
[Federal Register Volume 79, Number 235 (Monday, December 8, 2014)]
[Proposed Rules]
[Pages 72730-72740]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73717; File No. SR-NYSEArca-2014-126]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change, as Modified by Amendment No. 1, Relating to 
the Listing and Trading of Shares of the AdvisorShares Pacific Asset 
Enhanced Floating Rate ETF Under NYSE Arca Equities Rule 8.600

December 2, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 19, 2014, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. On November 26, 
2014, the Exchange filed Amendment No. 1 to the proposal.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ Amendment No. 1 amends the proposed rule change in the 
following ways: (1) Specifies that the floating rate high yield 
corporate bonds in which the Fund invests generally must have a $100 
million par amount outstanding at the time of investment; (2) 
clarifies that senior loans in which the Fund may invest includes 
leveraged loans; and (3) specifies that the U.S. exchange-traded 
futures contracts, U.S. exchange-traded options on futures contracts 
and U.S. exchange-traded put and call options in which the Fund 
invests will trade on exchanges that are members of the Intermarket 
Surveillance Group.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): 
AdvisorShares Pacific Asset Enhanced Floating Rate ETF. The text of the 
proposed rule change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares \5\: AdvisorShares Pacific 
Asset Enhanced Floating Rate ETF (``Fund'').\6\ The Shares will be

[[Page 72731]]

offered by AdvisorShares Trust (the ``Trust''), a statutory trust 
organized under the laws of the State of Delaware and registered with 
the Securities and Exchange Commission (the ``Commission'') as an open-
end management investment company.\7\ The investment adviser to the 
Fund will be AdvisorShares Investments, LLC (the ``Adviser''). Pacific 
Asset Management (the ``Sub-Adviser'') \8\, will be the sub-advisor to 
the Fund, and is subject to the oversight of the Adviser and the 
Trust's Board of Directors (``Board''). Foreside Fund Services, LLC 
(the ``Distributor'') will be the principal underwriter and distributor 
of the Fund's Shares. The Bank of New York Mellon (the 
``Administrator'') will serve as the administrator, custodian, transfer 
agent and fund accounting agent for the Fund.
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    \5\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \6\ The Commission has approved listing and trading on the 
Exchange of a number of actively managed funds under Rule 8.600. 
See, e.g., Securities Exchange Act Release Nos. 69591 (May 16, 
2013), 78 FR 30372 (May 22, 2013) (SR-NYSEArca-2013-33) (order 
approving Exchange listing and trading of International Bear ETF); 
69061 (March 7, 2013), 78 FR 15990 (March 13, 2013) (SR-NYSEArca-
2013-01) (order approving Exchange listing and trading of Newfleet 
Multi-Sector Income ETF); and 67277 (June 27, 2012), 77 FR 39554 
(July 3, 2012) (SR-NYSEArca-2012-39) (order approving Exchange 
listing and trading of the Global Alpha & Beta ETF).
    \7\ The Trust is registered under the 1940 Act. On June 25, 
2014, the Trust filed with the Commission an amendment to its 
registration statement on Form N-1A under the Securities Act of 1933 
(15 U.S.C. 77a) (``Securities Act'') and under the 1940 Act relating 
to the Fund (File Nos. 333-157876 and 811-22110) (``Registration 
Statement''). The description of the operation of the Trust and the 
Fund herein is based, in part, on the Registration Statement. In 
addition, the Commission has issued an order granting certain 
exemptive relief to the Trust under the 1940 Act. See Investment 
Company Act Release No. 29291 (May 28, 2010) (File No. 812-13677) 
(``Exemptive Order'').
    \8\ Pacific Life Fund Advisors LLC, a registered adviser, 
conducts its fixed income asset management business under the name 
Pacific Asset Management.
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    Commentary .06 to Rule 8.600 provides that, if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio. In addition, Commentary 
.06 further requires that personnel who make decisions on the open-end 
fund's portfolio composition must be subject to procedures designed to 
prevent the use and dissemination of material nonpublic information 
regarding the open-end fund's portfolio.\9\ Commentary .06 to Rule 
8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca 
Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the 
establishment of a ``fire wall'' between the investment adviser and the 
broker-dealer reflects the applicable open-end fund's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. The 
Adviser is not registered as a broker-dealer or affiliated with a 
broker-dealer. The Sub-Adviser is not registered as a broker-dealer but 
is affiliated with Pacific Select Distributors, Inc., a registered 
broker-dealer.\10\
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    \9\ 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 Sub-Adviser and their 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.
    \10\ The Sub-Adviser represents that Pacific Select 
Distributors, Inc. is a limited purpose broker-dealer with a primary 
business purpose of serving as distributor for mutual funds and 
variable annuity products. Pacific Select Distributors, Inc. does 
not engage in any brokerage or trading activity.
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    In the event (a) the Adviser or Sub-Adviser becomes, or becomes 
newly affiliated with, a broker-dealer, or (b) any new adviser or sub-
adviser is, or becomes affiliated with, a broker-dealer, it will 
implement a fire wall with respect to its relevant personnel or 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.
Principal Investments
    According to the Registration Statement, the Fund's investment 
objective will seek to provide a high level of current income.
    Under normal circumstances,\11\ the Fund will invest at least 80% 
of its net assets (plus any borrowings for investment purposes) in 
floating rate loans and other floating rate debt securities, 
derivatives or other instruments that have economic interests similar 
to such securities (each as described further below).
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    \11\ 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 fixed income markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
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    The Fund will attempt to achieve its investment objective through 
investments in a focused portfolio comprised primarily of senior 
secured floating rate loans (``Senior Loans''), floating rate high 
yield corporate bonds,\12\ index credit default swap agreements, single 
name credit default swap agreements, total return swap agreements,\13\ 
interest rate swap agreements and cash.\14\ The Fund will invest in 
Senior Loans that the Adviser or the Sub-Adviser deems to be highly 
liquid with readily available prices. The Fund will invest in Senior 
Loans rated C or higher by a credit rating agency registered as a 
nationally recognized statistical rating organization (``NRSRO'') with 
the Commission (for

