[Federal Register Volume 79, Number 249 (Tuesday, December 30, 2014)]
[Notices]
[Pages 78524-78530]
[FR Doc No: 2014-30440]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73914; File No. SR-NYSEArca-2014-100]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings to Determine Whether to Approve or Disapprove Proposed Rule
Change Relating to Listing and Trading of Shares of the SPDR SSgA
Global Managed Volatility ETF under NYSE Arca Equities Rule 8.600

December 22, 2014.

I. Introduction

    On September 5, 2014, NYSE Arca, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade
shares (``Shares'') of the SPDR SSgA Global Managed Volatility ETF
(``Fund'') under NYSE Arca Equities Rule 8.600. The proposed rule
change was published for comment in the Federal Register on September
24, 2014.\3\ On November 4, 2014, pursuant to Section 19(b)(2) of the
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ The Commission has received no comment letters
on the proposed rule change. This Order institutes proceedings under
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or
disapprove the proposed rule change.
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    \1\ 15 U.S. C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73141 (Sept. 18,
2014), 79 FR 57161 (``Notice'').
    \4\ 15 U.S. C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 73515, 79 FR 66758
(Nov. 10, 2014). The Commission designated a longer period within
which to take action on the proposed rule change and designated
December 23, 2014, as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
    \6\ 15 U.S. C. 78s(b)(2)(B).
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II. Description of the Proposal

A. Generally

    The Exchange proposes to list and trade Shares of the Fund under
NYSE Arca Equities Rule 8.600, which governs the listing and trading of
Managed Fund Shares. The Shares will be offered by SSgA Active ETF
Trust (``Trust''), which is organized as a Massachusetts business trust
and is registered with the Commission as an open-end management
investment company.\7\ SSgA Funds Management, Inc. will serve as the
investment adviser to the Fund (``Adviser''). State Street Global
Markets, LLC will be the principal underwriter and distributor of the
Fund's Shares, and State Street Bank and Trust Company (``Custodian''
or ``Transfer Agent'') will serve as administrator, custodian, and
transfer agent for the Fund. The Exchange represents that the Adviser
is not a registered broker-dealer but is affiliated with a broker-
dealer and has implemented a ``fire wall'' with respect to such broker-
dealer regarding access to information concerning the composition of or
changes to the Fund's portfolio.\8\ The Exchange further represents
that, in the event (a) the Adviser or any sub-

adviser becomes registered as a broker-dealer or 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, the Adviser
or any new adviser or sub-adviser, as the case may be, will implement a
fire wall with respect to its relevant personnel or broker-dealer
affiliate, as applicable, regarding access to information concerning
the composition of or changes to the portfolio, and will be subject to
procedures designed to prevent the use and dissemination of material,
non-public information regarding the portfolio.\9\
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    \7\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). According to the Exchange, on September 20,
2012, the Trust filed with the Commission an amendment to its
registration statement on Form N-1A under the Securities Act of 1933
(``Securities Act'') and under the 1940 Act relating to the Fund
(File Nos. 333-173276 and 811-22542) (``Registration Statement'').
In addition, the Exchange states that the Trust has obtained from
the Commission certain exemptive relief under the 1940 Act. See
Investment Company Act Release No. 29524 (Dec. 13, 2010) (File No.
812-13487).
    \8\ 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 or changes to the investment company portfolio.
    \9\ The Exchange represents that an investment adviser to an
open-end fund is required to be registered under the Investment
Advisers Act of 1940 (``Advisers Act''). As a result, the Adviser
and 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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B. The Exchange's Description of the Fund

