[Federal Register Volume 81, Number 197 (Wednesday, October 12, 2016)]
[Notices]
[Pages 70455-70460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24577]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79052; File No. SR-NYSEArca-2016-82]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change, as Modified by Amendment Nos. 1, 2, and 3 Thereto, To List 
and Trade Shares of the JPMorgan Diversified Event Driven ETF Under 
NYSE Arca Equities Rule 8.600

October 5, 2016.

I. Introduction

    On June 20, 2016, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or 
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares of the JPMorgan Diversified Event 
Driven ETF under NYSE Arca Equities Rule 8.600. The proposed rule 
change was published for comment in the Federal Register on July 7, 
2016.\3\ On August 18, 2016, the Exchange filed Amendment No. 1 to the 
proposed rule change,\4\ and,

[[Page 70456]]

pursuant to Section 19(b)(2) of the Act,\5\ 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.\6\ On 
September 1, 2016, the Exchange filed Amendment No. 2 to the proposed 
rule change.\7\ On September 2, 2016, the Exchange filed Amendment No. 
3 to the proposed rule change.\8\ The Commission has received no 
comments on the proposal. This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \9\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment Nos. 1, 
2, and 3 thereto.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78218 (Jul. 1, 
2016), 81 FR 44339 (``Notice'').
    \4\ In Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, the Exchange clarified: (a) certain 
aspects relating to the Fund's investment strategy, including 
descriptions of (i) certain return factors that the Fund seeks to 
utilize to achieve its investment objective, (ii) the Fund's total 
net long market exposure, (iii) the Fund's use of derivative 
instruments and its market exposure to such instruments, and (iv) 
the Fund's investments in mutual funds; (b) that the common stock 
into which convertible securities held by the Fund can be converted 
will be exchange-traded; (c) that the Fund may invest no more than 
5% of its assets, in the aggregate, in over-the-counter (``OTC'') 
common stocks, preferred stocks, warrants, rights, and contingent 
value rights (``CVRs'') of U.S. and foreign corporations (including 
emerging market securities); (d) the redemption order submission 
cut-off time; (e) that no more than 10% of the net assets of the 
Fund will be invested in Depositary Receipts (as defined herein) 
that are not exchange-listed; and (f) the use of certain defined 
terms. Amendment No. 1 to the proposed rule change is available at: 
https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-1.pdf. Because Amendment No. 1 to the proposed rule change does not 
materially alter the substance of the proposed rule change or raise 
unique or novel regulatory issues, Amendment No. 1 is not subject to 
notice and comment.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 78610, 81 FR 57960 
(Aug. 24, 2016). The Commission designated October 5, 2016 as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ In Amendment No. 2, which partially amended the proposed 
rule change, as modified by Amendment No. 1 thereto, the Exchange 
clarified (a) the Fund's holdings in mutual fund shares as the only 
non-exchange-traded investment company securities the Fund may hold, 
and (b) that Depositary Receipts (as defined herein) are included as 
equity securities subject to the 10% limitation on equity securities 
whose principal market is not a member of the Intermarket 
Surveillance Group (``ISG'') or is a market with which the Exchange 
does not have a comprehensive surveillance sharing agreement. 
Amendment No. 2 to the proposed rule change is available at: https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-2.pdf. 
Because Amendment No. 2 to the proposed rule change does not 
materially alter the substance of the proposed rule change or raise 
unique or novel regulatory issues, Amendment No. 2 is not subject to 
notice and comment.
    \8\ In Amendment No. 3, which partially amended the proposed 
rule change, as modified by Amendment Nos. 1 and 2 thereto, the 
Exchange (a) made conforming changes to the Statutory Basis section 
of the filing to reflect the same changes made by Amendment No. 2 to 
the proposed rule change, and (b) clarified a reference to the term 
``advisor'' to mean ``Adviser.'' Amendment No. 3 to the proposed 
rule change is available at: https://www.sec.gov/comments/sr-nysearca-2016-82/nysearca201682-3.pdf. Because Amendment No. 3 to 
the proposed rule change does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
Amendment No. 3 is not subject to notice and comment.
    \9\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