[[Page 72732]]

example, Moody's Investor Service, Inc.), or is unrated but considered 
to be of comparable quality by the Adviser or Sub-Adviser. The Fund 
will not invest in Senior Loans that are in default at the time of 
purchase. In addition, for investment purposes, the Senior Loan must 
have a par amount outstanding of $150 million or greater at the time 
the loan is originally issued.\15\ Floating rate high yield corporate 
bonds in which the Fund invests generally must have $100 million or 
more par amount outstanding at the time of investment.
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    \12\ Senior Loans and floating rate high yield corporate bonds 
are instruments with interest rates which float, adjust or vary 
periodically based upon a benchmark indicator, a specified 
adjustment schedule, or prevailing interest rates. Senior Loans will 
generally be purchased from banks or other financial institutions 
through assignments or participations. A direct interest in a Senior 
Loan may be acquired directly from the agent of the lender or 
another lender by assignment or an indirect interest may be acquired 
as a participation in another lender's portion of a Senior Loan.
    \13\ Index Credit default swaps (CDX) can be used to gain 
exposure to a basket of credit risk by selling protection against 
default or other credit events or by buying protection in order to 
hedge broad market credit risk. Single name credit default swaps 
(CDS) can be used to allow the Fund to increase or decrease exposure 
to specific issuers through lower trading costs. Total return swaps 
(TRS) are contracts to obtain the total return of a reference asset 
or index in exchange for paying a financing cost. Interest rate 
swaps (IRS) are agreements between two parties to exchange one 
stream of interest payments for another. Each of these swaps is a 
type of derivative instrument, a financial contract whose value 
depends upon, or is derived from, the value of an underlying asset, 
reference rate or index, and may relate to bonds, loans, interest 
rates and related indexes. CDX, CDS, TRS and IRS are collectively 
referred to in the ``Principal Investments'' section of this filing 
as ``swap agreements.'' The Fund will typically use exchange-traded 
and over-the-counter (``OTC'') swap agreements as (i) a method to 
enhance returns; (ii) a substitute for taking a position in the 
underlying asset; and, (iii) as a part of a strategy designed to 
reduce exposure to other risks. To limit potential risks associated 
with such transactions, the Fund will segregate assets determined to 
be liquid by the Sub-Adviser in accordance with the 1940 Act to 
cover its obligations under derivative instruments. The Fund will 
include appropriate risk disclosure in its offering documents, 
including leveraging risk. The use of swap agreements will increase 
the Fund's net exposure to a particular issue, fixed income markets 
or the financial markets generally.
    \14\ In pursuing its investment objective, the Fund will seek to 
outperform the Credit Suisse Institutional Leveraged Loan Index (the 
``Index'').
    \15\ The Commission previously has approved listing and trading 
on NYSE Arca of an issue of Managed Fund Shares that primarily holds 
senior loans that include leveraged loans. See Securities Exchange 
Act Release No. 69244 (March 27, 2013), 78 FR 19766 (April 2, 2013) 
(SR-NYSEArca-2013-08) (order approving listing and trading of SPDR 
Blackstone/GSO Senior Loan ETF under NYSE Arca Equities Rule 8.600).
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    According to the Fund's Registration Statement, the Fund generally 
will invest in Senior Loans (including leveraged loans) that may be in 
the form of participations and assignments. A direct interest in a 
Senior Loan may be acquired directly from the agent of the lender or 
another lender by assignment or an indirect interest may be acquired as 
a participation in another lender's portion of a Senior Loan.
    Generally, secured Senior Loans are secured by specific assets of 
the borrower. Senior Loans, and some floating rate high yield corporate 
bonds, are debt instruments that may have a right to payment that is 
senior to most other debts of the borrowers. Borrowers may include 
corporations, partnerships and other entities that operate in a variety 
of industries and geographic regions. Senior Loans in which the Fund 
will invest consist of domestic issuers and U.S. dollar denominated 
foreign issuers.
    Senior Loans and floating rate high yield corporate bonds in which 
the Fund intends to invest are expected to be rated below investment 
grade (i.e., high yield/high risk securities, sometimes called non-
investment grade securities) \16\ or, may not be rated by any 
nationally recognized rating service, and if unrated, of comparable 
quality as determined by the Sub-Adviser.
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    \16\ Non-investment-grade securities, also referred to as ``high 
yield securities'' or ``junk bonds,'' are debt securities that are 
rated lower than the four highest rating categories by a nationally 
recognized statistical rating organization (for example, lower than 
Baa3 by Moody's Investors Service, Inc. (``Moody's'') or lower than 
BBB- by Standard & Poor's (``S&P'')) or are determined to be of 
comparable quality by the Fund's Sub-Adviser.
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Investment Characteristics
    According to the Registration Statement, the Sub-Adviser's 
selection process will start with a top-down market analysis and will 
be complemented by bottom-up security selection. The strategy will aim 
to provide exposure to the most liquid segment of the bank loan 
marketplace. In general, the investable universe will be comprised of 
the largest loans in the Index. The factors considered by the Sub-
Adviser when determining liquidity specifically for loans may include 
the frequency of trading or quotes, the number of dealers in the market 
willing to purchase or sell the loan, trading volume, the nature of the 
security, and the market for the security including prospects for 
future demand for the loan.
    Once the Sub-Adviser has determined the investable universe, both 
the macro-economic environment and technical factors that could 
materially impact the credit markets are assessed. The Sub-Adviser then 
will determine an overall target of portfolio risk and leverage to 
employ for the near term.
    Once the Sub-Adviser has determined the target risk and investable 
universe, the Sub-Adviser will construct what is believed to be the 
most effective mix of investments in accordance with the overall 
portfolio guidelines. As a result, investments with the most favorable 
risk/reward analyses will tend to have a greater representation or 
leverage in the Fund's portfolio. Due to the nature of the exchange-
traded fund (``ETF'') structure and liquidity requirements, the 
portfolio will place a higher value on liquidity relative to products 
without such a requirement. The portfolio will be diversified by 
industry and issuer, with no individual issuer representing more than 
5% of the portfolio. The typical duration positioning will be between 
0.25 years to 0.75 years as determined by the Sub-Adviser.\17\
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    \17\ Duration is a measure used to determine the sensitivity of 
a security's price to changes in interest rates. The longer a 
security's duration, the more sensitive it will be to changes in 
interest rates.
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    Once an investment is made, monitoring will take place each 
business day. Portfolio values will be monitored through daily third-
party pricing. Credit updates will be captured through the Sub-
Adviser's research system. This system will serve as a centralized 
credit hub for the Sub-Adviser's research team. The system will 
aggregate information such as portfolio holdings, outlooks, analyst 
comments, and investment theses for the portfolio management, 
operations, and credit teams. Investments will be sold based upon 
relative value opportunities or changes in corporate fundamentals.
    An investment will generally be sold when the issue no longer 
offers relative value or an adverse change in corporate or sector 
fundamentals has occurred.
Leverage
    To seek an increase in yield, the Fund expects to employ leverage 
to enhance potential return. The Fund may use leverage by (i) borrowing 
money, up to the maximum amount permitted under the 1940 Act, for 
investment purposes normally on a floating rate basis or (ii) through 
swap agreements. The timing and terms of leverage will be determined by 
the Sub-Adviser's ETF Investment Committee.
    The Fund's investments in swap agreements will be made in 
accordance with the 1940 Act and consistent with the Fund's investment 
objective and policies.\18\
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    \18\ The Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. The Sub-Adviser will evaluate the creditworthiness of 
counterparties on an ongoing basis. In addition to information 
provided by credit agencies, the Sub-Adviser evaluates each approved 
counterparty using various methods of analysis, including earning 
updates, a broker-dealer's reputation, the Sub-Adviser's past 
experience with the broker-dealer, a counterparty's liquidity and 
its share of market participation.
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    The Fund's assets that are not invested directly in floating rate 
loans, floating rate high yield corporate bonds or swap agreements will 
be held in cash or cash equivalents, including money market instruments 
and exchange traded products (``ETPs'') \19\ that invest in these and 
other highly liquid instruments, in order to cover its obligations 
under certain swap agreements. The larger the value of the Fund's 
derivative positions, the more the Fund will be required to maintain 
cash or cash equivalents as collateral for such derivatives.
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    \19\ See note 23, infra.
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Other (Non-Principal) Investments
    According to the Registration Statement, while the Fund, under 
normal circumstances, will invest at least 80% of its net assets in 
securities and financial instruments described above, the Fund may 
invest up to 20% of its net assets in the following securities and 
financial instruments.\20\
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    \20\ Unless otherwise indicated, the Fund may invest up to 20% 
of its net assets in the types of investments referenced below in 
this section, subject to the limitations imposed by the Fund's 
investment objective, policies, and restrictions described in the 
Fund's Registration Statement, as well as the federal securities 
laws.
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    The Fund may invest in debt securities (other than those described 
in the Principal Investments section above), which are securities 
consisting

