
[Federal Register Volume 80, Number 16 (Monday, January 26, 2015)]
[Notices]
[Pages 4015-4021]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-01246]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74093: File No. SR-NYSEArca-2014-126]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
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

January 20, 2015.

I. Introduction

    On November 19, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
AdvisorShares Pacific Asset Enhanced Floating Rate ETF (``Fund'') under 
NYSE Arca Equities Rule 8.600. On November 26, 2014, the Exchange filed 
Amendment No. 1 to the proposal.\3\ The proposed rule change, as 
modified by Amendment No. 1 thereto, was published for comment in the 
Federal Register on December 8, 2014.\4\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 amended the proposed rule change in the 
following ways: (1) Specified 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) 
clarified that senior loans in which the Fund may invest includes 
leveraged loans; and (3) specified 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 (``ISG'').
    \4\ See Securities Exchange Act Release No. 73717 (December 2, 
2014), 79 FR 72730 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade Shares of the Fund under 
NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''), which governs 
the listing and trading of Managed Fund Shares on the Exchange. The 
Shares will be offered by AdvisorShares Trust (``Trust''), a statutory 
trust organized under the laws of the State of Delaware and registered 
with the Commission as an open-end management investment company.\5\ 
AdvisorShares Investments, LLC (``Adviser'') will be the investment 
adviser to the Fund, and Pacific Asset Management (``Sub-Adviser''), 
will be the sub-adviser to the Fund.\6\ The Bank of New York Mellon 
(``Administrator'') will serve as the administrator, custodian, 
transfer agent and fund accounting agent for the Fund. Foreside Fund 
Services, LLC will be the principal underwriter and distributor of the 
Fund's Shares.
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    \5\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). The Exchange states that 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) and under the 1940 Act relating to the Fund (File Nos. 333-
157876 and 811-22110) (``Registration Statement''). In addition, 
according to the Exchange, 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).
    \6\ The Exchange represents that 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 Disteributors, Inc., a registered broker-dealer. The 
Exchange states that the Sub-Adviser represetnts 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, and that Pacific Select Distributors, 
Inc. does not engage in any borkerage or trading activity. The 
Exchange states that in the event (a) the Adviser or the Sub-Adviser 
becomes a registered broker-dealer or becomes newly affilitated 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 its broker-dealer affiliate regarding 
access to information concerning the composition of or changes to 
the portfolio, and the 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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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategy, including other 
portfolio holdings and investment restrictions.\7\
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    \7\ The Commission notes that additional information regarding 
the Fund, the Trust, and the Shares, including investment 
strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, distributions, and taxes, 
among other things, can be found in the Notice and the Registration 
Statement, as applicable. See Notice, supra note 4, and Registration 
Statement, supra note 5, respectively.

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[[Page 4016]]

A. Principal Investments (under normal circumstances) \8\
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    \8\ The Exchange states that the term ``under normal 
circumstances'' means, without limitation, 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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    According to the Exchange, the Fund's investment objective will 
seek to provide a high level of current income. 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). 
The Exchange states that the Fund will seek to outperform the Credit 
Suisse Institutional Leveraged Loan Index. 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.\9\
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    \9\ 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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    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,\10\ index credit default swaps, single name 
credit default swaps, total return swaps,\11\ interest rate swaps and 
cash.
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    \10\ According to the Exchange, 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, 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.
    \11\ According to the Exchange, 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 as ``swaps.'' The Exchange states 
that the Fund will typically use exchange-traded and over-the-
counter (``OTC'') swaps 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 swaps will increase the Fund's net exposure to a particular 
issue, fixed income markets, or the financial markets generally.
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    According to the Exchange, 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)\12\ 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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    \12\ According to the Exchange, 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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    According to the Exchange, the Fund generally will invest in Senior 
Loans (including leveraged loans) that may be in the form of 
participations and assignments.\13\ Senior Loans in which the Fund will 
invest consist of domestic issuers and U.S. dollar denominated foreign 
issuers. 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, 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.
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    \13\ According to the Exchange, 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.
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    According to the Exchange, 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.
    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 
swaps. The Fund's investments in swaps will be made in accordance with 
the 1940 Act and consistent with the Fund's investment objective and 
policies.\14\
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    \14\ 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 Senior Loans, 
floating rate high yield corporate bonds, or swaps will be held in cash 
or cash equivalents, including money market instruments and exchange 
traded products (``ETPs'') \15\ that invest in these and other highly 
liquid instruments, in order to cover its obligations under certain 
swaps. 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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    \15\ According to the Exchange, 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 
Exchange states that the ETPs all will be listed and traded in the 
U.S. on registered exchanges and that 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 and 
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. While the Fund may invest in inverse ETPs, the Fund will 
not invest in leveraged or inverse leveraged ETPs (e.g., 2X or 3X).
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B. Other (Non-Principal) Investments