    The statements made below are representations and assertions by the
Exchange concerning the Fund.
1. Principal Investment Policies
    According to the Exchange, the Fund will seek to provide
competitive, long-term returns while maintaining low, long-term
volatility relative to the broad global market. Under normal
circumstances,\10\ the Fund will invest all of its assets in the SSgA
Global Managed Volatility Portfolio (``Portfolio''), a separate series
of the SSgA Master Trust with an identical investment objective as the
Fund. As a result, the Fund will invest indirectly through the
Portfolio.
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    \10\ The term ``under normal circumstances'' 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.
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    The Adviser will utilize a proprietary quantitative investment
process to select a portfolio of exchange-listed and traded equity
securities that the Adviser believes will exhibit low volatility and
provide competitive, long-term returns relative to the broad global
market.\11\ The Portfolio will invest its assets in both U.S. and
foreign investments. The Portfolio will generally invest at least 80%
of its net assets in global equity securities and at least 30% of its
net assets in global equity securities of issuers economically tied to
countries other than the United States. The Portfolio will generally
hold securities of issuers economically tied to at least three
countries, including the United States. The Portfolio may purchase
exchange-listed and traded common stocks and preferred securities of
U.S. and foreign corporations.\12\ The Adviser expects to favor
securities with low exposure to market risk factors and low security-
specific risk. The Adviser will consider market risk factors to
include, among others, a security's size, momentum, value, liquidity,
leverage, and growth. While the Adviser will attempt to manage the
Fund's volatility exposure to stabilize performance, there can be no
guarantee that the Fund will reach its target volatility. Additionally,
the Adviser will implement risk constraints at the security, industry,
size exposure, and sector levels. Through this quantitative process of
security selection and portfolio diversification, the Adviser expects
that the Portfolio will be subject to a low level of absolute risk (as
defined by standard deviation of returns) and thus should exhibit low
volatility over the long term.
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    \11\ Volatility is a statistical measurement of the magnitude of
up and down fluctuations in the value of a financial instrument or
index over time. Volatility may result in rapid and dramatic price
swings.
    \12\ Investments in common stock of foreign corporations may
also be in the form of American Depositary Receipts (``ADRs''),
Global Depositary Receipts (``GDRs'') and European Depositary
Receipts (``EDRs'') (collectively ``Depositary Receipts'').
Depositary Receipts are receipts, typically issued by a bank or
trust company, which evidence ownership of underlying securities
issued by a foreign corporation. For ADRs, the depository is
typically a U.S. financial institution and the underlying securities
are issued by a foreign issuer. For other Depositary Receipts, the
depository may be a foreign or a U.S. entity, and the underlying
securities may have a foreign or a U.S. issuer. Depositary Receipts
will not necessarily be denominated in the same currency as their
underlying securities. Generally, ADRs, in registered form, are
designed for use in the U.S. securities market, and EDRs, in bearer
form, are designated for use in European securities markets. GDRs
are tradable both in the United States and in Europe and are
designed for use throughout the world. The Portfolio may invest in
unsponsored Depositary Receipts. The issuers of unsponsored
Depositary Receipts are not obligated to disclose material
information in the United States, and, therefore, there may be less
information available regarding such issuers and there may not be a
correlation between such information and the market value of the
Depositary Receipts. Unsponsored Depositary Receipts will not exceed
10% of the Fund's net assets.
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    The Fund is intended to be managed in a ``master-feeder''
structure, under which the Fund will invest substantially all of its
assets in the Portfolio (i.e., a ``master fund''), which is a separate
1940 Act-registered mutual fund that has an identical investment
objective.\13\ As a result, the Fund (i.e., the ``feeder fund'') will
have an indirect interest in all of the securities owned by the
corresponding Portfolio. Because of this indirect interest, the Fund's
investment returns should be the same as those of the Portfolio,
adjusted for the expenses of the Fund. In extraordinary instances, the
Fund reserves the right to make direct investments in securities.
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    \13\ The Adviser represents that, in general, the Portfolio
(i.e., the master fund) will be where investments will be held and
that these investments will primarily consist of equity securities
and may, to a lesser extent, include other investments as described
under ``Non-Principal Investment Policies'' below. The Fund (i.e.,
the feeder fund) will invest in shares of the Portfolio and will not
invest in investments described under ``Non-Principal Investment
Policies,'' but may be exposed to such investments by means of the
Fund's investment in shares of the Portfolio. In extraordinary
instances, the Fund reserves the right to make direct investments in
equity securities and other investments.
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    The Adviser will manage the investments of the Portfolio. Under the
master-feeder arrangement, and pursuant to the investment advisory
agreement between the Adviser and the Trust, investment advisory fees
charged at the Portfolio level will be deducted from the advisory fees
charged at the Fund level. This arrangement avoids a ``layering'' of
fees, i.e., the Fund's total annual operating expenses would be no
higher as a result of investing in a master-feeder arrangement than
they would be if the Fund pursued its investment objectives directly.
In addition, the Fund may discontinue investing through the master-
feeder arrangement and pursue its investment objectives directly if the
Fund's Board of Trustees (``Board'') determines that doing so would be
in the best interests of shareholders.
    The exchange-listed and traded equity securities in which the
Portfolio would be permitted to invest will be limited to: (1) equity
securities that trade in markets that are members of the Intermarket
Surveillance Group (``ISG'') or are parties to a comprehensive
surveillance sharing agreement (``CSSA'') with the Exchange; or (2)
``Actively-Traded Securities'' as defined

