
[Federal Register Volume 81, Number 171 (Friday, September 2, 2016)]
[Notices]
[Pages 60759-60764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21129]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78712; File No. SR-NYSEArca-2016-70]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, Regarding Use of 
Rule 144A Securities by the Fidelity Corporate Bond ETF, Fidelity 
Investment Grade Bond ETF, Fidelity Limited Term Bond ETF, and Fidelity 
Total Bond ETF

August 29, 2016.

I. Introduction

    On May 11, 2016, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to permit the 
Fidelity Corporate Bond ETF, Fidelity Investment Grade Bond ETF, 
Fidelity Limited Term Bond ETF, and Fidelity Total Bond ETF 
(individually, ``Fund,'' and collectively, ``Funds'') to consider 
securities issued pursuant to Rule 144A under the Securities Act of 
1933 (``Securities Act'') as debt securities eligible for principal 
investment. The proposed rule change was published for comment in the 
Federal Register on May 31, 2016.\3\ On June 30, 2016, pursuant to 
section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On July 26, 2016, the Exchange 
filed Amendment No. 1 to the proposed rule change.\6\ The Commission

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has received no comments on the proposed rule change. This order 
institutes proceedings under section 19(b)(2)(B) of the Act\7\ to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 1 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 77891 (May 24, 
2016), 81 FR 34388 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78207, 81 FR 44338 
(Jul. 7, 2016). The Commission designated August 29, 2016 as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ In Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, the Exchange: (a) Corrected certain 
aspects of the the investment descriptions for each Fund in 
accordance with the Prior Corporate Bond Releases and Prior Total 
Bond Releases (as defined herein); (b) confirmed that all of the 
Rule 144A securities in which a Fund invests will be corporate debt 
securities for which transactions are reported to TRACE (as defined 
herein); and (c) confirmed that FINRA (as defined herein), on behalf 
of the Exchange, is able to access, as needed, trade information for 
the Rule 144A securities as well as certain other fixed income 
securities held by the Funds reported to TRACE. Amendment No. 1 is 
available at: https://www.sec.gov/comments/sr-nysearca-2016-70/nysearca201670-1.pdf. Because Amendment No. 1 to the proposed rule 
change does not materially alter the substance of the proposed rule 
change or raise unique or novel regulatory issues, Amendment No. 1 
is not subject to notice and comment.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposal

    The Commission approved the listing and trading of shares 
(``Shares'') of the Funds under NYSE Arca Equities Rule 8.600,\8\ which 
governs the listing and trading of Managed Fund Shares. The Exchange 
proposes to amend the representation in the Prior Corporate Bond Notice 
and Prior Total Bond Notice to provide that each Fund may include Rule 
144A securities within a Fund's principal investments in debt 
securities (i.e., debt securities in which at least 80% of a Fund's 
assets are invested).
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    \8\ See Securities Exchange Act Release Nos. 72068 (May 1, 
2014), 79 FR 25923 (May 6, 2014) (SR-NYSEArca-2014-47) (notice of 
filing of proposed rule change relating to listing and trading of 
Shares of Fidelity Corporate Bond ETF Managed Shares under NYSE Arca 
Equities Rule 8.600) (``Prior Corporate Bond Notice''); 72439 (Jun. 
20, 2014), 79 FR 36361 (Jun. 26, 2014) (SR-NYSEArca-2014-47) (order 
approving proposed rule change relating to listing and trading of 
Shares of Fidelity Corporate Bond ETF Managed Shares under NYSE Arca 
Equities Rule 8.600) (``Prior Corporate Bond Order'' and, together 
with the Prior Corporate Bond Notice, ``Prior Corporate Bond 
Releases''); 72064 (May 1, 2014), 79 FR 25908 (May 6, 2014) (SR-
NYSEArca-2014-46) (notice of filing of proposed rule change relating 
to listing and trading of Shares of Fidelity Investment Grade Bond 
ETF; Fidelity Limited Term Bond ETF; and Fidelity Total Bond ETF 
under NYSE Arca Equities Rule 8.600) (``Prior Total Bond Notice''); 
72748 (Aug. 4, 2014), 79 FR 46484 (Aug. 8, 2014) (SR-NYSEArca-2014-
46) (order approving proposed rule change relating to listing and 
trading of Shares of the Fidelity Investment Grade Bond ETF, 
Fidelity Limited Term Bond ETF, and Fidelity Total Bond ETF under 
NYSE Arca Equities Rule 8.600) (``Prior Total Bond ETF Order'' and, 
together with the Prior Total Bond Notice, ``Prior Total Bond 
Releases'').
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A. Exchange's Description of the Funds

