[Federal Register Volume 84, Number 212 (Friday, November 1, 2019)]
[Notices]
[Pages 58763-58769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23859]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87409; File No. SR-NYSEArca-2019-73]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Permitting the
Continued Listing and Trading of the WisdomTree Emerging Markets
Multifactor Fund and the WisdomTree International Multifactor Fund
October 28, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on October 15, 2019, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
[[Page 58764]]
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. 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 permit the continued listing and trading
of the WisdomTree Emerging Markets Multifactor Fund and the WisdomTree
International Multifactor Fund, under NYSE Arca Rule 8.600-E (``Managed
Fund Shares''). The proposed rule 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
Pursuant to NYSE Arca Rule 8.600-E, the Exchange proposes to permit
the continued listing and trading of the WisdomTree Emerging Markets
Multifactor Fund (``Emerging Markets Fund'') and the WisdomTree
International Multifactor Fund (``International Fund'') (each a Fund,
and collectively, the ``Funds''), that do not otherwise meet the
standards set forth in Rule 8.600-E, Commentary .01(e), as described
below. The shares (``Shares'') of the Funds commenced trading on the
Exchange on August 10, 2018 pursuant to the generic listing criteria in
Commentary .01 to NYSE Arca Rule 8.600-E (``Managed Fund Shares'').\4\
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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) 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.
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The Shares are offered by the WisdomTree Trust (the ``Trust'').
WisdomTree Asset Management, Inc. (the ``Adviser'') acts as adviser to
the Funds. Mellon Investments Corporation acts as sub-adviser (the
``Sub-Adviser'') to the Funds. The Trust is registered with the
Commission as an investment company and has most recently updated its
registration statement on Form N-1A (``Registration Statement'') with
the Commission on behalf of the Funds that includes disclosure
described herein.\5\
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\5\ See Registration Statement (File Nos. 333-132380 and 811-
21864) and filings dated August 1, 2019. The description of the
operation of the Trust and the Funds herein is based, in part, on
the information in the Registration Statement.
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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 investment company's portfolio composition must be
subject to procedures designed to prevent the use and dissemination of
material nonpublic information regarding the applicable investment
company portfolio. The Adviser is not registered as a broker-dealer and
is not affiliated with a broker-dealer. The Sub-Adviser is affiliated
with multiple broker-dealers and has implemented and will maintain a
``fire wall'' with respect to such broker-dealers and their personnel
regarding access to information concerning the composition and/or
changes to a Fund's portfolio. In addition, Sub-Adviser personnel who
make decisions regarding a Fund's portfolio are subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding such Fund's portfolio. In the event (a) the
Adviser or Sub-Adviser becomes registered as a broker-dealer or newly
affiliated with a broker-dealer, or (b) any new adviser or sub-adviser
is a registered broker-dealer or becomes affiliated with a broker-
dealer, 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, Sub-Adviser and their related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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The Exchange submits this proposal in order to allow the Funds to
hold OTC currency swaps and OTC currency forwards in a manner that may
not comply with Commentary .01(e) to Rule 8.600-E.\7\ Specifically, the
aggregate gross notional value of each Fund's investments in OTC
derivatives may exceed 20% of Fund assets, calculated as the aggregate
gross notional value of such OTC derivatives.\8\ The Exchange proposes
that up to 50% of each Fund's assets (calculated as the aggregate gross
notional value of the OTC derivatives) may be invested in OTC
derivatives, that is, currency swaps and currency forwards, that are
used to reduce (that is, ``hedge'') currency risk arising from each
Fund's investments. Each Fund's investments in OTC derivatives, other
[[Page 58765]]
than OTC derivatives used to hedge each Fund's portfolio against
currency risk, will be limited to 20% of the assets in each Fund's
portfolio, calculated as the aggregate gross notional value of such OTC
derivatives. The only OTC derivatives that each Fund may invest in are
currency swaps and currency forwards.
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\7\ In particular, the Funds may not meet the requirement under
Commentary .01(e) to Rule 8.600-E, which provides that a portfolio
may hold OTC derivatives, including forwards, options and swaps on
commodities, currencies and financial instruments (e.g., stocks,
fixed income, interest rates, and volatility) or a basket or index
of any of the foregoing; however, on both an initial and continuing
basis, no more than 20% of the assets in the portfolio may be
invested in OTC derivatives. For purposes of calculating this
limitation, a portfolio's investment in OTC derivatives will be
calculated as the aggregate gross notional value of the OTC
derivatives.
