[Federal Register Volume 84, Number 102 (Tuesday, May 28, 2019)]
[Notices]
[Pages 24563-24572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10988]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85899; File No. SR-NYSEArca-2019-36]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of JPMorgan Income
Builder Blend ETF Under NYSE Arca Rule 8.600-E
May 21, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on May 10, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Rule 8.600-E (``Managed Fund Shares''): JPMorgan Income
Builder Blend ETF. The proposed change is available on the Exchange's
website at www.nyse.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
following under NYSE Arca Rule 8.600-E, which governs the listing and
trading of Managed Fund Shares \4\ on the Exchange: JPMorgan Income
Builder Blend ETF (the ``Fund'').\5\
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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 Rule 5.2-E(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 Trust is registered under the 1940 Act. On July 31,
2018, the Trust filed with the Commission an amendment to its
registration statement on Form N-1A under the Securities Act of 1933
(15 U.S.C. 77a) (``Securities Act'') and the 1940 Act relating to
the Fund (File Nos. 333-191837 and 811-22903) (the ``Registration
Statement''). The description of the operation of the Trust and the
Fund herein is based, in part, on the Registration Statement. The
Trust will file an amendment to the Registration Statement as
necessary to conform to representations in this filing. 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. 31990 (February 9, 2016) (``Exemptive Order''). Investments made
by the Fund will comply with the conditions set forth in the
Exemptive Order.
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[[Page 24564]]
The Fund is a series of J.P. Morgan Exchange-Traded Fund Trust
(``Trust''), a Delaware statutory trust. J.P. Morgan Investment
Management Inc. (``Adviser'' or ``Administrator'') will be the
investment adviser to the Fund and also provide administrative services
for and oversee the other service providers for the Fund. The Adviser
is a wholly-owned subsidiary of JPMorgan Asset Management Holdings
Inc., which is an indirect, wholly-owned subsidiary of JPMorgan Chase &
Co. (``JPMorgan Chase''), a bank holding company. JPMorgan Distribution
Services, Inc. (``Distributor'') will be the distributor of the Fund's
Shares.
Commentary .06 to Rule 8.600-E provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect
and maintain 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.\6\ 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
Adviser is not registered as a broker-dealer but is affiliated with a
broker-dealer and has implemented and will maintain a fire wall with
respect to such broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio. In the
event (a) the Adviser becomes registered as a broker-dealer or newly
affiliated with one or more broker-dealers, or (b) any new adviser or
sub-adviser is a registered broker-dealer or becomes affiliated with a
broker-dealer, it will implement and maintain a fire wall with respect
to its relevant personnel or its broker-dealer affiliate regarding
access to information concerning the composition and/or changes to the
portfolio, and will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding such
portfolio.
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\6\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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JPMorgan Income Builder Blend ETF
According to the Registration Statement, the Fund seeks to maximize
income on a risk-adjusted basis as the primary objective, while
maintaining prospects for capital appreciation as a secondary
objective. The Adviser will buy and sell securities and other
investments for the Fund based on the Adviser's view of strategies,
sectors, and overall portfolio construction taking into account income
generation, risk/return analyses, and relative value considerations.
Under normal market conditions,\7\ the Fund may invest in the fixed
income securities, equity securities, derivative instruments and other
financial instruments described below.
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\7\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
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The Fund may invest in the following ``Fixed Income Securities'':
U.S. Government obligations; \8\
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\8\ U.S. Government obligations 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
(``STRIPS'') and Coupons Under Book Entry Safekeeping (``CUBES'').
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U.S. Government Agency Securities; \9\
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\9\ U.S. Government Agency Securities include securities issued
or guaranteed by agencies and instrumentalities of the U.S.
government. These include all types of securities issued by the
Government National Mortgage Association (``Ginnie Mae''), the
Federal National Mortgage Association (``Fannie Mae'') and the
Federal Home Loan Mortgage Corporation (``Freddie Mac''), including
funding notes, subordinated benchmark notes, collateralized mortgage
obligations (``CMOs'') and Real Estate Mortgage Investment Conduits
(``REMICs'').
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Treasury Receipts;\10\
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\10\ Treasury Receipts are interests in separately traded
interest and principal component parts of U.S. Treasury obligations
that are issued by banks or brokerage firms and that are created by
depositing U.S. Treasury notes and U.S. Treasury bonds into a
special account at a custodian bank. Receipts include Treasury
Receipts (``TRs''), Treasury Investment Growth Receipts (``TIGRs''),
and Certificates of Accrual on Treasury Securities (``CATS'').
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Trust preferred securities;
Zero-coupon, pay-in-kind and deferred payment
securities;\11\
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\11\ Zero-coupon securities are securities that are sold at a
discount to par value and on which interest payments are not made
during the life of the security. Pay-in-kind securities are
securities that have interest payable by delivery of additional
securities. Deferred payment securities are zero-coupon debt
securities which convert on a specified date to interest bearing
debt securities.
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Variable and floating rate instruments;
Inverse floating rate securities;
Synthetic variable rate instruments;\12\
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\12\ Synthetic variable rate instruments are instruments that
generally involve the deposit of a long-term tax exempt bond in a
custody or trust arrangement and the creation of a mechanism to
adjust the long-term interest rate on the bond to a variable short-
term rate and a right (subject to certain conditions) on the part of
the purchaser to tender it periodically to a third party at par.
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Municipal securities;
Auction rate municipal securities and auction rate
preferred securities;
Brady bonds;
Agency and non-agency asset-backed securities
(``ABS'');\13\
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\13\ ABS may include collateralized bond obligations (``CBOs''),
collateralized loan obligations (``CLOs''), and other collateralized
debt obligations (``CDOs'').
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Agency and non-agency mortgage-backed securities
(``MBS'');\14\
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\14\ MBS may include agency and non-agency collateralized
mortgage obligations (``CMOs''); collateralized mortgage-backed
securities (``CMBS''); residential mortgage-backed securities
(``RMBS'') and principal-only (PO) and interest-only (IO) stripped
MBS. Non-agency ABS and non-agency MBS are referred to herein as
``Private ABS/MBS.''