in Regulation M (``Reg M'') under the Act that are traded on U.S. and
non-U.S. exchanges with last sale reporting.\14\
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    \14\ The Exchange states that Rule 101 under Reg M defines
Actively-Traded Securities as securities that have an average daily
trading volume of at least $1 million and are issued by an issuer
whose common equity securities have a public float value of at least
$150 million. Rule 102 includes an analogous definition for
actively-traded reference securities.
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    The Portfolio and Fund do not intend to concentrate their
investments in any particular industry. The Portfolio and Fund will
look to the Global Industry Classification Standard (``GICS'') Level 3
(Industries) in making industry determinations.\15\
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    \15\ GICS classifications can be found on the Standard & Poor's
Web site at http://www.us.spindices.com/search/?query=gics+map.
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    The Portfolio may invest in exchange-traded preferred securities.
Preferred securities pay fixed or adjustable rate dividends to
investors and have ``preference'' over common stock in the payment of
dividends and the liquidation of a company's assets.
2. Non-Principal Investment Policies
    In certain situations or market conditions, in order to take
temporary defensive positions, the Fund may (either directly or through
the Portfolio) temporarily depart from its normal investment policies
and strategies, provided that the alternative is consistent with the
Fund's investment objective and is in the best interest of the Fund.
For example, the Fund may hold a higher than normal proportion of its
assets in cash in times of extreme market stress.
    According to the Registration Statement, in addition to the
principal investments described above, the Portfolio may invest its
remaining net assets in other investments, as described below. The
investment practices of the Portfolio are the same in all material
respects to those of the Fund.
    The Portfolio may invest in U.S. Government obligations. U.S.
Government obligations are a type of bond. U.S. Government obligations
include securities issued or guaranteed as to principal and interest by
the U.S. Government, its agencies, or instrumentalities.\16\
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    \16\ One type of U.S. Government obligation, U.S. Treasury
obligations, are backed by the full faith and credit of the U.S.
Treasury and differ only in their interest rates, maturities, and
times of issuance. U.S. Treasury bills have initial maturities of
one-year or less; U.S. Treasury notes have initial maturities of one
to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Other U.S. Government
obligations are issued or guaranteed by agencies or
instrumentalities of the U.S. Government including, but not limited
to, the Federal National Mortgage Association, the Government
National Mortgage Association (``Ginnie Mae''), the Small Business
Administration, the Federal Farm Credit Administration, the Federal
Home Loan Mortgage Corporation, the Federal Home Loan Banks, Banks
for Cooperatives (including the Central Bank for Cooperatives), the
Federal Land Banks, the Federal Intermediate Credit Banks, the
Tennessee Valley Authority, the Export-Import Bank of the United
States, the Commodity Credit Corporation, the Federal Financing
Bank, the National Credit Union Administration, and the Federal
Agricultural Mortgage Corporation. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities,
including, for example, Ginnie Mae pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury.
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    The Portfolio may purchase U.S. registered, dollar-denominated
bonds of foreign corporations, governments, agencies, and supra-
national entities.
    The Portfolio may invest in restricted securities. Restricted
securities are securities that are not registered under the Securities
Act, but which can be offered and sold to ``qualified institutional
buyers'' under Rule 144A under the Securities Act. When Rule 144A
restricted securities present an attractive investment opportunity and
meet other selection criteria, the Portfolio may make such investments
depending on the market that exists for the particular security. The
Board has delegated to the Adviser the responsibility for determining
the liquidity of Rule 144A restricted securities that the Portfolio may
invest in.\17\
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    \17\ In reaching liquidity decisions, the Adviser may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer).
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    The Portfolio may conduct foreign currency transactions on a spot
(i.e., cash) or forward basis (i.e., by entering into forward contracts
to purchase or sell foreign currencies).
    The Portfolio may invest in exchange-traded products (``ETPs''),
including exchange-traded funds (``ETFs'') registered under the 1940
Act; exchange traded commodity trusts; and exchange-traded notes.\18\
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    \18\ For purposes of this filing, ETPs include Investment
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3));
Index-Linked Securities (as described in NYSE Arca Equities Rule
5.2(j)(6)); Portfolio Depositary Receipts (as described in NYSE Arca
Equities Rule 8.100); Trust Issued Receipts (as described in NYSE
Arca Equities Rule 8.200); Commodity-Based Trust Shares (as
described in NYSE Arca Equities Rule 8.201); Currency Trust Shares
(as described in NYSE Arca Equities Rule 8.202); Commodity Index
Trust Shares (as described in NYSE Arca Equities Rule 8.203); and
Managed Fund Shares (as described in NYSE Arca Equities Rule 8.600).
The Portfolio may invest in ETFs managed by the Adviser. The Adviser
may receive management or other fees from the ETPs in which the
Portfolio or Fund may invest, as well as a management fee for
managing the Fund. The ETPs all will be listed and traded in the
U.S. on national securities exchanges.
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    In addition, the Portfolio may invest in the securities of other
investment companies, including money market funds and exchange-traded
closed-end funds, subject to applicable limitations under Section
12(d)(1) of the 1940 Act.\19\ The Portfolio may invest up to 25% of its
total assets in one or more ETPs that are qualified publicly traded
partnerships (``QPTPs'') and whose principal activities are the buying
and selling of commodities or options, futures, or forwards with
respect to commodities.\20\ A QPTP is an entity that is treated as a
partnership for federal income tax purposes, subject to certain
requirements. If such an ETP fails to qualify as a QPTP, the income
generated from the Portfolio's investment in the ETP may not comply
with certain income tests necessary for the Portfolio to qualify as a
regulated investment company under Subchapter M of the Internal Revenue
Code.
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    \19\ The Fund will invest substantially all of its assets in the
Portfolio. The Exchange states that, pursuant to Section 12(d)(1) of
the 1940 Act, a fund may invest in the securities of another
investment company (the ``acquired company'') provided that the
fund, immediately after such purchase or acquisition, does not own
in the aggregate: (i) More than 3% of the total outstanding voting
stock of the acquired company; (ii) securities issued by the
acquired company having an aggregate value in excess of 5% of the
value of the total assets of the fund; (iii) securities issued by
the acquired company and all other investment companies (other than
Treasury stock of the fund) having an aggregate value in excess of
10% of the value of the total assets of the fund; or (iv) in the
case of investment in a closed-end fund, more than 10% of the total
outstanding voting stock of the acquired company. The Fund may also
invest in the securities of other investment companies if such
securities are the only investment securities held by the Fund, such
as through a master-feeder arrangement. The Fund currently will
pursue its investment objective through such an arrangement. To the
extent allowed by law, regulation, the Fund's investment
restrictions, and the Trust's exemptive relief, the Fund may invest
its assets in securities of investment companies that are money
market funds, including those advised by the Adviser or otherwise
affiliated with the Adviser, in excess of the limits discussed
above.
    \20\ Examples of such entities are the PowerShares DB Energy
Fund, PowerShares DB Oil Fund, PowerShares DB Precious Metals Fund,
PowerShares DB Gold Fund, PowerShares DB Silver Fund, PowerShares DB
Base Metals Fund, and PowerShares DB Agriculture Fund, which are
listed and traded on the Exchange pursuant to NYSE Arca Equities
Rule 8.200.
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    The Portfolio may invest in exchange-traded shares of real estate
investment trusts (``REITs'').
    The Portfolio may invest in repurchase agreements with commercial
banks, brokers, or dealers to generate income from its excess cash
balances and to invest securities lending cash collateral. A repurchase
agreement is an agreement under which a fund acquires

