[Federal Register Volume 78, Number 179 (Monday, September 16, 2013)]
[Notices]
[Pages 56970-56977]
[FR Doc No: 2013-22397]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70356; File No. SR-NYSEArca-2013-86]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of Franklin Short
Duration U.S. Government ETF Under NYSE Arca Equities Rule 8.600

September 10, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on August 27, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. 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\ 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 following
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): Franklin
Short Duration U.S. Government ETF. The text of the proposed rule
change is available on the Exchange's Web site at www.nyse.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the
following under NYSE Arca Equities Rule 8.600, which governs the
listing and trading of Managed Fund Shares\3\ on the Exchange: Franklin
Short Duration U.S. Government ETF (the ``Fund'').\4\ The Shares of the
Fund will be offered by Franklin ETF Trust (the ``Trust''). The Trust
will be registered with the Commission as an open-end

management investment company.\5\ Franklin Advisers, Inc. will serve as
the investment manager to the Fund (the ``Manager''). Franklin
Templeton Distributors, Inc. (the ``Distributor'') will be the
principal underwriter and distributor of the Fund's Shares. Franklin
Templeton Services, LLC (the ``Administrator'') will serve as
administrator for the Fund and The Bank of New York Mellon will serve
as sub-administrator for the Fund. The Bank of New York Mellon will
serve as the custodian and transfer agent for the Fund (``Custodian''
and ``Transfer Agent,'' respectively).
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    \3\ 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 goal 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.
    \4\ The Securities and Exchange Commission (``Commission'') has
previously approved listing and trading on the Exchange of a number
of actively managed funds under Rule 8.600. See, e.g., Securities
Exchange Act Release Nos. 57801 (May 8, 2008), 73 FR 27878 (May 14,
2008) (SR-NYSEArca-2008-31) (order approving Exchange listing and
trading of twelve actively-managed funds of the WisdomTree Trust);
60460 (August 7, 2009), 74 FR 41468 (August 17, 2009) (SR-NYSEArca-
2009-55) (order approving listing and trading of Dent Tactical ETF);
63076 (October 12, 2010), 75 FR 63874 (October 18, 2010) (SR-
NYSEArca-2010-79) (order approving listing and trading of Cambria
Global Tactical ETF).
    \5\ The Trust will be registered under the 1940 Act. On February
7, 2013, the Trust filed a registration statement on Form N-1A under
the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 77a), and
under the 1940 Act, relating to the Fund (File Nos. 333-186504 and
811-22801) (the ``Registration Statement''). The description of the
operation of the Trust and the Fund herein is based, in part, on the
Registration Statement. The Trust filed an application on June 8,
2012, and amendments to the application on October 26, 2012 and
December 18, 2012, requesting an Order under Section 6(c) of the
1940 Act for exemptions from various provisions of the 1940 Act and
rules thereunder (File No. 812-14042) (``Exemptive Application'').
The Commission has issued an order granting certain exemptive relief
to the Trust under the 1940 Act. See Investment Company Act Release
No. 30350 (January 15, 2013) (``Exemptive Order''). Investments made
by the Fund will comply with the conditions set forth in the
Exemptive Application and the Exemptive Order.
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    Commentary .06 to Rule 8.600 provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition of and/or
changes to such investment company portfolio. 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.\6\ Commentary .06 to Rule 8.600 is
similar to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule
5.2(j)(3); however, Commentary .06 in connection with the establishment
of a ``fire wall'' between the investment adviser and the broker-dealer
reflects the applicable open-end fund's portfolio, not an underlying
benchmark index, as is the case with index-based funds. The Manager is
not registered as a broker-dealer but it is affiliated with a broker-
dealer and has represented that it has implemented a fire wall with
respect to its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio. In the
event (a) the Manager or any sub-adviser becomes newly affiliated with
a broker-dealer, or (b) any new adviser or sub-adviser is a registered
broker-dealer or becomes affiliated with a broker-dealer, they will
implement a fire wall with respect to their relevant personnel or
broker-dealer affiliate regarding access to information concerning the
composition and/or changes to the portfolio, and will be subject to
procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio.
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    \6\ 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 Manager 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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Fund Investments
    According to the Registration Statement, the Fund's investment goal
is to provide a high level of current income as is consistent with
prudent investing, while seeking preservation of capital. The Fund will
seek to achieve its investment goal by investing, under normal market
conditions,\7\ at least 80% of its net assets in securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
The Fund currently targets an estimated average portfolio duration\8\
of three (3) years or less. The Manager calculates the duration of the
portfolio by modeling the cash flows of all the individual holdings,
including the impact of prepayment variability and coupon adjustments
where applicable, to determine the duration of each holding and then
aggregating based on the size of the position. In performing this
duration calculation, the Manager utilizes third party models as
adjusted based on the Manager's market expectations with respect to
interest rates, borrower-level factors affecting credit availability,
the condition of the housing market as well as broader economic
factors, among other things, consistent with industry practice. Because
the Fund publishes its portfolio on a daily basis, market participants
have the ability to assess whether the duration calculation is
consistent with generally accepted market calculations of duration.
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    \7\ The term ``under normal market conditions'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar intervening
circumstance.
    \8\ In comparison to maturity (which is the date on which a debt
instrument ceases and the issuer is obligated to repay the principal
amount), duration is a measure of the expected price volatility of a
debt instrument as a result of changes in market rates of interest,
based on the weighted average timing of the instrument's expected
principal and interest payments and other factors. Duration differs
from maturity in that it considers a security's yield, coupon
payments, principal payments, call features and coupon adjustments
in addition to the amount of time until the security finally
matures. As the value of a security changes over time, so will its
duration. Prices of securities with lower durations tend to be less
sensitive to interest rate changes than securities with higher
durations. In general, a portfolio of securities with a lower
duration can be expected to be less sensitive to interest rate
changes than a portfolio with a higher duration.
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    According to the Registration Statement, the Fund generally will
invest a substantial portion of its assets in mortgage-backed
securities\9\ issued or guaranteed by the U.S. government, its agencies
or instrumentalities, including adjustable rate mortgage securities,
but the Fund also will invest in direct obligations of the U.S.
government (such as Treasury bonds, bills and notes) and in securities
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including government sponsored entities. All of the
Fund's principal investments will be debt securities, including bonds,
notes and debentures.
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    \9\ Mortgage-backed securities represent an interest in a pool
of mortgage loans made by banks and other financial institutions to
finance purchases of homes, commercial buildings and other real
estate. The individual mortgage loans are packaged or ``pooled''
together for sale to investors. As the underlying mortgage loans are
paid off, investors receive principal and interest payments. These
securities may be fixed-rate or adjustable-rate mortgage-backed
securities (ARMS). Further, these securities can also be categorized
as collateralized mortgage obligations (CMOs) or real estate
mortgage investment conduits (REMICs) where they are divided into
multiple classes with each class being entitled to a different share
of the principal and/or interest payments received from the pool of
underlying assets.
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    According to the Registration Statement, the mortgage-backed