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Stripped MBS;\15\
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\15\ Stripped MBS are derivative multi-class mortgage securities
which are usually structured with two classes of shares that receive
different proportions of the interest and principal from a pool of
mortgage assets. These include IO and PO securities issued outside a
Real Estate Mortgage Investment Conduit (``REMIC'') or CMO
structure.
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Custodial receipts;\16\
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\16\ The Fund may acquire securities in the form of custodial
receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Treasury notes or bonds
in connection with programs sponsored by banks and brokerage firms.
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Inflation-linked securities, including Treasury Inflation
Protected Securities (``TIPS'');
Loan assignments and participations, and commitments to
purchase loan assignments;
Adjustable rate mortgage loans (``ARMs'');
Mortgages (directly held);\17\
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\17\ Directly held mortgages are debt instruments secured by
real property.
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Sovereign obligations and obligations of supranational
agencies;
[[Page 24565]]
Corporate debt securities of U.S. and foreign issuers; and
Convertible securities.
The Fund may hold cash and cash equivalents.\18\
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\18\ For purposes of this filing, cash equivalents include the
securities included in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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The Fund may purchase and sell securities on a when-issued, delayed
delivery, or forward commitment basis.
The Fund may enter into short-term funding agreements, which are
agreements issued by banks and highly rated U.S. insurance companies
such as Guaranteed Investment Contracts (``GICs'') and Bank Investment
Contracts (``BICs'').
The Fund may invest in private placements, restricted securities
and Rule 144A securities.
The Fund may invest in the following exchange-listed equity
securities: U.S. and foreign exchange-listed common stocks of U.S. and
foreign corporations, U.S. and foreign exchange-listed preferred stocks
of U.S. and foreign corporations, U.S. and foreign exchange-listed
warrants of U.S. and foreign corporations, U.S. and foreign exchange-
listed rights of U.S. and foreign corporations, U.S. and foreign
exchange-listed master limited partnerships (``MLPs''), U.S. and
foreign exchange-listed real estate investment trusts (``REITs''), U.S.
and foreign exchange-listed convertible securities.
The Fund may invest in U.S. and foreign exchange-listed and non-
exchange-traded Depositary Receipts.\19\
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\19\ 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 equity weight of the Fund's portfolio will be invested in
non-exchange-traded ADRs.
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The Fund may hold exchange-traded funds (``ETFs''),\20\ and U.S.
exchange-traded closed-end funds.
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\20\ For purposes of this filing, ``ETFs'' are Investment
Company Units (as described in NYSE Arca Rule 5.2-E(j)(3));
Portfolio Depositary Receipts (as described in NYSE Arca Rule 8.100-
E); and Managed Fund Shares (as described in NYSE Arca Rule 8.600-
E). All ETFs will be listed and traded in the U.S. on a national
securities exchange. While the Fund may invest in inverse ETFs, the
Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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The Fund may invest in securities of non-exchange-traded investment
company securities, subject to applicable limitations under Section
12(d)(1) of the 1940 Act.
The Fund may hold structured investments.\21\
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\21\ A structured investment is a security having a return tied
to an underlying index or other security or asset class. Structured
investments generally are individually negotiated agreements and may
be traded OTC. Structured investments are organized and operated to
restructure the investment characteristics of the underlying index,
currency, commodity or financial instrument. Structured investments
that are equities may include OTC rights, OTC warrants and OTC
equity-linked notes.
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The Fund may hold the following U.S. and non-U.S. exchange-listed
and over-the-counter (``OTC'') derivative instruments: OTC foreign
currency forwards; U.S. and non-U.S. exchange-listed futures and
options on stocks, Fixed Income Securities, interest rates, credit,
currencies, commodities or related indices; and OTC options on stocks,
Fixed Income Securities, interest rates, credit, currencies,
commodities or related indices.
The Fund may invest in exchange-traded or OTC total return swaps on
U.S. and foreign equities, U.S. and foreign equity indices, currencies,
interest rates, inflation, commodities, Fixed Income Securities and
Fixed Income Securities indexes.
The Fund may engage in foreign currency transactions which involve
strategies used to hedge against currency risks, for other risk
management purposes or to increase income or gain to the Fund. These
strategies may consist of use of any of the following: options on
currencies, currency futures, options on such futures, forward foreign
currency transactions (including non-deliverable forwards (``NDFs'')),
forward rate agreements, spot currency transactions, and currency
swaps, caps and floors.
The Fund may invest in mortgage dollar rolls.
The Fund may hold exchange-traded or non-exchange-traded contingent
value rights (``CVRs'').\22\
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\22\ For purposes of this filing, CVRs are rights provided to
shareholders of a company in connection with a corporate
restructuring or acquisition. These rights relate to additional
benefits to shareholders if a certain event occurs. CVRs frequently
have an expiration date relating to the times that contingent events
must occur. CVRs related to a company's stock are generally related
to the price performance of such stock. The Adviser represents that
the Fund will not actively invest in such securities but may, at
times, receive a distribution of such securities in connection with
the Fund's holdings in other securities. Therefore, the Fund's
holdings in non-exchange-traded CVRs, if any, would not be utilized
to further the Fund's investment objective and would not be acquired
as the result of the Fund's voluntary investment decisions.
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The Fund may engage in short sales of any financial instruments in
which it may invest.
The Fund will not invest in securities or other financial
instruments that have not been described in this proposed rule change.
Other Restrictions
The Fund may invest up to 20% of the Fund's assets in non-exchange-
traded investment company securities.
The Fund may invest up to 15% of the Fund's assets in the aggregate
in OTC equity-linked notes, OTC rights, OTC warrants and OTC CVRs.
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 and other investments 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 (e.g., 2Xs
and 3Xs) of the Fund's primary broad-based securities benchmark index
(as defined in Form N-1A).\23\
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\23\ 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.
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The Fund's Use of Derivatives
Investments in derivative instruments will be made in accordance
with the Fund's investment objective and policies.
To limit the potential risk associated with such transactions, the
Fund will enter into offsetting transactions or segregate or
``earmark'' assets determined to be liquid by the Adviser in accordance
with procedures established by the Trust's Board of Trustees (the
``Board''). In addition, the Fund has included 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.