\8\ The Adviser and Sub-Adviser monitor counterparty credit risk
exposure (including for OTC derivatives) and evaluate counterparty
credit quality on a continuous basis.
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Otherwise, the Funds comply with, and will continue to comply with,
all other listing requirements on an initial and continued listing
basis under Commentary .01(e) to Rule 8.600-E for Managed Fund Shares
(``Generic Listing Standards'').
WisdomTree Emerging Markets Multifactor Fund
According to the Registration Statement, the Emerging Markets Fund
seeks capital appreciation. The Emerging Markets Fund is actively
managed using a model-based approach and seeks to achieve its
investment objective by investing primarily in equity securities of
emerging markets that exhibit certain characteristics that the Adviser
believes to be indicative of positive future returns based on a model
developed by the Adviser. The Adviser seeks to identify equity
securities of emerging markets countries that have the highest
potential for returns based on proprietary measures of fundamental
factors, such as value and quality, and technical factors, such as
momentum and correlation. The Adviser employs a quantitative model to
identify which securities the Emerging Markets Fund might purchase and
sell and opportune times for purchases and sales. At a minimum, the
Emerging Markets Fund's portfolio will be rebalanced quarterly
according to the Adviser's quantitative model, although a more active
approach may be taken depending on such factors as market conditions
and investment opportunities, and the number of holdings in the
Emerging Markets Fund may vary. The Sub-Adviser, with oversight by the
Adviser, is responsible for the day-to-day management of the Emerging
Markets Fund's portfolio in implementing the foregoing models-based
approach.
The Adviser's strategy, as implemented by the Sub-Adviser, seeks to
manage the Emerging Markets Fund's currency risk by dynamically hedging
currency fluctuations in the relative value of the applicable foreign
currencies against the U.S. dollar (the ``Emerging Markets Currency
Hedge''), ranging from a 0% to 100% hedge. The hedge ratios are
adjusted as frequently as weekly utilizing signals such as interest
rate differentials, momentum, and value.
Under normal market conditions,\9\ the Emerging Markets Fund will
hold only the following instruments: Non-U.S. Component Stocks,\10\
U.S. Component Stocks \11\ (in addition to U.S. exchange-listed
exchange-traded funds (``ETFs'')),\12\ American Depository Receipts
(``ADRs''), cash and cash equivalents,\13\ OTC currency forwards and
OTC currency swaps. As noted above, all of the Emerging Markets Fund's
holdings meet, and will continue to meet, the Generic Listing Standards
with the exception of its holdings in OTC currency forwards and OTC
currency swaps, which, following the effectiveness of this proposal,
may exceed the requirement under Rule 8.600-E, Commentary .01(e), that
prohibits the aggregate gross notional value of OTC derivatives from
exceeding 20% of the weight of the portfolio (including gross notional
exposures).
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\9\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
\10\ See Commentary .01(a)(2) to Rule 8.600-E.
\11\ See Commentary .01(a)(1) to Rule 8.600-E.
\12\ For purposes of this filing, the term ``ETFs'' includes
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. The Fund will not invest in inverse or
leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
\13\ For purposes of this filing, cash equivalents are the
short-term instruments enumerated in Commentary .01(c) to Rule
8.600-E.
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WisdomTree International Multifactor Fund
According to the Registration Statement, the International Fund
seeks capital appreciation. The International Fund is actively managed
using a model-based approach and seeks to achieve its investment
objective by investing primarily in equity securities of developed
markets, excluding the United States and Canada, that exhibit certain
characteristics that the Adviser believes to be indicative of positive
future returns based on a model developed by the Adviser. The Adviser
seeks to identify equity securities of developed countries, excluding
the United States and Canada, that have the highest potential for
returns based on proprietary measures of fundamental factors, such as
value and quality, and technical factors, such as momentum and
correlation. The Adviser employs a quantitative model to identify which
securities the International Fund might purchase and sell and opportune
times for purchases and sales. At a minimum, the International Fund's
portfolio will be rebalanced quarterly according to the Adviser's
quantitative model, although a more active approach may be taken
depending on such factors as market conditions and investment
opportunities, and the number of holdings in the International Fund may
vary. The Sub-Adviser, with oversight by the Adviser, is responsible
for the day-to-day management of the International Fund's portfolio in
implementing the foregoing models-based approach.
