
[Federal Register Volume 82, Number 84 (Wednesday, May 3, 2017)]
[Notices]
[Pages 20656-20664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08900]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80541; File No. SR-NYSEArca-2017-48]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to the Listing and Trading of Shares 
of the Franklin Liberty Intermediate Municipal Opportunities ETF and 
Franklin Liberty Municipal Bond ETF Under NYSE Arca Equities Rule 8.600

April 27, 2017.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on April 24, 2017, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the Franklin 
Liberty Intermediate Municipal Opportunities ETF and Franklin Liberty 
Municipal Bond ETF (each a ``Fund'' and, collectively, the ``Funds'') 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''). The 
proposed change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of each 
Fund under NYSE Arca Equities Rule 8.600,\4\ which governs the listing 
and trading of Managed Fund Shares.\5\ The Shares will be offered by 
the Franklin Templeton ETF Trust (the ``Trust''), which is registered 
with the Commission as an open-end management investment company.\6\ 
Each Fund is a series of the Trust.
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    \4\ The Securities and Exchange Commission (``Commission'') has 
approved for Exchange listing and trading shares of actively managed 
funds that principally hold municipal bonds. See, e.g., Securities 
Exchange Act Release Nos. 60981 (November 10, 2009), 74 FR 59594 
(November 18, 2009) (SR-NYSEArca-2009-79) (order approving listing 
and trading of shares of the PIMCO Short-Term Municipal Bond 
Strategy Fund and PIMCO Intermediate Municipal Bond Strategy Fund); 
79293 (November 10, 2016), 81 FR 81189 (November 17, 2016) (SR-
NYSEArca-2016-107) (order approving listing and trading of shares of 
Cumberland Municipal Bond ETF under Rule 8.600). The Commission also 
has approved listing and trading on the Exchange of shares of the 
SPDR Nuveen S&P High Yield Municipal Bond Fund under Commentary .02 
of NYSE Arca Equities Rule 5.2(j)(3). See Securities Exchange Act 
Release No. 63881 (February 9, 2011), 76 FR 9065 (February 16, 2011) 
(SR-NYSEArca-2010-120).
    \5\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \6\ The Trust is registered under the 1940 Act. On March 23, 
2017, the Trust filed with the Commission an amendment to its 
registration statement on Form N-1A under the Securities Act of 1933 
(15 U.S.C. 77a) (``Securities Act''), and under the 1940 Act 
relating to the Funds (File Nos. 333-208873 and 811-23124) 
(``Registration Statement''). The description of the operation of 
the Trust and the Funds herein is based, in part, on the 
Registration Statement. In addition, the Commission has issued an 
order granting certain exemptive relief to the Trust, Franklin 
Advisers, Inc. and Franklin Templeton Distributors, Inc. under the 
1940 Act. See Investment Company Act Release No. 30350 (Jan. 15, 
2013) (File No. 812-14042) (``Exemptive Order'').
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    The investment adviser to each Fund will be Franklin Advisers, Inc. 
(the ``Adviser''). Franklin Templeton Distributors, Inc. will serve as 
the distributor (the ``Distributor'') of each Fund's Shares on an 
agency basis. Franklin Templeton Services, LLC will serve as the 
administrator and State Street Bank and Trust Company will serve as the 
sub-administrator, custodian and transfer agent for each Fund.
    Commentary .06 to Rule 8.600 provides that, if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio.\7\ In addition,

[[Page 20657]]