    Fidelity Investments Money Management, Inc. (``FIMM''), an 
affiliate of Fidelity Management & Research Company (``FMR''), is the 
manager (``Manager'') of each Fund. FMR Co., Inc. (``FMRC'') serves as 
a sub-adviser for the Fidelity Total Bond ETF. FMRC has day-to-day 
responsibility for choosing certain types of investments of foreign and 
domestic issuers for Fidelity Total Bond ETF. Other investment 
advisers, which also are affiliates of FMR, serve as sub-advisers to 
the Funds and assist FIMM with foreign investments, including Fidelity 
Management & Research (U.K.) Inc., Fidelity Management & Research (Hong 
Kong) Limited, and Fidelity Management & Research (Japan) Inc. 
(individually, ``Sub-Adviser,'' and together with FMRC, collectively 
``Sub-Advisers''). Fidelity Distributors Corporation is the distributor 
for the Funds' Shares.
    The Funds are funds of Fidelity Merrimack Street Trust (``Trust''), 
a Massachusetts business trust.\9\ The Exchange represents that the 
Shares of the Fidelity Corporate Bond ETF, Fidelity Limited Term Bond 
ETF, and Fidelity Total Bond ETF are currently trading on the Exchange.
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    \9\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). According to the Exchange, on December 29, 
2015, the Trust filed with the Commission an amendment to its 
registration statement on Form N-1A under the Securities Act and the 
1940 Act relating to the Funds (File Nos. 333-186372 and 811-22796) 
(``Registration Statement''). In addition, the Exchange states that 
the Trust has obtained certain exemptive relief under the 1940 Act. 
See Investment Company Act Release No. 30513 (May 10, 2013) (File 
No. 812-14104).
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1. Fidelity Corporate Bond ETF
    As described in the Prior Corporate Bond Notice, the Fidelity 
Corporate Bond ETF seeks a high level of current income. The Manager 
normally invests at least 80% of Fidelity Corporate Bond ETF assets in 
investment-grade corporate bonds and other corporate debt 
securities.\10\ Corporate debt securities are bonds and other debt 
securities issued by corporations and other business structures, as 
described in the Prior Corporate Bond Notice.
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    \10\ According to the Exchange, investment-grade debt securities 
include all types of debt instruments, including corporate debt 
securities that are of medium and high-quality. An investment-grade 
rating means the security or issuer is rated investment-grade by a 
credit rating agency registered as a nationally recognized 
statistical rating organization with the Commission (for example, 
Moody's Investors Service, Inc.), or is unrated but considered to be 
of equivalent quality by the Fidelity Corporate Bond ETF's Manager 
or Sub-Advisers.
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    The Fidelity Corporate Bond ETF may hold uninvested cash or may 
invest it in cash equivalents such as money market securities, or 
shares of short-term bond exchanged-traded funds registered under the 
1940 Act (``ETFs''), or mutual funds or money market funds, including 
Fidelity central funds (special types of investment vehicles created by 
Fidelity for use by the Fidelity funds and other advisory clients). The 
Manager uses the Barclays U.S. Credit Bond Index as a guide in 
structuring the Fund and selecting its investments. FIMM manages the 
Fund to have similar overall interest rate risk to the Barclays U.S. 
Credit Bond Index.
    As stated in the Prior Corporate Bond Releases, in buying and 
selling securities for the Fund, the Manager analyzes the credit 
quality of the issuer, security-specific features, current valuation 
relative to alternatives in the market, short-term trading 
opportunities resulting from market inefficiencies, and potential 
future valuation. In managing the Fund's exposure to various risks, 
including interest rate risk, the Manager considers, among other 
things, the market's overall risk characteristics, the market's current 
pricing of those risks, information on the Fund's competitive universe 
and internal views of potential future market conditions.
    While the Manager normally invests at least 80% of assets of the 
Fund in investment grade corporate bonds and other corporate debt 
securities, as described above, the Manager may invest up to 20% of the 
Fund's assets in other securities and financial instruments, as 
summarized below.
    In addition to corporate debt securities, the debt securities in 
which the Fund may invest are U.S. Government securities; repurchase 
agreements and reverse repurchase agreements; mortgage- and other 
asset-backed securities; loans; loan participations, loan assignments, 
and other evidences of indebtedness, including letters of credit, 
revolving credit facilities, and other standby financing commitments; 
structured securities; stripped securities; municipal securities; 
sovereign debt obligations; obligations of international agencies or 
supranational entities; and other securities believed to have debt-like 
characteristics, including hybrid securities, which may offer 
characteristics similar to those of a bond security such as stated 
maturity and preference over equity in bankruptcy.
    The Fund may invest in restricted securities, which are subject to 
legal restrictions on their sale. Restricted securities generally can 
be sold in privately negotiated transactions, pursuant to an exemption 
from registration under the Securities Act, or in a registered public 
offering.
2. Fidelity Investment Grade Bond ETF
    As described in the Prior Total Bond Notice, the Fidelity 
Investment Grade Bond ETF (which has not yet commenced operation) will 
seek a high level of current income. The Manager normally will invest 
at least 80% of the