II. Exchange's Description of the Proposal

    The Exchange proposes to list and trade shares (``Shares'') of the 
JPMorgan Diversified Event Driven ETF (``Fund'') under NYSE Arca 
Equities Rule 8.600, which governs the listing and trading of Managed 
Fund Shares. The Fund is a series of J.P. Morgan Exchange-Traded Fund 
Trust (``Trust''), a Delaware statutory trust.\10\ J.P. Morgan 
Investment Management Inc. (``Adviser'') will be the investment adviser 
to the Fund. The Adviser is a wholly-owned subsidiary of JPMorgan Asset 
Management Holdings Inc., which is a wholly-owned subsidiary of 
JPMorgan Chase & Co., a bank holding company. The Adviser will also 
provide administrative services for, and will oversee the other service 
providers of, the Fund. SEI Investments Distribution Co. will be the 
distributor of the Fund's Shares.
---------------------------------------------------------------------------

    \10\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). The Exchange states that, on April 22, 2016, 
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 the 1940 Act relating to the Fund (File 
Nos. 333-191837 and 811-22903) (``Registration Statement''). The 
Exchange also notes that an exemptive order (``Exemptive Order'') 
was issued on February 19, 2016 (IC Release No. 31990). The Exchange 
represents that investments made by the Fund will comply with the 
conditions set forth in the Exemptive Order.
---------------------------------------------------------------------------

    The Fund will seek to provide long-term total return and will seek 
to achieve its investment objective by employing an event-driven 
investment strategy, primarily investing in companies that the Adviser 
believes will be impacted by pending or anticipated corporate or 
special situation events. In executing this investment strategy, the 
Fund will seek to capture the price difference between a security's 
market price and the anticipated value post-event, based on the 
assumption that an event or catalyst will affect future pricing. It 
will do so based on its systematic investment process for securities 
selection. The Adviser believes it has identified (and will continue to 
identify) a set of sources of potential event-driven investment return 
that have a low correlation to each other and traditional markets and 
have distinct risk and return profiles (``return factors'').
    Under normal market conditions,\11\ the Fund will seek to achieve 
its investment objective by employing its investment strategy to access 
certain return factors. For example, the return factors that the 
Adviser may utilize include, but are not limited to, the following:
---------------------------------------------------------------------------

    \11\ The term ``under normal market conditions'' includes, but 
is not limited to, the absence of extreme volatility or trading 
halts in the securities markets or the financial markets generally; 
circumstances under which the Fund's investments are made for 
temporary defensive purposes; operational issues (e.g., systems 
failure) causing dissemination of inaccurate market information; or 
force majeure type events such as cyber-attacks, natural or man-made 
disaster, act of God, armed conflict, act of terrorism, riot or 
labor disruption, or any similar intervening circumstance.
---------------------------------------------------------------------------

    (1) Merger arbitrage--seeks to capitalize on price discrepancies 
and returns generated by a corporate transaction. The Fund may purchase 
the common stock of the company being acquired and may short the common 
stock of the acquirer in expectation of profiting from the price 
differential between the purchase price of the securities and the value 
received for the securities as a result of or in expectation of the 
consummation of the merger.
    (2) Activism tracking--invests in companies that are the target of 
activist investors.
    (3) Share buybacks--attempts to exploit the outperformance of a 
company engaged in a share buyback program.
    (4) Parents and spinoffs--attempts to capture positive performance 
of a parent company after the spinoff announcement; this typically 
leads to a revaluation of the company.
    (5) Index arbitrage--attempts to profit from the price changes of 
assets as they are added to or deleted from indices.
    (6) Post-reorganization equities--attempts to profit from the 
mispricing of companies as they emerge from bankruptcy.
    Each return factor represents a potential source of investment 
return that results from, among other things, assuming a particular 
risk or taking advantage of a market opportunity. Each return factor 
represents a potential source of investment return, and the Adviser 
allocates assets to a subset of return factors based on current 
investment opportunities. Under normal market conditions, the Fund will 
seek to achieve its investment objective by employing the event-driven 
strategy to access certain return factors. The Adviser believes that, 
in general, the Fund's event-driven investment returns will be 
attributable to the individual contributions of the various return 
factors. By employing this return factor based approach, the Fund will 
seek to provide positive total returns over time while maintaining a 
relatively low correlation with traditional markets. The exposure to 
individual return factors may vary based on the market opportunity of 
the individual return factors. Additional return factors may be 
identified over time.
    The Fund will invest its assets globally to gain exposure to equity 
securities (across market capitalizations) in developed markets. The 
Fund may use both long and short positions (achieved primarily through 
the use of derivative instruments as described below). The Fund 
generally will