[[Page 72733]]

of a certificate or other evidence of a debt (secured or unsecured) on 
which the issuing company or governmental body promises to pay the 
holder thereof a fixed, variable, or floating rate of interest for a 
specified length of time, and to repay the debt on the specified 
maturity date.
    Debt securities include investment-grade securities, non-
investment-grade securities, and unrated securities. Selection of such 
debt securities will generally be dependent on an independent analysis 
performed by the Sub-Adviser.
    Debt securities in which the Fund may invest consist of the 
following:

Bank Obligations of domestic and foreign banks, which may include 
certificates of deposit, commercial paper,\21\ bankers' acceptances, 
and fixed time deposits. The Fund will not invest in fixed time 
deposits which (i) are not subject to prepayment; or (ii) provide for 
withdrawal penalties upon prepayment, if in the aggregate, more than 
15% of its net assets would be invested in such deposits, repurchase 
agreements with remaining maturities of more than seven days or other 
illiquid assets;
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    \21\ Commercial paper is a short-term obligation with a maturity 
ranging from one to 270 days issued by banks, corporations and other 
borrowers. The Fund may invest in commercial paper rated A-1 or A-2 
by S&P or Prime-1 or Prime-2 by Moody's.
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Corporate Debt, which are debt securities issued by businesses to 
finance their operations and consist of notes, corporate bonds, high 
yield bonds, debentures and commercial paper. The Fund may invest in 
corporate debt issued by domestic or foreign companies of all kinds, 
including those with small-, mid- and large-capitalizations. The Fund 
may also invest in corporate debt securities which are representative 
of one or more high yield bond or credit derivative indices, which may 
change from time to time;
Asset-backed securities (``ABS'') are instruments created from many 
types of assets, including auto loans, credit card receivables, home 
equity loans, and student loans. ABS are issued through special purpose 
vehicles that are bankruptcy remote from the issuer of the collateral. 
The Fund may invest in ABS provided such securities are consistent with 
the Fund's investment objectives and policies. The Fund will not invest 
more than 5% of its net assets in non-agency ABS;
Mortgage Backed Securities (``MBS'') and mortgage-related securities, 
which are interests in pools of residential or commercial mortgage 
loans, including mortgage loans made by savings and loan institutions, 
mortgage bankers, commercial banks and others. Pools of mortgage loans 
are assembled as securities for sale to investors by various 
governmental, government-related and private organizations. The Fund 
also may invest in debt instruments which are secured with collateral 
consisting of mortgage-related securities. The Fund will not invest, 
however, more than 5% of its net assets in mortgage-related securities;
Inflation-indexed bonds, which are debt securities whose principal 
value is periodically adjusted according to the rate of inflation;
Floating rate loans (other than those described in the Principal 
Investments section above) consisting of (i) unsecured senior loans and 
(ii) secured and unsecured subordinated loans, second lien loans and 
subordinated bridge loans (``Junior Loans'').\22\ Unsecured senior 
loans and Junior Loans are subject to the same general risks of Senior 
Loans; however, due to their lower place in the borrower's capital 
structure and possible unsecured status, unsecured senior loans and 
Junior Loans involve a higher degree of overall risk than Senior Loans 
of the same borrower; and,
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    \22\ The Fund will invest in Junior Loans the Adviser or Sub-
Adviser deems to be highly liquid with readily available prices. The 
Fund will invest in Junior Loans rated C or higher by a NRSRO, or is 
unrated but considered to be of comparable quality by the Adviser or 
Sub-Adviser. The Fund will not invest in Junior Loans that are in 
default at time of purchase. In addition, for investment purposes, 
the Junior Loan must have a par amount outstanding of $150 million 
or greater at the time the loan is originally issued.
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U.S. government securities, which are securities issued or guaranteed 
by the U.S. government or its agencies or instrumentalities. U.S. 
government securities consist of U.S. Treasury bills, U.S. Treasury 
notes, U.S. Treasury bonds, obligations issued by U.S. government 
agencies and instrumentalities which are supported by (i) the full 
faith and credit of the U.S. Treasury, (ii) the discretionary authority 
of the U.S. government, or (iii) the right of the issuer to borrow from 
the U.S. Treasury, and separately traded principal and interest 
components of securities guaranteed or issued by the U.S. government or 
its agencies, instrumentalities or sponsored enterprises if such 
components trade independently under the Separate Trading of Registered 
Interest and Principal of Securities program (``STRIPS'') or any 
similar program sponsored by the U.S. government, or U.S. Treasury 
zero-coupon bonds, which are U.S. Treasury bonds which have been 
stripped of their unmatured interest coupons, the coupons themselves, 
and receipts or certificates representing interests in such stripped 
debt obligations and coupons.