Commentary .06 further requires that personnel who make decisions on 
the open-end fund's portfolio composition must be subject to procedures 
designed to prevent the use and dissemination of material nonpublic 
information regarding the open-end fund's portfolio. The Adviser is not 
a registered broker-dealer but is affiliated with a broker-dealer. The 
Adviser has implemented and will maintain a ``fire wall'' with respect 
to such broker-dealer affiliate regarding access to information 
concerning the composition of and/or changes to each Fund's portfolio. 
In the event (a) the Adviser becomes registered as a broker-dealer or 
newly affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser to a Fund is a registered broker-dealer or becomes affiliated 
with a broker-dealer, the applicable adviser or sub-adviser will 
implement and maintain a fire wall with respect to its relevant 
personnel or broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to a Fund's portfolio, and 
will be subject to procedures designed to prevent the use and 
dissemination of material non-public information regarding such 
portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and its related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. This Rule requires investment advisers 
to adopt a code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with Rule 204A-1 under the Advisers Act. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser to provide investment advice to clients 
unless such investment adviser has (i) adopted and implemented 
written policies and procedures reasonably designed to prevent 
violation, by the investment adviser and its supervised persons, of 
the Advisers Act and the Commission rules adopted thereunder; (ii) 
implemented, at a minimum, an annual review regarding the adequacy 
of the policies and procedures established pursuant to subparagraph 
(i) above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
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Franklin Liberty Intermediate Municipal Opportunities ETF
Principal Investments
    According to the Registration Statement, the investment objective 
of the Fund will be to achieve a high level of current income that is 
exempt from federal income taxes. Under normal market conditions,\8\ 
the Fund will invest at least 80% of its net assets in municipal 
securities whose interest is free from federal income taxes, including 
the federal alternative minimum tax.
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    \8\ The term ``normal market conditions'' is defined in NYSE 
Arca Equities Rule 8.600(c)(5).
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    The Fund may invest in municipal securities rated in any rating 
category by U.S. nationally recognized rating services (or comparable 
unrated or short-term rated securities), including below investment 
grade and defaulted securities and securities of issuers that are, or 
are about to be, involved in reorganizations, financial restructurings, 
or bankruptcy (generally referred to as ``distressed debt''). Such 
investments typically involve the purchase of lower-rated or defaulted 
debt securities, comparable unrated debt securities, or other 
indebtedness (or participations in the indebtedness) of such issuers. 
Although the Adviser will search for investments across a large number 
of municipal securities that finance different types of projects, from 
time to time, based on economic conditions, the Fund may have 
significant positions in municipal securities that finance similar 
types of projects.
    According to the Registration Statement, the Funds may invest in 
one or more of the following municipal securities (``Municipal 
Securities''):
     General obligation bonds, which are typically issued by 
states, counties, cities, towns and regional districts and backed by 
the issuer's pledge of its full faith, credit and taxing power for the 
payment of principal and interest.
     Revenue bonds, which are generally backed by the net 
revenue derived from a particular facility, group of facilities, or, in 
some cases, the proceeds of a special excise tax or other specific 
revenue source.
     Anticipation notes, including bond, revenue and tax 
anticipation notes, which are issued to provide interim financing of 
various municipal needs in anticipation of the receipt of other sources 
of money for repayment of the notes.
     Insured Municipal Securities, which are covered by 
insurance policies that guarantee the timely payment of principal and 
interest. When beneficial, a Fund may purchase insurance for an 
uninsured bond directly from a qualified municipal bond insurer, in 
which case a Fund pays the insurance premium directly to the insurance 
company.
     Municipal lease obligations, which generally are issued to 
support a government's infrastructure by financing or refinancing 
equipment or property acquisitions or the construction, expansion or 
rehabilitation of public facilities. A Fund may also gain exposure to 
municipal lease obligations through certificates of participation, 
which represent a proportionate interest in the payments under a 
specified lease or leases.
     Municipal Securities that are issued on a when-issued or 
delayed delivery basis.
     Variable and floating rate securities, including variable 
rate demand notes, municipal inflation protected securities, index-
based floating rate securities, and auction rate securities, which have 
interest rates that change either at specific intervals from daily up 
to semi-annually, or whenever a benchmark rate changes.
     Pre-refunded bonds, which are outstanding debt securities 
that are not immediately callable (redeemable) by the issuer but have 
been ``pre-refunded'' by the issuer.
     Zero coupon bonds (including convertible and step coupon 
bonds) and deferred interest securities.
     Stripped securities, which are debt securities that have 
been transformed from a principal amount with periodic interest coupons 
into a series of zero coupon bonds, each with a different maturity date 
corresponding to one of the payment dates for interest coupon payments 
or the redemption date for the principal amount.
     Mandatory tender (mandatory put) Municipal Securities, 
which may be sold with a requirement that a holder of a security 
surrender the security to the issuer or its agent for cash at a date 
prior to the stated maturity.
     Callable securities, which give the issuer the right to 
redeem the security on a given date or dates (known as the call dates) 
prior to maturity.
     Tax-exempt commercial paper, which typically represents an 
unsecured short-term obligation (270 days or less) issued by a 
municipality.
     Tax-exempt or qualified private activity and industrial 
development revenue bonds, which are typically issued by or on behalf 
of public authorities to finance various privately operated facilities 
which are expected to benefit the municipality and its residents, such 
as business, manufacturing, housing, sports and pollution control, as 
well as public facilities such as airports, mass transit systems, ports 
and parking.
Franklin Liberty Municipal Bond ETF
Principal Investments
    According to the Registration Statement, the investment objective 
of the Fund will be to achieve a high level of current income that is 
exempt from federal income taxes. Under normal market conditions, the 
Fund will invest at least 80% of its net assets in Municipal Securities 
whose interest is free from federal income taxes, including the federal 
alternative minimum tax.
    Although the Adviser will search for investments across a large 
number of Municipal Securities that finance different types of 
projects, from time to time, based on economic conditions, the

[[Page 20658]]

