[Federal Register Volume 79, Number 87 (Tuesday, May 6, 2014)]
[Notices]
[Pages 25923-25933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-10360]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72068; File No. SR-NYSEArca-2014-47]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change, as Modified by Amendment No. 1, Proposing To
List and Trade Shares of Fidelity[supreg] Corporate Bond ETF Managed
Shares Under NYSE Arca Equities Rule 8.600
May 1, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on April 16, 2014, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. On April 30, 2014, the Exchange filed Amendment No. 1 to
the proposed rule change, which amended and replaced the proposed rule
change in its entirety.\3\ 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.
\3\ See infra note 7.
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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''):
Fidelity[supreg] Corporate Bond 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade the shares (``Shares'') of
the following under NYSE Arca Equities Rule 8.600, which governs the
listing and trading of Managed Fund Shares: \4\ Fidelity Corporate Bond
ETF (the ``Fund'').\5\ The Fund will be a fund of Fidelity Merrimack
Street Trust (``Trust''), a Massachusetts business trust.\6\
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\4\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index or
combination thereof.
\5\ The Commission has previously approved the listing and
trading on the Exchange of other 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); 60981 (November 10, 2009), 74 FR
59594 (November 18, 2009) (SR-NYSEArca-2009-79) (order approving
Exchange listing and trading of five fixed income funds of the PIMCO
ETF Trust); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012)
(SR-NYSEArca-2011-95) (order approving Exchange listing and trading
of PIMCO Total Return ETF); 66670 (March 28, 2012), 77 FR 20087
(April 3, 2012) (SR-NYSEArca-2012-09) (order approving Exchange
listing and trading of PIMCO Global Advantage Inflation-Linked Bond
Strategy Fund).
\6\ The Trust is registered under the 1940 Act. On April 17,
2014, the Trust filed with the Commission an amendment to its
registration statement on Form N-1A under the Securities Act of 1933
(15 U.S.C. 77a) (``1933 Act'') and the 1940 Act relating to the Fund
(File Nos. 333-186372 and 811-22796) (``Registration Statement'').
The description of the operation of the Trust and the Fund herein is
based, in part, on the Registration Statement. In addition, the
Commission has issued an order granting certain exemptive relief to
the Trust under the 1940 Act. See Investment Company Act Release No.
30513 (May 10, 2013) (``Exemptive Order'') (File No. 812-14104).
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Fidelity Management & Research Company (``FMR'') will be the Fund's
manager (``Manager''). Fidelity Investments Money Management, Inc.
(``FIMM'') and other investment advisers, as described below, will
serve as sub-advisers for the Fund (``Sub-Advisers''). FIMM will have
day-to-day responsibility for choosing investments for the Fund. FIMM
is an affiliate of FMR. Other investment advisers, which also are
affiliates of FMR, will assist FMR with foreign investments, including
Fidelity Management & Research (U.K.) Inc. (``FMR U.K.''), Fidelity
Management & Research (Hong Kong) Limited (``FMR H.K.''), and Fidelity
Management & Research (Japan) Inc. (``FMR Japan''). Fidelity
Distributors Corporation (``FDC'') will be the distributor for the
Fund's Shares.\7\
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\7\ This Amendment No. 1 to SR-NYSEArca-2014-47 replaces SR-
NYSEArca-2014-47 as originally filed and supersedes such filing in
its entirety.
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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 will erect a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition and/or
changes to such investment company portfolio.\8\ In addition,
Commentary .06 further requires that personnel who make decisions on
the open-end fund's portfolio composition must be subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the open-end fund's portfolio. The Manager and
the Sub-Advisers are not broker-dealers but are affiliated with one or
more broker-dealers and have implemented a fire wall with respect to
[[Page 25924]]
such broker-dealers regarding access to information concerning the
composition and/or changes to the Fund's portfolio, and will be subject
to procedures designed to prevent the use and dissemination of material
non-public information regarding the Fund's portfolio.
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\8\ 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 the Sub-Advisers, and their
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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In the event (a) the Manager or any of the Sub-Advisers become
registered as a broker-dealer or become 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.
Fidelity Corporate Bond ETF
According to the Registration Statement, the Fund will seek a high
level of current income.
According to the Registration Statement, FMR normally \9\ will
invest at least 80% of assets in investment-grade corporate bonds and
other corporate debt securities.\10\
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\9\ The term ``normally'' as used herein includes, but is not
limited to, the absence of adverse market, economic, political or
other conditions, including extreme volatility or trading halts in
the fixed income 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. According to the Registration Statement, however, the
Fund reserves the right to invest without limitation in investment-
grade money market or short-term debt instruments for temporary,
defensive purposes.
\10\ According to the Registration Statement, investment-grade
debt securities include all types of debt instruments, including
corporate debt securities, that are of medium and high-quality. An
investment-grade rating means the security or issuer is rated
investment-grade by a credit rating agency registered as a
nationally recognized statistical rating organization (``NRSRO'')
with the Commission (for example, Moody's Investors Service, Inc.),
or is unrated but considered to be of equivalent quality by the
Fund's Manager or Sub-Advisers.
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According to the Registration Statement, corporate debt securities
are bonds and other debt securities issued by corporations and other
business structures. According to the Manager, corporate debt
securities include loans \11\, loan participations and loan
assignments, structured securities,\12\ repurchase agreements with
corporate counterparties,\13\ and other securities believed to have
corporate debt-like characteristics, including hybrid securities,\14\
which may offer characteristics similar to those of a bond security
such as stated maturity and preference over equity in bankruptcy.
According to the Registration Statement, the Fund may hold uninvested
cash or may invest it in cash equivalents such as money market
securities, or shares of short-term bond exchanged- traded funds
registered under the 1940 Act (``ETFs'') \15\ or mutual funds or money
market funds, including Fidelity central funds (special types of
investment vehicles created by Fidelity for use by the Fidelity funds
and other advisory clients).\16\
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\11\ According to the Registration Statement, the Fund may
acquire loans by buying an assignment of all or a portion of the
loan from a lender or by purchasing a loan participation from a
lender or other purchaser of a participation.
\12\ According to the Registration Statement, structured
securities (also called ``structured notes'') are derivative debt
securities, the interest rate on or principal of which is determined
by an unrelated indicator. According to the Registration Statement,
the Fund may invest in ``indexed securities'', which are instruments
whose prices are indexed to the prices of other securities,
securities indexes, or other financial indicators.