    The Fund may invest in issuers located outside the United States 
directly, or in financial instruments, ETFs or other ETPs that are 
indirectly linked to the performance of foreign issuers.\23\ Such 
financial instruments consist of American Depositary Receipts 
(``ADRs''), Global Depositary Receipts (``GDRs''), European Depositary 
Receipts (``EDRs''), International Depository Receipts (``IDRs''), 
``ordinary shares,'' and ``New York shares'' issued and traded in the 
U.S.\24\
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    \23\ For purposes of this proposed rule change, ETPs include 
Investment Company Units (as described in NYSE Arca Equities Rule 
5.2(j)(3)); Index-Linked Securities (as described in NYSE Arca 
Equities Rule 5.2(j)(6)); Portfolio Depositary Receipts (as 
described in NYSE Arca Equities Rule 8.100); Trust Issued Receipts 
(as described in NYSE Arca Equities Rule 8.200); Commodity-Based 
Trust Shares (as described in NYSE Arca Equities Rule 8.201); 
Currency Trust Shares (as described in NYSE Arca Equities Rule 
8.202); Commodity Index Trust Shares (as described in NYSE Arca 
Equities Rule 8.203); Trust Units (as described in NYSE Arca 
Equities Rule 8.500); and Managed Fund Shares (as described in NYSE 
Arca Equities Rule 8.600). The ETPs all will be listed and traded in 
the U.S. on registered exchanges. The Fund will invest in the 
securities of ETFs registered under the 1940 Act consistent with the 
requirements of Section 12(d)(1) of the 1940 Act, or any rule, 
regulation or order of the Commission or interpretation thereof. The 
Fund will only make such ETF investments in conformity with the 
requirements of Regulation M of the Internal Revenue Code of 1986, 
as amended (the ``Internal Revenue Code''). While the Fund may 
invest in inverse ETPs, the Fund will not invest in leveraged or 
inverse leveraged ETPs (e.g., 2X or 3X).
    \24\ ADRs are U.S. dollar denominated receipts typically issued 
by U.S. banks and trust companies that evidence ownership of 
underlying securities issued by a foreign issuer. The underlying 
securities may not necessarily be denominated in the same currency 
as the securities into which they may be converted. The underlying 
securities are held in trust by a custodian bank or similar 
financial institution in the issuer's home country. The depositary 
bank may not have physical custody of the underlying securities at 
all times and may charge fees for various services, including 
forwarding dividends and interest and corporate actions. Generally, 
ADRs in registered form are designed for use in domestic securities 
markets and are traded on exchanges or OTC in the U.S. GDRs, EDRs, 
and IDRs are similar to ADRs in that they are certificates 
evidencing ownership of shares of a foreign issuer; however, GDRs, 
EDRs, and IDRs may be issued in bearer form and denominated in other 
currencies, and are generally designed for use in specific or 
multiple securities markets outside the U.S. EDRs, for example, are 
designed for use in European securities markets while GDRs are 
designed for use throughout the world. Ordinary shares are shares of 
foreign issuers that are traded abroad and on a U.S. exchange. New 
York shares are shares that a foreign issuer has allocated for 
trading in the U.S. ADRs, ordinary shares, and New York shares all 
may be purchased with and sold for U.S. dollars, which protects the 
Fund from the foreign settlement risks described below. ADRs may be 
sponsored or unsponsored, but unsponsored ADRs will not exceed 10% 
of the Fund's net assets. Not more than 10% of the net assets of the 
Fund in the aggregate invested in equity securities (other than non-
exchange-traded investment company securities) shall consist of 
equity securities whose principal market is not a member of the 
Intermarket Surveillance Group (``ISG'') or is a market with which 
the Exchange does not have a comprehensive surveillance sharing 
agreement. See note 40, infra.

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[[Page 72734]]

    The Fund may trade U.S. exchange-traded futures contracts, U.S. 
exchange-traded or OTC options on futures contracts, and U.S. exchange-
traded or OTC put and call options on securities and securities 
indices, as the Sub-Adviser determines is appropriate in seeking the 
Fund's investment objective, and except as restricted by the Fund's 
investment limitations. The Fund may purchase futures contracts and 
options to protect against a decline in the market value of the 
securities in its portfolio or to anticipate an increase in the market 
value of securities that the Fund may seek to purchase in the future. 
In addition, the Fund may sell futures contracts or write covered call 
options as a means of increasing the yield on its assets and as a means 
of providing limited protection against decreases in its market value. 
U.S. exchange-traded futures contracts, U.S. exchange-traded options on 
futures contracts and U.S. exchange-traded put and call options in 
which the Fund invests will trade on exchanges that are members of ISG.
    The Fund may invest in structured notes, which are debt obligations 
that also contain an embedded derivative component with characteristics 
that adjust the obligation's risk/return profile. Generally, the 
performance of a structured note will track that of the underlying debt 
obligation and the derivative embedded within it. The Fund has the 
right to receive periodic interest payments from the issuer of the 
structured notes at an agreed-upon interest rate and a return of the 
principal at the maturity date.
    The Fund may invest in exchange-traded equity securities that 
represent ownership interests in a company or partnership and that 
consist of common stocks, preferred stocks, warrants to acquire common 
stock, securities convertible into common stock, investments in master 
limited partnerships, and rights.
    The Fund may invest in the securities of other investment companies 
to the extent that such an investment would be consistent with the 
requirements of Section 12(d)(1) of the 1940 Act, or any rule, 
regulation or order of the Commission or interpretation thereof.
    Consistent with the restrictions discussed above, the Fund may 
invest in several different types of investment companies from time to 
time, including mutual funds, ETFs, exchange and OTC-traded closed-end 
funds, and exchange and OTC-traded BDCs, when the Adviser or the Sub-
Adviser believes such an investment is in the best interests of the 
Fund and its shareholders. For example, the Fund may elect to invest in 
another investment company when such an investment presents a more 
efficient investment option than buying securities individually. The 
Fund also may invest in investment companies that are included as 
components of an index, such as business development companies 
(``BDCs''), to seek to track the performance of that index. A BDC is a 
less common type of closed-end investment company that more closely 
resembles an operating company than a typical investment company. 
Investment companies may include index-based investments, such as ETFs 
that hold substantially all of their assets in securities representing 
a specific index as well as ETFs that are actively managed.
    The Fund may invest in the securities of exchange and OTC-traded 
pooled investment vehicles that are not investment companies and, thus, 
not required to comply with the provisions of the 1940 Act. These 
pooled vehicles typically hold commodities, such as gold or oil, 
currency, or other property that is itself not a security.\25\
---------------------------------------------------------------------------

