
multiple (i.e., 2Xs and 3Xs) of the Fund's primary broad-based 
securities benchmark index (as defined in Form N-1A).
    (12) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.

This approval order is based on all of the Exchange's representations, 
including those set forth above and in the Notice and Order, and the 
Exchange's description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 3 and 5, is consistent with 
Section 6(b)(5) of the Act \39\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \39\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\40\ that the proposed rule change (SR-NYSEArca-2014-20), as 
modified by Amendment Nos. 3 and 5, be, and it hereby is, approved.
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    \40\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-22163 Filed 9-16-14; 8:45 am]
BILLING CODE 8011-01-P