\13\ According to the Registration Statement, a repurchase
agreement is an agreement to buy a security at one price and a
simultaneous agreement to sell it back at an agreed-upon price. The
Fund may engage in repurchase agreement transactions with parties
whose creditworthiness has been reviewed and found satisfactory by
the Manager. Investment-grade debt securities include repurchase
agreements collateralized by U.S. Government securities as well as
repurchase agreements collateralized by equity securities, non-
investment-grade debt, and all other instruments in which the Fund
can perfect a security interest, provided the repurchase agreement
counterparty has an investment-grade rating.
\14\ According to the Manager, a hybrid security generally
combines both debt and equity characteristics. A common type of
hybrid security is a convertible bond that has features of a debt
security, until a certain date or triggering event, at which point
the security may be converted into an equity security. A hybrid
security may also be a warrant, convertible security, certificate of
deposit or other evidence of indebtedness.
\15\ For purposes of this filing, ETFs, which will be listed on
a national securities exchange, include the following: Investment
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3));
Portfolio Depositary Receipts (as described in NYSE Arca Equities
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca
Equities Rule 8.600).
\16\ According to the Manager, it is currently expected that the
Fund will only invest in central funds that are money market funds.
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FMR will use the Barclays[supreg] U.S. Credit Bond Index
(``Index'') as a guide in structuring the Fund and selecting its
investments. FMR will manage the Fund to have similar overall interest
rate risk to the Index.
According to the Registration Statement, FMR also may invest the
Fund's assets in debt securities of foreign issuers in addition to
securities of domestic issuers. In selecting foreign securities, FMR's
analysis also will consider the credit, currency, and economic risks
associated with the security and the country of its issuer. FMR may
also consider an issuer's potential for success in light of its current
financial condition, its industry position, and economic and market
conditions.
According to the Registration Statement, in buying and selling
securities for the Fund, FMR analyzes the credit quality of the issuer,
security-specific features, current valuation relative to alternatives
in the market, short-term trading opportunities resulting from market
inefficiencies, and potential future valuation. In managing the Fund's
exposure to various risks, including interest rate risk, FMR will
consider, among other things, the market's overall risk
characteristics, the market's current pricing of those risks,
information on the Fund's competitive universe and internal views of
potential future market conditions.
Other Investments
While FMR normally will invest at least 80% of assets of the Fund
in investment-grade corporate bonds and other corporate debt
securities, as described above, FMR may invest up to 20% of the Fund's
assets in other securities and financial instruments, as summarized
below.\17\
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\17\ The Fund's holdings of investment grade corporate bonds and
other corporate debt securities are generally expected to be U.S.
dollar denominated.
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In addition to corporate debt securities, the debt securities in
which the Fund may invest are U.S. Government securities;\18\
repurchase agreements \19\ and reverse repurchase agreements;\20\
mortgage and other asset-
[[Page 25925]]
backed securities;\21\ loans; loan participations and loan assignments
and other evidences of indebtedness, including letters of credit,
revolving credit facilities and other standby financing
commitments;\22\ structured securities; stripped securities;\23\
municipal securities; sovereign debt obligations;\24\ obligations of
international agencies or supranational entities; and other securities
believed to have debt-like characteristics, including hybrid
securities,\25\ which may offer characteristics similar to those of a
bond security such as stated maturity and preference over equity in
bankruptcy (collectively, and including corporate debt securities,
``Debt Securities'').\26\
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\18\ According to the Manager, U.S. Government securities are
high-quality securities issued or guaranteed by the U.S. Treasury or
by an agency or instrumentality of the U.S. Government. U.S.
Government securities may be backed by the full faith and credit of
the U.S. Treasury, the right to borrow from the U.S. Treasury, or
the agency or instrumentality issuing or guaranteeing the security.
Certain issuers of U.S. Government securities, including the Federal
National Mortgage Association (``Fannie Mae''), the Federal Home
Loan Mortgage Corporation (``Freddie Mac''), and the Federal Home
Loan Banks, are sponsored or chartered by Congress but their
securities are neither issued nor guaranteed by the U.S. Treasury.
U.S. Government securities include mortgage and other asset-backed
securities.
\19\ According to the Manager, in addition to the investment-
grade repurchase agreements with corporate counterparties described
above, the Fund may invest in repurchase agreements collateralized
by U.S. Government securities as well as repurchase agreements
collateralized by equity securities, non-investment-grade debt, and
all other instruments in which the Fund can perfect a security
interest, with repurchase agreement counterparties that do not have
an investment-grade rating.
\20\ In a reverse repurchase agreement, a fund sells a security
to another party, such as a bank or broker-dealer, in return for
cash and agrees to repurchase that security at an agreed-upon price
and time. According to the Registration Statement, the Fund will
enter into reverse repurchase agreements with parties whose
creditworthiness has been reviewed and found satisfactory by the
Manager.
\21\ According to the Registration Statement, asset-backed
securities represent interests in pools of mortgages, loans,
receivables, or other assets. The Fund's investments in asset backed
securities may include investments in private label residential
mortgage backed securities (``RMBS''). The Fund may invest in
privately issued asset-backed securities. According to the Manager,
the Fund may invest up to 20% of its total assets in mortgage-backed
securities or in other asset-backed securities, although this 20%
limitation will not apply to U.S. Government securities.
According to the Registration Statement, the Fund may invest in
mortgage securities, which are issued by government and non-
government entities such as banks, mortgage lenders, or other
institutions. A mortgage security is an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an
underlying pool of mortgages. Some mortgage securities, such as
collateralized mortgage obligations (or ``CMOs''), make payments of
both principal and interest at a range of specified intervals;
others make semiannual interest payments at a predetermined rate and
repay principal at maturity (like a typical bond). Mortgage
securities are based on different types of mortgages, including
those on commercial real estate or residential properties.
Fannie Maes and Freddie Macs are pass-through securities issued
by Fannie Mae and Freddie Mac, respectively. Fannie Mae and Freddie
Mac, which guarantee payment of interest and repayment of principal
on Fannie Maes and Freddie Macs, respectively, are federally
chartered corporations supervised by the U.S. Government that act as
governmental instrumentalities under authority granted by Congress.
Fannie Mae and Freddie Mac are authorized to borrow from the U.S.
Treasury to meet their obligations. Fannie Maes and Freddie Macs are
not backed by the full faith and credit of the U.S. Government.
According to the Registration Statement, to earn additional
income for the Fund, FMR may use a trading strategy that involves
selling (or buying) mortgage securities and simultaneously agreeing
to purchase (or sell) mortgage securities on a later date at a set
price.
\22\ According to the Manager, in addition to the loans, loan
participations and loan assignments described in corporate debt
securities above, the Fund may invest in loans, loan participations
and loan assignments that do not have an investment-grade rating.