    \25\ Exchange-traded pooled investment vehicles include Trust 
Issued Receipts (as described in NYSE Arca Equities Rule 8.200); 
Commodity-Based Trust Shares (as described in NYSE Arca Equities 
Rule 8.201); Currency Trust Shares (as described in NYSE Arca 
Equities Rule 8.202); Commodity Index Trust Shares (as described in 
NYSE Arca Equities Rule 8.203); and Trust Units (as described in 
NYSE Arca Equities Rule 8.500).
---------------------------------------------------------------------------

    The Fund may enter into repurchase agreements with financial 
institutions, which may be deemed to be loans. It is the current policy 
of the Fund not to invest in repurchase agreements that do not mature 
within seven days if any such investment, together with any other 
illiquid assets held by the Fund, amounts to more than 15% of the 
Fund's net assets. The investments of the Fund in repurchase 
agreements, at times, may be substantial when, in the view of the Sub-
Adviser, liquidity or other considerations so warrant.
    The Fund may engage in short sales transactions in which the Fund 
sells a security it does not own.
    The Fund may utilize swap agreements, other than those referenced 
in the Principal Investments section above, in an attempt to gain 
exposure to the securities in a market without actually purchasing 
those securities, or to hedge a position. Such swap agreements consist 
of interest rate caps, under which, in return for a premium, one party 
agrees to make payments to the other to the extent that interest rates 
exceed a specified rate, or ``cap'', interest rate floors, under which, 
in return for a premium, one party agrees to make payments to the other 
to the extent that interest rates fall below a specified level, or 
``floor''; and interest rate collars, under which a party sells a cap 
and purchases a floor or vice versa in an attempt to protect itself 
against interest rate movements exceeding given minimum or maximum 
levels.
Investment Restrictions
    According to the Registration Statement, the Fund may not:
    (i) With respect to 75% of its total assets, purchase securities of 
any issuer (except securities issued or guaranteed by the U.S. 
government, its agencies or instrumentalities or shares of investment 
companies) if, as a result, more than 5% of its total assets would be 
invested in the securities of such issuer; or (ii) acquire more than 
10% of the outstanding voting securities of any one issuer. For 
purposes of this policy, the issuer of the underlying security will be 
deemed to be the issuer of any respective depositary receipt; \26\ or
---------------------------------------------------------------------------

    \26\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act. See note 24, supra, regarding depositary 
receipts that the Fund may hold.
---------------------------------------------------------------------------

    (ii) [sic] Invest 25% or more of its total assets in the securities 
of one or more issuers conducting their principal business activities 
in the same industry or group of industries. This limitation does not 
apply to investments in securities issued or guaranteed by the U.S. 
government, its agencies or instrumentalities, or shares of investment 
companies. The Fund will not invest 25% or more of its total assets in 
any investment company that so concentrates.\27\
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    \27\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
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    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 or Sub-
Adviser,\28\ in accordance

[[Page 72735]]

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. 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.\29\
---------------------------------------------------------------------------

    \28\ In reaching liquidity decisions, the Adviser or Sub-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).
    \29\ 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).
---------------------------------------------------------------------------

    To respond to adverse market, economic, political or other 
conditions, the Fund may invest up to 100% of its total assets, without 
limitation, in debt securities and money market instruments, either 
directly or through ETPs (see supra note 23). The Fund may be invested 
in this manner for extended periods, depending on the Sub-Adviser's 
assessment of market conditions. For purposes of this paragraph, debt 
securities and money market instruments include shares of mutual funds, 
commercial paper, certificates of deposit, bankers' acceptances, U.S. 
government securities, repurchase agreements and bonds that are rated 
BBB or higher.
    According to the Registration Statement, the Fund will seek to 
qualify for treatment as a Regulated Investment Company (``RIC'') under 
the Internal Revenue Code.\30\
---------------------------------------------------------------------------

    \30\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    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).\31\
---------------------------------------------------------------------------

    \31\ 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.
---------------------------------------------------------------------------