a financial instrument (e.g., a security issued by the U.S. government
or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a seller, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase
agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the
period the instrument is held by a fund and is unrelated to the
interest rate on the underlying instrument.
    The Portfolio may enter into reverse repurchase agreements, which
involve the sale of securities with an agreement to repurchase the
securities at an agreed-upon price, date, and interest payment and have
the characteristics of borrowing. The securities purchased with the
funds obtained from the agreement and securities collateralizing the
agreement will have maturity dates no later than the repayment date.
Generally, the effect of such transactions is that a fund can recover
all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while in many
cases a fund is able to keep some of the interest income associated
with those securities.
    In addition to repurchase agreements, the Portfolio may invest in
short-term instruments, including money market instruments, (including
money market funds advised by the Adviser), cash, and cash equivalents,
on an ongoing basis to provide liquidity or for other reasons. Money
market instruments are generally short-term investments that may
include but are not limited to: (i) Shares of money market funds; (ii)
obligations issued or guaranteed by the U.S. government, its agencies,
or its instrumentalities (including government-sponsored enterprises);
(iii) negotiable certificates of deposit, bankers' acceptances, fixed
time deposits, and other obligations of U.S. and foreign banks
(including foreign branches) and similar institutions; (iv) commercial
paper rated at the date of purchase ``Prime-1'' by Moody's or ``A-1''
by Standard & Poor's, or if unrated, of comparable quality as
determined by the Adviser; \21\ (v) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at
the date of purchase of not more than 397 days and that satisfy the
rating requirements set forth in Rule 2a-7 under the 1940 Act; (vi)
short-term U.S. dollar-denominated obligations of foreign banks
(including U.S. branches) that, in the opinion of the Adviser, are of
comparable quality to obligations of U.S. banks which may be purchased
by the Portfolio; and (vii) variable rate demand notes.
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    \21\ Commercial paper consists of short-term, promissory notes
issued by banks, corporations, and other entities to finance short-
term credit needs. These securities generally are discounted but
sometimes may be interest bearing.
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3. Investment Restrictions
    According to the Registration Statement, the Portfolio and the Fund
will be classified as a ``non-diversified'' investment company under
the 1940 Act.\22\ A non-diversified classification means that the
Portfolio or Fund is not limited by the 1940 Act with regard to the
percentage of its assets that may be invested in the securities of a
single issuer. This means that the Portfolio or Fund may invest a
greater portion of its assets in the securities of a single issuer than
a diversified fund. Although the Portfolio and Fund will be non-
diversified for purposes of the 1940 Act, the Portfolio and Fund intend
to maintain the required level of diversification and otherwise conduct
its operations so as to qualify as a ``regulated investment company''
for purposes of the Internal Revenue Code of 1986.
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    \22\ A ``non-diversified company,'' as defined in Section
5(b)(2) of the 1940 Act, means any management company other than a
diversified company (as defined in Section 5(b)(1) of the 1940 Act).
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    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser. The Fund
will monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
    Neither the Fund nor the Portfolio will invest in options, futures
contracts, or swaps agreements. The Fund's and Portfolio's investments
will be consistent with its investment objective and will not be used
to enhance leverage.
4. 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.\23\ 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.
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    \23\ 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.
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    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, ETPs, and certain exchange-traded
securities underlying the Shares with other markets and other entities
that are members of the ISG, and FINRA, on behalf of the Exchange, may
obtain trading information regarding trading in the Shares, ETPs, and
certain exchange-traded securities underlying the Shares from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, ETPs, and certain
exchange-traded securities underlying 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.\24\ FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities held by the Fund reported to
FINRA's Trade Reporting and Compliance Engine.
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    \24\ 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.
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    In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
5. Information Sharing Procedures
    In the proposal, the Exchange states that the Commission requires
that, in designing a new derivative securities product, the self-
regulatory organization (``SRO'') determine that it has adequate