\23\ According to the Registration Statement, the Fund may
invest in stripped securities, which are the separate income or
principal components of a debt security. Stripped mortgage
securities are created when the interest and principal components of
a mortgage security are separated and sold as individual securities.
\24\ According to the Manager, sovereign debt obligations are
issued or guaranteed by foreign governments or their agencies,
including debt of developing countries. Sovereign debt may be in the
form of conventional securities or other types of debt instruments
such as loans or loan participations.
\25\ See, supra note 14.
\26\ According to the Manager, Debt Securities may be fixed,
variable or floating rate securities. Variable rate securities
provide for a specific periodic adjustment in the interest rate,
while floating rate securities have interest rates that change
whenever there is a change in a designated benchmark rate or the
issuer's credit quality, sometimes subject to a cap or floor on such
rate. Some variable or floating rate securities are structured with
put features that permit holders to demand payment of the unpaid
principal balance plus accrued interest from the issuers or certain
financial intermediaries. In addition, Debt Securities may include
zero coupon bonds, which do not make interest payments; instead,
they are sold at a discount from their face value and are redeemed
at face value when they mature. Investments in Debt Securities may
have a leveraging effect on the Fund.
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According to the Registration Statement, the Fund may invest in
securities of other investment companies, including shares of ETFs
registered under the 1940 Act, closed-end investment companies (which
include business development companies), unit investment trusts, and
open-end investment companies. In addition, the Fund may invest in
other exchange-traded products (``ETPs'') such as commodity pools, or
other entities that are traded on an exchange.\27\ It is anticipated
that the Fund's investments in other ETFs and ETPs will generally be
limited to fixed income ETFs and ETPs.
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\27\ For purposes of this filing, ETPs, which will be listed on
a national securities exchange, include 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 Trust Units (as described in NYSE Arca Equities
Rule 8.500).
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According to the Registration Statement, the Fund may invest in
inverse ETFs (also called ``short ETFs'' or ``bear ETFs''), shares of
which are expected to increase in value as the value of the underlying
benchmark decreases.
According to the Registration Statement, the Fund also may invest
in leveraged ETFs, which seek to deliver multiples or inverse multiples
of the performance of an index or other benchmark they track and use
derivatives in an effort to amplify the returns of the underlying index
or benchmark.
According to the Registration Statement, the Fund may invest in
exchange traded notes (``ETNs''), which are a type of senior,
unsecured, unsubordinated debt security issued by financial
institutions that combines aspects of both bonds and ETFs.\28\ It is
anticipated that the Fund's investments in other ETNs will generally be
limited to fixed income ETNs. An ETN's returns are based on the
performance of a market index or other reference asset minus fees and
expenses. The Fund may invest in leveraged ETNs.
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\28\ ETNs, which will be listed on a national securities
exchange, are securities such as those described in NYSE Arca
Equities Rule 5.2(j)(6).
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According to the Registration Statement, the Fund may invest in
American Depositary Receipts (``ADRs'') as well as other ``hybrid''
forms of ADRs, including European Depositary Receipts (``EDRs'') and
Global Depositary Receipts (``GDRs''), which are certificates
evidencing ownership of shares of a foreign issuer.\29\ These
certificates are issued by depository banks and generally trade on an
established market in the United States or elsewhere. The underlying
shares are held in trust by a custodian bank or similar financial
institution in the issuer's home country. The depository bank may not
have physical custody of the underlying securities at all times and may
charge fees for various services, including forwarding dividends and
interest and corporate actions. ADRs are alternatives to directly
purchasing the underlying foreign securities in their national markets
and currencies.
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\29\ The Fund will invest only in ADRs, EDRs and GDRs that are
traded on an exchange that is a member of the Intermarket
Surveillance Group (``ISG'') or with which the Exchange has in place
a comprehensive surveillance sharing agreement. See, infra note 58.
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According to the Registration Statement, FMR may make investments
in derivatives,\30\ regardless of whether the Fund may own the asset,
instrument, or components of the index underlying the derivative, as
applicable,(e.g., a swap based on the Barclays U.S. Credit Bond Index),
and
[[Page 25926]]
forward-settling securities.\31\ The Fund's derivative investments may
be on corporate debt securities, Debt Securities, interest rates,
currencies, and related indexes. Depending on FMR's outlook and market
conditions, FMR may engage in these transactions to increase or
decrease the Fund's exposure to changing security prices, interest
rates, credit qualities, or other factors that affect security values,
or to gain or reduce exposure to an asset, instrument, or index.
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\30\ According to the Registration Statement, derivatives are
investments whose values are tied to an underlying asset,
instrument, currency or index. The derivatives in which the Fund may
invest are futures (both long and short positions), options
(including options on futures and swaps), forwards, and swaps
(including interest rate swaps (exchanging a floating rate for a
fixed rate)), total return swaps (exchanging a floating rate for the
total return of an index, security, or other instrument or
investment) and credit default swaps (buying or selling credit
default protection). Investments in derivatives may have a
leveraging effect on the Fund.
\31\ According to the Registration Statement, forward-settling
securities involve a commitment to purchase or sell specific
securities when issued, or at a predetermined price or yield. When a
fund does not already own or have the right to obtain securities
equivalent in kind and amount, a commitment to sell securities is
equivalent to a short sale. Payment and delivery take place after
the customary settlement period.
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According to the Registration Statement, the Fund 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). Forward contracts are customized transactions that require
a specific amount of a currency to be delivered at a specific exchange
rate on a specific date or range of dates in the future. Forward
contracts are generally traded in an interbank market directly between
currency traders (usually large commercial banks) and their customers.
The parties to a forward contract may agree to offset or terminate the
contract before its maturity, or may hold the contract to maturity and
complete the contemplated currency exchange.
According to the Registration Statement, the Fund may utilize
certain currency management strategies involving forward contracts, as
described below. The Fund may also use swap agreements, indexed
securities, and options and futures contracts relating to foreign
currencies for the same purposes. Forward contracts not calling for
physical delivery of the underlying instrument will be settled through
cash payments rather than through delivery of the underlying currency.
According to the Registration Statement, forward contracts may be
used as a ``settlement hedge'' or ``transaction hedge'' designed to
protect the Fund against an adverse change in foreign currency values
between the date a security denominated in a foreign currency is
purchased or sold and the date on which payment is made or received.
Entering into a forward contract for the purchase or sale of the amount
of foreign currency involved in an underlying security transaction for
a fixed amount of U.S. dollars ``locks in'' the U.S. dollar price of
the security. Forward contracts to purchase or sell a foreign currency
may also be used to protect the Fund in anticipation of future
purchases or sales of securities denominated in foreign currency, even
if the specific investments have not yet been selected.