securities in which the Fund will substantially invest are issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
such as Ginnie Mae and U.S. government-sponsored entities, such as
Fannie Mae and Freddie Mac. Most mortgage-backed securities are pass-
through securities, which means they provide investors with monthly
payments consisting of a pro rata share of both regular interest and
principal payments as well as unscheduled prepayments on the underlying
mortgage loans. Because prepayment rates of individual mortgage pools
vary widely, the average life of a particular pool cannot be predicted
accurately. Adjustable-rate mortgage-backed securities include ARMS and
other mortgage-backed securities with interest rates that adjust
periodically to reflect prevailing market interest rates.
    According to the Registration Statement, the Fund may invest in
securities with various levels of credit support \10\ including, but
not limited to, those issued or guaranteed by the Federal Home Loan
Banks, Veterans Administration, Federal Housing Authority, Export-
Import Bank of the United States, Overseas Private Investment
Corporation, Commodity Credit Corporation, Small Business
Administration, U.S. Agency for International Development, Tennessee
Valley Authority and Farm Credit System.
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    \10\ Government agency or instrumentality securities have
different levels of credit support. For example, Ginnie Mae
securities carry a guarantee as to the timely repayment of principal
and interest that is backed by the full faith and credit of the U.S.
government. However, the full faith and credit guarantee does not
apply to the market prices and yields of the Ginnie Mae securities
or to the net asset value (``NAV''), trading price or performance of
the Fund, which will vary with changes in interest rates and other
market conditions. Fannie Mae and Freddie Mac pass-through mortgage
certificates are backed by the credit of the respective
instrumentality and are not guaranteed by the U.S. government. Other
securities issued by government agencies or instrumentalities,
including government sponsored entities, may only be backed by the
credit worthiness of the issuing institution, not the U.S.
Government, or the issuers may have the right to borrow from the
U.S. Treasury to meet its obligations.
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    The Fund may invest in callable agency securities, which give the
issuer (the U.S. government agency) the right to redeem the security
prior to maturity. The Fund may also invest in U.S. government
inflation-indexed securities.\11\ Additionally, the Fund may invest,
without limitation, in mortgage dollar rolls.\12\ However, the Fund
will invest only in covered mortgage dollar rolls, meaning that the
Fund establishes a segregated account with liquid securities equal in
value to the securities it will repurchase. The Fund intends to enter
into mortgage dollar rolls only with high quality securities dealers
and banks as determined by the Manager under board approved
counterparty review procedures.
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    \11\ Inflation-indexed securities are fixed-income securities
that are structured to provide protection against inflation. The
value of the security's principal or the interest income paid on the
security is adjusted to track changes in an official inflation
measure. The U.S. Treasury uses the Consumer Price Index for Urban
Consumers as the inflation measure.
    \12\ In a mortgage dollar roll, the Fund will sell (or buy)
mortgage-backed securities for delivery on a specified date and
simultaneously contract to repurchase (or sell) substantially
similar (same type, coupon, and maturity) securities on a future
date. During the period between a sale and repurchase, the Fund will
forgo principal and interest paid on the mortgage-backed securities.
The Fund will earn or lose money on a mortgage dollar roll from any
difference between the sale price and the future purchase price. In
a sale and repurchase, the Fund also earns money on the interest
earned on the cash proceeds of the initial sale.
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Other Investments
    According to the Registration Statement, when the Manager believes
market or economic conditions are unfavorable for investors, the
Manager may invest up to 100% of the Fund's assets in a temporary
defensive manner by holding all or a substantial portion of its assets
in cash, cash equivalents or other high quality short-term investments.
Temporary defensive investments generally may include short-term U.S.
government securities, high-grade commercial paper, bank obligations,
repurchase agreements, money market fund shares (including shares of an
affiliated money market fund) and other money market instruments. The
Manager also may invest in these types of securities or hold cash while
looking for suitable investment opportunities or to maintain
liquidity.\13\
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    \13\ Circumstances under which the Fund may temporarily depart
from its normal investment process include, but are not limited to,
extreme volatility or trading halts in the equity markets or the
financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
type events such as systems failure, natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance.
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    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Manager.\14\ The
Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether, in light of current circumstances, an adequate level
of liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid securities. Illiquid securities 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.\15\
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    \14\ In reaching liquidity decisions, the Manager may consider
the following factors: the frequency of trades and quotes for the
security, the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer).
    \15\ 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 1933 Act).
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    The Fund may invest in other investment companies to the extent
permitted by the 1940 Act, Commission rules thereunder and exemptions
thereto. Section 12(d)(1)(A) of the 1940 Act requires that, as
determined immediately after a purchase is made, (i) not more than 5%
of the value of the Fund's total assets will be invested in the
securities of any one investment company, (ii) not more than 10% of the
value of the Fund's total assets will be invested in securities of
investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by
the Fund. Certain exceptions to these limitations may apply, and the
Fund may also rely on any future applicable Commission rules or orders
that provide exceptions to these limitations.
    The Fund may invest up to 20% of its net assets in securities not
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage backed securities. According to
the Registration Statement, these investments may include investment
grade debt securities.\16\ The Fund will