information sharing procedures to detect and deter potential trading
abuses,\25\ and the Exchange further states that in many, but not all,
cases, this requirement is met through listing standards that require
the securities underlying a new derivatives securities product to be
listed on markets that are members of the ISG or with which the
Exchange has a CSSA. For example, the generic listing standards for
options on closed-end funds holding foreign stocks, options on foreign
index ETFs, and foreign index options require information sharing
agreements for the underlying index or portfolio securities.\26\
Similarly, the listing standards for stock index warrants contain a
specific limitation on the percentage of foreign country securities
that are not traded on markets that are not subject to CSSAs.\27\
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    \25\ See, e.g., Securities Exchange Act Release No. 40761 (Dec.
8, 1998) (S7-13-98) (``New Products Release''). The New Products
Release was adopted in 1998 to expand the scope of SRO matters that
do not constitute proposed rule changes in response to the need for
flexibility in regulating new derivative securities products by
developing streamlined filing procedures to ease the SROs'
regulatory burdens in many circumstances.
    \26\ See, e.g., NYSE Arca Options Rule 5.3(e) (options on
international closed end funds) (requiring the Exchange to have a
market information sharing agreement with the primary exchange for
each of the securities held by the fund or that such fund be
classified as a diversified fund under Section 5(b) of the 1940 Act
and that securities of the fund be issued by issuers in five or more
countries); NYSE Arca Options Rule 5.3(g) (options on ETFs)
(requiring that non-U.S. component securities of the underlying
index or portfolio that are not subject to CSSAs not, in the
aggregate, represent more than 50% of the weight of the index or
portfolio; that component securities for which the primary market is
in any one country that is not subject to a CSSA not represent 20%
or more of the index weight; and that component securities for which
the primary market is in any two countries not subject to CSSAs not
represent 33% or more of the index weight); NYSE Arca Options Rule
5.12 (requiring that non-U.S. component securities of the index not
subject to CSSAs not, in the aggregate, represent more than 20% of
the index weight).
    \27\ See, e.g., NYSE Arca Equities Rule 8.3 (a)(7) (Listing of
Currency and Index Warrants) (Foreign Country Securities or American
Depository Receipts thereon that: (A) Are not subject to a
comprehensive surveillance agreement, and (B) have less than 50% of
their global trading volume (in dollar value) within the United
States, shall not, in the aggregate, represent more than 20% of the
weight of the index, unless such index is otherwise approved for
warrant or option trading). See, e.g., Securities Exchange Act
Release Nos. 31121 (Aug. 28, 1992) (SR-PSE-92-09 and SR-PSE-92-10)
(order granting accelerated approval of proposed rule changes
relating to listing index warrants based on the FT-SE Eurotrack 200
Index and the Eurotop 100 Index); 30462 (Mar. 11, 1992) (SR-Amex 91-
10, SR-NYSE-91-13, SR-CBOE-91-09, SR-CBOE-91-13) (order approving
proposed rule changes relating to listing of index options and index
warrants based on the FT-SE Eurotrack 200 Index); 28544 (Oct. 17,
1990) (SR-Amex-90-08; SR-NYSE-90-36; SR-PHLX-90-25; SR-PSE-90-18)
(order approving proposed rule changes relating to the listing of
index warrants based on the CAC-40 Index).
---------------------------------------------------------------------------

    However, the Exchange points out that the generic listing standards
for ETFs based on foreign indexes in NYSE Arca Equities Rule 5.2(j)(3)
(Investment Company Units), and for closed-end funds holding foreign
securities, do not include specific CSSA requirements.\28\
Additionally, the Exchange argues that the American Stock Exchange and
the New York Stock Exchange have proposed, and the Commission has
approved, the listing or trading pursuant to unlisted trading
privileges of shares of many foreign-index-based ETFs that hold
securities listed and traded on markets with which the ETF-listing
exchange did not have CSSAs.\29\
---------------------------------------------------------------------------