Fund may have significant positions in Municipal Securities that 
finance similar types of projects.
    According to the Registration Statement, the Fund may invest in one 
or more of the Municipal Securities listed above. The Fund generally 
buys Municipal Securities rated, at the time of purchase, in one of the 
top four ratings categories by one or more U.S. nationally recognized 
rating services (or comparable unrated or short-term rated 
securities).\9\
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    \9\ This limitation generally is applied at the time of purchase 
and a downgrade of a particular security below one of the top four 
ratings categories will not automatically cause the Fund to sell the 
security. The Adviser will, however, take such downgrade into 
account when analyzing the portfolio.
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Non-Principal Investments
    According to the Registration Statement, while each Fund, under 
normal market conditions, will invest at least 80% of its net assets in 
Municipal Securities whose interest is free from federal income taxes, 
including the federal alternative minimum tax, each Fund may invest up 
to 20% of its net assets in the securities that pay interest that may 
be subject to the federal alternative minimum tax and, although not 
anticipated, in securities that pay taxable interest, as described 
below.
    With respect to up to 20% of its net assets, each Fund may invest 
in bank obligations; \10\ taxable commercial paper; \11\ other 
investment companies,\12\ including exchange-traded funds 
(``ETFs'');\13\ U.S. government securities;\14\ and unrated debt 
securities.\15\
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    \10\ Bank obligations include fixed, floating or variable rate 
certificates of deposit (CDs), letters of credit, time and savings 
deposits, bank notes and bankers' acceptances. CDs are negotiable 
certificates issued against funds deposited in a commercial bank for 
a definite period of time and earning a specified return. Time 
deposits are non-negotiable deposits that are held in a banking 
institution for a specified period of time at a stated interest 
rate. Savings deposits are deposits that do not have a specified 
maturity and may be withdrawn by the depositor at any time. Bankers' 
acceptances are negotiable drafts or bills of exchange normally 
drawn by an importer or exporter to pay for specific merchandise.
    \11\ Commercial paper is an unsecured, short-term loan to a 
corporation, typically for financing accounts receivable and 
inventory with maturities of up to 270 days. Each Fund may invest in 
taxable commercial paper only for temporary defensive purposes.
    \12\ Each Fund may invest in other investment companies to the 
extent permitted by the 1940 Act, Commission rules thereunder and 
exemptions thereto. Each Fund may also invest its cash balances in 
affiliated money market funds to the extent permitted by its 
investment policies and rules and exemptions granted under the 1940 
Act.
    \13\ The ETFs in which a Fund may invest include Investment 
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); 
Portfolio Depositary Receipts (as described in NYSE Arca Equities 
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca 
Equities Rule 8.600). Such ETFs all will be listed and traded in the 
U.S. on registered exchanges.
    \14\ U.S. government securities include obligations of, or 
guaranteed by, the U.S. federal government, its agencies, 
instrumentalities or sponsored enterprises. Some U.S. government 
securities are supported by the full faith and credit of the U.S. 
government. These include U.S. Treasury obligations and securities 
issued by the Government National Mortgage Association (GNMA). A 
second category of U.S. government securities are those supported by 
the right of the agency, instrumentality or sponsored enterprise to 
borrow from the U.S. government to meet its obligations. These 
include securities issued by Federal Home Loan Banks. A third 
category of U.S. government securities are those supported by only 
the credit of the issuing agency, instrumentality or sponsored 
enterprise. These include securities issued by the Federal National 
Mortgage Association (FNMA) and Federal Home Loan Mortgage 
Corporation (FHLMC).
    \15\ Debt securities or their issuers which are not rated by 
rating agencies, sometimes due to the size of or manner of the 
securities offering, the decision by one or more rating agencies not 
to rate certain securities or issuers as a matter of policy, or the 
unwillingness or inability of the issuer to provide the prerequisite 
information and fees to the rating agencies.
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    The Franklin Liberty Intermediate Municipal Opportunities ETF may 
also invest in defaulted debt securities \16\ and high-yield debt 
securities.\17\
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    \16\ Investments in securities of issuers that are, or are about 
to be, involved in reorganizations, financial restructurings, or 
bankruptcy (generally referred to as ``distressed debt'') typically 
involve the purchase of lower-rated or defaulted debt securities, 
comparable unrated debt securities, or other indebtedness of such 
issuers. The Franklin Liberty Municipal Bond ETF may not buy 
defaulted debt securities. However, the Franklin Liberty Municipal 
Bond ETF is not required to sell a debt security that has defaulted 
if the Adviser believes it is advantageous to continue holding the 
security.
    \17\ High-yield or lower-rated debt securities are securities 
that have been rated by Moody's or S&P below their top four rating 
categories (e.g., BB or Ba and lower) and are considered below 
investment grade.
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Investment Restrictions
    According to the Registration Statement, a Fund may invest up to 
100% of its assets in temporary defensive investments, including cash, 
cash equivalents or other high quality short-term investments, such as 
short-term debt instruments, including U.S. government securities, high 
grade commercial paper, repurchase agreements, negotiable certificates 
of deposit, non-negotiable fixed time deposits, bankers acceptances, 
and other money market equivalents. In addition, with respect to each 
of the Funds, on a temporary basis, during periods of high cash inflows 
or outflows,\18\ a Fund may depart from its principal investment 
strategies; for example, it may hold a higher than normal proportion of 
its assets in cash. During such periods, a Fund may not be able to 
achieve its investment objective. To the extent allowed by exemptions 
from and rules under the 1940 Act and a Fund's other investment 
policies and restrictions, the Adviser also may invest a Fund's assets 
in shares of one or more money market funds managed by the Adviser or 
its affiliates.
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    \18\ ``Periods of high cash inflows or outflows,'' as used 
herein, mean rolling periods of seven calendar days during which 
inflows or outflows of cash, in the aggregate, exceed 10% of a 
Fund's net assets as of the opening of business on the first day of 
such periods.
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    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
consistent with Commission guidance. Each 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 a 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.\19\
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    \19\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act).
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    Each Fund intends to qualify for and to elect treatment as a 
separate regulated investment company under Subchapter M of the 
Internal Revenue Code of 1986.\20\
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    \20\ 26 U.S.C. 851.
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    Each 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. A Fund will not necessarily 
focus its investments in a particular state, and will not invest more 
than 15% of its total assets in Municipal Securities of any one state 
as discussed below.

[[Page 20659]]