[[Page 70457]]

maintain a total net long market exposure, meaning that the Fund's 
aggregate exposure will be greater to instruments that the Adviser 
expects to outperform. However, the Fund may have net long or net short 
exposure to one or more industry sectors, individual markets, and/or 
currencies based on the return factors.
    The Adviser will make use of derivatives (as described below), in 
implementing its strategies. Under normal market conditions, the 
Adviser currently expects that a significant portion of the Fund's 
exposure will be attained through the use of derivatives in addition to 
its exposure through direct investments. Derivatives will primarily be 
used as an efficient means of implementing a particular strategy in 
order to gain exposure to a desired return factor. For example, the 
Fund may use a total return swap to establish both long and short 
positions in order to gain the desired exposure rather than physically 
purchasing and selling short each instrument. Derivatives may also be 
used to increase gain, to effectively gain targeted exposure from its 
cash positions, to hedge various investments, and/or for risk 
management. As a result of the Fund's use of derivatives and to serve 
as collateral, the Fund may hold significant amounts of U.S. Treasury 
obligations, including Treasury bills, bonds and notes and other 
obligations issued or guaranteed by the U.S. Treasury, other short-term 
investments, including money market funds and foreign currencies, in 
which certain derivatives are denominated.
    The amount that may be invested in any one instrument will vary and 
generally depend on the return factors employed by the Adviser at that 
time. However, with the exception of specified investment limitations 
for certain assets described below, there are no stated percentage 
limitations on the amount that can be invested in any one type of 
instrument, and the Adviser may, at times, focus on a smaller number of 
instruments. Moreover, the Fund will generally be unconstrained by any 
particular capitalization, style or sector and may invest in any 
developed region or country. The Fund may have both long and short 
exposure to these instruments. The Adviser will make use of 
quantitative models and information and data supplied by third parties 
to, among other things, help determine the portfolio's weightings among 
various investments and construct sets of transactions and investments.
    The Fund will purchase a particular instrument when the Adviser 
believes that such instrument will allow the Fund to gain the desired 
exposure to a return factor. Conversely, the Fund will consider selling 
a particular instrument when it no longer provides the desired exposure 
to a return factor. In addition, investment decisions will take into 
account a return factor's contribution to the Fund's overall 
volatility.
    In addition to its main return factors, the Fund may utilize return 
factors that use debt securities. The Fund may invest, either directly 
or through financial derivative instruments, debt securities that are 
subject to a downgrade from investment grade to non-investment grade 
(also known as high yield/junk bond) status. For example, the Fund may 
invest in the bonds that have been downgraded while hedging credit risk 
more broadly by using credit default swaps indices in order to attempt 
to keep the Fund's exposure market neutral.

A. Exchange's Description of the Fund's Principal Investments

    Under normal market conditions, the Fund will invest principally 
(i.e., more than 50% of the Fund's assets) in the securities and 
financial instruments described below, which may be represented by 
derivatives, as discussed below.
    The Fund may invest in exchange-listed and traded common stocks, 
preferred stocks,\12\ warrants and rights \13\ of U.S. and foreign 
corporations (including emerging market securities), and U.S. and non-
U.S. real estate investment trusts (``REITs'').\14\ Exchange-listed and 
traded common stocks, preferred stocks, warrants and rights of U.S. 
corporations, and U.S. REITs will be traded on U.S. national securities 
exchanges.
---------------------------------------------------------------------------

    \12\ Preferred stock is a class of stock that generally pays a 
dividend at a specified rate and has preference over common stock in 
the payment of dividends and in liquidation (U.S. and non-U.S., 
including emerging markets).
    \13\ Rights are securities, typically issued with preferred 
stock or bonds, that give the holder the right to buy a 
proportionate amount of common stock at a specified price (U.S. and 
non-U.S., including emerging markets).
    \14\ REITs are pooled investment vehicles which invest primarily 
in income-producing real estate or real estate related loans or 
interest.
---------------------------------------------------------------------------

    The Fund may invest in exchange-listed and OTC ``Depositary 
Receipts'' \15\ as described below.
---------------------------------------------------------------------------