Creation and Redemption of Shares
The consideration for a purchase of Creation Units will generally
be cash, but may consist of an in-kind deposit of a designated
portfolio of equity securities and other investments (the ``Deposit
Instruments'') and an amount of cash computed as described below (the
``Cash Amount'') under some
[[Page 24566]]
circumstances. The Cash Amount together with the Deposit Instruments,
as applicable, are referred to as the ``Portfolio Deposit,'' which
represents the minimum initial and subsequent investment amount for a
Creation Unit of the Fund. The size of a Creation Unit will be 50,000
Shares and will be subject to change.
In the event the Fund requires Deposit Instruments and a Cash
Amount in consideration for purchasing a Creation Unit, the function of
the Cash Amount is to compensate for any differences between the net
asset value (``NAV'') per Creation Unit and the Deposit Amount (as
defined below). The Cash Amount 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 aggregate market
value of the Deposit Instruments. If the Cash Amount is a positive
number (the NAV per Creation Unit exceeds the Deposit Amount), the
Authorized Participant will deliver the Cash Amount. If the Cash Amount
is a negative number (the NAV per Creation Unit is less than the
Deposit Amount), the Authorized Participant will receive the Cash
Amount. The Administrator, through the National Securities Clearing
Corporation (``NSCC''), will make available on each business day,
immediately prior to the opening of business on the Exchange (currently
9:30 a.m. Eastern time (``E.T.'')), the list of the names and the
required number of shares of each Deposit Instrument to be included in
the current Portfolio Deposit (based on information at the end of the
previous business day), as well as information regarding the Cash
Amount for the Fund.
The identity and number of the Deposit Instruments and Cash Amount
required for the Portfolio Deposit for the Fund changes as rebalancing
adjustments and corporate action events are reflected from time to time
by the Adviser with a view to the investment objective of the Fund. In
addition, the Trust reserves the right to accept a basket of securities
or cash that differs from Deposit Instruments or to permit the
substitution of an amount of cash (i.e., a ``cash in lieu'' amount) to
be added to the Cash Amount to replace any Deposit Instrument which
may, among other reasons, not be available in sufficient quantity for
delivery, not be permitted to be re-registered in the name of the Trust
as a result of an in-kind creation order pursuant to local law or
market convention or for other reasons as described in the Registration
Statement, or which may not be eligible for trading by a Participating
Party (defined below).
Procedures for Creation of Creation Units
To be eligible to place orders with the Distributor to create
Creation Units of the Fund, an entity or person either must be (1) a
``Participating Party,'' i.e., a broker-dealer or other participant in
the clearing process through the Continuous Net Settlement System of
the NSCC; or (2) a Depositary Trust Company (``DTC'') Participant,
which, in either case, must have executed an agreement with the
Distributor (``Participant Agreement''). Such Participating Party and
DTC Participant are collectively referred to as an ``Authorized
Participant.'' All orders to create Creation Units must be received by
the Distributor no later than the closing time of the regular trading
session on the Exchange (``Closing Time'') (ordinarily 4:00 p.m. E.T.),
in each case on the date such order is placed in order for creation of
Creation Units to be effected based on the NAV of the Fund as
determined on such date.
Redemption of Creation Units
Shares may be redeemed only in Creation Units at their NAV next
determined after receipt of a redemption request in proper form by the
Distributor, only on a business day and only through a Participating
Party or DTC Participant who has executed a Participant Agreement. All
orders to redeem Creation Units must be received by the Distributor no
later than the Exchange Closing Time (ordinarily 4:00 p.m. E.T.).
Although the Fund will generally pay redemption proceeds in cash,
there may be instances when it will make redemptions in-kind.\24\ In
these instances, the Administrator, through NSCC, makes available
immediately prior to the opening of business on the Exchange (currently
9:30 a.m. E.T.) on each day that the Exchange is open for business, the
identity of the Fund's assets and/or an amount of cash that will be
applicable (subject to possible amendment or correction) to redemption
requests received in proper form on that day. With respect to
redemptions in-kind, the redemption proceeds for a Creation Unit
generally consist of ``Redemption Instruments'' (which are securities
received on redemption) as announced by the Administrator on the
business day of the request for redemption, plus cash in an amount
equal to the difference between the NAV of the Shares being redeemed,
as next determined after a receipt of a request in proper form, and the
value of the Redemption Instruments.
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\24\ The Adviser represents that, to the extent the Trust
effects the creation or redemption of Shares in cash, such
transactions will be effected in the same manner for all Authorized
Participants.
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Disclosed Portfolio
The Fund's disclosure of derivative positions in the applicable
Disclosed Portfolio includes information that market participants can
use to value these positions intraday. On a daily basis, the Fund will
disclose the information regarding the Disclosed Portfolio required
under NYSE Arca Rule 8.600-E (c)(2) to the extent applicable. The
Fund's website information will be publicly available at no charge.
Impact on Arbitrage Mechanism
The Adviser believes there will be minimal impact to the arbitrage
mechanism as a result of the use of derivatives. Market makers and
participants should be able to value derivatives as long as the
positions are disclosed with relevant information. The Adviser believes
that the price at which Shares trade will continue to be disciplined by
arbitrage opportunities created by the ability to purchase or redeem
Shares at their NAV, which should ensure that Shares will not trade at
a material discount or premium in relation to their NAV.
The Adviser does not believe there will be any significant impacts
to the settlement or operational aspects of the Fund's arbitrage
mechanism due to the use of derivatives. Because derivatives generally
are not eligible for in-kind transfer, they will typically be
substituted with a ``cash in lieu'' amount when the Fund processes
purchases or redemptions of creation units in-kind.
Application of Generic Listing Requirements
The Exchange is submitting this proposed rule change because the
portfolio for the Fund will not meet all of the ``generic'' listing
requirements of Commentary .01 to NYSE Arca Rule 8.600-E applicable to
the listing of Managed Fund Shares. The Fund's portfolio would meet all
such requirements except for those set forth in Commentary .01(a),
Commentary
[[Page 24567]]
.01(b)(4),\25\ and Commentary .01(b)(5) to NYSE Arca Rule 8.600-E.\26\
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\25\ Commentary .01(b)(4) provides that component securities
that in the aggregate account for at least 90% of the fixed income
weight of the portfolio must be either: (a) from issuers that are
required to file reports pursuant to Sections 13 and 15(d) of the
Act; (b) from issuers that have a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more; (c) from issuers that have outstanding securities that are
notes, bonds debentures, or evidence of indebtedness having a total
remaining principal amount of at least $1 billion; (d) exempted
securities as defined in Section 3(a)(12) of the Act; or (e) from
issuers that are a government of a foreign country or a political
subdivision of a foreign country.