According to the Registration Statement, the Fund may also use
forward contracts to hedge against a decline in the value of existing
investments denominated in a foreign currency. The Fund also may enter
into forward contracts to shift its investment exposure from one
currency into another. This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another
foreign currency. This type of strategy, sometimes known as a ``cross-
hedge'', will tend to reduce or eliminate exposure to the currency that
is sold, and increase exposure to the currency that is purchased, much
as if the Fund had sold a security denominated in one currency and
purchased an equivalent security denominated in another.\32\
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\32\ According to the Registration Statement, the Fund may
cross-hedge its U.S. dollar exposure in order to achieve a
representative weighted mix of the major currencies in its benchmark
index and/or to cover an underweight country or region exposure in
its portfolio. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Fund to assume
the risk of fluctuations in the value of the currency it purchases.
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According to the Registration Statement, the Fund may invest in
options and futures relating to foreign currencies. Currency futures
contracts are similar to forward currency exchange contracts, except
that they are traded on exchanges (and have margin requirements) and
are standardized as to contract size and delivery date. Most currency
futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency,
which generally is purchased or delivered in exchange for U.S. dollars,
or may be a futures contract. The purchaser of a currency call obtains
the right to purchase the underlying currency, and the purchaser of a
currency put obtains the right to sell the underlying currency.
As described in the Registration Statement, the Fund may invest in
exchange-listed futures.\33\ The exchange-listed futures contracts in
which the Fund may invest will have various types of underlying
instruments, including specific assets or securities, baskets of assets
or securities, commodities or commodities indexes, or indexes of
securities prices or rates.
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\33\ According to the Registration Statement, in purchasing a
futures contract, the buyer agrees to purchase a specified
underlying instrument at a specified future date. In selling a
futures contract, the seller agrees to sell a specified underlying
instrument at a specified date. Futures contracts are standardized,
exchange-traded contracts and the price at which the purchase and
sale will take place is fixed when the buyer and seller enter into
the contract. Some currently available futures contracts are based
on specific securities or baskets of securities, some are based on
commodities or commodities indexes (for funds that seek commodities
exposure), and some are based on indexes of securities prices
(including foreign indexes for funds that seek foreign exposure) or
rates. In addition, some currently available futures contracts are
based on Eurodollars. Positions in Eurodollar futures reflect market
expectations of forward levels of three-month London Interbank
Offered Rate (LIBOR) rates.
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According to the Registration Statement, the Fund may invest in
U.S. exchange-traded as well as over-the-counter (``OTC'') options.\34\
Unlike exchange-traded options, which are standardized with respect to
the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC options generally are established through
negotiation with the other party to the option contract. The OTC
options in which the Fund may invest will have various types of
underlying instruments, including specific assets or securities,
baskets of assets or securities, indexes of securities or commodities
prices, and futures contracts (including commodity futures contracts).
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\34\ Not more than 10% of the net assets of the Fund in the
aggregate shall consist of futures contracts or exchange-traded
options contracts whose principal market is not a member of ISG or
is a market with which the Exchange does not have a comprehensive
surveillance sharing agreement.
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According to the Registration Statement, the Fund may also buy and
sell options on swaps (swaptions), which are generally options on
interest rate swaps.\35\ An option on a swap gives a party the right
(but not the obligation) to enter into a new swap agreement or to
extend, shorten, cancel or modify an existing contract at a specific
date in the future in exchange for a premium.
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\35\ According to the Manager, the Fund may also enter into
options on credit default swaps, credit default index swaps or
interest rate swaps. Options on credit default swaps or credit
default index swaps can be used to hedge the credit risk of the
Fund. An option on an interest rate swap can be used to hedge the
interest risk of the Fund.
---------------------------------------------------------------------------
As described in the Registration Statement, the Fund may hold swap
agreements, a portion of which holdings may consist of cleared
swaps.\36\ The
[[Page 25927]]
Fund may enter into, among other things, interest rate swaps (where the
parties exchange a floating rate for a fixed rate),\37\ asset swaps
(e.g., where parties combine the purchase or sale of a bond with an
interest rate swap), total return swaps, and credit default swaps.
---------------------------------------------------------------------------
\36\ According to the Registration Statement, swap agreements
are two-party contracts entered into primarily by institutional
investors. Cleared swaps are transacted through futures commission
merchants (FCMs) that are members of central clearinghouses with the
clearinghouse serving as a central counterparty similar to
transactions in futures contracts. In a standard ``swap''
transaction, two parties agree to exchange one or more payments
based, for example, on the returns (or differentials in rates of
return) earned or realized on particular predetermined investments
or instruments (such as securities, commodities, indexes, or other
financial or economic interests). The underlier of a cleared swap
will depend on the product being cleared. For a cleared interest
rate swap, as with previously uncleared interest rate swaps, the
underlier will be a designated interest rate indicator. According to
the Registration Statement, to limit the counterparty risk involved
in swap agreements, the Fund will enter into swap agreements only
with counterparties that meet certain standards of creditworthiness.
\37\ According to the Manager, an interest rate swap is a swap
where one stream of future interest payments is exchanged for
another based on a specified principal amount. Interest rate swaps
often provide for the exchange of fixed rate payments for floating
rate payments linked to a specified floating interest rate (most
often the LIBOR) plus/minus a spread. Interest rate swaps can be
used to limit or manage exposure to fluctuations in interest rates,
or to obtain a marginally lower interest rate on a debt issuance
hedged by the interest rate swap than it would have been able to get
without the swap.
---------------------------------------------------------------------------
According to the Registration Statement, a total return swap is a
contract whereby one party agrees to make a series of payments to
another party based on the change in the market value of the assets
underlying such contract (which can include a security or other
instrument, commodity, index or baskets thereof) during the specified
period. In exchange, the other party to the contract agrees to make a
series of payments calculated by reference to an interest rate and/or
some other agreed-upon amount (including the change in market value of
other underlying assets). In total return swaps, the underlying asset,
referred to as the reference asset, is usually a benchmark (e.g.,
Barclays CMBS Index), asset class or designated security. The Fund may
use total return swaps to gain exposure to an asset without owning it
or taking physical custody of it.
According to the Registration Statement, in a credit default swap,
the credit default protection buyer makes periodic payments, known as
premiums, to the credit default protection seller. In return the credit
default protection seller will make a payment to the credit default
protection buyer upon the occurrence of a specified credit event. A
credit default swap can refer to a single issuer or asset, a basket of
issuers or assets or index of assets, each known as the reference
entity or underlying asset.\38\
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\38\ A credit default index swap is similar to a credit default
swap, but is a transaction on an index of single name entities.