    \15\ Depositary Receipts include American Depositary Receipts 
(``ADRs''), Global Depositary Receipts (``GDRs'') and European 
Depositary Receipts (``EDRs''). ADRs are receipts typically issued 
by an American bank or trust company that evidence ownership of 
underlying securities issued by a foreign corporation. EDRs are 
receipts issued by a European bank or trust company evidencing 
ownership of securities issued by a foreign corporation. GDRs are 
receipts issued throughout the world that evidence a similar 
arrangement. ADRs, EDRs and GDRs may trade in foreign currencies 
that differ from the currency the underlying security for each ADR, 
EDR or GDR principally trades in. Generally, ADRs, in registered 
form, are designed for use in the U.S. securities markets. EDRs, in 
registered form, are used to access European markets. GDRs, in 
registered form, are tradable both in the United States and in 
Europe and are designed for use throughout the world. No more than 
10% of the net assets of the Fund will be invested in Depositary 
Receipts that are not exchange-listed.
---------------------------------------------------------------------------

    The Fund may invest in the following cash and cash equivalents: 
investments in money market funds (for which the Adviser and/or its 
affiliates serve as investment adviser or administrator), bank 
obligations,\16\ commercial paper,\17\ repurchase agreements, and 
short-term funding agreements.\18\
---------------------------------------------------------------------------

    \16\ Bank obligations include the following: bankers' 
acceptances, certificates of deposit, and time deposits. Bankers' 
acceptances are bills of exchange or time drafts drawn on and 
accepted by a commercial bank. Maturities are generally six months 
or less. Certificates of deposit are negotiable certificates issued 
by a bank for a specified period of time and earning a specified 
return. Time deposits are non-negotiable receipts issued by a bank 
in exchange for the deposit of funds.
    \17\ Commercial paper consists of secured and unsecured short-
term promissory notes issued by corporations and other entities. 
Maturities generally vary from a few days to nine months.
    \18\ Short-term funding agreements are agreements issued by 
banks and highly rated U.S. insurance companies such as Guaranteed 
Investment Contracts and Bank Investment Contracts.
---------------------------------------------------------------------------

    The Fund may invest in corporate debt.\19\
---------------------------------------------------------------------------

    \19\ The Adviser expects that, under normal market conditions, 
the Fund will invest at least 75% of its corporate debt securities 
in issuances that have at least $100,000,000 par amount outstanding 
in developed countries, or at least $200,000,000 par amount 
outstanding in emerging market countries.
---------------------------------------------------------------------------

    In addition to money market funds referenced above, the Fund may 
invest in shares of non-exchange-traded investment company securities, 
that is, mutual fund shares, including mutual fund shares for which the 
Adviser and/or its affiliates may serve as investment adviser or 
administrator, to the extent permitted by Section 12(d)(1) \20\ of the 
1940 Act and the rules thereunder.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 80a-12(d)(1).
---------------------------------------------------------------------------

    In addition, the Fund may invest in exchange traded funds 
(``ETFs''),\21\ purchase and sell futures contracts on indexes of 
securities, invest in swaps (credit default swaps (``CDSs''), CDS 
indices, and total return swaps on equity securities, equity indexes, 
fixed income securities, and fixed income futures), invest in forward 
and spot

[[Page 70458]]

currency transactions \22\ (such investments consist of non-deliverable 
forwards (``NDFs''), foreign forward currency contracts, and spot 
currency transactions), and invest in OTC and exchange-traded call and 
put options on equities, fixed income securities, and currencies or 
options on indexes of equities, fixed income securities, and 
currencies.
---------------------------------------------------------------------------

    \21\ The ETFs in which the Fund may invest will be registered 
under the 1940 Act and include Investment Company Units (as 
described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio 
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100); 
and Managed Fund Shares (as described in NYSE Arca Equities Rule 
8.600). Such ETFs all will be listed and traded in the U.S. on 
registered exchanges. While the Fund may invest in inverse ETFs, the 
Fund will not invest in leveraged or inverse leveraged (e.g., 2X, -
2X, 3X, or -3X) ETFs.
    \22\ The Fund will limit its investments in currencies to those 
currencies with a minimum average daily foreign exchange turnover of 
USD $1 billion as determined by the Bank for International 
Settlements (``BIS'') Triennial Central Bank Survey. As of the most 
recent BIS Triennial Central Bank Survey, at least 52 separate 
currencies had minimum average daily foreign exchange turnover of 
USD $1 billion. For a list of eligible BIS currencies, see 
www.bis.org.
---------------------------------------------------------------------------

    The Fund may invest in U.S. Government obligations, which may 
include direct obligations of the U.S. Treasury, including Treasury 
bills, notes and bonds, all of which are backed as to principal and 
interest payments by the full faith and credit of the United States, 
and separately traded principal and interest component parts of such 
obligations that are transferable through the Federal book-entry system 
known as Separate Trading of Registered Interest and Principal of 
Securities and Coupons Under Book Entry Safekeeping.