\26\ Commentary .01(b)(5) provides that non-agency, non-
government-sponsored entity (``GSE'') and privately-issued mortgage-
related and other asset-backed securities components of a portfolio
shall not account, in the aggregate, for more than 20% of the weight
of the fixed income portion of the portfolio.
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With respect to Commentary .01(a) to NYSE Arca Rule 8.600-E, as
noted above, the Fund may hold OTC equity-linked notes, rights,
warrants and CVRs, which are deemed non-exchange-traded equity
securities for purposes of this filing.\27\ Because such securities are
not listed on a national securities exchange or an exchange that has
last-sale reporting, such securities would not meet the criteria of
Commentary .01(a)(1)(E) and (a)(2)(E) to NYSE Arca Rule 8.600-E
applicable to U.S. Component Stocks and Non-U.S. Component Stocks. As
noted above, the Fund may invest up to 15% of the Fund's assets in the
aggregate in OTC equity-linked notes, rights, warrants and CVRs. The
Exchange believes that this limitation is appropriate in that OTC
warrants, rights, equity-linked notes and CVRs are providing debt or
equity-oriented exposures or are received in connection with the Fund's
previous investment in fixed income securities or equities. All of the
other equity securities held by the Fund will comply with the
requirements of Commentary .01(a)(1)(E) and (a)(2)(E) to NYSE Arca Rule
8.600-E. With respect to OTC CVRs, the Adviser represents that the Fund
will not actively invest in such securities but may, at times, receive
a distribution of such securities in connection with the Fund's
holdings in other securities. Therefore, the Fund's holdings in non-
exchange-traded CVRs, if any, would not be utilized to further the
Fund's investment objective and would not be acquired as the result of
the Fund's voluntary investment decisions.
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\27\ Commentary .01(a) to NYSE Arca Rule 8.600-E provides
criteria applicable to exchange-traded equity securities held by a
series of Managed Fund Shares. Among such criteria, equity
securities that are U.S. Component Stocks as described in NYSE Arca
Rule 5-2-E(j)(3) shall be listed on a national securities exchange
and shall be NMS Stocks as defined in Rule 600 of Regulation NMS
under the Act (with a limited exception for certain ADRs). Equity
securities that are Non-U.S. Component Stocks as described in NYSE
Arca Rule 5-2-E(j)(3) shall be listed and traded on an exchange that
has last-sale reporting.
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The Fund may invest in non-exchange-traded investment company
securities, which are equity securities. Because such securities have a
net asset value based on the value of securities and financial assets
the investment company holds, the Exchange believes it is both
unnecessary and inappropriate to apply to such investment company
securities the criteria in Commentary .01(a)(1).\28\ As noted above,
the Fund may invest up to 20% of the Fund's assets in non-exchange-
traded investment company securities.
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\28\ The Commission has previously approved proposed rule
changes under Section 19(b) of the Act for series of Managed Fund
Shares that may invest in non-exchange traded investment company
securities. See, e.g., Securities Exchange Act Release No. 85244
(March 4, 2019), 84 FR 8553 (March 8, 2019) (SR-NYSEArca-2018-82)
(Order Granting Approval of a Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, Regarding Certain Changes Relating to
Investments of the PGIM Active High Yield Bond ETF).
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The Exchange notes that Commentary .01(a)(1)(A) through (D) to Rule
8.600-E exclude application of those provisions to certain ``Derivative
Securities Products'' that are exchange-traded investment company
securities, including Investment Company Units (as described in NYSE
Arca Rule 5.2-E(j)(3)), Portfolio Depositary Receipts (as described in
NYSE Arca Rule 8.100-E) and Managed Fund Shares (as described in NYSE
Arca Rule 8.600-E).\29\ In its 2008 Approval Order approving amendments
to Commentary .01(a) to Rule 5.2(j)(3) that exclude Derivative
Securities Products from certain provisions of Commentary .01(a) (which
exclusions are similar to those in Commentary .01(a)(1) to Rule 8.600-
E), the Commission stated that ``based on the trading characteristics
of Derivative Securities Products, it may be difficult for component
Derivative Securities Products to satisfy certain quantitative index
criteria, such as the minimum market value and trading volume
limitations.'' The Exchange notes that it would be difficult or
impossible to apply to non-exchange-traded investment company
securities the generic quantitative criteria (e.g., market
capitalization, trading volume, or portfolio criteria) in Commentary
.01 (a) through (d) applicable to U.S. Component Stocks. For example,
the requirement for U.S. Component Stocks in Commentary .01(a)(1)(B)
that there be minimum monthly trading volume of 250,000 shares, or
minimum notional volume traded per month of $25,000,000, averaged over
the last six months is tailored to exchange-traded securities (e.g.,
U.S. Component Stocks) and not to mutual fund shares, which do not
trade in the secondary market. Moreover, application of such criteria
would not serve the purpose served with respect to U.S. Component
Stocks, namely, to establish minimum liquidity and diversification
criteria for U.S. Component Stocks held by series of Managed Fund
Shares.