Again, the buyer of a credit default index swap receives credit
protection on each name in the index and the seller of the swap
takes on the risk of the creditworthiness of each name in the index.
The buying or selling of protection on an index is an efficient way
to adjust the overall exposure to a specific sector or subset of a
sector rather than buying many single name credit default swaps to
achieve a similar effect.
---------------------------------------------------------------------------
According to the Registration Statement, the Fund may invest in
lower-quality Debt Securities. Lower-quality Debt Securities include
all types of debt instruments, including debt securities of foreign
issuers, that have poor protection with respect to the payment of
interest and repayment of principal, or may be in default.
According to the Registration Statement, the Fund may invest in
preferred securities.\39\ Preferred securities may take the form of
preferred stock and represent an equity or ownership interest in an
issuer that pays dividends at a specified rate and that has precedence
over common stock in the payment of dividends. The Fund's investments
in preferred securities generally are not expected to be exchange-
listed. In the event an issuer is liquidated or declares bankruptcy,
the claims of owners of bonds take precedence over the claims of those
who own preferred and common stock.
---------------------------------------------------------------------------
\39\ According to the Manager, the Fund may invest in exchange-
listed and non-exchange-listed preferred securities.
---------------------------------------------------------------------------
As described in the Registration Statement, the Fund may invest in
real estate investment trusts (``REITS''). According to the Manager,
the Fund may invest in exchange-listed and non-exchange-listed REITs.
According to the Registration Statement, the Fund may invest in
restricted securities, which are subject to legal restrictions on their
sale. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration
under the 1933 Act, or in a registered public offering.
According to the Registration Statement, the Fund may engage in
transactions with financial institutions that are, or may be considered
to be, ``affiliated persons'' of the Fund under the 1940 Act. These
transactions may involve repurchase agreements with custodian banks;
short-term obligations of, and repurchase agreements with, the 50
largest U.S. banks (measured by deposits); municipal securities; U.S.
Government securities with affiliated financial institutions that are
primary dealers in these securities; short-term currency transactions;
and short-term borrowings. In accordance with exemptive orders issued
by the Commission, the Fund's Board of Trustees has established and
periodically reviews procedures applicable to transactions involving
affiliated financial institutions.
Limitations on Investments
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 Manager or Sub-
Advisers.\40\ 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.\41\
---------------------------------------------------------------------------
\40\ According to the Registration Statement, the Fund does not
currently intend to purchase any security if, as a result, more than
10% of its net assets would be invested in securities that are
deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the
prices at which they are valued.
For purposes of the Fund's illiquid assets limitation discussed
above, if through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 10% of
its net assets were invested in illiquid assets, it would consider
appropriate steps to protect liquidity. According to the
Registration Statement, various factors may be considered in
determining the liquidity of the Fund's investments, including: (1)
The frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the number
of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the
nature of the marketplace in which it trades (including any demand,
put or tender features, the mechanics and other requirements for
transfer, any letters of credit or other credit enhancement
features, any ratings, the number of holders, the method of
soliciting offers, the time required to dispose of the security, and
the ability to assign or offset the rights and obligations of the
security).
\41\ 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).
---------------------------------------------------------------------------
[[Page 25928]]
According to the Registration Statement, the Fund may not with
respect to 75% of the Fund's total assets, purchase the securities of
any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, or securities
of other investment companies) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.\42\
---------------------------------------------------------------------------
\42\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------
According to the Registration Statement, the Fund may not purchase
the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry.\43\
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\43\ 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).
According to the Registration Statement, for purposes of the
Fund's concentration limitation discussed above, with respect to any
investment in repurchase agreements collateralized by U.S.
Government securities, FMR will look through to the U.S. Government
securities. For purposes of the Fund's concentration limitation
discussed above, FMR may analyze the characteristics of a particular
issuer and security and assign an industry or sector classification
consistent with those characteristics in the event that the third-
party classification provider used by FMR does not assign a
classification.
---------------------------------------------------------------------------
According to the Registration Statement, the Trust, on behalf of
the Fund, will file with the National Futures Association a notice
claiming an exclusion from the definition of the term ``commodity pool
operator'' (``CPO'') under the Commodity Exchange Act,\44\ as amended,
and the rules of the Commodity Futures Trading Commission (``CFTC'')
promulgated thereunder, with respect to the Fund's operation.
Accordingly, neither the Fund nor its Manager will be subject to
registration or regulation as a commodity pool or a CPO. However, the
CFTC has adopted certain rule amendments that significantly affect the
continued availability of this exclusion, and may subject advisers to
funds to regulation by the CFTC. The Manager currently does not expect
to register as a CPO of the Fund. However, there is no certainty that
the Fund or its Sub-Advisers will be able to rely on an exclusion in
the future as the Fund's investments change over time. The Fund may
determine not to use investment strategies that trigger additional CFTC
regulation or may determine to operate subject to CFTC regulation, if
applicable.
---------------------------------------------------------------------------
\44\ 7 U.S.C. 1.
---------------------------------------------------------------------------
Any foreign equity securities in which the Fund may invest will be
limited to securities that trade in markets that are members of the
Intermarket Surveillance Group (``ISG''), which includes all U.S.
national securities exchanges and certain foreign exchanges, or are
parties to a comprehensive surveillance sharing agreement with the
Exchange.\45\
---------------------------------------------------------------------------
\45\ See, infra ``Surveillance''. The Fund does not currently
intend to invest in foreign equity securities.
---------------------------------------------------------------------------
According to the Registration Statement, the Fund intends to
qualify annually and to elect to be treated as a regulated investment
company (``RIC'') under the Internal Revenue Code.\46\
---------------------------------------------------------------------------
\46\ 26 U.S.C. 851.
---------------------------------------------------------------------------
Net Asset Value
According to the Registration Statement, the Fund's net asset value
(``NAV'') will be the value of a single Share. The NAV of the Fund will
be computed by adding the value of the Fund's investments, cash, and
other assets, subtracting its liabilities, and dividing the result by
the number of Shares outstanding.
The value of the Fund's Shares bought and sold in the secondary
market will be driven by market price. The price of these Shares, like
the price of all traded securities, will be subject to factors such as
supply and demand, as well as the current value of the portfolio
securities held by the Fund. Secondary market Shares, available for
purchase or sale on an intraday basis, do not have a fixed relationship
either to the previous day's NAV or to the current day's NAV. Prices in
the secondary market, therefore, may be below, at, or above the most
recently calculated NAV of such Shares.
According to the Registration Statement, the Fund's Board of
Trustees has delegated day-to-day valuation oversight responsibilities
to FMR. FMR has established the FMR Fair Value Committee (``FMR
Committee'') to fulfill these oversight responsibilities.