    \28\ See, e.g., Securities Exchange Act Release No. 54739 (Nov.
9, 2006) (SR-Amex-2006-78) (stating that CSSAs are not required in
connection with listing of ETFs under the generic listing criteria
of American Stock Exchange Rule 1000A given that the generic listing
criteria otherwise require minimum levels of liquidity,
concentration, and pricing transparency for index components).
    \29\ See, e.g., Securities Exchange Act Release Nos. 42748 (May
2, 2000), 65 FR 30155 (May 10, 2000) (SR-Amex-98-49) (order
approving listing and trading of six series of World Equity
Benchmark Shares based on foreign stock indexes); 42786 (May 15,
2000), 65 FR 33586 (May 24, 2000) (SR-Amex-99-49) (order partially
approving listing and trading of series of the iShares Trust based
on foreign stock indexes); 44900 (Oct. 25, 2001), 66 FR 55712 (Nov.
2, 2001) (SR-Amex-2001-45) (order approving listing and trading of
seven series of funds of iShares, Inc. based on foreign indexes);
36947 (Mar. 8, 1996) (SR-Amex-95-43) (order approving listing of
Index Fund Shares based on 18 foreign indexes); 52178 (July 29,
2005) (SR-NYSE-2005-41 (order approving listing of iShares MSCI EAFE
Growth and iShares MSCI EAFE Value Funds); 52816 (Nov. 21, 2005)
(SR-NYSE-2005-70) (order approving listing of iShares MSCI Index
Funds). A list of ISG members is available at https://www.isgportal.org/isgPortal/public/members.htm.
---------------------------------------------------------------------------

    The Exchange believes that its ability to monitor trading in the
Fund would not be impacted by the absence of CSSAs with, or ISG
membership of, markets on which ``Actively-Traded Securities'' (as
defined in Rule 101(c)(1) of Reg M) \30\ are listed or traded. The
Exchange states that many established and reputable markets are not
members of ISG.\31\ The Exchange asserts that such markets have price
transparency, regulatory surveillance, liquidity, and last-sale
information, as well as numerous other regulatory requirements
traditionally associated with national securities exchanges in the
United States. However, the Exchange notes that, at times, local laws,
such as privacy laws in certain European nations, preclude markets from
becoming ISG members or would result in any CSSA entered into being
severely limited with respect to the information that can be shared.
The Exchange further notes that, while some exchanges in the European
Union may not be ISG members, those exchanges have the obligation to
share trading data with their national regulator, and these national
regulators are parties to sharing agreements with each other.
Therefore, while there may be instances where the exchanges in the
European Union may not directly share trading data, the Exchange argues
that regulators may share information with each other when necessary,
to deter and detect market manipulation.
---------------------------------------------------------------------------

    \30\ 17 CFR 242.101(c)(1).
    \31\ Non-ISG member exchanges include: Abu Dhabi Securities
Exchange; Athens Exchange; BM&FBOVESPA S.A.; BME Spanish Exchanges;
Bolsa Mexicana de Valores; Bourse de Luxembourg; Deutsche B[ouml]rse
AG; Euronext Brussels N.V./S.A.; Euronext Lisbon--Sociedade Gestora
de Mercados Regulamentados, S.A.; Euronext Paris S.A.; Indonesia
Stock Exchange; Irish Stock Exchange; Johannesburg Stock Exchange;
Moscow Exchange; Philippine Stock Exchange; Saudi Stock Exchange;
Shanghai Futures Exchange; Shenzhen Stock Exchange; SIX Swiss
Exchange; Stock Exchange of Thailand; Taiwan Futures Exchange;
Taiwan Stock Exchange; Tel-Aviv Stock Exchange; The Egyptian
Exchange; Wiener B[ouml]rse AG; and Zhengzhou Commodity Exchange.
---------------------------------------------------------------------------

    The Exchange further states that, as the global marketplace has
evolved and become more interconnected, an issuer's securities may be
traded on multiple markets. For example, thanks to harmonized European
legislation, and, in particular, the Prospectus Directive of the
Markets in Financial Instruments Directive (``MiFID''),\32\ issuers
wishing to raise capital in the European Union may take advantage of
``passporting'' their prospectus, which allows an issuer to use one
prospectus and raise capital across the European Economic Area
(EEA).\33\ The Exchange notes that one of the consequences of this
single prospectus is that an issuer's securities can and often do trade
across several markets in the EEA, some of which may be ISG members and
others may not.
---------------------------------------------------------------------------

    \32\ Information regarding the Prospectus Directive is available
from the European Commission at http://ec.europa.eu/internal_market/securities/prospectus/index_en.htm.
    \33\ See The Forum of European Securities Commissions [FESCO], A
``European Passport'' For Issuers at 4-8, Fesco/99-098e (May 10,
2000), available at http://www.esma.europa.eu/system/files/99_098e.PDF.
---------------------------------------------------------------------------

    Additionally, MiFID, introduced in 2007, contains a transaction
reporting requirement, under which various markets and trading firms
are required to submit transaction reports to an ``Approved Reporting
Mechanism.'' MiFID also makes it possible for any transferable security
that has been admitted to trading on a regulated market of an ``EU
Member State'' to be admitted to trading on other Member States'
regulated markets or on any other trading venues. As a result, it is
difficult to predict where the liquidity in any particular security
will primarily

reside. Moreover, the MiFID best execution requirement \34\ may require
an executing broker to trade on markets that are not ISG members. The
Exchange argues that these developments would make it challenging for
the Fund to limit the trading of foreign securities on markets that are
members of ISG or with which the Exchange has a CSSA.
---------------------------------------------------------------------------