not invest in non-investment grade debt securities. The Fund may also
lend a portfolio of securities up to 33\1/3\% of the value of its total
assets (measured at the time of the most recent loan). In exchange, the
Fund will receive cash collateral from a borrower at least equal to the
value of the security loaned by the Fund. Cash collateral typically
consists of any combination of cash, securities issued by the U.S.
government and its agencies and instrumentalities, and irrevocable
letters of credit. Such securities will only be loaned to parties that
meet creditworthiness standards approved by the Fund's board. The Fund
may also invest in multi-class pass-through securities, when-issued,
delayed delivery and to-be-announced transactions; callable securities;
Franklin Templeton money market funds; repurchase agreements; U.S.
Treasury rolls; unrated debt securities deemed by the Manager to be of
comparable quality to investment grade debt securities; variable rate
securities; and zero coupon, deferred interest and pay-in-kind bonds.
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    \16\ Debt securities that are rated Baa or higher by Moody's,
BBB or higher by S&P, or unrated securities deemed by the Manager to
be of comparable quality, are considered to be ``investment grade.''
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    The Fund will not invest in equity securities other than possible
investments in shares of other investment companies as noted above.
    The Fund will be classified as a ``diversified'' investment company
under the 1940 Act.\17\
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    \17\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
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    The Fund will not invest more than 25% of the Fund's net assets in
securities of issuers in any one industry (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities or securities of other investment companies, whether
registered or excluded from registration under Section 3(c) of the 1940
Act).\18\
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    \18\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests more than 25% of
the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
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    Additionally, the Fund will not purchase the securities of any one
issuer (other than the U.S. government or any of its agencies or
instrumentalities or securities of other investment companies, whether
registered or excluded from registration under Section 3(c) of the 1940
Act) if immediately after such investment (i) more than 5% of the value
of the Fund's total assets would be invested in such issuer or (ii)
more than 10% of the outstanding voting securities of such issuer would
be owned by the Fund, except that up to 25% of the value of the Fund's
total assets may be invested without regard to such 5% and 10%
limitations.
    The Fund intends to qualify for and to elect treatment as a
separate regulated investment company (``RIC'') under Subchapter M of
the Internal Revenue Code.\19\
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    \19\ 26 U.S.C. 851 et seq.
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    The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600. The Exchange represents
that, for initial and/or continued listing, the Fund will be in
compliance with Rule 10A-3 \20\ under the Act, as provided by NYSE Arca
Equities Rule 5.3. A minimum of 100,000 Shares for the Fund 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 as defined in NYSE Arca Equities Rule
8.600(c)(2) will be made available to all market participants at the
same time.
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    \20\ 17 CFR 240.10A-3.
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Investments in Derivatives
    Consistent with the Exemptive Order, to pursue its investment goal,
the Fund may invest in interest rate, fixed income index, bond and U.S.
Treasury futures contracts. The use of these derivative transactions
may allow the Fund to obtain net long or short exposures to selected
interest rates or durations. These derivatives may be used to hedge
risks associated with the Fund's other portfolio investments. The Fund
expects that no more than 20% of the value of the Fund's net assets
will be invested in derivative instruments.
    The Fund will not invest in options, futures contracts or swap
agreements other than as set forth in the preceding paragraph. The
Fund's investments will be consistent with its investment goal and will
not be used to enhance leverage.
Creation and Redemption of Shares
    According to the Registration Statement, the Fund will issue and
redeem Shares on a continuous basis at NAV in aggregations of 50,000
Shares (``Creation Units'').
    The consideration for purchase of Creation Units of the Fund will
consist of (i) a specified all-cash payment (the ``Cash Deposit'') or
(ii) a designated portfolio of securities (including any portion of
such securities for which cash may be substituted) (the ``Deposit
Securities''), together with the deposit of a specified cash payment
(the ``Cash Component''). The Cash Component will be equal to the
difference between the NAV of the Shares (per Creation Unit) and the
market value of the Deposit Securities. Together, the Deposit
Securities and the Cash Component or, alternatively, the Cash Deposit,
constitute the ``Fund Deposit,'' which will be applicable to creation
requests received in proper form. The Fund Deposit represents the
minimum initial and subsequent investment amount for a Creation Unit of
the Fund.
    The Manager will make available through the National Securities
Clearing Corporation (``NSCC'') on each business day prior to the
opening of business on the Exchange, the list of names and the required
number or par value of each Deposit Security and the amount of the Cash
Component (or Cash Deposit) to be included in the current Fund Deposit
(based on information as of the end of the previous business day for
the Fund). Such Fund Deposit is applicable to purchases of Creation
Units of Shares until such time as the next-announced Fund Deposit is
made available.
    To be eligible to place orders with the Distributor and to create a
Creation Unit of the Fund, an entity must be: (i) a broker-dealer or
other participant in the clearing process through the Continuous Net
Settlement System of the NSCC (the ``Clearing Process''), a clearing
agency that is registered with the Commission, or (ii) a Depositary
Trust Company (``DTC'') Participant, and must have executed an
agreement with the Distributor, with respect to creations and
redemptions of Creation Units. An entity that satisfies these
requirements is known as an ``Authorized Participant.'' Creation Units
may be purchased only by or through an Authorized Participant.
    To initiate an order for a Creation Unit, an Authorized Participant
must submit to the Distributor or its agent an irrevocable order to
purchase Shares, in proper form, before 4:00 p.m., Eastern time (the
``Cut-off Time'') on any business day to receive that day's NAV. Once
the Fund has accepted an order, upon the next determination of the NAV
of the Shares, the Fund will confirm the issuance of a Creation Unit,
against receipt of payment, at such NAV. Except as provided in the
Registration Statement, a Creation Unit will not be issued until the
transfer of good title to the Fund of the Deposit Securities and the
payment of the Cash Component (or Cash Deposit) have been completed. A
standard creation transaction fee will be imposed to offset the
transfer and other transaction costs associated with the issuance of
Creation Units.