Generally, portfolio securities and assets held by the Fund will be
valued as follows:
In computing the Fund's NAV, the Fund's Debt Securities (including
defaulted debt,\47\ but excluding exchange-traded convertible
securities), restricted securities, OTC-traded REITs; OTC-traded
preferred securities; and forward-settling securities (collectively,
``OTC-Traded Securities'') will be valued based on price quotations
obtained from a broker-dealer who makes markets in such securities or
other equivalent indications of value provided by a third-party pricing
service. Any such third-party pricing service may use a variety of
methodologies to value some or all such securities to determine the
market price. For example, the prices of securities with
characteristics similar to those held by the Fund may be used to assist
with the pricing process. In addition, the pricing service may use
proprietary pricing models. The Fund's OTC-Traded Securities will
generally be valued at bid prices. In certain cases, some of the Fund's
OTC-Traded Securities may be valued at the mean between the last
available bid and ask prices.\48\
---------------------------------------------------------------------------
\47\ According to the Manager, when a bond defaults and goes
into bankruptcy, a market often continues to exist for the bond
(normally at a steep discount to its face value). Buyers typically
value the defaulted bond based on expected restructuring outcomes or
liquidation distributions. Market quotations provided by broker-
dealers or pricing services reflect these market indicators.
\48\ For example, foreign bonds for which a current bid price is
not available will be valued at the mean between the last available
bid and ask prices.
---------------------------------------------------------------------------
Debt securities with remaining maturities of sixty days or less for
which market quotations and information furnished by a third party
pricing service are not readily available will be valued at amortized
cost, which approximates current value.
Exchange traded equity securities, including ETFs, ETPs, ETNs,
ADRs, EDRs, and GDRs, as well as exchange-traded REITs, exchange-traded
preferred securities, and exchange-traded convertible securities, will
be valued at market value, which will generally be determined using the
last reported official closing or last trading price on the exchange or
market on which the security is primarily traded at the time of
valuation or, if no sale has occurred, at the last quoted bid price on
the primary market or exchange on which they are traded.
Investment company securities (other than ETFs), including money
market funds, central funds, closed end investment companies, unit
investment trusts and open-end investment companies will be valued at
NAV.
Exchange-traded futures contracts will be valued at the settlement
or closing price determined by the applicable exchange.
Exchange-traded option contracts, including options on futures and
swaps, will be valued at their most recent sale
[[Page 25929]]
price. If no such sales are reported, these contracts will be valued at
their most recent bid price. In certain cases, some of the Fund's
exchange-traded derivative securities may be valued at the mean between
the last available bid and ask prices.
OTC-traded derivative instruments, including options, swaps,
forwards and currency-related derivatives, will normally be valued on
the basis of quotes obtained from a third party broker-dealer who makes
markets in such securities or on the basis of quotes obtained from an
independent third-party pricing service. The Fund's OTC-traded
derivative instruments will generally be valued at bid prices. Certain
OTC-traded derivative instruments, such as interest rate swaps and
credit default swaps, are valued at the mean price.
Prices described above will be obtained from pricing services that
have been approved by the Fund's Board of Trustees. A number of
independent third party pricing services are available and the Fund may
use more than one of these services. The Fund may also discontinue the
use of any pricing service at any time. FMR will engage in oversight
activities with respect to the Fund's pricing services, which includes,
among other things, testing the prices provided by pricing services
prior to calculation of the Fund's NAV, conducting periodic due
diligence meetings, and periodically reviewing the methodologies and
inputs used by these services.
Foreign securities and instruments will be valued in their local
currency following the methodologies described above. Foreign
securities, instruments and currencies will be translated to U.S.
dollars, based on foreign currency exchange rate quotations supplied by
a pricing service as of the close of the New York Stock Exchange
(``NYSE''), which will use a proprietary model to determine the
exchange rate.
Forward foreign currency exchange contracts will be valued at an
interpolated rate based on days to maturity between the closest
preceding and subsequent settlement period. Such interpolated rates are
derived from foreign currency exchange rate quotations reported by an
independent third-party pricing service.
Other portfolio securities and assets for which market quotations,
official closing prices, or information furnished by a pricing service
are not readily available or, in the opinion of the FMR Committee, are
deemed unreliable will be fair valued in good faith by the FMR
Committee in accordance with applicable fair value pricing policies.
For example, if, in the opinion of the FMR Committee, a security's
value has been materially affected by events occurring before the
Fund's pricing time but after the close of the exchange or market on
which the security is principally traded, that security will be fair
valued in good faith by the FMR Committee in accordance with applicable
fair value pricing policies.
In fair valuing a security, the FMR Committee may consider factors
including price movements in futures contracts and ADRs, market and
trading trends, the bid/ask quotes of brokers, and off-exchange
institutional trading.
Creation and Redemption of Shares
According to the Registration Statement, the Fund will issue and
redeem Shares on a continuous basis at NAV per Share in aggregations of
a specified number of Shares called ``Creation Units.'' Creation Units
generally will be issued in exchange for portfolio securities and/or
cash. Shares trade in the secondary market at market prices that may
differ from the Shares' NAV. Shares are not individually redeemable,
but are redeemable only in Creation Unit aggregations, and in exchange
for portfolio securities and/or cash. A Creation Unit of the Fund will
consist of a block of 50,000 shares, which is subject to change.
Shareholders who are not ``Authorized Participants'' (as defined below)
will not be able to purchase or redeem Shares directly with or from the
Fund.
Purchases and redemptions of Creation Units may be made in whole or
in part on a cash basis, rather than in-kind, under the circumstances
set forth in the Exemptive Order.
The Trust will issue and redeem Shares of the Fund only in Creation
Units on a continuous basis through FDC, without a sales load, at its
NAV next determined after receipt, on any business day, of an order in
proper form. To be eligible to place orders to purchase a Creation Unit
of the Fund, an entity must be an Authorized Participant, which is
either (i) a ``Participating Party,'' i.e., broker-dealer or other
participant in the clearing process through the Continuous Net
Settlement System of the National Securities Clearing Corporation
(``NSCC''), a clearing agency that is registered with the Commission
(the ``Clearing Process''); or (ii) a Depository Trust Company
(``DTC'') participant, and, in each case, must have executed an
agreement with FDC, with respect to creations and redemptions of
Creation Units (``Participant Agreement''). All Shares of the Fund,
however created, will be entered on the records of DTC in the name of
Cede & Co. for the account of a DTC participant.
The consideration for purchase of a Creation Unit generally will
consist of an in-kind deposit of a designated portfolio of securities
(``Deposit Securities'') together with a deposit of a specified cash
payment (``Cash Component'') computed as described herein.