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\29\ The Commission initially approved the Exchange's proposed
rule change to exclude ``Derivative Securities Products'' (i.e.,
Investment Company Units and securities described in Section 2 of
Rule 8) and ``Index-Linked Securities (as described in Rule 5.2-
E(j)(6)) from Commentary .01(a)(A)(1) through (4) to Rule 5.2-
E(j)(3) in Securities Exchange Act Release No. 57751 (May 1, 2008),
73 FR 25818 (May 7, 2008) (SR-NYSEArca-2008-29) (Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, to Amend the Eligibility Criteria for Components of an
Index Underlying Investment Company Units) (``2008 Approval
Order''). See also, Securities Exchange Act Release No. 57561 (March
26, 2008), 73 FR 17390 (April 1, 2008) (Notice of Filing of Proposed
Rule Change and Amendment No. 1 Thereto to Amend the Eligibility
Criteria for Components of an Index Underlying Investment Company
Units). The Commission subsequently approved generic criteria
applicable to listing and trading of Managed Fund Shares, including
exclusions for Derivative Securities Products and Index-Linked
Securities in Commentary .01(a)(1)(A) through (D), in Securities
Exchange Act Release No. 78397 (July 22, 2016), 81 FR 49320 (July
27, 2016) (Order Granting Approval of Proposed Rule Change, as
Modified by Amendment No. 7 Thereto, Amending NYSE Arca Equities
Rule 8.600 To Adopt Generic Listing Standards for Managed Fund
Shares). See also, Amendment No. 7 to SR-NYSEArca-2015-110,
available at https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-9.pdf.
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The Exchange notes that the Commission has previously approved
listing and trading of an issue of Managed Fund Shares that may invest
in equity securities that are non-exchange-traded securities of other
open-end investment company securities notwithstanding that the fund
would not meet the requirements of Commentary .01(a)(1)(A) through (E)
to Rule 8.600-E with respect to such fund's investments in such
securities.\30\ Thus, the Exchange believes that it is appropriate to
permit the Fund to invest in non-exchange-traded open-end management
investment company securities, as described above.
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\30\ See Securities Exchange Act Release No. 83319 (May 24,
2018) (SR-NYSEArca-2018-15) (Order Approving a Proposed Rule Change,
as Modified by Amendment No. 1 Thereto, to Continue Listing and
Trading Shares of the PGIM Ultra Short Bond ETF Under NYSE Arca Rule
8.600-E).
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The Fund will not comply with the requirements in Commentary
.01(b)(4) to Rule 8.600-E that component securities that in the
aggregate account for at least 90% of the fixed income weight of the
portfolio meet one of the criteria specified in Commentary
[[Page 24568]]
.01(b)(4), because certain Private ABS/MBS by their nature cannot
satisfy the criteria in Commentary .01(b)(4).\31\ Instead, the Exchange
proposes that the Fund's investments in Fixed Income Securities other
than Private ABS/MBS will be required to comply with the requirements
of Commentary .01(b)(4), and Private ABS/MBS will be limited to 20% of
the weight of the Fund's portfolio. The Exchange believes that
excluding Private ABS/MBS from the 90% calculation in Commentary
.01(b)(4) is consistent with the Act because the Fund's portfolio will
minimize the risk to the overall Fund associated with any particular
holding of the Fund as a result of the diversification provided by the
investments and the Adviser's selection process, which closely monitors
investments to ensure maintenance of credit and liquidity standards.
Further, the Exchange believes that this alternative limitation is
appropriate because Commentary .01(b)(4) to Rule 8.600-E is not
designed for structured finance vehicles such as Private ABS/MBS.
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\31\ Private ABS/MBS are generally issued by special purpose
vehicles, so the criteria in Commentary .01(b)(4) to Rule 8.600-E
regarding an issuer's market capitalization and the remaining
principal amount of an issuer's securities are typically unavailable
with respect to Private ABS/MBS, even though such Private ABS/MBS
may own significant assets.
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The Exchange notes that the Commission has previously approved the
listing of Managed Fund Shares with similar investment objectives and
strategies without imposing requirements that a certain percentage of
such funds' securities meet one of the criteria set forth in Commentary
.01(b)(4).\32\
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\32\ See, e.g., Exchange Act Release Nos. 67894 (September 20,
2012) 77 FR 59227 (September 26, 2012) (SR-BATS-2012-033) (order
approving the listing and trading of shares of the iShares Short
Maturity Bond Fund); 70342 (September 6, 2013), 78 FR 56256
(September 12, 2013) (SR-NYSEArca-2013-71) (order approving the
listing and trading of shares of the SPDR SSgA Ultra Short Term Bond
ETF, SPDR SSgA Conservative Ultra Short Term Bond ETF and SPDR SSgA
Aggressive Ultra Short Term Bond ETF). See also, Securities Exchange
Act Release Nos. 84047 (September 6, 2018), 83 FR 46200 (September
12, 2018) (SR-NASDAQ-2017-128) (Notice of Filing of Amendment No. 3
and Order Granting Accelerated Approval of a Proposed Rule Change,
as Modified by Amendment No. 3, To List and Trade Shares of the
Western Asset Total Return ETF); 85022 (January 31, 2019), 25 FR
2265 (February 6, 2019) (SR-NASDAQ-2018-080) (Notice of Filing of
Amendment No. 3 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1, 2 and 3, To
List and Trade Shares of the BrandywineGLOBAL-Global Total Return
ETF).
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The Fund will not comply with the requirements in Commentary
.01(b)(5) to Rule 8.600-E that non-agency, non-GSE and privately-issued
mortgage-related and other asset-backed securities components of a
portfolio shall not account, in the aggregate, for more than 20% of the
weight of the fixed income portion of the portfolio. The Exchange
proposes that Private ABS/MBS will be limited to 20% of the weight of
the Fund's entire portfolio rather than to only the fixed income
portion of the portfolio.
The Exchange believes this exception from Commentary .01(b)(5) is
appropriate because the Fund's investment in non-agency, non-GSE and
privately-issued mortgage-related and other ABS may provide the Fund
with benefits associated with increased diversification, as such
investments may be less correlated to interest rates than other Fixed
Income Securities. The Exchange notes that application of the 20%
limitation only to the fixed income portion of the Fund's portfolio may
impose a much more restrictive percentage limit on permitted holdings
of non-agency ABS and non-agency MBS for the Fund, which has a more
diversified investment portfolio compared to series of Managed Fund
Shares that hold principally or exclusively fixed income securities.
For example, a fund holding 100% of its assets in fixed income
securities can hold 20% of its entire portfolio's weight in non-agency
ABS. In contrast, a fund holding 25% of its assets in fixed income
securities, 25% in U.S. Component Stocks, and 50% in cash and cash
equivalents is limited to a 5% (25% * 20% = 5%) allocation to non-
agency ABS. The Exchange, therefore, believes application of the 20%
limitation to the Fund's entire portfolio would be more equitable for
the Fund compared to series of Managed Fund Shares with different
investment objectives and holdings.