    Shares of the 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 and only on a
business day. The Manager 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
to redemption requests received in proper form on that day (``Fund
Securities''), and an amount of cash 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.
    According to the Registration Statement, such Fund Securities and
the corresponding cash amount will be applicable, in order to effect
redemptions of Creation Units of the 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.
    When partial or full cash redemptions of Creation Units are
available or specified, they will be effected in essentially the same
manner as in-kind redemptions. In the case of partial or full cash
redemption, the Authorized Participant receives 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 the Fund must be
submitted to the Distributor by or through an Authorized Participant.
An Authorized Participant must submit an irrevocable request to redeem
Shares generally before 4:00 p.m., Eastern time on any business day, in
order to receive that day's NAV. A standard redemption transaction fee
will be imposed to offset transfer and other transaction costs that may
be incurred by the Fund.
    The right of redemption may be suspended or the date of payment
postponed with respect to the Fund: (i) For any period during which the
Exchange is closed (other than customary weekend and holiday closings);
(ii) for any period during which trading on the Exchange is suspended
or restricted; (iii) for any period during which an emergency exists as
a result of which disposal of the Fund's portfolio securities or
determination of its NAV is not reasonably practicable; or (iv) in such
other circumstance as is permitted by the Commission.
    Detailed descriptions of the Fund's procedures for creating and
redeeming Shares, transaction fees and expenses, dividends,
distributions, taxes, risks, and reports to be distributed to
beneficial owners of the Shares can be found in the Registration
Statement or on the Web site for the Fund (www.franklintempleton.com),
as applicable.
Determination of Net Asset Value
    According to the Registration Statement, the Fund will calculate
the NAV per Share each business day normally as of the close of regular
trading on the New York Stock Exchange (``NYSE''), normally 4:00 p.m.
Eastern time. The Fund will not calculate the NAV on days the NYSE is
closed for trading. The NAV of the Fund will be determined by deducting
the Fund's liabilities from the total assets of the portfolio. The NAV
per Share will be determined by dividing the total NAV of the Fund by
the number of Shares outstanding.
    When determining its NAV, the Fund will value cash and receivables
at their realizable amounts, and will record interest as accrued and
dividends on the ex-dividend date. The Fund will generally utilize two
independent pricing services to assist in determining a current market
value for each security.
    According to the Registration Statement, generally, trading in
corporate bonds, U.S. government securities and money market
instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities as of such times
generally is used in computing the NAV. Occasionally, events affecting
the values of these securities may occur between the times at which the
values are determined and the close of the NYSE. The Fund will rely on
third-party pricing vendors to monitor for events materially affecting
the value of these securities during this period. If an event occurs,
the third-party pricing vendors will provide revised values to the
Fund, which will be incorporated into the calculation of the Fund's
NAV.
    The Fund will have 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. According to the Registration Statement, 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.
    Mortgage pass-through securities, other mortgage-backed securities,
CMOs and asset-backed securities generally trade in the over-the-
counter market rather than on a securities exchange. The Fund
predominantly values these portfolio securities by relying on
independent pricing services, but may also utilize quotations from bond
dealers and information with respect to bond and note transactions when
prices are not readily available from or reliably priced by such
independent pricing services, all in accordance with valuation
procedures approved by the Fund's board. The 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, maturity date, option adjusted spread models,
prepayment projections, interest rate spreads and yield curves. Matrix
pricing is considered a form of fair value pricing.
    The Fund will not invest in equity securities other than possible
investments in shares of other investment companies as noted above.
Redeemable securities issued by open-end investment companies are
valued on any given business day using the respective closing NAVs of
such companies for purchase and/or redemption orders placed on that day
in accordance with valuation procedures approved by the Fund's board.
For securities that are traded on an exchange, the Fund will value
those securities at the last quoted sale price of the day in accordance
with valuation procedures approved by the Fund's board.
Availability of Information
    The Fund's Web site (www.franklintempleton.com), which will be
publicly available prior to the public offering of Shares, will include
a form of the prospectus for the Fund that may be downloaded. The
Fund's Web site will include additional quantitative information
updated on a daily basis, including, for the Fund, (1) the prior
business day's NAV and the market closing price or mid-point of the
bid/ask spread at the time of calculation of such