    The Exchange states that the Fund may invest up to 20% of its net 
assets

[[Page 4017]]

in the securities and financial instruments described below.\16\
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    \16\ 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), including investment-grade, non-
investment-grade, and unrated securities. Debt securities in which the 
Fund may invest consist of the following: (i) Bank obligations of 
domestic and foreign banks, which may include certificates of deposit, 
commercial paper,\17\ bankers' acceptances, and fixed time 
deposits;\18\ (ii) corporate debt; \19\ (ii) asset-backed securities 
(``ABS''); \20\ mortgage-backed securities (``MBS'') and mortgage-
related securities; \21\ inflation-indexed bonds;\22\ floating rate 
loans (other than those described in the Principal Investments section) 
consisting of (a) unsecured senior loans and (b) secured and unsecured 
subordinated loans, second lien loans, and subordinated bridge loans 
(``Junior Loans''); \23\ and U.S. government securities.\24\
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    \17\ According to the Exchange, 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.
    \18\ According to the Exchange, 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.
    \19\ According to the Exchange, corporate debt 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.
    \20\ According to the Exchange, 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.
    \21\ According to the Exchange, MBS and mortgage-related 
securities 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 MBS and mortgage-related securities.
    \22\ According to the Exchange, inflation-indexed bonds are debt 
securities whose principal value is periodically adjusted according 
to the rate of inflation.
    \23\ According to the Exchange, 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. 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 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, each Junior Loan must have a par amount 
outstanding of $150 million or greater at the time the loan is 
originally issued.
    \24\ According to the Exchange, U.S. government securities are 
securities issued or guaranteed by the U.S. government or its 
agencies or instrumentalities, and 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 (a) 
the full faith and credit of the U.S. Treasury, (b) the 
discretionary authority of the U.S. government, or (c) the right of 
the issuer to borrow from the U.S. Treasury; 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 
include 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).
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    The Fund may invest in issuers located outside the United States 
directly, or in financial instruments, ETFs, or other ETPs\25\ that are 
indirectly linked to the performance of foreign issuers. 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.\26\
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    \25\ See supra note 15.
    \26\ According to the Exchange, 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. 
ADRs may be sponsored or unsponsored, but the Exchange states that 
unsponsored ADRs will not exceed 10% of the Fund's net assets. In 
addition, the Exchange states that 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.
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    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. 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.\27\
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    \27\ According to the Exchange, structured notes 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.
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    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 
(including index-based and actively managed) 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

[[Page 4018]]

time to time, including mutual funds, ETFs, exchange- and OTC-traded 
closed-end funds, and exchange- and OTC-traded business development 
companies (``BDCs'').\28\
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    \28\ According to the Exchange, a BDC is a less common type of 
closed-end investment company that more closely resembles an 
operating company than a typical investment company.
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    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.\29\
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    \29\ According to the Exchange, 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).
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    The Fund may enter into repurchase agreements with financial 
institutions, which may be deemed to be loans.\30\
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    \30\ According to the Exchange, 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.
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    The Fund may engage in short sales transactions in which the Fund 
sells a security it does not own.
    The Fund may utilize swaps (other than those referenced in the 
Principal Investments section) in an attempt to gain exposure to the 
securities in a market without actually purchasing those securities, or 
to hedge a position. Such swaps 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).
    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.\31\ 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.
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    \31\ See supra note 15.
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C. Fund Investment Restrictions

    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,\32\ in accordance 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.
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    \32\ 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).
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    The Fund may not, with respect to 75% of its total assets, purchase 
securities of any issuer (except securities issued or guaranteed by the 
U.S. government, its agencies or instrumentalities or shares of 
investment companies) if, as a result, more than 5% of its total assets 
would be invested in the securities of such issuer; or 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.
    The Fund may not invest 25% or more of its total assets in the 
securities of one or more issuers conducting their principal business 
activities in the same industry or group of industries. This limitation 
does not apply to investments in securities issued or guaranteed by the 
U.S. government, its agencies or instrumentalities, or shares of 
investment companies. The Fund will not invest 25% or more of its total 
assets in any investment company that so concentrates.
    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).\33\
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    \33\ The Exchange represents that 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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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\34\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 6(b)(5) of the Act,\35\ 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 
requirements of NYSE Arca Equities Rule 8.600 to be listed and traded 
on the Exchange.
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    \34\ 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).
    \35\ 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,\36\ 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