[[Page 60761]]

Fund's assets in investment-grade debt securities (those of medium and 
high quality). The debt securities in which the Fund may invest are 
corporate debt securities; U.S. Government securities; repurchase 
agreements and reverse repurchase agreements; money market securities; 
mortgage- and other asset-backed securities; senior loans; loan 
participations and loan assignments and other evidences of 
indebtedness, including letters of credit, revolving credit facilities 
and other standby financing commitments; stripped securities; municipal 
securities; sovereign debt obligations; and obligations of 
international agencies or supranational entities (collectively, ``Debt 
Securities'').
    As described in the Prior Total Bond Notice, the Fidelity 
Investment Grade Bond ETF may hold uninvested cash or may invest it in 
cash equivalents such as repurchase agreements, shares of short term 
bond ETFs, mutual funds, or money market funds, including Fidelity 
central funds (special types of investment vehicles created by Fidelity 
for use by the Fidelity funds and other advisory clients). The Manager 
will use the Barclays U.S. Aggregate Bond Index (``Aggregate Index'') 
as a guide in structuring the Fund and selecting its investments, and 
will manage the Fund to have similar overall interest rate risk to the 
Aggregate Index.
    As described in the Prior Total Bond Notice, the Manager will 
consider other factors when selecting the Fidelity Investment Grade 
Bond ETF's investments, including the credit quality of the issuer, 
security-specific features, current valuation relative to alternatives 
in the market, short-term trading opportunities resulting from market 
inefficiencies, and potential future valuation. In managing the 
Fidelity Investment Grade Bond ETF's exposure to various risks, 
including interest rate risk, the Manager will consider, among other 
things, the market's overall risk characteristics, the market's current 
pricing of those risks, information on the Fidelity Investment Grade 
Bond ETF's competitive universe, and internal views of potential future 
market conditions.
3. Fidelity Limited Term Bond ETF
    As described in the Prior Total Bond Notice, the Fidelity Limited 
Term Bond ETF seeks to provide a high rate of income. The Manager 
normally invests at least 80% of the Fidelity Limited Term Bond ETF's 
assets in investment-grade Debt Securities (those of medium and high 
quality).
    The Fidelity Limited Term Bond ETF may hold uninvested cash or may 
invest it in cash equivalents such as repurchase agreements, shares of 
short term bond ETFs, mutual funds, or money market funds, including 
Fidelity central funds (special types of investment vehicles created by 
Fidelity for use by the Fidelity funds and other advisory clients). The 
Manager uses the Fidelity Limited Term Composite Index (``Composite 
Index'') as a guide in structuring the Fund and selecting its 
investments. The Manager manages the Fidelity Limited Term Bond ETF to 
have similar overall interest rate risk to the Composite Index.
    The Manager considers other factors when selecting the Fidelity 
Limited Term Bond ETF's investments, including the credit quality of 
the issuer, security-specific features, current valuation relative to 
alternatives in the market, short-term trading opportunities resulting 
from market inefficiencies, and potential future valuation. In managing 
the Fidelity Limited Term Bond ETF's exposure to various risks, 
including interest rate risk, the Manager considers, among other 
things, the market's overall risk characteristics, the market's current 
pricing of those risks, information on the Fund's competitive universe, 
and internal views of potential future market conditions.
4. Fidelity Total Bond ETF
    As described in the Prior Total Bond Notice, the Fidelity Total 
Bond ETF seeks a high level of current income. The Manager normally 
invests at least 80% of the Fidelity Total Bond ETF's assets in Debt 
Securities. The Manager allocates the Fidelity Total Bond ETF's assets 
across investment-grade, high yield, and emerging market Debt 
Securities. The Manager may invest up to 20% of the Fund's assets in 
lower-quality Debt Securities.
    The Fidelity Total Bond ETF may hold uninvested cash or may invest 
it in cash equivalents such as repurchase agreements, shares of short 
term bond ETFs, mutual funds, or money market funds, including Fidelity 
central funds (special types of investment vehicles created by Fidelity 
for use by the Fidelity funds and other advisory clients).
    The Manager uses the Barclays U.S. Universal Bond Index 
(``Universal Index'') as a guide in structuring and selecting the 
investments of the Fidelity Total Bond ETF and selecting its 
investments, and in allocating the Fidelity Total Bond ETF's assets 
across the investment-grade, high yield, and emerging market asset 
classes. The Manager manages the Fidelity Total Bond ETF to have 
similar overall interest rate risk to the Universal Index. The Manager 
considers other factors when selecting the Fund's investments, 
including the credit quality of the issuer, security-specific features, 
current valuation relative to alternatives in the market, short-term 
trading opportunities resulting from market inefficiencies, and 
potential future valuation. In managing the Fund's exposure to various 
risks, including interest rate risk, the Manager considers, among other 
things, the market's overall risk characteristics, the market's current 
pricing of those risks, information on the Fund's competitive universe, 
and internal views of potential future market conditions.
    As described in the Prior Total Bond Notice, the Manager may invest 
the Fidelity Total Bond ETF's assets in Debt Securities of foreign 
issuers in addition to securities of domestic issuers.
5. Other Investments of the Funds
    While, as described above, the Manager normally invests at least 
80% of assets of Fidelity Limited Term Bond ETF in investment-grade 
Debt Securities (and will normally invest at least 80% of assets of the 
Fidelity Investment Grade Bond ETF in investment-grade Debt 
Securities), and the Manager normally invests at least 80% of assets of 
the Fidelity Total Bond ETF in Debt Securities, the Manager may invest 
up to 20% of a Fund's assets in other securities and financial 
instruments (``Other Investments,'' as described in the Prior Total 
Bond Notice). As described in the Prior Corporate Bond Notice and Prior 
Total Bond Notice, as part of a Fund's Other Investments, (i.e., up to 
20% of a Fund's assets), each Fund may invest in restricted securities, 
which are subject to legal restrictions on their sale.\11\
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    \11\ Restricted securities are subject to legal restrictions on 
their sale. Restricted securities generally can be sold in privately 
negotiated transactions, pursuant to an exemption from registration 
under the Securities Act, or in a registered public offering. Rule 
144A securities are securities which, while privately placed, are 
eligible for purchase and resale pursuant to Rule 144A. Rule 144A 
permits certain qualified institutional buyers, such as a Fund, to 
trade in privately placed securities even though such securities are 
not registered under the Securities Act.
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B. Exchange's Description of the Proposed Change to the Principal 
Investments of the Funds