NAV (the ``Bid/Ask Price''),\21\ and a calculation of the premium or
discount of the market closing price or Bid/Ask Price against the NAV,
and (2) a table showing the number of days the Market Price (as defined
by the Commission in Form N-1A) \22\ of the Fund shares was greater
than the Fund's NAV and the number of days it was less than the Fund's
NAV (i.e., premium or discount) for the most recently completed
calendar year, and the most recently completed calendar quarters since
that year (or the life of the Fund, if shorter). On each business day,
before commencement of trading in Shares in the Core Trading Session on
the Exchange, the Fund will disclose on its Web site the Disclosed
Portfolio that will form the basis for the Fund's calculation of NAV at
the end of the business day.\23\
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    \21\ The Bid/Ask Price of the Fund will be determined using the
mid-point of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Fund's NAV. The records relating
to Bid/Ask Prices will be retained by the Fund and its service
providers.
    \22\ The Commission has defined ``Market Price'' in Form N-1A as
the ``last reported sale price at which Exchange-Traded Fund shares
trade on the principal U.S. market on which the Fund's Shares are
traded during a regular trading session or, if it more accurately
reflects the current market value of the Fund's Shares at the time
the Fund uses to calculate its net asset value, a price within the
range of the highest bid and lowest offer on the principal U.S.
market on which the Fund's Shares are traded during a regular
trading session.''
    \23\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
the Fund will be able to disclose at the beginning of the business
day the portfolio that will form the basis for the NAV calculation
at the end of the business day.
---------------------------------------------------------------------------