Net Asset Value
    The NAV per Share of the Fund will be computed by dividing the 
value of the net assets of the Fund (i.e., the value of its total 
assets less total liabilities) by the total number of Shares of the 
Fund outstanding, rounded to the nearest cent. Expenses and fees, 
including without limitation, the management, administration and 
distribution fees, are accrued daily and taken into account for 
purposes of determining NAV per Share. The NAV per Share for the Fund 
will be calculated by the Administrator and determined as of the close 
of the regular trading session on the New York Stock Exchange 
(``NYSE'') (ordinarily 4:00 p.m., Eastern Time) on each day that such 
exchange is open.
    In computing the Fund's NAV, the Fund's securities holdings will be 
valued based on their last readily available market price. Price 
information on listed securities, including ETPs in which the Fund 
invests, will be taken from the exchange where the security is 
primarily traded. Other portfolio securities and assets for which 
market quotations are not readily available or determined to not 
represent the current fair value will be valued based on fair value as 
determined in good faith by the Fund's Sub-Adviser in accordance with 
procedures adopted by the Board.
    U.S. exchange-traded options, exchange-traded swaps and exchange-
traded closed end funds will be valued at the closing settlement price 
determined by the applicable exchange. Exchange-traded equity 
securities, including common stocks, preferred stocks, warrants, 
convertible securities, rights, pooled investment vehicles, exchange-
traded BDC's, master limited partnerships, ETPs, sponsored ADRs, GDRs, 
EDRs, IDRs, ordinary shares, and New York shares (collectively, 
``Exchange-traded Equity'') will be valued at market value, which will 
generally be determined using the last reported official closing or 
last trading price on the exchange or market on which the security is 
primarily traded at the time of valuation or, if no sale has occurred, 
at the last quoted bid price on the primary market or exchange on which 
they are traded. If market prices are unavailable or the Fund believes 
that they are unreliable, or when the value of a security has been 
materially affected by events occurring after the relevant market 
closes, the Fund will price those securities at fair value as 
determined in good faith using methods approved by the Trust's Board.
    Unsponsored ADRs, which are traded OTC, will be valued on the basis 
of the market closing price on the exchange where the stock of the 
foreign issuer that underlies the ADR is listed. Investment company 
securities (other than ETFs, exchange-traded closed-end funds and 
exchange-traded BDCs), including mutual funds, OTC-traded closed-end 
funds, and OTC-traded BDCs, will be valued at net asset value. Non-
exchange-traded derivatives, including swaps, options traded OTC, 
options on futures traded OTC, and certain structured notes, will 
normally be valued on the basis of quotes obtained from brokers and 
dealers or pricing services using data reflecting the earlier closing 
of the principal markets for those assets. Prices obtained from 
independent pricing services use information provided by market makers 
or estimates of market values obtained from yield data relating to 
investments or securities with similar characteristics.
    Futures contracts will be valued at the settlement or closing price 
determined by the applicable exchange.
    Debt securities, floating rate loans, other floating rate debt 
securities, Senior Loans, Junior Loans, U.S. Treasury securities, OTC-
traded pooled investment vehicles, other obligations issued or 
guaranteed by U.S. government agencies and instrumentalities, STRIPs, 
zero-coupon bonds, bank obligations, corporate debt securities, ABS, 
mortgage-backed securities, mortgage-related securities, commercial 
paper, repurchase agreements, inflation-indexed bonds, certificates of 
deposits, bankers' acceptances, and certain structured notes 
(collectively, ``OTC-traded Securities'') generally trade in the OTC 
market rather than on a securities exchange. The Fund will generally 
value OTC-traded Securities by relying on independent pricing services. 
The Fund's pricing services will use valuation models or matrix pricing 
to determine current value. In general, pricing services use 
information with respect to comparable bond and note transactions, 
quotations from bond dealers or by reference to other securities that 
are considered comparable in such characteristics as

[[Page 72736]]

rating, interest rate, maturity date, option adjusted spread models, 
prepayment projections, interest rate spreads and yield curves. Matrix 
price is an estimated price or value for a fixed-income security. 
Matrix pricing is considered a form of fair value pricing. The Fund's 
debt securities will generally be valued at bid prices. In certain 
cases, some of the Fund's debt securities may be valued at the mean 
between the last available bid and ask prices.
    Foreign exchange rates will be priced using 4:00 p.m. (Eastern 
Time) mean prices from major market data vendors.
Creation and Redemption of Shares
    According to the Registration Statement, the Fund will issue and 
redeem Shares on a continuous basis at NAV in aggregated lots which 
shall initially be of 25,000 Shares (each, a ``Creation Unit'').
    All orders to create or redeem Creation Units must be received by 
the Distributor no later than 3:00 p.m., Eastern Time in order for the 
creation or redemption of Creation Units to be effected based on the 
NAV of Shares of the Fund as next determined on such date.
    The Fund typically will issue and redeem Creation Units principally 
for cash, calculated based on the NAV per Share, multiplied by the 
number of Shares representing a Creation Unit (``Deposit Cash''), plus 
a fixed and/or variable transaction fee; however, the Trust reserves 
the right to permit or require Creation Units to be issued in exchange 
for the Deposit Securities together with the Cash Component, described 
below. \32\
---------------------------------------------------------------------------

    \32\ The Adviser represents that, to the extent the Trust 
effects the creation of Shares in cash, such transactions will be 
effected in the same manner for all authorized participants.
---------------------------------------------------------------------------

    The consideration for purchase of a Creation Unit of each Fund 
generally will consist of an in-kind deposit of a designated portfolio 
of securities--the ``Deposit Securities''--per each Creation Unit 
constituting a substantial replication, or a representation, of the 
securities included in the Fund's portfolio and an amount of cash--the 
``Cash Component.'' Together, the Deposit Securities and the Cash 
Component will constitute the ``Fund Deposit,'' which represents the 
minimum initial and subsequent investment amount for a Creation Unit of 
the Fund. The Cash Component is an amount equal to the difference 
between the NAV of the Shares of the Fund (per Creation Unit) and the 
market value of the Deposit Securities.
    In addition, the Trust reserves the right to permit or require the 
substitution of an amount of cash--i.e., a ``cash in lieu'' amount--to 
be added to the Cash Component to replace any Deposit Security which 
may not be available in sufficient quantity for delivery or which may 
not be eligible for transfer through the clearing process, or which may 
not be eligible for trading by an authorized participant or the 
investor for which it is acting.
    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 Administrator and only on a business day. The Trust 
will not redeem Shares of the Fund in amounts less than Creation Units. 
Unless cash redemptions are available or specified, the redemption 
proceeds for a Creation Unit generally will consist of the ``Fund 
Securities''--as announced by the Administrator on the business day of 
the request for redemption received in proper form--plus cash in an 
amount equal to the difference between the NAV of the Shares being 
redeemed, as next determined after a receipt of a request in proper 
form, and the value of the Fund Securities, less a redemption 
transaction fee.
    The Administrator, through the National Securities Clearing 
Corporation (``NSCC''), will make available immediately prior to the 
opening of business on the Exchange (currently 9:30 a.m., Eastern Time) 
on each business day, the Fund Securities, Deposit Securities and Fund 
Deposit, that will be applicable to creation and redemption requests 
received in proper form on that day as well as the estimated Cash 
Component.
    According to the Registration Statement, if it is not possible to 
effect deliveries of the Fund Securities, for example if the investor 
is not able to accept delivery, the Trust may in its discretion 
exercise its option to redeem Shares of the Fund in cash, and the 
redeeming beneficial owner will be required to receive its redemption 
proceeds in cash. In addition, an investor may request a redemption in 
cash which the Fund may, in its sole discretion, permit.\33\ In either 
case, the investor will receive a cash payment equal to the NAV of its 
Shares based on the NAV of Shares of the Fund next determined after the 
redemption request is received in proper form (minus a redemption 
transaction fee and additional charge for requested cash redemptions, 
as described in the Registration Statement). The Fund may also, in its 
sole discretion, upon request of a shareholder, provide such redeemer a 
portfolio of securities which differs from the exact composition of the 
applicable Fund Securities but does not differ in NAV.
---------------------------------------------------------------------------