    The Exchange proposes that each Fund may include Rule 144A 
securities within a Fund's principal investments in debt securities 
(i.e., debt securities in which at least 80% of a Fund's assets are 
invested). As discussed below, the Exchange believes it is appropriate 
for Rule 144A securities to be included as

[[Page 60762]]

principal investments of a Fund in view of (1) the high level of 
liquidity in the market for such securities compared to other debt 
securities asset classes, and (2) the high level of transparency in the 
market for Rule 144A securities, particularly in light of reporting of 
transaction data in such securities through the Trade Reporting and 
Compliance Engine (``TRACE'') operated by the Financial Industry 
Regulatory Authority (``FINRA''). All of the Rule 144A securities in 
which a Fund invests will be corporate debt securities for which 
transactions are reported in TRACE.
    FMR has represented to the Exchange that Rule 144A securities 
account for approximately 20% of daily trading volume in U.S. corporate 
bonds. Dealers trade and report transactions in Rule 144A securities in 
the same manner as registered corporate bonds. While the average number 
of daily trades and U.S. dollar volume in registered corporate bonds is 
much higher than in Rule 144A securities, the average lot size is 
higher for Rule 144A securities.\12\ Specifically, the average lot size 
for 144A securities for the period January 1, 2015 through August 31, 
2015 was approximately $2.2 million, compared to an average lot size 
for the same period of approximately $500,000 for registered corporate 
bonds.
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    \12\ Source: MarketAxess Trace Data. For example, for the period 
January 1, 2015 through August 31, 2015, for registered bonds and 
Rule 144A securities with $1 billion to $1.999 billion the average 
daily dollar volume outstanding was approximately $6.8 billion and 
$1.7 billion, respectively, and the average lot size was $666,647 
and $2,398,292, respectively.
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    In addition, in 2013, the Commission approved FINRA rules relating 
to dissemination of information regarding transactions in Rule 144A 
securities in TRACE.\13\ In approving FINRA's proposed rule change to 
amend its rules regarding dissemination of Rule 144A transactions, the 
Commission stated:
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    \13\ See Securities Exchange Act Release Nos. 70009 (Jul. 19, 
2013), 78 FR 44997 (Jul. 25, 2103) (SR-FINRA-2013-029) (notice of 
filing of a proposed rule change relating to the dissemination of 
transactions in TRACE-Eligible securities effected pursuant to Rule 
144A); 70345 (Sept. 6, 2013), 78 FR 56251 (Sept. 12, 2013) (SR-
FINRA-2013-029) (order approving proposed rule change relating to 
the dissemination of transactions in TRACE-Eligible securities 
effected pursuant to Rule 144A). In the proposed rule change, FINRA 
proposed to amend FINRA Rule 6750 to provide for the dissemination 
of Rule 144A transactions, provided the asset type (e.g., corporate 
bonds) currently is subject to dissemination under FINRA Rule 6750; 
to amend the dissemination protocols to extend the dissemination 
caps currently applicable to the non-Rule 144A transactions in such 
asset type (e.g., non-Rule 144A corporate bond transactions) to Rule 
144A transactions in such securities; to amend FINRA Rule 7730 to 
establish a data set for real-time Rule 144A transaction data and a 
second data set for historic Rule 144A transaction data; to amend 
the definition of ``Historic TRACE Data'' to reference the three 
data sets currently included therein and the proposed fourth data 
set; and to make other clarifying and technical amendments. FINRA 
Rule 6730(a) requires any transaction in a TRACE-Eligible security 
to be reported to TRACE as soon as practicable, but no later than 
within 15 minutes of the transaction, subject to specified 
exceptions. FINRA Rule 6730(c) requires the trade report to contain 
information on size, price, time of execution, amount of commission, 
the date of settlement, and other information.

    Real-time dissemination of last-sale information could aid 
dealers in deriving better quotations, because they would know the 
prices at which other market participants had recently transacted in 
the same or similar instruments. This information could aid all 
market participants in evaluating current quotations, because they 
could inquire why dealer quotations might differ from the prices of 
recently executed transactions. Furthermore, post-trade transparency 
affords market participants a means of testing whether dealer 
quotations before the last sale were close to the price at which the 
last sale was executed. In this manner, post-trade transparency can 
promote price competition between dealers and more efficient price 
discovery and ultimately lower transaction costs in the market for 
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Rule 144A securities.