Alternatively, the Fund may issue and redeem Creation Units in exchange
for a specified all-cash payment (``Cash Deposit''). Together, the
Deposit Securities and the Cash Component or, alternatively, the Cash
Deposit, will constitute the ``Portfolio Deposit,'' which represents
the minimum initial and subsequent investment amount for a Creation
Unit. In the event the Fund requires Deposit Securities and a Cash
Component in consideration for purchasing a Creation Unit, the function
of the Cash Component is to compensate for any differences between the
NAV per Creation Unit and the Deposit Amount (as defined below). The
Cash Component would be an amount equal to the difference between the
NAV of the Shares (per Creation Unit) and the ``Deposit Amount,'' which
is an amount equal to the market value of the Deposit Securities. A
fixed transaction fee is applicable to each purchase of Creation Units,
and an additional variable transaction fee may apply under certain
circumstances.\49\
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\49\ An additional variable transaction charge will be imposed
for purchases effected outside the Clearing Process, which would
include purchases of Creation Units for cash and in-kind purchases
where the investor is allowed to substitute cash in lieu of
depositing a portion of the Deposit Securities.
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The Fund will make available through the NSCC on each business day,
prior to the opening of trading on the NYSE (currently 9:30 a.m.
Eastern time), the list of the names and the required number of shares
of each Deposit Security and the amount of the Cash Component (or Cash
Deposit) to be included in the current Portfolio Deposit (based on
information at the end of the previous business day) for the Fund. Such
Portfolio Deposit will be applicable, subject to any adjustments as
described below, in order to effect purchases of Creation Units until
such time as the next-announced Portfolio Deposit composition is made
available.
Shares may be redeemed only in Creation Units at their NAV next
determined after receipt of a redemption request in proper form by the
Fund through the transfer agent and only on a business day through an
Authorized Participant that has entered into a Participant Agreement.
FMR, through
[[Page 25930]]
NSCC, will make available immediately prior to the opening of trading
on NYSE (currently 9:30 a.m. Eastern time) on each business day, the
identity of the basket of securities (``Fund Securities'') that will be
applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as defined below) on that day.
All orders to purchase Creation Units of the Fund must be received
by FDC or its agent no later than the closing time of regular trading
hours on the NYSE (ordinarily 4:00 p.m. Eastern time), or one hour
prior to the closing time (ordinarily 3:00 p.m. Eastern time) in the
case of nonconforming orders,\50\ in each case on the date such order
is placed in order for the creation of Creation Units to be effected
based on the NAV of Shares of the Fund as next determined on such date
after receipt of the order in proper form.
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\50\ A nonconforming order may be placed by an Authorized
Participant in the event that the Fund permits the substitution of
an amount of cash to be added to the Cash Component to replace any
Deposit Security. The Fund reserves the right to permit the
substitution of an amount of cash (i.e., a cash in lieu amount) to
replace any Deposit Security which may, among other reasons, not be
available in sufficient quantity for delivery, not be eligible for
transfer through the systems of DTC, the Federal Reserve System or
the clearing process, not be permitted to be re-registered in the
name of the Trust as a result of an in-kind purchase order pursuant
to local law or market convention, restricted under the securities
laws or which may not be eligible for trading by an Authorized
Participant or the investor for which it is acting.
---------------------------------------------------------------------------
The redemption proceeds for a Creation Unit generally will consist
of an in-kind transfer Fund Securities--as announced by the Fund on the
business day of the request for redemption received in proper form--
plus cash in an amount equal to the difference between the NAV of the
Shares being redeemed, as next determined after a receipt of the
request in proper form, and the value of the Fund Securities (``Cash
Redemption Amount''), less a redemption transaction fee and any
applicable variable fee. In the event that the Fund Securities have a
value greater than the NAV of the Shares being redeemed, a compensating
cash payment to the Fund equal to the differential plus the applicable
redemption transaction fee is required to be made by or through an
Authorized Participant by the redeeming shareholder. Notwithstanding
the foregoing, the Fund will substitute a cash-in-lieu amount to
replace any Fund Security that is a non-deliverable instrument. Non-
deliverable instruments will be part of the Cash Component.
An order to redeem Creation Units will be deemed received by the
Fund on the transmittal date if such order is received in proper form
by the transfer agent not later than 4:00 p.m. Eastern time (or one
hour prior to the closing time (ordinarily 3:00 p.m. Eastern time) for
nonconforming orders) on such transmittal date and other applicable
requirements are met.
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
NYSE is closed (other than customary weekend and holiday closings);
(ii) for any period during which trading on the NYSE is suspended or
restricted; (iii) for any period during which an emergency exists as a
result of which disposal of the shares or determination of the Fund's
NAV is not reasonably practicable; or (iv) in such other circumstances
as is permitted by the Commission.
Availability of Information
The Trust's Web site (www.fidelity.com), which will be publicly
available, will include a form of the prospectus for the Fund that may
be downloaded. The Trust's Web site will include additional
quantitative information updated on a daily basis, including, on a per
Share basis for the Fund, the prior business day's NAV and the market
closing price or, if that is unavailable, the mid-point of the bid/ask
spread at the time of calculation of such NAV (the ``Bid/Ask
Price''),\51\ and a calculation of the premium or discount of the
market closing price, or if that is unavailable, the Bid/Ask Price
against the NAV. On each business day, before commencement of trading
in Shares in the ``Core Trading Session'' (9:30 a.m. Eastern time to
4:00 p.m. Eastern time) on the Exchange, the Fund will disclose on the
Trust's Web site the Disclosed Portfolio as defined in NYSE Arca
Equities Rule 8.600 (c) (2) that will form the basis for the Fund's
calculation of NAV at the end of the business day.\52\
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\51\ The Bid/Ask Price of the Fund's Shares will be determined
using the mid-point of the highest bid and the lowest offer on the
Exchange as of the time of calculation of the Fund's NAV. The
records relating to Bid/Ask Prices will be retained by the Fund and
its service providers.
\52\ Under accounting procedures 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.
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On a daily basis, the Fund will disclose for each portfolio
security and other financial instrument of the Fund the following
information: ticker symbol (if applicable), name of security or
financial instrument, number of shares (if applicable) and dollar value
of each of the 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.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder
Reports are available free upon request from the Trust, and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commission's Web site at www.sec.gov. Information
regarding market price and trading volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers.
Quotation and last sale information for the Shares and underlying
equity securities that are U.S. exchange listed, including ETFs, ETPs,
ETNs, and ADRs and exchange-traded REITs, exchange-traded preferred
securities, and exchange-traded convertible securities will be
available via the Consolidated Tape Association (``CTA'') high speed
line. Quotation and last sale information for such U.S. exchange-listed
securities, as well as futures will be available from the exchange on
which they are listed. Quotation and last sale information for
exchange-listed options will be available via the Options Price
Reporting Authority.