    Under normal market conditions, except for periods of high cash 
inflows or outflows,\21\ each Fund will satisfy the following criteria. 
Each Fund will have a minimum of 35 Municipal Securities holdings. 
After a Fund has at least $100 million in assets, it will have a 
minimum of 75 Municipal Securities holdings. With respect to 75% of 
each Fund's total assets, no single Municipal Securities issuer will 
account for more than 3% of the weight of a Fund's portfolio. For the 
remaining portion of each Fund's assets, no single Municipal Securities 
issuer will account for more than 6% of the weight of a Fund's 
portfolio. Each Fund will limit its investments in Municipal Securities 
of any one state to 15% of a Fund's total assets and will be 
diversified among issuers in at least 10 states. Each Fund will limit 
its investments in Municipal Securities in any single sector to 25% of 
a Fund's total assets.\22\ Pre-refunded bonds will be excluded from the 
above limits given that they have a high level of credit quality and 
liquidity.\23\
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    \21\ See notes 8 and 18, supra, regarding the meaning of the 
terms ``normal market conditions'' and ``periods of high cash 
inflows or outflows,'' respectively.
    \22\ A Fund's investments in Municipal Securities will include 
investments in state and local (e.g., county, city, town) Municipal 
Securities relating to such sectors as the following: Dedicated tax; 
public power; tax increment; toll road; port revenue; airport 
revenue; water revenue; sewer revenue; higher education (colleges 
and universities); wastewater revenue; school districts; and sales 
tax revenue.
    \23\ Pre-refunded bonds (also known as refunded or escrow-
secured bonds) have a high level of credit quality and liquidity 
because the issuer ``pre-refunds'' the bond by setting aside in 
advance all or a portion of the amount to be paid to the bondholders 
when the bond is called. Generally, an issuer uses the proceeds from 
a new bond issue to buy high grade, interest bearing debt 
securities, including direct obligations of the U.S. government, 
which are then deposited in an irrevocable escrow account held by a 
trustee bank to secure all future payments of principal and interest 
on the pre-refunded bonds.
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Application of Generic Listing Requirements
    The Exchange is submitting this proposed rule change because the 
portfolios for the Funds will not meet all of the ``generic'' listing 
requirements of Commentary .01 to NYSE Arca Equities Rule 8.600 
applicable to the listing of Managed Fund Shares. Each Fund's portfolio 
will meet all such requirements except for those set forth in 
Commentary .01(b)(1).\24\
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    \24\ Commentary .01(b)(1) to NYSE Arca Equities Rule 8.600 
provides that components that in the aggregate account for at least 
75% of the fixed income weight of the portfolio each shall have a 
minimum original principal amount outstanding of $100 million or 
more.
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    The Exchange believes that it is appropriate and in the public 
interest to approve listing and trading of Shares of the Funds on the 
Exchange notwithstanding that the Funds would not meet the requirements 
of Commentary .01(b)(1) to Rule 8.600 in that the Funds' investments in 
Municipal Securities will be well-diversified. A Fund will not 
necessarily focus its investments in a particular state, and will not 
invest more than 15% of its total assets in Municipal Securities of any 
one state. As noted above, under normal market conditions, except for 
periods of high cash inflows or outflows,\25\ each Fund will satisfy 
the following criteria. Each Fund will have a minimum of 35 Municipal 
Securities holdings. After a Fund has at least $100 million in assets, 
it will have a minimum of 75 Municipal Securities holdings. With 
respect to 75% of each Fund's total assets, no single Municipal 
Securities issuer will account for more than 3% of the weight of a 
Fund's portfolio. For the remaining portion of each Fund's assets, no 
single Municipal Securities issuer will account for more than 6% of the 
weight of a Fund's portfolio. Each Fund will limit its investments in 
Municipal Securities of any one state to 15% of a Fund's total assets 
and will be diversified among issuers in at least 10 states. Each Fund 
will limit its investments in Municipal Securities in any single sector 
to 25% of a Fund's total assets. As noted above, pre-refunded bonds 
will be excluded from the above limits given that they have a high 
level of credit quality and liquidity.
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    \25\ See notes 8 and 17, supra, regarding the meaning of the 
terms ``normal market conditions'' and ``periods of high cash 
inflows or outflows,'' respectively.
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    The Exchange believes that permitting Fund Shares to be listed and 
traded on the Exchange notwithstanding that less than 75% of the weight 
of a Fund's portfolio may consist of components with less than $100 
million minimum original principal amount outstanding would provide the 
Funds with greater ability to select from a broad range of Municipal 
Securities, as described above, that would support a Fund's investment 
objective.
    The Exchange believes that, notwithstanding that each Fund's 
portfolio may not satisfy Commentary .01(b)(1) to Rule 8.600, the 
Funds' portfolios will not be susceptible to manipulation. A Fund will 
not invest more than 15% of its total assets in Municipal Securities of 
any one state. In addition, each Fund's portfolio will be well-
diversified in that each Fund will have a specified minimum number of 
Municipal Securities holdings and will be subject to percentage 
limitations on a Fund's total assets invested in Municipal Securities 
of individual issuers, states and sectors, as described above. The 
Exchange notes that, other than Commentary .01(b)(1) to Rule 8.600, 
each Fund's portfolio will meet all other requirements of Rule 8.600.
Creations and Redemptions
    According to the Registration Statement, the Trust will issue and 
sell Shares of a Fund only in ``Creation Units'' in aggregations of 
100,000 Shares per Creation Unit on a continuous basis through the 
Distributor or its agent, without a sales load, at a price based on a 
Fund's NAV next determined after receipt, on any ``Business Day,'' \26\ 
of an order received by the Distributor or its agent in proper form. On 
days when the Exchange closes earlier than normal, a Fund may require 
orders to be placed earlier in the day.
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    \26\ A ``Business Day'' with respect to each Fund is any day the 
Exchange is open for business.
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    In its discretion, the Adviser reserves the right to increase or 
decrease the number of a Fund's Shares that constitute a Creation Unit.
Creation of Fund Shares
    The consideration for purchase of Creation Units of a Fund may 
consist of the ``Deposit Securities'' (i.e., the in-kind deposit of a 
designated portfolio of securities (including any portion of such 
securities for which cash may be substituted)) and the Cash Component 
computed as described below. Together, the Deposit Securities and the 
Cash Component constitute the ``Fund Deposit,'' which will be 
applicable (subject to possible amendment or correction) to creation 
requests received in proper form. The Fund Deposit represents the 
minimum initial and subsequent investment amount for a Creation Unit of 
a Fund. Currently, a Fund's Shares generally will be offered in 
Creation Units solely for cash.
    The ``Cash Component'' is an amount equal to the difference between 
the NAV of the Shares (per Creation Unit) and the ``Deposit Amount,'' 
which is an amount equal to the market value of the Deposit Securities, 
and serves to compensate for any differences between the NAV per 
Creation Unit and the Deposit Amount.
    Each Fund's current policy is to accept cash in substitution for 
the Deposit Securities it might otherwise accept as in-kind 
consideration for the purchase of Creation Units. A Fund may, at times, 
elect to receive Deposit Securities (i.e., the in-kind deposit of a 
designated portfolio of securities) and a Cash Component as 
consideration for