    \33\ The Adviser represents that, to the extent the Trust 
effects the redemption of Shares in cash, such transactions will be 
effected in the same manner for all authorized participants.
---------------------------------------------------------------------------

    Redemptions of Shares for Fund Securities will be subject to 
compliance with applicable federal and state securities laws and the 
Fund (whether or not it otherwise permits cash redemptions) reserves 
the right to redeem Creation Units for cash to the extent that the Fund 
could not lawfully deliver specific Fund Securities upon redemptions or 
could not do so without first registering the Fund Securities under 
such laws. An authorized participant or an investor for which it is 
acting subject to a legal restriction with respect to a particular 
stock included in the Fund Securities applicable to the redemption of a 
Creation Unit may be paid an equivalent amount of cash.
Availability of Information
    The Fund's Web site (www.advisorshares.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Fund's Web 
site will include additional quantitative information updated on a 
daily basis, including, for the Fund, (1) daily trading volume, the 
prior business day's reported closing price, NAV and mid-point of the 
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask 
Price''),\34\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Core Trading Session on the Exchange, the 
Fund's Web site will disclose the Disclosed Portfolio that will form 
the basis for the Fund's calculation of NAV at the end of the business 
day.\35\
---------------------------------------------------------------------------

    \34\ The Bid/Ask Price of the Fund's Shares will be determined 
using the mid-point of the highest bid and the lowest offer on the 
Exchange as of the time of calculation of the Fund's NAV. The 
records relating to Bid/Ask Prices will be retained by the Fund and 
its service providers.
    \35\ Under accounting procedures followed by the Fund, trades 
made on the prior business day (``T'') will be booked and reflected 
in NAV on the current business day (``T+1''). Accordingly, the Fund 
will be able to disclose at the beginning of the business day the 
portfolio that will form the basis for the NAV calculation at the 
end of the business day.

---------------------------------------------------------------------------

[[Page 72737]]

    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.
    In addition, a basket composition file, which includes the security 
names and share quantities, if applicable, required to be delivered in 
exchange for the Fund's Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the Exchange via the NSCC. The basket represents one Creation Unit of 
the Fund. The NAV of Shares of the Fund will normally be determined as 
of the close of the regular trading session on the Exchange (ordinarily 
4:00 p.m. Eastern Time) on each business day. Authorized participants 
may refer to the basket composition file for information regarding 
securities and financial instruments that may comprise the Fund's 
basket on a given day.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's shareholder reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports will be available free upon request from the Trust, and those 
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or 
downloaded from the Commission's Web site at www.sec.gov. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers.
    Quotation and last sale information for the Shares and the 
underlying U.S. Exchange-traded Equity will be available via the 
Consolidated Tape Association (``CTA'') high-speed line, and from the 
national securities exchange on which they are listed. Quotation and 
last sale information for exchange-listed options cleared via the 
Options Clearing Corporation will be available via the Options Price 
Reporting Authority. Price information regarding exchange-traded 
options, exchange-traded swaps, exchange-traded closed end funds, 
futures and Exchange-traded Equity held by the Fund will be available 
from the U.S. and non-U.S. exchanges trading such assets.
    Quotation information from brokers and dealers or pricing services 
will be available for unsponsored ADRs; non-exchange-traded derivatives 
(including swaps, options traded OTC, options on futures traded OTC and 
certain structured notes); and OTC-traded Securities. Price information 
for investment company securities (other than ETFs, exchange-traded 
closed end funds and exchange-traded BDCs) is available from the 
applicable investment company's Web site and from market data vendors. 
Pricing information regarding each asset class in which the Fund will 
invest will generally be available through nationally recognized data 
service providers through subscription agreements. Foreign exchange 
prices are available from major market data vendors.
    In addition, the Portfolio Indicative Value, as defined in NYSE 
Arca Equities Rule 8.600(c)(3), will be widely disseminated at least 
every 15 seconds during the Core Trading Session by one or more major 
market data vendors.\36\ The dissemination of the Portfolio Indicative 
Value, together with the Disclosed Portfolio, will allow investors to 
determine the value of the underlying portfolio of the Fund on a daily 
basis and will provide a close estimate of that value throughout the 
trading day.
---------------------------------------------------------------------------

    \36\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Portfolio Indicative Values taken from CTA or other data feeds. The 
Portfolio Indicative Value calculation will be an estimate of the 
value of the Fund's NAV per Share using market data converted into 
U.S. dollars at the current currency rates. The Portfolio Indicative 
Value price will be based on quotes and closing prices from the 
securities' local market and may not reflect events that occur 
subsequent to the local market's close. Premiums and discounts 
between the Portfolio Indicative Value and the market price of the 
Shares may occur. This should not be viewed as a ``real-time'' 
update of the NAV per Share of the Fund, which will be calculated 
only once a day.
---------------------------------------------------------------------------

    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, distributions 
and taxes is included in the Registration Statement. All terms relating 
to the Fund that are referred to, but not defined in, this proposed 
rule change are defined in the Registration Statement.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund.\37\ Trading in Shares of the Fund 
will be halted if the circuit breaker parameters in NYSE Arca Equities 
Rule 7.12 have been reached. Trading also may be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. These may include: (1) The 
extent to which trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Fund; 
or (2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. Trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of the Fund may be 
halted.
---------------------------------------------------------------------------