The Adviser's strategy, as implemented by the Sub-Adviser, seeks to
manage the International Fund's currency risk by dynamically hedging
currency fluctuations in the relative value of the applicable foreign
currencies against the U.S. dollar (the ``International Multifactor
Currency Hedge'' and collectively, with the Emerging Markets Currency
Hedge, the ``Currency Hedge''), ranging from a 0% to 100% hedge. The
hedge ratios are adjusted as frequently as weekly utilizing signals
such as interest rate differentials, momentum, and value.
Under normal market conditions, the International Fund will hold
only the following instruments: Non-U.S. Component Stocks, U.S.
Component Stocks (in addition to U.S. exchange-listed ETFs), ADRs, cash
and cash equivalents, and OTC currency forwards and OTC currency swaps.
As noted above, the International Fund's holdings meet the Generic
Listing Standards with the exception of its holdings in OTC currency
forwards and OTC currency swaps, which may not meet the requirement
under Rule 8.600-E, Commentary .01(e) that prevents the aggregate gross
notional value of OTC derivatives from exceeding 20% of the weight of
the portfolio (including gross notional exposures).\14\
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\14\ Because the Fund is not in compliance with Rule 8.600-E,
Commentary .01(e), the Exchange has commenced delisting proceedings
pursuant to Rule 5.5-E(m), including issuing a deficiency
notification.
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The Trust is required to comply with Rule 10A-3 under the Act \15\
for the initial and continued listing of the Shares of each Fund. In
addition, the Exchange represents that the Shares of each Fund will
meet and be subject to all other requirements of the Generic Listing
Standards and continued listing requirements for Managed Fund Shares
under Exchange Rule 8.600-E. All statements and representations made in
this filing regarding the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of reference assets and portfolio
indicative values, and the
[[Page 58766]]
applicability of Exchange listing rules specified in this filing shall
constitute continued listing requirements for the Funds. The Trust, on
behalf of the Funds, has represented to the Exchange that it will
advise the Exchange of any failure by a Fund or the Shares to comply
with the continued listing requirements, and, pursuant to its
obligations under Section 19(g)(1) of the Act, the Exchange will
surveil for compliance with the continued listing requirements. If a
Fund is not or the Shares are not in compliance with the applicable
listing requirements, the Exchange will commence delisting procedures
under Exchange Rule 5.5-E(m).
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\15\ 17 CFR 240.10A-3.
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Application of Generic Listing Requirements
The Exchange is submitting this proposed rule change because the
portfolios for the Funds will not meet all of the Generic Listing
Standards of Commentary .01 to NYSE Arca Rule 8.600-E applicable to the
listing of Managed Fund Shares. Each Fund's portfolio will meet all
such requirements except for those set forth in Commentary .01(e) (with
respect to OTC Derivatives), as described below.\16\
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\16\ See note 7, supra.
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As described above, the Funds meet all of the Generic Listing
Standards except with respect to their holdings in OTC currency
forwards and OTC currency swaps, which would be used to achieve their
respective Currency Hedge. The Exchange believes that this proposal
does not raise any novel or substantive issues for the Commission to
review because there are numerous filings that were either effective
upon filing or that the Commission has approved for the listing and
trading of series of Managed Fund Shares that employ similar hedging
strategies.\17\
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\17\ See Securities Exchange Act Release Nos. 85474 (March 29,
2019), 84 FR 13371 (April 4, 2019) (SR-CboeBZX-2019-019) (notice of
filing and immediate effectiveness of a proposed rule change to make
certain changes to the listing rule governing the listing and
trading of the shares of the WisdomTree Japan Multifactor Fund and
the WisdomTree Europe Multifactor Fund to allow each fund to hedge
its foreign currency exposure with up to 50% gross notional exposure
to OTC currency swaps); 84143 (September 14, 2018), 83 FR 47659
(September 20, 2018) (SR-CboeBZX-2018-019) (order approving the
listing and trading of eighteen series of Managed Fund Shares that
allowed each series to hedge its foreign equity position with up to
50% gross notional exposure to OTC currency swaps); 84818 (December
13, 2018), 83 FR 65189 (December 19, 2018) (SR-NYSEArca-2018-75)
(order approving the listing and trading of a series of Managed Fund
Shares that may hold up to 50% of the aggregate gross notional value