[[Page 20660]]

the purchase of Creation Units. If a Fund elects to accept Deposit 
Securities, a purchaser's delivery of the Deposit Securities together 
with the Cash Component will constitute the ``Fund Deposit,'' which 
will represent the consideration for a Creation Unit of a Fund.
    The identity and number of shares of the Deposit Securities and the 
amount of the Cash Component changes pursuant to changes in the 
composition of a Fund's portfolio and as rebalancing adjustments and 
corporate action events are reflected from time to time by the Adviser 
with a view to the investment objective of a Fund. The composition of 
the Deposit Securities and the amount of the Cash Component may also 
change in response to adjustments to the weighting or composition of 
the component securities constituting a Fund's portfolio.
    Each Fund reserves the right to permit or require the substitution 
of a ``cash in lieu'' amount to be added to the Cash Component to 
replace any Deposit Security that may not be available in sufficient 
quantity for delivery or that may not be eligible for transfer through 
the facilities of Depository Trust Company (``DTC'') (``DTC 
Facilities'') or the clearing process through the Continuous Net 
Settlement System of the National Securities Clearing Corporation 
(``NSCC'') (``NSCC Clearing Process'') (as discussed below), or that 
the Authorized Participant is not able to trade due to a trading 
restriction. Each Fund also reserves the right to permit or require a 
``cash in lieu'' amount in certain circumstances, including 
circumstances in which: (i) The delivery of the Deposit Security by the 
Authorized Participant would be restricted under applicable securities 
or other local laws; (ii) the delivery of the Deposit Security to the 
Authorized Participant would result in the disposition of the Deposit 
Security by the Authorized Participant becoming restricted under 
applicable securities or other local laws; or (iii) in certain other 
situations.
    When partial or full cash purchases of Creation Units are available 
or specified for a Fund (currently, Creation Units of each Fund are 
generally offered solely for cash), they will be effected in 
essentially the same manner as in-kind purchases thereof. In the case 
of a partial or full cash purchase, the ``Authorized Participant'' (as 
defined below) must pay the cash equivalent of the Deposit Securities 
it would otherwise be required to provide through an in-kind purchase, 
plus the same Cash Component required to be paid by an in-kind 
purchaser.
    To be eligible to place orders with the Distributor and to create a 
Creation Unit of a Fund, an entity must be: (i) A ``Participating 
Party,'' i.e., a broker-dealer or other participant in the NSCC 
Clearing Process, or (ii) a DTC Participant, and, in either case, must 
have executed an agreement with the Distributor with respect to 
creations and redemptions of Creation Units (Authorized Participant 
Agreement). A Participating Party or DTC Participant who has executed 
an Authorized Participant Agreement is referred to as an ``Authorized 
Participant.'' All Shares of a Fund, however created, will be entered 
on the records of DTC in the name of Cede & Co. for the account of a 
DTC Participant.
    An Authorized Participant must submit an irrevocable order to 
purchase Shares of a Fund, in proper form, generally before 4 p.m., 
Eastern time on any Business Day in order to receive that day's NAV. 
Creation Units may be purchased only by or through an Authorized 
Participant that has entered into an Authorized Participant Agreement 
with the Distributor.
    An Authorized Participant must submit an irrevocable order to 
purchase Shares of a Fund, in proper form, generally before 4 p.m., 
Eastern time on any Business Day in order to receive that day's NAV.
Redemption of Fund Shares
    Shares of a Fund may be redeemed by Authorized Participants only in 
Creation Units at their NAV next determined after receipt of a 
redemption request in proper form by the Distributor or its agent and 
only on a Business Day. A Fund will not redeem Shares in amounts less 
than Creation Units.
    The Adviser will make available through the NSCC, prior to the 
opening of business on the Exchange on each Business Day, the 
designated portfolio of securities (including any portion of such 
securities for which cash may be substituted) that will be applicable 
(subject to possible amendment or correction) to redemption requests 
received in proper form on that day (``Fund Securities''), and an 
amount of cash as described below (``Cash Amount'') (if any). Such Fund 
Securities and the corresponding Cash Amount (each subject to possible 
amendment or correction) are applicable in order to effect redemptions 
of Creation Units of a Fund until such time as the next announced 
composition of the Fund Securities and Cash Amount is made available. 
Fund Securities received on redemption may not be identical to Deposit 
Securities that are applicable to creations of Creation Units under 
certain circumstances.
    Unless cash redemptions are available or specified for a Fund, the 
redemption proceeds for a Creation Unit generally consist of Fund 
Securities, plus the Cash Amount, which is an amount equal to the 
difference between the NAV of the Shares being redeemed, as next 
determined after the receipt of a redemption request in proper form, 
and the value of Fund Securities, less a redemption transaction fee (as 
described below).
    Each Fund may, in its sole discretion, substitute a ``cash in 
lieu'' amount to replace any Fund Security that may not be eligible for 
transfer through DTC Facilities or the NSCC Clearing Process or that 
the Authorized Participant is not able to trade due to a trading 
restriction. Each Fund also reserves the right to permit or require a 
``cash in lieu'' amount in certain circumstances, including 
circumstances in which: (i) The delivery of a Fund Security to the 
Authorized Participant would be restricted under applicable securities 
or other local laws; (ii) the delivery of a Fund Security to the 
Authorized Participant would result in the disposition of the Fund 
Security by the Authorized Participant becoming restricted under 
applicable securities or other local laws; or (iii) in certain other 
situations. The amount of cash paid out in such cases will be 
equivalent to the value of the substituted security listed as a Fund 
Security. In the event that the Fund Securities have a value greater 
than the NAV of the Shares, a compensating cash payment equal to the 
difference is required to be made by or through an Authorized 
Participant by the redeeming shareholder. When partial or full cash 
redemptions of Creation Units are available or specified for a Fund 
(currently, Creation Units of each Fund are generally redeemed solely 
for cash), they will be effected in essentially the same manner as in-
kind redemptions thereof. In the case of partial or full cash 
redemption, the Authorized Participant will receive the cash equivalent 
of the Fund Securities it would otherwise receive through an in-kind 
redemption, plus the same Cash Amount to be paid to an in-kind 
redeemer.
    Redemption requests for Creation Units of a Fund must be submitted 
to the Distributor or its agent by or through an Authorized 
Participant. An Authorized Participant must submit an irrevocable 
request to redeem Shares of a Fund, in proper form, generally before 4 
p.m., Eastern time on any Business Day, in order to receive that day's 
NAV.