    \37\ See NYSE Arca Equities Rule 7.12, Commentary .04.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. Eastern Time in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca 
Equities Rule 8.600(d)(2)(B)(ii), the Adviser will implement and 
maintain, or be subject to, procedures designed to prevent the use and 
dissemination of material non-public information regarding the actual 
components of the Fund's portfolio. The Exchange represents that, for 
initial and/or continued listing, the Fund will be in compliance with 
Rule 10A-3 \38\ under the Act, as provided by NYSE Arca Equities Rule 
5.3. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the

[[Page 72738]]

Exchange. The Exchange will obtain a representation from the issuer of 
the Shares that the NAV per Share will be calculated daily and that the 
NAV and the Disclosed Portfolio as defined in NYSE Arca Equities Rule 
8.600(c)(2) will be made available to all market participants at the 
same time.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws. The Exchange represents that these 
procedures are adequate to properly monitor Exchange trading of the 
Shares in all trading sessions and to deter and detect violations of 
Exchange rules and federal securities laws applicable to trading on the 
Exchange.\39\
---------------------------------------------------------------------------

    \39\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.\40\
---------------------------------------------------------------------------

    \40\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets 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 communicate as needed 
regarding trading in the Shares, exchange-traded equity securities, 
futures contracts and exchange-traded options contracts with other 
markets and other entities that are members of the ISG, and FINRA, on 
behalf of the Exchange, may obtain trading information regarding 
trading in the Shares, exchange-traded equity securities, 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-traded equity securities, 
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. In 
addition, FINRA, on behalf of the Exchange, is 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'').
    Not more than 10% of the net assets of the Fund in the aggregate 
invested in equity securities (other than non-exchange-traded 
investment company securities) shall consist of equity securities whose 
principal market is not a member of the 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 exchange-traded options contracts shall 
consist of options contracts whose principal market is not a member of 
the ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit Holders in an Information Bulletin (``Bulletin'') 
of the special characteristics and risks associated with trading the 
Shares. Specifically, the Bulletin will discuss the following: (1) The 
procedures for purchases and redemptions of Shares in Creation Unit 
aggregations (and that Shares are not individually redeemable); (2) 
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence 
on its Equity Trading Permit Holders to learn the essential facts 
relating to every customer prior to trading the Shares; (3) the risks 
involved in trading the Shares during the Opening and Late Trading 
Sessions when an updated Portfolio Indicative Value will not be 
calculated or publicly disseminated; (4) how information regarding the 
Portfolio Indicative Value and the Disclosed Portfolio is disseminated; 
(5) the requirement that Equity Trading Permit Holders deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (6) trading 
information.
    In addition, the Bulletin will reference that the Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. The 
Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m. Eastern Time each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \41\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \41\ 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 NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. FINRA, on behalf of the Exchange, 
will communicate as needed regarding trading in the Shares, exchange-
traded equity securities, futures contracts and exchange-traded options 
contracts with other markets and other entities that are members of the 
ISG, and FINRA, on behalf of the Exchange, may obtain trading 
information regarding trading in the Shares, exchange-traded equity 
securities, 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-traded 
equity securities, 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. In addition, FINRA, on behalf of the Exchange, is 
able to access, as needed, trade information for certain fixed income 
securities held by the Fund reported to TRACE. Not more than 10% of the 
net assets of the Fund in the aggregate invested in equity securities 
(other than non-exchange-traded investment company securities) shall 
consist of equity securities whose principal market is not a member of 
the ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement. The Fund may invest up to 
5% of net assets in non-agency ABS. The Fund may invest up to 5% of net

[[Page 72739]]

assets in mortgage-related securities. The Fund may not purchase or 
hold illiquid assets if, in the aggregate, more than 15% of its net 
assets would be invested in illiquid assets. The Adviser is not 
registered as a broker-dealer or affiliated with a broker-dealer. The 
Sub-Adviser is not registered as a broker-dealer but is affiliated with 
Pacific Select Distributors, Inc., a registered broker-dealer. The Sub-
Adviser represents that Pacific Select Distributors, Inc. is a limited 
purpose broker-dealer with a primary business purpose of serving as 
distributor for mutual funds and variable annuity products. Pacific 
Select Distributors, Inc. does not engage in any brokerage or trading 
activity.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. Quotation and last sale 
information for the Shares and the underlying U.S. Exchange-traded 
Equity will be available via the CTA high-speed line, and from the 
national securities exchange on which they are listed. Quotation and 
last sale information for exchange-listed options cleared via the 
Options Clearing Corporation will be available via the Options Price 
Reporting Authority. Price information regarding exchange-traded 
options, exchange-traded swaps, exchange-traded closed end funds, 
futures and Exchange-traded Equity held by the Fund will be available 
from the U.S. and non-U.S. exchanges trading such assets. Quotation 
information from brokers and dealers or pricing services will be 
available for unsponsored ADRs; non-exchange-traded derivatives 
(including swaps, options traded OTC, options on futures traded OTC and 
certain structured notes); and OTC-traded Securities. Price information 
for investment company securities (other than ETFs, exchange-traded 
closed end funds and exchange-traded BDCs) is available from the 
investment company's Web site and from market data vendors. Pricing 
information regarding each asset class in which the Fund will invest 
will generally be available through nationally recognized data service 
providers through subscription agreements. Foreign exchange prices are 
available from major market data vendors. 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. 
Moreover, prior to the commencement of trading, the Exchange will 
inform its Equity Trading Permit Holders in an Information Bulletin of 
the special characteristics and risks associated with trading the 
Shares. Trading in Shares of the Fund will be halted if the circuit 
breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. Trading in the Shares 
will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets 
forth circumstances under which Shares of the Fund may be halted. In 
addition, as noted above, investors will have ready access to 
information regarding the Fund's holdings, the Portfolio Indicative 
Value, the Disclosed Portfolio, and quotation and last sale information 
for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the Fund's holdings, 
the Portfolio Indicative Value, the Disclosed Portfolio, and quotation 
and last sale information for the Shares.

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

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

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2014-126 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 Number SR-NYSEArca-2014-126. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your

[[Page 72740]]

comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 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 Number SR-NYSEArca-2014-126 and should be submitted on or before 
December 29, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-28644 Filed 12-5-14; 8:45 am]
BILLING CODE P