The Exchange notes that the Commission has previously approved the
listing of actively managed exchange-traded funds that can invest 20%
of their total assets in non-agency, non-GSE and other privately issued
ABS and MBS.\33\ In addition, the Commission has previously approved
listing and trading of shares of an issue of Managed Fund Shares where
such fund's investments in non-agency, non-GSE and other privately
issued ABS and MBS (i.e., Private ABS/MBS) will, in the aggregate, not
exceed 20% of the total assets of the fund, rather than the weight of
the fixed income portion of the fund's portfolio.\34\ Therefore, the
Exchange believes it is appropriate to apply the 20% limitation to the
Fund's investment in non-agency, non-GSE and privately-issued mortgage-
related and other ABS components of the Fund's portfolio to the Fund's
total assets.
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\33\ See, e.g., Securities Exchange Act Release Nos. 80946 (June
15, 2017) 82 FR 28126 (June 20, 2017) (SR-NASDAQ-2017-039)
(permitting the Guggenheim Limited Duration ETF to invest up to 20%
of its total assets in privately-issued, non-agency and non-GSE ABS
and MBS); 76412 (November 10, 2015), 80 FR 71880 (November 17, 2015)
(SR-NYSEArca-2015-111) (permitting the RiverFront Strategic Income
Fund to invest up to 20% of its assets in privately-issued, non-
agency and non-GSE ABS and MBS); 74814 (April 27, 2015), 80 FR 24986
(May 1, 2015) (SR-NYSEArca-2014-107) (permitting the Guggenheim
Enhanced Short Duration ETF to invest up to 20% of its assets in
privately-issued, non-agency and non-GSE ABS and MBS); 74109
(January 21, 2015), 80 FR 4327 (January 27, 2015) (SR-NYSEArca-2014-
134) (permitting the IQ Wilshire Alternative Strategies ETF to
invest up to 20% of its total assets in MBS and other ABS, without
any limit on the type of such MBS and ABS).
\34\ See Securities Exchange Act Release No. 83319 (May 24,
2018), 83 FR 25097 (May 31, 2018) (SR-NYSEArca-2018-15) (Order
Approving a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, to Continue Listing and Trading Shares of the PGIM Ultra
Short Bond ETF Under NYSE Arca Rule 8.600-E).
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Deviations from the generic requirements are necessary for the Fund
to achieve its investment objective in a manner that is cost-effective
and that maximizes investors' returns. Further, the proposed
alternative requirements are narrowly tailored to allow the Fund to
achieve its investment objective in manner that is consistent with the
principles of Section 6(b)(5) of the Act. As a result, it is in the
public interest to approve listing and trading of Shares of the Fund on
the Exchange pursuant to the requirements set forth herein.
The Exchange notes that, other than Commentary .01(a), (b)(4) and
(b)(5) to Rule 8.600-E, as described above, the Fund's portfolio will
meet all other requirements of Rule 8.600-E.
Availability of Information
The Fund's website (www.jpmorganfunds.com), which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund that may be downloaded. The Fund's
website will include additional quantitative information updated on a
daily basis, including, for the Fund, (1) daily trading volume, the
prior business day's reported closing price, NAV and mid-point of the
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask
Price''),\35\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the
frequency
[[Page 24569]]
distribution of discounts and premiums of the daily Bid/Ask Price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. On each business day, before commencement
of trading in Shares in the Core Trading Session on the Exchange, the
Adviser will disclose on the Fund's website the Disclosed Portfolio for
the Fund as defined in NYSE Arca Rule 8.600-E(c)(2) that will form the
basis for the Fund's calculation of NAV at the end of the business
day.\36\
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\35\ 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.
\36\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
the Fund will be able to disclose at the beginning of the business
day the portfolio that will form the basis for the NAV calculation
at the end of the business day.
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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 website at www.sec.gov.
Quotation and last sale information for the Shares and for
portfolio holdings of the Fund that are U.S. exchange-listed, including
common stocks, preferred stocks, warrants, rights, MLPs, REITs,
convertible securities, ETFs, closed-end funds, and Depositary Receipts
will be available via the CTA high speed line. Price information for
U.S. and foreign exchange-traded futures and options on futures will be
available from the exchange on which they are listed. Quotation and
last sale information for exchange-listed options cleared via the
Options Clearing Corporation will be available via the Options Price
Reporting Authority. Quotation and last sale information for foreign
exchange-listed equity securities will be available from the exchanges
on which they trade and from major market data vendors, as applicable.
Information regarding market price and trading volume for 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 information for OTC options, cash equivalents, swaps, and
Fixed Income Securities may be obtained from brokers and dealers who
make markets in such securities or through nationally recognized
pricing services through subscription agreements. Forwards and spot
currency price information will be available from major market data
vendors. Price information for OTC equity-linked notes, OTC warrants,
non-exchange-traded CVRs, OTC Depositary Receipts, 144A securities,
private placement securities and restricted securities is available
from major market data vendors.
In addition, the PIV, as defined in NYSE Arca Rule 8.600-E(c)(3),
will be widely disseminated by one or more major market data vendors at
least every 15 seconds during the Core Trading Session.\37\ The
dissemination of the PIV, 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.
---------------------------------------------------------------------------
\37\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available PIVs
taken from the CTA or other data feeds.
---------------------------------------------------------------------------
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\38\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E 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 of the Fund inadvisable.
---------------------------------------------------------------------------
\38\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------
Trading in the Shares will be subject to NYSE Arca Rule 8.600-
E(d)(2)(D), which sets forth circumstances under which Shares of the
Fund may be halted.
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. E.T. in
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Rule 7.6-E, 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.
Except as described herein, the Shares of the Fund will conform to
the initial and continued listing criteria under NYSE Arca Rule 8.600-
E. The Exchange represents that, for initial and/or continued listing,
the Fund will be in compliance with Rule 10A-3 \39\ under the Act, as
provided by NYSE Arca Rule 5.3-E. A minimum of 100,000 Shares of the
Fund will be outstanding at the commencement of trading on the
Exchange. The Exchange will obtain a representation from the issuer of
the Shares of the Fund that the NAV and the Disclosed Portfolio will be
made available to all market participants at the same time.
