
[Federal Register Volume 81, Number 230 (Wednesday, November 30, 2016)]
[Notices]
[Pages 86360-86365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28774]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79384; File No. SR-NYSEArca-2016-70]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2 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

November 23, 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'' or 
``Exchange 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\ On August 29, 
2016, the Commission instituted 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.\8\ In the 
Order Instituting Proceedings, the Commission solicited comments to 
specified matters related to the proposal.\9\ On November 22, 2016, the 
Exchange filed Amendment No. 2 to the proposed rule change.\10\ The 
Commission has received no comments on the proposed rule change. This 
order grants approval of the proposed rule change, as modified by 
Amendment Nos. 1 and 2 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).
    \8\ See Securities Exchange Act Release No. 78712, 81 FR 60759 
(Sept. 2, 2016) (``Order Instituting Proceedings''). Specifically, 
the Commission instituted 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.'' See id., 81 FR at 60764.
    \9\ See id.
    \10\ In Amendment No. 2, which amended and replaced the proposed 
rule change in its entirety, the Exchange clarified that no more 
than 35% of a Fund's assets may be invested in Rule 144A securities. 
Amendment No. 2 is available at: https://www.sec.gov/comments/sr-nysearca-2016-70/nysearca201670-2.pdf. Because Amendment No. 2 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. 2 is not subject to notice and comment.
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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,\11\ 
which governs the listing and

[[Page 86361]]

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), 
provided that no more than 35% of a Fund's assets may be invested in 
Rule 144A securities.
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    \11\ 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.\12\ 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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    \12\ 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.\13\ 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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    \13\ 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 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

[[Page 86362]]

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.\14\
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    \14\ 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), provided that no more than 35% of a Fund's assets may be 
invested in Rule 144A securities. As discussed below, the Exchange 
believes it is appropriate for Rule 144A securities to be included as 
principal investments of a Fund, subject to the 35% limitation 
referenced above, 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.\15\ Specifically, the average lot size 
for 144A securities for the period January 1, 2015 through

[[Page 86363]]

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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    \15\ 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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    The Exchange notes that, in 2013, the Commission approved FINRA 
rules relating to dissemination of information regarding transactions 
in Rule 144A securities in TRACE.\16\ 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.\17\
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    \16\ 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.
    \17\ The Exchange notes that in a 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 further notes that, while the proposed rule change 
would categorize Rule 144A securities within a Fund's principal 
investments in debt securities (subject to a limitation of investments 
in Rule 144A securities to 35% of a Fund's assets), 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.\18\
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    \18\ The Exchange notes that in a recent rulemaking proposal 
relating to open-end fund liquidity risk management programs, the 
Commission stated 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).
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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 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.\19\ 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

[[Page 86364]]

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.\20\ 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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    \19\ 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.
    \20\ 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. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal, as modified by Amendment Nos. 1 and 2 thereto, is consistent 
with the Exchange Act and the rules and regulations thereunder 
applicable to a national securities exchange.\21\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1 and 2 thereto, is consistent with Section 6(b)(5) of 
the Exchange Act,\22\ 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.
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    \21\ 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).
    \22\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that transaction information relating to Rule 
144A securities is available via TRACE. According to the Exchange, all 
of the Rule 144A securities in which a Fund invests will be corporate 
debt securities for which transactions are reported in TRACE. The 
Commission believes that limiting Rule 144A securities in which a Fund 
invests as principal investments to corporate debt securities for which 
transactions are reported to TRACE would help to promote market 
transparency and provide an appropriate limit on the use of 144A 
securities as debt securities eligible for principal investment, 
provided that no more than 35% of a Fund's assets may be invested in 
Rule 144A securities.
    The Commission notes that, while the proposal would allow a Fund to 
consider Rule 144A securities as debt securities eligible for principal 
investment, subject to the 35% limitation referenced above, any 
investments in such securities would be required to comply with the 
restrictions under the 1940 Act and rules thereunder relating to 
investments 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. The Manager or Sub-
Advisers, who are responsible for the day-to-day decisions regarding 
the liquidity of securities, may consider various factors 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 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). Ultimately, however, a Fund's Board of 
Directors has responsibility for determining the liquidity of 
securities (including Rule 144A securities) held by a Fund.
    The Commission further notes that pursuant to the 1940 Act and 
rules thereunder, Funds are required to monitor their respective 
portfolio's liquidity on an ongoing basis to determine whether, in 
light of current circumstances, an adequate level of liquidity is being 
maintained, and to 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. Moreover, the Exchange represents that 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.
    Importantly, the Commission notes that the Funds will continue to 
be listed and traded on the Exchange pursuant to the initial and 
continued listing criteria in NYSE Arca Equities Rule 8.600. 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 Commission finds that 
providing the Manager or Sub-Advisers of each Fund additional 
flexibility to consider Rule 144A securities as debt securities 
eligible for principal investment, given the protections discussed 
above, is consistent with the Act.