[[Page 20661]]

Net Asset Value
    The NAV of each Fund will be determined by deducting a Fund's 
liabilities from the total assets of the portfolio. The NAV per Share 
will be determined by dividing the total NAV of a Fund by the number of 
Shares outstanding.
    Each Fund will calculate its NAV per Share each Business Day as of 
1 p.m. Pacific time which normally coincides with the close of trading 
on the New York Stock Exchange (``NYSE''). Each Fund will not calculate 
its NAV on days the NYSE is closed for trading. If the NYSE has a 
scheduled early close or unscheduled early close, a Fund's Share price 
would still be determined as of 1 p.m. Pacific time/4 p.m. Eastern 
time. Each Fund's NAV per Share will be available online at 
www.libertyshares.com.
    Municipal Securities generally trade in the over-the-counter 
(``OTC'') market rather than on a securities exchange. Each Fund's 
pricing services will use valuation models or matrix pricing to 
determine current value. In general, they will use information with 
respect to comparable bond and note transactions, quotations from bond 
dealers or by reference to other securities that are considered 
comparable in such characteristics as rating, interest rate and 
maturity date. Matrix pricing is considered a form of fair value 
pricing.
    Each Fund generally will use two independent pricing services to 
assist in determining a current market value for each security. If 
market quotations are readily available for portfolio securities listed 
on a securities exchange, a Fund will value those securities at the 
last quoted sale price or the official closing price of the day, 
respectively, in accordance with valuation procedures approved by the 
Board of Trustees, or, if there is no reported sale, within the range 
of the most recent quoted bid and ask prices. Short-term debt 
instruments, including U.S. government securities, high grade 
commercial paper, repurchase agreements, negotiable certificates of 
deposit, non-negotiable fixed time deposits, bankers acceptances, and 
other money market equivalents will be valued at prices supplied by 
approved pricing services which are generally within the range of the 
most recent bid and ask prices.
    Generally, trading in U.S. government securities and money market 
equivalents is substantially completed each day at various times before 
1 p.m. Pacific time. The value of these securities used in computing 
the NAV will be determined as of such times. Each Fund will rely on 
third-party pricing vendors to provide evaluated prices that reflect 
current fair market value as of 1 p.m. Pacific time.
    Each Fund has procedures, approved by the Board of Trustees, to 
determine the fair value of individual securities and other assets for 
which market prices are not readily available or which may not be 
reliably priced (such as in the case of trade suspensions or halts, 
price movement limits set by certain foreign markets, and thinly traded 
or illiquid securities). Some methods for valuing these securities may 
include: Fundamental analysis (earnings multiple, etc.), matrix 
pricing, discounts from market prices of similar securities, or 
discounts applied due to the nature and duration of restrictions on the 
disposition of the securities. The Board of Trustees oversees the 
application of fair value pricing procedures.
    ETFs 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 a 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, a Fund will price those securities at fair value as determined 
in good faith using methods approved by the Funds' Board of Trustees.
    Shares of non-exchange-traded open-end investment companies will be 
valued at their current day NAV published by the relevant fund.
Indicative Optimized Portfolio Value
    Information regarding the intraday value of Shares of a Fund (the 
Indicative Optimized Portfolio Value'' or ``IOPV'') will be 
disseminated every 15 seconds during the Exchange's Core Trading 
Session (normally 9:30 a.m. to 4:00 p.m. Eastern Time) by market data 
vendors or other information providers. The IOPV will be based on the 
current market value of the Fund's portfolio holdings that will form 
the basis for the Fund's calculation of NAV at the end of the Business 
Day, as disclosed on the Fund's Web site prior to that Business Day's 
commencement of trading. The IOPV will generally be determined by using 
both current market quotations and/or price quotations obtained from 
broker-dealers that may trade in the portfolio securities held by a 
Fund. A Fund's IOPV disseminated during the Exchange's Core Trading 
Session should not be viewed as a real-time update of a Fund's NAV, 
which is calculated only once a day.
Availability of Information
    Each Fund's Web site (www.libertyshares.com), which will be 
publicly available prior to the public offering of Shares, will include 
a form of the prospectus for the Funds that may be downloaded. Each 
Fund's Web site will include additional quantitative information 
updated on a daily basis, including, for each Fund, (1) daily trading 
volume, the prior Business Day's NAV and market closing price or mid-
point of the bid/ask spread at the time of calculation of such NAV (the 
``Bid/Ask Price''),\27\ and a calculation of the premium or discount of 
the market closing price or Bid/Ask Price against the NAV, and (2) data 
in chart format displaying the frequency distribution of discounts and 
premiums of the daily market closing price or Bid/Ask Price against the 
NAV, within appropriate ranges, for the most recently completed 
calendar year, and the most recently completed calendar quarters since 
that year (or the life of a Fund, if shorter). On each Business Day, 
before commencement of trading in Shares in the Core Trading Session on 
the Exchange (ordinarily 9:30 a.m., Eastern Time), each Fund's Web site 
will disclose the Disclosed Portfolio \28\ that will form the basis for 
a Fund's calculation of its NAV at the end of the Business Day.\29\
---------------------------------------------------------------------------