    \34\ See generally The Committee of European Securities
Regulators [CESR], Best Execution Under MiFID; Questions and
Answers, CESR/07-320 (May 2007), available at http://www.cmvm.pt/CMVM/Cooperacao%20Internacional/Docs_ESMA_Cesr/Documents/07_320.pdf
(MiFID's best execution regime requires investment firms to take all
reasonable steps to obtain the best possible result for their
clients, taking into account price, costs, speed, likelihood of
execution and settlement, size, nature or any other consideration
relevant to order execution. CESR considers this requirement to be
of a general and overarching nature.); see also The Committee of
European Securities Regulators (CESR), Best Execution Under MiFID;
Public Consultation, CESR/07-050b (Feb. 2007), available at http://www.esma.europa.eu/system/files/07_050b.pdf; Financial Services
Authority (FSA), Implementing MiFID's Best Execution Requirement
(May 2006), available at http://www.fsa.gov.uk/pubs/discussion/dp06_03.pdf.
---------------------------------------------------------------------------

    In addition, the Exchange believes that it is not necessary to its
ability to detect and deter manipulation in Shares of the Fund for
equity securities in which the Fund invests to be listed and traded on
markets that are members of ISG or with which the Exchange has a CSSA,
provided that such equity securities are Actively-Traded Securities. As
the Commission noted in adopting Reg M, Actively-Traded Securities are
less likely to be manipulated because the costs of such manipulation is
high, aberrations in price are more likely to be discovered and quickly
corrected, and such securities are generally traded on markets with
high levels of transparency and surveillance. For this reason, the
Exchange asserts that Actively-Traded Securities were excepted from the
prophylactic provisions of Rule 101 of Reg M \35\ and, thus, would not
be subject to the restrictions imposed upon distribution participants
or issuers and selling security holders during the restricted period,
as those terms are defined in Reg M.
---------------------------------------------------------------------------

    \35\ Rule 102 similarly excepts from its provisions actively-
traded reference securities.
---------------------------------------------------------------------------

    The Exchange argues that, as the Commission recognized in adopting
Reg M, the detection of manipulation of Actively-Traded Securities is
aided substantially by the widespread coverage by analysts, news
outlets, investors, and other market participants around the world of
these securities.\36\ This close scrutiny and increased transparency of
the secondary markets means that unusual market activity is likely to
be observed and quickly corrected.
---------------------------------------------------------------------------

    \36\ See Release Nos. 33-7375; 34-38067; IC 22412: International
Series Release Nos. 1039; File No. S7-11-96, 62 FR 520 (Jan. 3,
1997) (Anti-manipulation Rules concerning Securities Offerings), at
62 FR 527.
---------------------------------------------------------------------------

    Further, that Exchange argues that, as also noted by the Commission
in adopting Reg M, because the costs associated with manipulating an
Actively-Traded Security will be higher, the likelihood of manipulation
of Actively-Traded Securities is low. This potential for improper
activity in an Actively-Traded Security to be used to manipulate, or
otherwise impact, trading in the Shares of the Fund is further diluted
by the fact that a single Actively-Traded Security represents only part
of the value of the Fund. This limited impact is guaranteed by
diversification requirements applicable to the Fund in the Exchange's
listing rules and the Internal Revenue Code, which requires certain
diversification to qualify as a regulated investment company
(``RIC'').\37\
---------------------------------------------------------------------------

    \37\ See 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Exchange also notes that other provisions of the securities
laws encourage disparate treatment for active, large capitalization
securities. In its no action letter \38\ to FINRA in 2012 regarding
Rule 15c3-1 under the Act (``Net Capital Rule''),\39\ the Commission
expanded the universe of foreign equity securities that were deemed to
have a ready market.\40\ Similar to the exemptions afforded Actively-
Traded Securities, the beneficial attributes of liquidity and size were
once again acknowledged and formed the basis for the Commission's
interpretation of this fundamental customer protection provision of the
securities laws.\41\
---------------------------------------------------------------------------