    Transactions executed by FINRA members became subject to 
dissemination through FINRA's TRACE on June 30, 2014, thus providing a 
level of transparency to the Rule 144A market comparable to that of 
registered bonds.\14\
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    \14\ In its June 30, 2014 press release ``FINRA Brings 144A 
Corporate Debt Transactions Into the Light,'' FINRA stated: ``144A 
transactions--resales of restricted corporate debt securities to 
large institutions called qualified institutional buyers (QIBs)--
account for a significant portion of the volume in corporate debt 
securities. In the first quarter of 2014, 144A transactions 
comprised nearly 13 percent of the average daily volume in 
investment-grade corporate debt, and nearly 30 percent of the 
average daily volume in high-yield corporate debt. 144A transactions 
comprised nearly 20 percent of the average daily volume in the 
corporate debt market as a whole. Through the Trade Reporting and 
Compliance Engine (TRACE), FINRA will disseminate 144A transactions 
subject to the same dissemination caps that are currently in effect 
for non-144A transactions. The same dissemination cap for 
investment-grade corporate bonds ($5 million) applies to both 144A 
and non-144A corporate bond transactions, and the $1 million 
dissemination cap for high-yield corporate bonds similarly applies 
to both 144A and non-144A transactions. 144A transactions are also 
subject to the same 15-minute reporting requirement as non-144A 
corporate debt transactions.'' See also FINRA Regulatory Notice 13-
35 October 2013.
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    The Exchange notes that, while the proposed rule change would 
categorize Rule 144A securities within a Fund's principal investments 
in debt securities, any investments in Rule 144A securities, of course, 
would be required to comply with restrictions under the 1940 Act and 
rules thereunder relating to investment in illiquid assets. As stated 
in the Prior Corporate Bond Notice and Prior Total Bond Notice, each 
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 Manager or Sub-Advisers. Each 
Fund monitors its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of a Fund's 
net assets are held in illiquid assets. Illiquid assets include assets 
subject to contractual or other restrictions on resale and other 
instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.\15\
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    \15\ In its recent rulemaking proposal relating to open-end fund 
liquidity risk management programs, the Commission noted that 
``[s]ecurities offered pursuant to rule 144A under the Securities 
Act may be considered liquid depending on certain factors.'' The 
Commission, citing to the ``Statement Regarding `Restricted 
Securities''' noted: ``The Commission stated [in the ``Statement 
Regarding `Restricted Securities'''] that `determination of the 
liquidity of Rule 144A securities in the portfolio of an investment 
company issuing redeemable securities is a question of fact for the 
board of directors to determine, based upon the trading markets for 
the specific security' and noted that the board should consider the 
unregistered nature of a rule 144A security as one of the factors it 
evaluates in determining its liquidity.'' See Release Nos. 33-9922; 
IC-31835; File Nos. S7-16-15; S7-08-15 (Sept. 22, 2015); n.94.
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    Moreover, as stated in the Prior Corporate Bond Notice and Prior 
Total Bond Notice, each Fund does not currently intend to purchase any 
asset if, as a result, more than 10% of its net assets would be 
invested in assets that are deemed to be illiquid because they are 
subject to legal or contractual restrictions on resale or because they 
cannot be sold or disposed of in the ordinary course of business at 
approximately the prices at which they are valued. For purposes of a 
Fund's illiquid assets limitation discussed above, if through a change 
in values, net assets, or other circumstances, a Fund were in a 
position where more than 10% of its net assets were invested in 
illiquid assets, it would consider appropriate steps to protect 
liquidity.
    The Prior Corporate Bond Notice and Prior Total Bond Notice stated 
that various factors may be considered in determining the liquidity of 
a Fund's investments, including: (1) The frequency of trades and quotes 
for the asset; (2) the number of dealers wishing to purchase or sell 