---------------------------------------------------------------------------
\39\ 17 CFR 240 10A-3.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances administered by the Exchange, as
well as cross-market surveillances administered by 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.\40\ The Exchange represents that
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and applicable federal securities laws.
---------------------------------------------------------------------------
\40\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
---------------------------------------------------------------------------
The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, certain
exchange-listed equity securities, certain futures, and certain
exchange-traded options with other markets and other entities that are
members of the Intermarket Surveillance Group (``ISG''), and the
Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading such securities and financial
instruments from such markets and other entities. In
[[Page 24570]]
addition, the Exchange may obtain information regarding trading in such
securities and financial instruments from markets and other entities
that are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.\41\ 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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\41\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolio holdings or reference asset, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange listing rules specified in this rule filing
shall constitute continued listing requirements for listing the Shares
on the Exchange.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Fund to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Fund is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares of the Fund. Specifically, the Bulletin will discuss
the following: (1) The procedures for purchases and redemptions of
Shares in Creation Units (and that Shares are not individually
redeemable); (2) NYSE Arca 9.2-E(a), which imposes a duty of due
diligence on its ETP Holders to learn the essential facts relating to
every customer prior to trading the Shares; (3) the risks involved in
trading the Shares during the Early and Late Trading Sessions when an
updated PIV will not be calculated or publicly disseminated; (4) how
information regarding the PIV and the Disclosed Portfolio is
disseminated; (5) the requirement that ETP Holders deliver a prospectus
to investors purchasing newly issued Shares prior to or concurrently
with the confirmation of a transaction; and (6) trading information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares of the Fund
will be calculated after 4:00 p.m. E.T. each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \42\ 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.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Rule 8.600-E. The
Adviser is not registered as a broker-dealer but is affiliated with a
broker-dealer and has implemented and will maintain a fire wall with
respect to such broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio. The
Exchange represents that trading in the Shares will be subject to the
existing trading surveillances administered by the Exchange, as well as
cross-market surveillances administered by FINRA on behalf of the
Exchange, which are designed to detect violations of Exchange rules and
applicable federal securities laws. The Exchange represents that these
procedures are adequate to properly monitor Exchange trading of the
Shares in all trading sessions and to deter and detect violations of
Exchange rules and applicable federal securities laws. The Exchange or
FINRA, on behalf of the Exchange, or both, will communicate as needed
regarding trading in the Shares, certain exchange-listed equity
securities, certain futures, and certain exchange-traded options with
other markets and other entities that are members of the ISG, and the
Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading such securities and financial
instruments from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in such securities
and financial instruments from markets and other entities that are
members of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. 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.
The PIV, as defined in NYSE Arca Rule 8.600-E (c)(3), will be
widely disseminated by one or more major market data vendors at least
every 15 seconds during the Core Trading Session. The Fund may hold up
to an aggregate amount of 15% of its net assets in illiquid assets
(calculated at the time of investment), deemed illiquid by the Adviser,
consistent with Commission guidance.
Except as described herein, the Shares of the Fund will conform to
the initial and continued listing criteria under NYSE Arca Rule 8.600-
E. The Exchange represents that, for initial and/or continued listing,
the Fund will be in compliance with Rule 10A-3 under the Act, as
provided by NYSE Arca Rule 5.3-E. A minimum of 100,000 Shares of the
Fund will be outstanding at the commencement of trading on the
Exchange. The Exchange will obtain a representation from the issuer of
the Shares of the Fund that the NAV per Share will be calculated daily
and that the NAV and the Disclosed Portfolio will be made available to
all market participants at the same time. In addition, a large amount
of information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. The Fund's portfolio holdings
will be disclosed on its website daily after the close of trading on
the Exchange and prior to the opening of trading on the Exchange the
following day. On a daily basis, the Fund will disclose the information
regarding the Disclosed Portfolio required under NYSE Arca Rule 8.600-E
(c)(2) to the extent applicable. The Fund's website information will be
publicly available at no charge.
Investors can also obtain the Trust's 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
[[Page 24571]]
Form N-SAR may be viewed on-screen or downloaded from the Commission's
website at www.sec.gov.
The website for the Fund 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 ETP Holders in an Information
Bulletin of the special characteristics and risks associated with
trading the Shares of the Fund. Trading in Shares of the Fund will be
halted if the circuit breaker parameters in NYSE Arca Rule 7.12-E 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 Rule 8.600-
E(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 PIV, the
Disclosed Portfolio, and quotation and last sale information for the
Shares. 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 and other investments
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
(e.g., 2Xs and 3Xs) of the Fund's primary broad-based securities
benchmark index (as defined in Form N-1A).
With respect to the Fund's investment in Private ABS/MBS, the
proposed non-compliance with the requirements in Commentary .01(b)(4)
to Rule 8.600-E that component securities that in the aggregate account
for at least 90% of the fixed income weight of the portfolio meet one
of the criteria specified in Commentary .01(b)(4) is appropriate
because certain Private ABS/MBS by their nature cannot satisfy the
criteria in Commentary .01(b)(4). Instead, the Exchange proposes that
the Fund's investments in Fixed Income Securities other than Private
ABS/MBS will be required to comply with the requirements of Commentary
.01(b)(4), and Private ABS/MBS will be limited to 20% of the weight of
the Fund's portfolio. The Exchange believes that excluding Private ABS/
MBS from the 90% calculation in Commentary .01(b)(4) is consistent with
the Act because the Fund's portfolio will minimize the risk to the
overall Fund associated with any particular holding of the Fund as a
result of the diversification provided by the investments and the
Adviser's selection process, which closely monitors investments to
ensure maintenance of credit and liquidity standards. Further, the
Exchange believes that this alternative limitation is appropriate
because Commentary .01(b)(4) to Rule 8.600-E is not designed for
structured finance vehicles such as Private ABS/MBS.
The Exchange notes that the Commission has previously approved the
listing of Managed Fund Shares with similar investment objectives and
strategies without imposing requirements that a certain percentage of
such funds' securities meet one of the criteria set forth in Commentary
.01(b)(4).\43\
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\43\ See note 32, supra.