    \38\ See Letter from Michael A. Macchiaroli, Associate Director,
Division of Trading and Markets (``Division''), Commission, to Grace
B. Vogel, Executive Vice President, FINRA (November 28, 2012) (the
``Ready Market No-Action Letter'') available at http://www.sec.gov/divisions/marketreg/mr-noaction/2012/finra-112812.pdf.
    \39\ The primary purpose of the Net Capital Rule is to protect
customers and other market participants from broker-dealer failures
by ensuring that broker-dealers maintain sufficient liquid assets to
satisfy their liabilities and to provide a cushion in excess of
liabilities to cover select risks in the event of liquidation. The
Net Capital Rule enhances investor/customer confidence in the
financial integrity of broker-dealers and the securities market.
    \40\ Paragraph (c)(11)(i) of the Net Capital Rule states that
the term ``ready market'' shall include ``a market in which there
exists independent bona fide offers to buy and sell so that a price
reasonably related to the last sales price or current bona fide
competitive bid and offer quotations can be determined for a
particular security almost instantaneously and where payment will be
received in settlement of a sale at such price within a relatively
short time conforming to trade custom.'' The ready market
designation implies that for the purposes of broker-dealer net
capital calculations, securities with such a designation held by the
broker-dealer would be subject to a 15% haircut as opposed to a 100%
haircut for non-marketable securities.
    \41\ In the Ready Market No Action Letter, the Division stated
that it would not recommend enforcement action to the Commission if
a broker-dealer treats an equity security of a foreign issuer as
having a ready market under Rule 15c3-1(c)(11) and subject to
haircuts under paragraph (c)(2)(vi)(J), if the following conditions
are met: (1) The security is listed for trading on a foreign
securities exchange located within a country that is recognized on
the FTSE World Index, where the security has been trading on that
exchange for at least the previous 90 days; (2) Daily quotations for
both bid and ask or last sale prices for security provided by the
foreign securities exchange on which the security is traded are
continuously available to broker-dealers in the United States,
through an electronic quotation system; (3) The median daily trading
volume (calculated over the preceding 20 business day period) of the
foreign equity security on the foreign securities exchange on which
the security is traded is either at least 100,000 shares or
$500,000; and (4) The aggregate unrestricted market capitalization
in shares of such security exceeds $500 million over each of the
preceding 10 business days.
---------------------------------------------------------------------------

    The Exchange asserts that permitting the Fund to invest in
Actively-Traded Securities, even if they trade on markets that are not
member of ISG, will allow investors to benefit from the Fund's
portfolio managers' expertise as well as potentially reducing costs to
shareholders. In addition, the Exchange asserts that investing directly
in Actively-Traded Securities would, in many cases, be a less expensive
alternative than other investments used by the Fund's portfolio
managers when they are restricted to trading in markets that are
members of ISG or with which the Exchange has a CSSA. For example,
investing in international index ETFs \42\ is a common way fund
managers provide investors with exposure to regions whose markets are
not members of ISG. These international index ETFs can be a less
efficient and less targeted proxy for direct investment in foreign
security components of those indexes. The fees imbedded in such ETFs
would be borne directly by a fund and indirectly by investors in shares
of a fund. Thus, the Exchange concludes that the ability of the Fund to
directly invest in Actively-Traded Securities listed or traded on
markets that may not be members of ISG or with which the Exchange has a
CSSA would be a less expensive alternative for the Fund's portfolio
managers, which lower costs to the benefit of shareholders of the Fund.
---------------------------------------------------------------------------

    \42\ As noted above, international index ETFs are listed under
NYSE Arca Equities Rule 5.2(j)(3), which does not include a
requirement that index components trade on markets that are members
of ISG or with which the Exchange has a CSSA.

---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2014-100 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \43\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change, as discussed below.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described below, the Commission seeks and encourages
interested persons to provide comments on the proposed rule change.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\44\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \45\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78s(b)(2)(B).
    \45\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As discussed above, as part of the Fund's principal investment
strategy, the exchange-listed and traded equity securities in which the
Portfolio would be permitted to invest would include ``Actively-Traded
Securities,'' as defined in Reg M under the Act, that are traded on
U.S. and non-U.S. exchanges with last sale reporting.\46\ The proposed
rule change would permit the listing and trading of an actively managed
ETF based on a portfolio of equity securities that may trade on
exchanges or markets that are neither members of ISG nor parties to a
CSSA with the Exchange, and the Commission believes that proceedings
are appropriate to consider, among other matters, whether the Exchange
would be able to obtain the information necessary to detect and deter
market manipulation, illegal trading, and other abuses involving the
new derivative securities product, including trading in the new
derivative securities product and its underlying securities.
---------------------------------------------------------------------------

    \46\ See supra note 14.
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\47\
---------------------------------------------------------------------------

    \47\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by January 20, 2015. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
February 3, 2015.
    The Commission asks that commenters address the sufficiency of the
Exchange's statements in the proposal, in addition to any other
comments they may wish to submit about the proposed rule change. In
particular, the Commission seeks comment on the statements of the
Exchange contained in the Notice,\48\ including the statements made in
connection with information sharing procedures with respect to certain
non-U.S. equity security holdings, the Exchange's arguments regarding
the applicability of the definition of ``Actively-Traded Securities''
under Reg M with respect to the securities in which an ETF may invest,
and any other issues raised by the proposed rule change.
---------------------------------------------------------------------------

    \48\ See Notice, supra note 3.
---------------------------------------------------------------------------

    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-2014-100 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 Numbers SR-NYSEArca-2014-100. 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 these filings 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-2014-100 and should
be submitted on or before January 20, 2015. Rebuttal comments should be
submitted by February 3, 2015.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\49\
---------------------------------------------------------------------------

    \49\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2014-30440 Filed 12-29-14; 8:45 am]
BILLING CODE 8011-01-P