the asset and the number of other potential purchasers; (3) dealer 
undertakings to make a market in the asset; and (4) the nature

[[Page 60763]]

of the asset and the nature of the marketplace in which it trades 
(including any demand, put or tender features, the mechanics and other 
requirements for transfer, any letters of credit or other credit 
enhancement features, any ratings, the number of holders, the method of 
soliciting offers, the time required to dispose of the security, and 
the ability to assign or offset the rights and obligations of the 
asset).
    The Exchange believes that the size of the Rule 144A market 
(approximately 20% of daily trading volume in U.S. corporate bonds), 
the active participation of multiple dealers utilizing trading 
protocols that are similar to those in the corporate bond market, and 
the transparency of the 144A market resulting from reporting of Rule 
144A transactions in TRACE will deter manipulation in trading the 
Shares. The Exchange notes that all of the Rule 144A securities in 
which a Fund invests will be corporate debt securities for which 
transactions are reported in TRACE.
    The Exchange represents that, except for the change described 
above, all other representations made in the Prior Corporate Bond 
Releases and the Prior Total Bond Releases remain unchanged. The Funds 
will continue to comply with all initial and continued listing 
requirements under NYSE Arca Equities Rule 8.600.
    The Exchange further represents that the trading in the Shares will 
be subject to the existing trading surveillances administered by the 
Exchange, as well as cross-market surveillances administered by FINRA, 
on behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws.\16\ 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. The Exchange or FINRA, on behalf 
of the Exchange, or both, will communicate as needed regarding trading 
in the Shares and underlying exchange-traded options, futures, 
exchange-traded equity securities (including ADRs, EDRs, and GDRs), and 
other exchange-traded instruments with other markets and other entities 
that are members of the ISG, and the Exchange or FINRA, on behalf of 
the Exchange, or both, may obtain trading information regarding trading 
in the Shares and underlying exchange-traded options, futures, 
exchange-traded equity securities (including ADRs, EDRs, and GDRs), and 
other exchange-traded instruments from such markets and other entities. 
The Exchange may obtain information regarding trading in the Shares and 
underlying exchange-traded options, futures, exchange-traded equity 
securities (including ADRs, EDRs, and GDRs), and other exchange-traded 
instruments from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.\17\ FINRA, on behalf of the Exchange, is able to 
access, as needed, trade information for the Rule 144A securities as 
well as certain other fixed income securities held by the Funds 
reported to TRACE. In addition, as stated in the Prior Corporate Bond 
Releases and the Prior Total Bond Releases, investors have ready access 
to information regarding the Funds' holdings, the Portfolio Indicative 
Value, the Disclosed Portfolio, and quotation and last-sale information 
for the Shares.
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    \16\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
    \17\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all of the components 
of the portfolio for a Fund may trade on exchanges that are members 
of the ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.
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    The Exchange also represents that all statements and 
representations made in this filing and the Prior Corporate Bond 
Releases and Prior Total Bond Releases regarding (a) the description of 
the Funds' respective portfolios, (b) limitations on portfolio holdings 
or reference assets, or (c) the applicability of Exchange rules and 
surveillance procedures shall constitute continued listing requirements 
for listing the Shares of the Funds on the Exchange. The Adviser has 
represented to the Exchange that it will advise the Exchange of any 
failure by a Fund to comply with the continued listing requirements, 
and, pursuant to its obligations under section 19(g)(1) of the Act, the 
Exchange will monitor for compliance with the continued listing 
requirements. If a Fund is not in compliance with the applicable 
listing requirements, the Exchange will commence delisting procedures 
under NYSE Arca Equities Rule 5.5(m).