B. Exchange's Description of the Fund's Other Investments

    While the Fund, under normal market conditions, will invest at 
least fifty percent (50%) of its assets in the securities and financial 
instruments described above, the Fund may invest its remaining assets 
in other assets and financial instruments, as described below.
    The Fund may invest in U.S. and non-U.S. convertible securities, 
which are bonds or preferred stock that can convert to common stock. 
The common stock into which convertible securities can be converted 
will be exchange-traded.
    The Fund may invest in reverse repurchase agreements.
    The Fund may invest in sovereign obligations, which are investments 
in debt obligations issued or guaranteed by a foreign sovereign 
government or its agencies, authorities, or political subdivisions.
    The Fund may invest no more than 5% of its assets in equity and 
debt securities that are restricted securities (Rule 144A securities), 
in addition to Rule 144A securities deemed illiquid by the Adviser, as 
referenced below.
    Under normal market conditions, the Fund may invest no more than 5% 
of its assets, in the aggregate, in OTC common stocks, preferred 
stocks, warrants, rights, and CVRs of U.S. and foreign corporations 
(including emerging market securities).

C. Exchange's Description of the Fund's Investment Restrictions

    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, 
consistent with Commission guidance. 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.
    The Fund may invest in other investment companies to the extent 
permitted by Section 12(d)(1) of the 1940 Act and rules thereunder and/
or any applicable exemption or exemptive order under the 1940 Act with 
respect to such investments.
    The Fund may invest in securities denominated in U.S. dollars, 
major reserve currencies, and currencies of other countries in which 
the Fund may invest.
    The Fund may invest in both investment grade and high yield debt 
securities.
    The Fund intends to qualify for and to elect treatment as a 
separate regulated investment company under Subchapter M of the 
Internal Revenue Code. Furthermore, the Fund may not concentrate 
investments in a particular industry or group of industries, as 
concentration is defined under the 1940 Act, the rules or regulations 
thereunder, or any exemption therefrom, as such statute, rules, or 
regulations may be amended or interpreted from time to time.\23\
---------------------------------------------------------------------------

    \23\ The Registration Statement states that, for purposes of the 
Fund's fundamental investment policy regarding industry 
concentration, ``to concentrate'' generally means to invest more 
than 25% of the Fund's total assets, taken at market value at the 
time of investment.
---------------------------------------------------------------------------

    The Fund is a diversified series of the Trust. The Fund intends to 
meet the diversification requirements of the 1940 Act.
    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and will not be used to enhance 
leverage (although certain derivatives may result in leverage). That 
is, while the Fund will be permitted to borrow as permitted under the 
1940 Act, the Fund's investments will not be used to seek performance 
that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the 
Fund's primary broad-based securities benchmark index (as defined in 
Form N-1A).\24\
---------------------------------------------------------------------------

    \24\ The Fund's broad-based securities benchmark index will be 
identified in a future amendment to the Registration Statement 
following the Fund's first full calendar year of performance.
---------------------------------------------------------------------------

D. Exchange's Description of the Fund's Use of Derivatives

    The Fund proposes to seek certain exposures through transactions in 
the specific derivative instruments described above. The derivatives to 
be used are futures, swaps, NDFs, foreign forward currency contracts, 
and call and put options. Derivatives, which are instruments that have 
a value based on another instrument, exchange rate, or index, may also 
be used as substitutes for securities in which the Fund can invest. The 
Fund may use these derivative instruments to increase gain, to 
effectively gain targeted exposure from its cash positions, to hedge 
various investments, and/or for risk management.
    Investments in derivative instruments will be made in accordance 
with the 1940 Act and consistent with the Fund's investment objective 
and policies. To limit the potential risk associated with such 
transactions, the Fund will segregate or ``earmark'' assets determined 
to be liquid by the Adviser in accordance with procedures established 
by the Trust's Board of Trustees and in accordance with the 1940 Act 
(or, as permitted by applicable regulation, enter into certain 
offsetting positions) to cover its obligations under derivative 
instruments. These procedures have been adopted consistent with Section 
18 of the 1940 Act and related Commission guidance. In addition, the 
Fund will include appropriate risk disclosure in its offering 
documents, including leveraging risk. Leveraging risk is the risk that 
certain transactions of the Fund, including the Fund's use of 
derivatives, may give rise to leverage, causing the Fund to be more 
volatile than if it had not been leveraged.\25\ Because the markets for 
certain assets, or the assets themselves, may be unavailable or cost 
prohibitive as