Quotation information for OTC-Traded Securities, OTC-traded
derivative securities (such as options, swaps, forwards and currency-
related derivatives), and investment company securities (excluding
ETFs), may be obtained from brokers and dealers who make markets in
such securities or through nationally recognized pricing services
through subscription agreements. The U.S. dollar value of foreign
securities, instruments and currencies can be derived by using foreign
currency exchange rate quotations obtained from nationally recognized
pricing services.
In addition, the Portfolio Indicative Value, as defined in NYSE
Arca Equities Rule 8.600 (c)(3), will be widely disseminated by one or
more major market data vendors at least every 15 seconds during the
Core Trading
[[Page 25931]]
Session.\53\ The dissemination of the Portfolio Indicative Value,
together with the Disclosed Portfolio, will allow investors to
determine the approximate 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.
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\53\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Portfolio Indicative Values taken from the CTA or other data feeds.
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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.\54\ 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.
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\54\ See NYSE Arca Equities Rule 7.12.
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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.
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 \55\ under the Act, as provided by NYSE Arca
Equities Rule 5.3. A minimum of 100,000 Shares will be outstanding at
the commencement of trading on the Exchange. The Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share
will be calculated daily and that the NAV and the Disclosed Portfolio
will be made available to all market participants at the same time.
\56\
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\55\ 17 CFR 240.10A-3.
\56\ The term ``Disclosed Portfolio'' is defined in NYSE Arca
Equities Rule 8.600(c)(2).
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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.\57\ 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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\57\ 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 and underlying exchange-traded options,
futures, exchange-traded equity securities (including ADRs, EDRs and
GDRs), and other exchange-traded instruments with other markets and
other entities that are members of the ISG, and FINRA, on behalf of the
Exchange, may obtain trading information regarding trading in the
Shares and underlying exchange-traded options, futures, exchange-traded
equity securities (including ADRs, EDRs and GDRs), and other exchange-
traded instruments from such markets and other entities. In addition,
the Exchange may obtain information regarding trading in the Shares and
underlying exchange-traded options, futures, exchange-traded equity
securities (including ADRs, EDRs and GDRs), and other exchange-traded
instruments from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.\58\ In addition, 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 (``TRACE'').
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\58\ 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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Not more than 10% of the net assets of the Fund in the aggregate
shall consist of futures contracts or exchange-traded options contracts
whose principal market is not a member of ISG or is a market with which
the Exchange does not have 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 Holders in an Information Bulletin (``Bulletin'')
of the special characteristics and risks associated with trading the
Shares. Specifically, the Bulletin will discuss the following: (1) The
procedures for purchases and redemptions of Shares in Creation Unit
aggregations (and that Shares are not individually redeemable); (2)
NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence
on its Equity Trading Permit Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated Portfolio Indicative Value will not be
calculated or publicly disseminated; (4) how information regarding the
Portfolio Indicative Value is disseminated; (5) the requirement that
Equity Trading Permit Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information.
In addition, the Bulletin will reference that 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
[[Page 25932]]
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) \59\ 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.
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\59\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.600. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares in all trading
sessions and to deter and detect violations of Exchange rules and
federal securities laws applicable to trading on the Exchange. FINRA,
on behalf of the Exchange, will communicate as needed regarding trading
in the Shares and underlying exchange-traded options, futures,
exchange-traded equity securities (including ADRs, EDRs and GDRs), and
other exchange-traded instruments with other markets and other entities
that are members of the ISG, and FINRA, on behalf of the Exchange, may
obtain trading information regarding trading in the Shares and
underlying exchange-traded options, futures, exchange-traded equity
securities (including ADRs, EDRs and GDRs), and other exchange-traded
instruments from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares and
underlying exchange-traded options, futures, exchange-traded equity
securities (including ADRs, EDRs and GDRs), and other exchange-traded
instruments from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement. In addition, 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 TRACE.
FMR normally will invest at least 80% of assets in investment-grade
corporate bonds and other corporate debt securities. The Manager and
the Sub-Advisers are affiliated with one or more broker-dealers and
have implemented a fire wall with respect to such broker-dealers
regarding access to information concerning the composition and/or
changes to the Fund's portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding the portfolio. 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 Manager or Sub-Adviser. Any foreign equity
securities in which the Fund may invest will be limited to securities
that trade in markets that are members of the ISG or parties to a
comprehensive surveillance sharing agreement. The Fund will invest only
in ADRs, EDRs and GDRs that are traded on an exchange that is a member
of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. Not more than 10% of the net assets of
the Fund in the aggregate shall consist of futures contracts or
exchange-traded options contracts whose principal market is not a
member of ISG or is a market with which the Exchange does not have 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 will be publicly available regarding the Fund and the
Shares, thereby promoting market transparency. Quotation and last sale
information for the Shares and underlying securities that are U.S.
exchange listed, including ETFs, ETPs, ETNs, ADRs, EDRs, GDRs,
exchange-traded REITs, exchange-traded preferred securities, and
exchange-traded convertible securities, will be available via the CTA
high speed line. Quotation and last sale information for such U.S.
exchange-listed securities as well as futures will be available from
the exchange on which they are listed. Quotation and last sale
information for exchange-listed options will be available via the
Options Price Reporting Authority. Quotation information from brokers
and dealers or pricing services will be available for Debt Securities;
restricted securities; OTC-traded REITs; OTC-traded preferred
securities; OTC-traded derivative securities, including options, swaps,
and currency-related derivatives; forwards; and investment company
securities (other than ETFs).
Moreover, the Portfolio Indicative Value will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Exchange's Core Trading Session. On each business
day, before commencement of trading in Shares in the Core Trading
Session on the Exchange, the Fund will disclose on the Trust's Web site
the Disclosed Portfolio that will form the basis for the Fund's
calculation of NAV at the end of the business day. The Trust's Web site
will include a form of 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 Equity Trading Permit 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. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, as noted above, investors
will have ready access to information regarding the Fund's holdings,
the Portfolio Indicative Value, the Disclosed Portfolio, and quotation
and last sale information for the Shares.
[[Page 25933]]
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 another
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 up to 90 days after
publication (i) as the Commission may designate if it finds such longer
period to be appropriate and publishes its reasons for so finding or
(ii) as to which the self-regulatory organization consents, the
Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2014-47 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2014-47. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2014-47, and should
be submitted on or before May 27, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10360 Filed 5-5-14; 8:45 am]
BILLING CODE 8011-01-P