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-70 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to section 
19(b)(2)(B) of the Act \18\ to determine whether the proposed rule 
change, as modified by Amendment No. 1 thereto, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide comments on the proposed rule 
change.
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    \18\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to section 19(b)(2)(B) of the Act,\19\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \20\
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    \19\ Id.
    \20\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal, as modified by Amendment No. 1. In particular, the 
Commission invites the written views of interested persons concerning 
whether the proposal, as modified by Amendment No. 1, is consistent 
with section 6(b)(5) or any other provision of the Act, or the rules 
and regulations thereunder. Although there do not appear to be any 
issues relevant to approval or disapproval that would be facilitated by 
an oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4, any request for an opportunity to 
make an oral presentation.\21\
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    \21\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).

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[[Page 60764]]

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by September 23, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 7, 2016. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice,\22\ as modified by Amendment No. 1 
thereto,\23\ in addition to any other comments they may wish to submit 
about the proposed rule change.
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    \22\ See supra note 3.
    \23\ See supra note 6.
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    The Commission generally seeks comment on whether the Exchange's 
representations relating to the proposed portfolio holdings in Rule 
144A securities are sufficient to prevent the susceptibility of the 
Funds to manipulation and are thereby consistent with the requirements 
of section 6(b)(5) of the Act, which, among other things, requires that 
the rules of an exchange be designed to prevent fraudulent and 
manipulative acts and practices and to protect investors and the public 
interest. In particular, the Commission seeks comment on the following:
    As described above, the Exchange has proposed that each Fund be 
permitted to include Rule 144A securities within a Fund's principal 
investments in debt securities. As a result of the proposed change, 
each Fund would be permitted to invest 100% of its principal 
investments in Rule 144A securities. The Exchange also provides that 
all of the Rule 144A securities in which a Fund invests will be 
corporate debt securities for which transactions are reported in TRACE. 
Rule 144A securities are restricted securities, which, as described 
above, are subject to legal restrictions on their sale and generally 
are sold in privately negotiated transactions, pursuant to an exemption 
from registration under the Securities Act, or in a registered public 
offering. The Exchange has not proposed additional quantitative 
criteria with respect to minimum liquidity or minimum diversification 
measures to be applied to the Rule 144A securities. Do commenters have 
views on whether the specific Rule 144A securities in which each Fund 
may invest would be sufficiently liquid and sufficiently diversified so 
as to reduce the extent to which Managed Fund Shares holding 
principally restricted securities may be susceptible to manipulation?
    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-2016-70 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-2016-70. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule 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 the filing also will 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-2016-70 and should 
be submitted on or before September 23, 2016. Rebuttal comments should 
be submitted by October 7, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(57).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21129 Filed 9-1-16; 8:45 am]
BILLING CODE 8011-01-P