[[Page 70459]]

compared to derivative instruments, suitable derivative transactions 
may be an efficient alternative for the Fund to obtain the desired 
asset exposure.
---------------------------------------------------------------------------

    \25\ To mitigate leveraging risk, the Adviser will segregate or 
``earmark'' liquid assets or otherwise cover the transactions that 
may give rise to such risk.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-82 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \26\ to determine whether the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3 thereto, 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. 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, as modified by Amendment Nos. 1, 2, and 3 thereto.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\27\ 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.'' \28\
---------------------------------------------------------------------------

    \27\ Id.
    \28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Under the proposal, the Exchange states that the Fund will invest 
in assets globally. In addition to certain U.S. securities, the Fund 
proposes to hold non-U.S. exchange listed and traded common stocks, 
preferred stocks, warrants, and rights. Further, the Fund proposes to 
hold non-U.S. REITs, Depositary Receipts, corporate bonds, sovereign 
obligations, and convertible securities. The Exchange, however, 
proposes no quantitative standards with respect to these non-U.S. 
securities in which the Fund, at the Adviser's discretion, may invest. 
The Commission has recently noted that appropriate quantitative 
standards help reduce the extent to which Managed Fund Shares holding 
non-U.S. components may be susceptible to manipulation.\29\ For 
example, with respect to certain equity securities, the Commission 
noted that standards, such as minimum market value, trading volume, and 
diversification requirements, should reduce the risk that Managed Fund 
Shares holding non-U.S. component stocks are susceptible to 
manipulation.\30\
---------------------------------------------------------------------------

    \29\ See Securities Exchange Act Release No. 78397 (Jul. 22, 
2016), 81 FR 49320, at 49325 (Jul. 27, 2016).
    \30\ Id.
---------------------------------------------------------------------------

    The Exchange also states that the Fund's investments may be 
represented by derivatives. Further, derivatives may be used ``to 
increase gain, to effectively gain targeted exposure from its cash 
positions, to hedge various investments, and/or for risk management.'' 
The Exchange does not propose to limit the amount of derivatives that 
the Fund may hold, and also does not provide any other information 
regarding the Fund's use of derivatives, including the use of OTC or 
non-centrally cleared derivatives. The Commission has previously noted 
that quantitative requirements, such as concentration limits on the use 
of listed derivatives and limits on OTC derivatives, help reduce the 
extent to which Managed Fund Shares holding derivative instruments may 
be susceptible to manipulation.\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    Accordingly, the Commission solicits comment on whether the 
proposal is consistent with the Act. In particular, the Commission 
seeks comment on whether the Exchange's representations relating to 
non-U.S. component securities and derivatives held by the Fund are 
sufficient to prevent the susceptibility of the Fund's portfolio to 
manipulation and are thereby consistent with the requirements of 
Section 6(b)(5) of the Act, which, among other things, requires that 
the rules of an exchange be designed to prevent fraudulent and 
manipulative acts and practices and to protect investors and the public 
interest.

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

    \32\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts 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 Acts 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 November 2, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 16, 2016. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice \33\ and in Amendment Nos. 1, 2, and 
3 to the proposed rule change,\34\ in addition to any other comments 
they may wish to submit about the proposed rule change.
---------------------------------------------------------------------------

    \33\ See supra note 3.
    \34\ See supra notes 4, 7, and 8.
---------------------------------------------------------------------------

    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-2016-82 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-2016-82. 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

[[Page 70460]]

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-2016-82 and should be submitted on or before 
November 2, 2016. Rebuttal comments should be submitted by November 16, 
2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Brent J. Fields,
Secretary.
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

[FR Doc. 2016-24577 Filed 10-11-16; 8:45 am]
 BILLING CODE 8011-01-P