    On a daily basis, the Manager will disclose for each portfolio
security or other financial instrument of the Fund the following
information on the Fund's Web site: Ticker symbol (if applicable), name
of security or financial instrument, number of shares or dollar value
of securities and financial instruments held in the portfolio, and
percentage weighting of the security and financial instrument in the
portfolio. The Web site information will be publicly available at no
charge.
    In addition, for in-kind creations, a basket composition file,
which will include the security names and share quantities to deliver
in exchange for 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 will represent one Creation Unit
of the Fund.
    Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's
Form N-CSR and Form N-SAR, filed twice a year. The Trust's SAI and
Shareholder Reports will be available free upon request from the Trust,
and those documents and the Form N-CSR and Form N-SAR may be viewed on-
screen or downloaded from the Commission's Web site at www.sec.gov.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares will be available via the Consolidated Tape Association
(``CTA'') high-speed line. In addition, the Portfolio Indicative Value,
as defined in NYSE Arca Equities Rule 8.600(c)(3), will be widely
disseminated at least every 15 seconds during the Core Trading Session
by one or more major market data vendors.\24\ The dissemination of the
Portfolio Indicative Value, together with the Disclosed Portfolio, will
allow investors to determine the value of the underlying portfolio of
the Fund on a daily basis and will provide a close estimate of that
value throughout the trading day.
---------------------------------------------------------------------------

    \24\ Currently, it is the Exchange's understanding that several
major market data vendors widely disseminate Portfolio Indicative
Values taken from CTA or other data feeds.
---------------------------------------------------------------------------

    The intra-day, closing and settlement prices of the portfolio
securities and other Fund investments will also be readily available
from the national securities exchanges trading such securities,
automated quotation systems, published or other public sources, or on-
line information services such as Bloomberg or Reuters.
    Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies, distributions
and taxes is included in the Registration Statement. All terms relating
to the Fund that are referred to, but not defined in, this proposed
rule change are defined in the Registration Statement.
Trading Halts
    With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\25\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Equities
Rule 7.12 have been reached. Trading also may be halted because of
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities and/or the
financial instruments comprising the Disclosed Portfolio of the Fund;
or (2) whether other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market are present. Trading in
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D),
which sets forth circumstances under which Shares of the Fund may be
halted.
---------------------------------------------------------------------------