[[Page 86365]]

    In support of this proposal, the Exchange represented that:

    (1) The Funds will continue to comply with all initial and 
continued listing requirements under NYSE Arca Equities Rule 8.600.
    (2) 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), provided that 
no more than 35% of a Fund's assets may be invested in Rule 144A 
securities.
    (3) All of the Rule 144A securities in which a Fund invests will 
be corporate debt securities for which transactions are reported in 
TRACE.
    (4) 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. 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.
    (5) 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.
    (6) 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.
    (7) Trading in Shares of a Fund will be halted if the circuit 
breaker parameters in NYSE Arca Equities Rule 7.12 have been reached 
or because of market conditions or for reasons that, in the view of 
the Exchange, make trading in the Shares inadvisable, and trading in 
the Shares will be subject to NYSE Arca Equities Rule 
8.600(d)(2)(D), which sets forth circumstances under which Shares of 
a Fund may be halted.
    (8) The Exchange represents that the Manager and the Sub-
Advisers are not broker-dealers but are affiliated with one or more 
broker-dealers and have each implemented a fire wall with respect to 
such broker-dealers regarding access to information concerning the 
composition and/or changes to the portfolios, and will be subject to 
procedures designed to prevent the use and dissemination of material 
non-public information regarding the portfolios.
    (9) The Exchange will obtain a representation from the issuer of 
the Shares that the net asset value (``NAV'') per Share will be 
calculated daily and that the NAV and the Disclosed Portfolio will 
be made available to all market participants at the same time.
    (10) The Portfolio Indicative Value with respect to Shares of 
each Fund will be widely disseminated by one or more major market 
data vendors at least every 15 seconds during the Exchange's Core 
Trading Session.
    (11) On each business day, before commencement of trading in 
Shares in the Core Trading Session on the Exchange, each Fund will 
disclose on the Trust's Web site the Disclosed Portfolio that will 
form the basis for a Fund's calculation of NAV at the end of the 
business day.
    (12) The Trust's Web site will include a form of the prospectus 
for the Funds and additional data relating to NAV and other 
applicable quantitative information.

    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. In addition, 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.\23\ 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).
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    \23\ The Commission notes that certain other proposals for the 
listing and trading of Managed Fund Shares include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Securities Exchange Act Release No. 
77499 (Apr. 1, 2016), 81 FR 20428 (Apr. 7, 2016) (Notice of Filing 
of Amendment No. 2, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 2, to List and 
Trade Shares of the SPDR DoubleLine Short Duration Total Return 
Tactical ETF of the SSgA Active Trust), available at: http://www.sec.gov/rules/sro/bats/2016/34-77499.pdf. In the context of this 
representation, it is the Commission's view that ``monitor'' and 
``surveil'' both mean ongoing oversight of the Fund's compliance 
with the continued listing requirements. Therefore, the Commission 
does not view ``monitor'' as a more or less stringent obligation 
than ``surveil'' with respect to the continued listing requirements.
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    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, as 
modified by Amendment Nos. 1 and 2 to the proposed rule change. The 
Commission notes that the Funds must comply with the requirements of 
NYSE Arca Equities Rule 8.600 to be listed and traded on the Exchange 
on an initial and continuing basis.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos.1 and 2 thereto, is 
consistent with Section 6(b)(5) of the Act \24\ and the rules and 
regulations thereunder applicable to a national securities exchange.
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    \24\ 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 
Exchange Act,\25\ that the proposed rule change (SR-NYSEArca-2016-70), 
as modified by Amendment Nos. 1 and 2 thereto, be, and it hereby is, 
approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-28774 Filed 11-29-16; 8:45 am]
BILLING CODE 8011-01-P