    \27\ The Bid/Ask Price of a Fund's Shares will be determined 
using the mid-point of the highest bid and the lowest offer on the 
Exchange as of the time of calculation of a Fund's NAV. The records 
relating to Bid/Ask Prices will be retained by each Fund and its 
service providers.
    \28\ The term ``Disclosed Portfolio'' is defined in NYSE Arca 
Equities Rule 8.600(c)(2).
    \29\ Under accounting procedures followed by the Funds, trades 
made on the prior Business Day (``T'') will be booked and reflected 
in NAV on the current Business Day (``T+1''). Accordingly, the Funds 
will be able to disclose at the beginning of the Business Day the 
portfolio that will form the basis for the NAV calculation at the 
end of the Business Day.
---------------------------------------------------------------------------

    On a daily basis, the Funds will disclose the information required 
under NYSE Arca Equities Rule 8.600(c)(2) to the extent applicable. The 
Web site information will be publicly available at no charge.
    In addition, a basket composition file, which includes the security 
names and share quantities, if applicable, required to be delivered in 
exchange for a Fund's Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the Exchange via the NSCC. The basket represents one Creation Unit of a 
Fund. The NAV of Shares of a Fund

[[Page 20662]]

will normally be determined as of the close of the Core Trading Session 
on the Exchange (ordinarily 4 p.m. Eastern time) on each Business Day. 
Authorized Participants may refer to the basket composition file for 
information regarding securities and financial instruments that may 
comprise a Fund's basket on a given day.
    Investors can also obtain each Fund's Statement of Additional 
Information (``SAI''), shareholder reports, Form N-CSR and Form N-SAR, 
filed twice a year. The Funds' SAI and shareholder reports will be 
available free upon request from the Trust, and those documents and the 
Form N-CSR and Form N-SAR may be viewed on-screen or downloaded from 
the Commission's Web site at www.sec.gov. Information regarding market 
price and trading volume of the Shares will be continually available on 
a real-time basis throughout the day on brokers' computer screens and 
other electronic services. Information regarding the previous day's 
closing price and trading volume information for the Shares will be 
published daily in the financial section of newspapers.
    Quotation and last sale information for the Shares and for ETFs 
will be available via the Consolidated Tape Association (``CTA'') high-
speed line, and from the national securities exchange on which they are 
listed.
    Quotation information from brokers and dealers or pricing services 
will be available for Municipal Securities, unrated debt securities, 
defaulted debt securities, high yield debt securities, and cash 
equivalents or other high quality short-term investments, including 
U.S. government securities, bank obligations and taxable commercial 
paper. Price information for money market funds and other investment 
companies will be available from the applicable investment company's 
Web site and from market data vendors. Pricing information regarding 
each other asset class in which a Fund will invest will generally be 
available through nationally recognized data service providers through 
subscription agreements. In addition, the IOPV (which is the Portfolio 
Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3)), 
will be widely disseminated at least every 15 seconds during the Core 
Trading Session (ordinarily 9:30 a.m. to 4:00 p.m., Eastern Time) by 
one or more major market data vendors or other information 
providers.\30\
---------------------------------------------------------------------------

    \30\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available IOPVs 
taken from CTA or other data feeds.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of a Fund. Trading in Shares of a Fund will be 
halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m., Eastern Time in 
accordance with NYSE Arca Equities Rule 7.34 (Early, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, the minimum price variation (``MPV'') for 
quoting and entry of orders in equity securities traded on the NYSE 
Arca Marketplace is $0.01, with the exception of securities that are 
priced less than $1.00 for which the MPV for order entry is $0.0001.
    The Shares of each Fund will conform to the initial and continued 
listing criteria under NYSE Arca Equities Rule 8.600. Consistent with 
NYSE Arca Equities Rule 8.600(d)(2)(B)(ii), the Adviser will implement 
and maintain, or be subject to, procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
actual components of a Fund's portfolio. The Exchange represents that, 
for initial and/or continued listing, a Fund will be in compliance with 
Rule 10A-3 \31\ under the Act, as provided by NYSE Arca Equities Rule 
5.3. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. The Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time. 
Each Fund's investments will be consistent with a Fund's investment 
objective and will not be used to enhance leverage.
---------------------------------------------------------------------------

    \31\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Exchange, as 
well as cross-market surveillances administered by Financial Industry 
Regulatory Authority (``FINRA'') on behalf of the Exchange, which are 
designed to detect violations of Exchange rules and applicable federal 
securities laws. The Exchange represents that these procedures are 
adequate to properly monitor Exchange trading of the Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and federal securities laws applicable to trading on the Exchange.\32\
---------------------------------------------------------------------------

    \32\ 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.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.\33\
---------------------------------------------------------------------------

    \33\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and ETFs 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 ETFs from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares and ETFs from markets and 
other entities that are members of ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement. In addition, 
FINRA, on behalf of the Exchange, is able to access, as needed, trade 
information for certain fixed income securities held by a Fund reported 
to FINRA's Trade Reporting and Compliance Engine (``TRACE''). FINRA 
also can access data obtained from the Municipal Securities Rulemaking 
Board (``MSRB'') relating to municipal bond trading activity for 
surveillance purposes in connection with trading in the Shares.