    \25\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

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 4:00 a.m. to 8:00 p.m. Eastern time in
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late
Trading Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price
variation (``MPV'') for quoting and entry of orders in equity
securities traded on the NYSE Arca Marketplace is $0.01, with the
exception of securities that are priced less than $1.00 for which the
MPV for order entry is $0.0001.
Surveillance
    The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\26\ 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 applicable federal securities laws.
---------------------------------------------------------------------------

    \26\ FINRA surveils trading on the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and

investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations. FINRA, on
behalf of the Exchange, will communicate as needed regarding trading in
the Shares with other markets and other entities that are members of
the Intermarket Surveillance Group (``ISG'') and FINRA, on behalf of
the Exchange, may obtain trading information regarding trading in the
Shares from such markets and other entities. In addition, the Exchange
may obtain information regarding trading in the Shares from markets and
other entities that are members of ISG or with which the Exchange has
in place a comprehensive surveillance sharing agreement.\27\
---------------------------------------------------------------------------

    \27\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') 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 ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated Portfolio Indicative Value will not be
calculated or publicly disseminated; (4) how information regarding the
Portfolio Indicative Value is disseminated; (5) the requirement that
ETP Holders deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
and (6) trading information.
    In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m. Eastern time each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \28\ 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.
---------------------------------------------------------------------------

    \28\ 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 Shares will be subject to the existing trading
surveillances, administered by FINRA on behalf of the Exchange, which
are designed to detect violations of Exchange rules and applicable
federal securities laws. The Manager is not registered as a broker-
dealer but it is affiliated with a broker-dealer and has represented
that it has implemented a fire wall with respect to its broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the portfolio.
    FINRA, on behalf of the Exchange, 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.
    The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. Moreover, the Portfolio
Indicative Value will be widely disseminated at least every 15 seconds
during the Core Trading Session by one or more major market data
vendors. On each business day, before commencement of trading in Shares
on a national securities exchange, the Fund will disclose on its Web
site the identities and quantities of the Fund's portfolio holdings
that will form the basis for the Fund's calculation of NAV at the end
of that business day. The intra-day, closing and settlement prices of
the portfolio securities and other Fund investments will also be
readily available from the national securities exchanges trading such
securities, automated quotation systems, published or other public
sources, or on-line information services such as Bloomberg or Reuters.
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, and
quotation and last sale information will be available via the CTA high-
speed line. The Web site for the Fund will include the prospectus for
the Fund and additional data relating to NAV and other applicable
quantitative information. Moreover, prior to the commencement of
trading, the Exchange will inform its ETP Holders in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares. Trading in Shares of the Fund will be halted if the
circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been
reached or because of market conditions or for reasons that, in the
view of the Exchange, make trading in the Shares inadvisable, 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
the Fund may be halted. In addition, as noted above, investors will
have ready access to information regarding the Fund's holdings, the
Portfolio Indicative Value, the Disclosed Portfolio, and quotation and
last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. Under normal market conditions, at least
80% of the Fund's net assets will be invested in securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
As noted above, the Shares will be subject to the existing trading
surveillances, administered by FINRA on behalf of the Exchange, which
are designed to detect violations of Exchange rules and applicable
federal securities laws and FINRA, on behalf of the Exchange, may
obtain information via ISG from other exchanges that are members of ISG
or with which the

Exchange has entered into a comprehensive surveillance sharing
agreement. In addition, as noted above, investors will have ready
access to information regarding the Fund's holdings, the Portfolio
Indicative Value and quotation and last sale information for the
Shares. The Fund may invest up to 15% of its net assets in illiquid
securities (calculated at the time of investment), including Rule 144A
securities deemed illiquid by the Manager. The Fund expects that no
more than 20% of the value of the Fund's net assets will be invested in
derivative instruments as discussed above. Such derivative investments
will be consistent with the Fund's investment goal and will not be used
to enhance leverage.

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

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

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

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

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date 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<EMAIL_ADDRESS>Please include
File Number SR-NYSEArca-2013-86 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2013-86. 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 Section, 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 will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2013-86 and should
be submitted on or before October 7, 2013.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22397 Filed 9-13-13; 8:45 am]
BILLING CODE 8011-01-P