[[Page 4019]]

Value of the Fund,\37\ as defined in NYSE Arca Equities Rule 
8.600(c)(3), will be widely disseminated by one or more major market 
data vendors at least every 15 seconds during the Core Trading 
Session.\38\ 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 (as 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.\39\ In addition, a basket 
composition file, which includes the security names and share 
quantities (as 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 National Securities Clearing Corporation. The Administrator will 
calculate the NAV per Share of the Fund as of the close of the regular 
trading session on the NYSE (ordinarily 4:00 p.m., Eastern Time) on 
each day such exchange is open.\40\ 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 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 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. The Fund's Web site will 
include a form of the prospectus for the Fund that may be downloaded 
and additional data relating to NAV and other applicable quantitative 
information.
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    \36\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \37\ According to the Exchange, the Portfolio Indicative Value 
calculation will be an estimate of the value of the Fund's Net Asset 
Value (``NAV'') per Share using market data converted into U.S. 
dollars at the current currency rates. The Portfolio Indicative 
Value 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, and the Portfolio Indicative Value should not be 
viewed as a ``real-time'' update of the NAV per Share of the Fund, 
which will be calculated only once per day.
    \38\ The Exchange states that several major market data vendors 
display or make widely available Portfolio Indicative Values taken 
from the CTA or other data feeds.
    \39\ 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.
    \40\ 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 are accrued daily and taken into account for purposes of 
determining NAV per Share. According to the Exchange, 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 Trust's Board of Directors (``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. 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, MBS, 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, and the Fund will 
generally value OTC-traded Securities by relying on independent 
pricing services. 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.
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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 and the Disclosed Portfolio will be made 
available to all market participants at the same time. Trading in the 
Shares of the Fund will be halted if the circuit breaker parameters in 
NYSE Arca Equities Rule 7.12 have been reached. Trading in the Shares 
of the Fund also may be halted because of other market conditions or 
for reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable,\41\ and

[[Page 4020]]

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 Shares of the Fund may be halted. The Exchange represents 
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 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 represents that the Adviser is not registered as a broker-
dealer or affiliated with a broker-dealer, and that the Sub-Adviser is 
not registered as a broker-dealer but is affiliated with Pacific Select 
Distributors, Inc., a limited purpose registered broker-dealer that 
does not engage in any brokerage or trading activity.\42\
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    \41\ These reasons 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. 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.
    \42\ See supra note 6. 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 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.
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    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 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.\43\
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    \43\ 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 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. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and underlying 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 and underlying 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 and underlying 
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. FINRA, on behalf of the Exchange, is 
able to access, as needed, trade information for certain fixed income 
securities held by the Fund that is reported to FINRA's Trade Reporting 
and Compliance Engine.
    (4) 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. 
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 Equity Trading Permit Holders to learn the essential facts 
relating to every customer prior to trading the Shares; (c) the risks 
involved in trading the Shares during the Opening and Late Trading 
Sessions when an updated Portfolio Indicative Value will not be 
calculated or publicly disseminated; (d) how information regarding the 
Portfolio Indicative Value and the Disclosed Portfolio is disseminated; 
(e) 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 (f) trading 
information.
    (5) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act,\44\ as provided by NYSE Arca 
Equities Rule 5.3.
---------------------------------------------------------------------------

    \44\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (6) 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).
    (7) 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, in accordance 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.
    (8) 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.
    (9) 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 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.
    (10) The Fund's investments in swaps will be made in accordance 
with the 1940 Act and consistent with the Fund's investment objective 
and policies. The Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced.

[[Page 4021]]

The Sub-Adviser will evaluate the creditworthiness of counterparties on 
an ongoing basis. 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.
    (11) The Fund's portfolio will be diversified by industry and 
issuer, with no individual issuer representing more than 5% of the 
portfolio.
    (12) 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. 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. 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.
    (13) Unsponsored ADRs will not exceed 10% of the Fund's net assets.
    (14) The Fund may invest up to 5% of its net assets in non-agency 
ABS.
    (15) The Fund may invest up to 5% of its net assets in MBS and 
mortgage-related securities.
    (16) 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 the Exchange's 
description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act \45\ and the rules and regulations thereunder 
applicable to a national securities exchange.
---------------------------------------------------------------------------

    \45\ 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,\46\ that the proposed rule change (SR-NYSEArca-2014-126), as 
modified by Amendment No. 1, be, and it hereby is, approved.
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    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-01246 Filed 1-23-15; 8:45 am]
BILLING CODE 8011-01-P