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The Exchange believes the proposed exception from Commentary
.01(b)(5) is appropriate because the Fund's investment in non-agency,
non-GSE and privately-issued mortgage-related and other ABS may provide
the Fund with benefits associated with increased diversification, as
such investments may be less correlated to interest rates than other
Fixed Income Securities. The Exchange notes that application of the 20%
limitation only to the fixed income portion of the Fund's portfolio may
impose a much more restrictive percentage limit on permitted holdings
of non-agency ABS and non-agency MBS for the Fund, which has a more
diversified investment portfolio compared to series of Managed Fund
Shares that hold principally or exclusively fixed income securities.
The Exchange believes application of the 20% limitation to the Fund's
entire portfolio would be more equitable for the Fund compared to
series of Managed Fund Shares with different investment objectives and
holdings.
The Fund may invest in shares of non-exchange-traded open-end
management investment company securities, which are equity securities.
Therefore, the Fund will not comply with the requirements of Commentary
.01(a)(1) to NYSE Arca Rule 8.600-E (U.S. Component Stocks) with
respect to its equity securities holdings. It is appropriate and in the
public interest to approve listing and trading of Shares of the Fund
notwithstanding that the Fund's holdings in such securities would not
meet the requirements of Commentary .01(a)(1)(A) through (E) to Rule
8.600-E. The Fund's investment in non-exchange-traded open-end
management investment company securities will not exceed 20% of the
Fund's assets. The Fund's investment in shares of non-exchange-traded
open-end management investment company securities will be utilized in
order to obtain income on short-term cash balances while awaiting
attractive investment opportunities, to provide liquidity in
preparation for anticipated redemptions or for defensive purposes,
which will allow the Fund to obtain the benefits of a more diversified
portfolio available in the shares of non-exchange-traded open-end
management investment company securities than might otherwise be
available. Moreover, such investments, which may include mutual funds
that invest, for example, principally in fixed income securities, would
be utilized to help the Fund meet its investment objective and to
equitize cash in the short term. The Fund will invest in such
securities only to the extent that those investments would be
consistent with the requirements of Section 12(d)(1) of the 1940 Act
and the rules thereunder. Because such securities must satisfy
applicable 1940 Act diversification requirements, and have a net asset
value based on the value of securities and financial assets the
investment company holds, it is both unnecessary and inappropriate to
apply to such investment company securities the criteria in Commentary
.01(a)(1).
The Exchange notes that it would be difficult or impossible to
apply to mutual fund shares certain of the generic quantitative
criteria (e.g., market capitalization, trading volume, or portfolio
criteria) in Commentary .01 (A) through (D) applicable to U.S.
Component Stocks. For example, the requirements for U.S. Component
Stocks in Commentary .01(a)(1)(B) that there be minimum monthly trading
volume of 250,000 shares, or minimum notional volume traded per month
of $25,000,000, averaged over the last six months are tailored to
exchange-traded securities (i.e., U.S. Component Stocks) and not to
mutual fund shares, which do not trade in the secondary market and for
which no such volume information is reported. In addition, Commentary
.01(a)(1)(A) relating to minimum market value of portfolio component
stocks, Commentary .01(a)(1)(C) relating to weighting of portfolio
component stocks, and Commentary .01(a)(1)(D) relating to minimum
number of portfolio components are not appropriately applied to open-
end management investment company securities; open-end investment
companies hold multiple individual securities as
[[Page 24572]]
disclosed publicly in accordance with the 1940 Act, and application of
Commentary .01(a)(1)(A) through (D) would not serve the purposes served
with respect to U.S. Component Stocks, namely, to establish minimum
liquidity and diversification criteria for U.S. Component Stocks held
by series of Managed Fund Shares.
To the extent the Fund invests in OTC equity-linked notes, OTC
rights, OTC warrants and non-exchange traded CVRs, the Fund will not
comply with the requirements of Commentary .01(a)(1) to NYSE Arca Rule
8.600-E (U.S. Component Stocks) and/or Commentary .01(a)(2) to NYSE
Arca Rule 8.600-E (Non-U.S. Component Stocks) with respect to its
equity securities holdings. As noted above, the Fund may invest up to
15% of the Fund's assets in the aggregate in OTC equity-linked notes,
rights, warrants and CVRs. The Exchange believes that this limitation
is appropriate in that OTC warrants, rights, equity-linked notes and
CVRs are providing debt or equity-oriented exposures or are received in
connection with the Fund's previous investment in fixed income
securities or equities. All of the other equity securities held by the
Fund will comply with the requirements of Commentary .01(a)(1)(E) and
(a)(2)(E) to NYSE Arca Rule 8.600-E. With respect to OTC CVRs, the
Adviser represents that the Fund will not actively invest in such
securities but may, at times, receive a distribution of such securities
in connection with the Fund's holdings in other securities. Therefore,
the Fund's holdings in non-exchange-traded CVRs, if any, would not be
utilized to further the Fund's investment objective and would not be
acquired as the result of the Fund's voluntary investment decisions.
The Exchange accordingly believes that it is appropriate and in the
public interest to approve listing and trading of Shares of the Fund on
the Exchange notwithstanding that the Fund would not meet the
requirements of Commentary .01(a), (b)(4) and (b)(5) to Rule 8.600-E.
The Exchange notes that, other than Commentary .01(a)(1), (a)(2),
(b)(4) and (b)(5) to Rule 8.600-E, the Fund's portfolio will meet all
other requirements of Rule 8.600-E.
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
that holds fixed income securities, equity securities and derivatives
and that will enhance competition among market participants, to the
benefit of investors and the marketplace. As noted above, the Exchange
has in place surveillance procedures relating to trading in the Shares
of the Fund 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 PIV, the Disclosed Portfolio for the Fund, and
quotation and last sale information for the Shares of the Fund.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of actively-managed exchange-traded product that holds
fixed income securities, equity securities and derivatives and that
will enhance competition among market participants, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2019-36 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-2019-36. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2019-36 and should be submitted
on or before June 18, 2019.
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\44\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10988 Filed 5-24-19; 8:45 am]
BILLING CODE 8011-01-P