[[Page 20663]]

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(a) the description of the portfolio, (b) limitations on portfolio 
holdings or reference assets, or (c) applicability of Exchange listing 
rules specified in this filing shall constitute continued listing 
requirements for listing the Shares of a Fund on the Exchange.
    The issuer 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).
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit Holders in an Information Bulletin (``Bulletin'') 
of the special characteristics and risks associated with trading the 
Shares. Specifically, the Bulletin will discuss the following: (1) The 
procedures for purchases and redemptions of Shares in Creation Unit 
aggregations (and that Shares are not individually redeemable); (2) 
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence 
on its Equity Trading Permit Holders to learn the essential facts 
relating to every customer prior to trading the Shares; (3) the risks 
involved in trading the Shares during the Opening and Late Trading 
Sessions when an updated IOPV will not be calculated or publicly 
disseminated; (4) how information regarding the IOPV and the Disclosed 
Portfolio is disseminated; (5) the requirement that Equity Trading 
Permit Holders deliver a prospectus to investors purchasing newly 
issued Shares prior to or concurrently with the confirmation of a 
transaction; and (6) trading information.
    In addition, the Bulletin will reference that each Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. The 
Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m., Eastern Time each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \34\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. The Exchange or FINRA, on behalf of 
the Exchange, or both, will communicate as needed regarding trading in 
the Shares and ETFs 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 ETFs from such markets and other entities. In addition, 
the Exchange may obtain information regarding trading in the Shares and 
ETFs from markets and other entities that are members of ISG or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement. In addition, FINRA, on behalf of the Exchange, is able to 
access, as needed, trade information for certain fixed income 
securities held by a Fund reported to TRACE. FINRA also can access data 
obtained from the MSRB relating to municipal bond trading activity for 
surveillance purposes in connection with trading in the Shares. Each 
Fund may not purchase illiquid assets if, in the aggregate, more than 
15% of its net assets would be invested in illiquid assets. Each 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 a Fund's 
net assets are held in illiquid assets. The Adviser is not registered 
as a broker-dealer but is affiliated with a broker-dealer and will 
implement and maintain a fire wall with respect to each of its relevant 
personnel or broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolios.
    The Exchange believes that it is appropriate and in the public 
interest to approve listing and trading of Shares of the Funds on the 
Exchange notwithstanding that the Funds would not meet the requirements 
of Commentary .01(b)(1) to Rule 8.600 in that the Funds' investments in 
Municipal Securities will be well-diversified. As noted above, under 
normal market conditions, except for periods of high cash inflows or 
outflows, each Fund will satisfy the following criteria. Each Fund will 
have a minimum of 35 Municipal Securities holdings. After a Fund has at 
least $100 million in assets, it will have a minimum of 75 Municipal 
Securities holdings. With respect to 75% of each Fund's total assets, 
no single Municipal Securities issuer will account for more than 3% of 
the weight of a Fund's portfolio. For the remaining portion of each 
Fund's assets, no single Municipal Securities issuer will account for 
more than 6% of the weight of a Fund's portfolio. Each Fund will limit 
its investments in Municipal Securities of any one state to 15% of a 
Fund's total assets and will be diversified among issuers in at least 
10 states. Each Fund will limit its investments in Municipal Securities 
in any single sector to 25% of a Fund's total assets. The Exchange 
believes it would be appropriate to exclude pre-refunded bonds from the 
above limits given that they have a high level of credit quality and 
liquidity. In addition, other than Commentary .01(b)(1) to Rule 8.600, 
each Fund's portfolio will meet all other requirements of Rule 8.600.
    The Exchange believes that permitting Fund Shares to be listed and 
traded on the Exchange notwithstanding that less than 75% of the weight 
of a Fund's portfolio may consist of components with less than $100 
million minimum original principal amount outstanding would provide the 
Funds with greater ability to select from a broad range of Municipal 
Securities, as described above, that would support a Fund's investment 
objective. The Exchange believes further that, notwithstanding that 
each Fund's portfolio may not satisfy Commentary .01(b)(1) to Rule 
8.600, the Funds' portfolios will not be susceptible to manipulation. A 
Fund will not invest more than 15% of its total assets in Municipal 
Securities of any one state. In addition, each Fund's portfolio will be 
well-diversified in that

[[Page 20664]]

each Fund will have a specified minimum number of Municipal Securities 
holdings and will be subject to percentage limitations on a Fund's 
total assets invested in Municipal Securities of individual issuers, 
states and sectors, as described above.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding each Fund and the Shares, 
thereby promoting market transparency. Quotation and last sale 
information for the Shares and ETFs will be available via the CTA high-
speed line, and from the national securities exchange on which they are 
listed. Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit Holders in an Information Bulletin of the 
special characteristics and risks associated with trading the Shares. 
Trading in Shares of the Funds will be halted if the circuit breaker 
parameters in NYSE Arca Equities Rule 7.12 have been reached or because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. Trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
circumstances under which Shares of the Funds may be halted. In 
addition, as noted above, investors will have ready access to 
information regarding the Funds' holdings, the IOPV, the Disclosed 
Portfolio, and quotation and last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
additional types of actively-managed exchange-traded products that 
principally hold municipal bonds and that will enhance competition 
among market participants, to the benefit of investors and the 
marketplace. As noted above, the Exchange has in place surveillance 
procedures relating to trading in the Shares and may obtain information 
via ISG from other exchanges that are members of ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement. In addition, as noted above, investors will have ready 
access to information regarding each Fund's holdings, IOPV, Disclosed 
Portfolio, and quotation and last sale information for the Shares.

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

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

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

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2017-48 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-2017-48. 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-2017-48 and should 
be submitted on or before May 24, 2017.
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    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08900 Filed 5-2-17; 8:45 am]
 BILLING CODE 8011-01-P