of the fund's portfolio in OTC derivatives for the purpose of
reducing currency, interest rate, credit, or duration risk, in
addition to allowing the fund to hold an additional 20% of non-
hedging OTC derivatives); 82591 (January 26, 2018), 83 FR 4707
(February 1, 2018) (SR-BatsBZX-2017-54) (the ``Inflation Hedged
Fund'') (order approving the listing and trading of a series of
Managed Fund Shares that could gain up to 50% gross notional
exposure to OTC derivatives in order to hedge against inflation in
the fund's portfolio); and 83363 (June 1, 2018), 83 FR 26531 (June
7, 2018) (SR-CboeBZX-2018-036) (notice of filing and immediate
effectiveness of a proposal to allow the Inflation Hedged Fund to
move increase its potential exposure to OTC derivative instruments
from 50% to 60% of the fund's gross notional value). See also SR-
NYSEArca-2017-09 (Notice of Filing of Amendment No. 2 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified
by Amendment No. 2, Regarding Investments of the Janus Short
Duration Income ETF Listed Under NYSE Arca Equities Rule 8.600); SR-
NYSEArca-2018-75 (Order Approving a Proposed Rule Change, as
Modified by Amendment No. 1 Thereto, Regarding the Listing and
Trading of Shares of the PGIM Ultra Short Bond ETF); SR-NYSEArca-
2018-98 (Notice of Filing of Amendment No. 4 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 4, To List and Trade Shares of the iShares Commodity
Multi-Strategy ETF Under NYSE Arca Rule 8.600-E); and SR-NYSEArca-
2018-83 (Notice of Filing of Amendment No. 4 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 4, Regarding Changes to Investments of the iShares
Bloomberg Roll Select Commodity Strategy ETF).
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Further, the Exchange believes that, while the portfolios of the
Funds may not meet Commentary .01(e) to Rule 8-600-E, the policy issues
that the rule is intended to address are otherwise mitigated by the
structure and purpose of the Currency Hedge within the Funds.\18\
Specifically, the Exchange believes that the policy issues that
Commentary .01(e) to Rule 8-600-E is intended to address are mitigated
by the way that the Funds would use OTC currency forwards and OTC
currency swaps. The rule is intended to mitigate concerns around the
manipulability of a particular underlying reference asset or
derivatives contract and to minimize counterparty risk. While the
Currency Hedge positions taken by the Funds may not meet the Generic
Listing Standards related to OTC derivatives holdings, the policy
concerns about limiting exposure to potentially manipulable underlying
reference assets that the Generic Listing Standards are intended to
address are otherwise mitigated by the liquidity in the underlying spot
currency market that prevents manipulation of the reference prices used
by the Currency Hedge. The Funds will attempt to limit counterparty
risk in OTC currency forwards and OTC currency swaps by: (i) Entering
into such contracts only with counterparties that Adviser and/or Sub-
Adviser believes are creditworthy; (ii) limiting a Fund's exposure to
each counterparty; and (iii) monitoring the creditworthiness of each
counterparty and the Fund's exposure to each counterparty on an ongoing
basis.
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\18\ Each Fund expects to invest in excess of 80% of its net
assets in Non-U.S. Component Stocks in a manner that will comply
with the Generic Listing Standards.
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Availability of Information
As noted above, the Funds will each comply with the requirements
for Managed Fund Shares related to Disclosed Portfolio, Net Asset Value
(``NAV''), and the Portfolio Indicative Value. Additionally, the intra-
day, closing and settlement prices of Non-U.S. Component Stocks, U.S.
Component Stocks, ADRs, and ETFs will be readily available from the
securities exchanges on which such securities are traded, as well as
published or other public sources, or online information services such
as Bloomberg or Reuters. Intraday price quotations on OTC currency
forwards and OTC currency swaps are available from major broker-dealer
firms and from third-parties, which may provide prices free with a time
delay or in real-time for a paid fee. Price information for cash
equivalents will be available from major market data vendors. Each
Fund's Disclosed Portfolio will be available on the issuer's website
(www.WisdomTree.com) free of charge. Each Fund's website will include
the prospectus for the applicable Fund and additional information
related to NAV and other applicable quantitative information.
Information regarding market price and trading volume of the Shares
will be continuously available throughout the day on brokers' computer
screens and other electronic services. Information regarding the
previous day's closing price and trading volume for the Shares will be
published daily in the financial section of newspapers. Trading in the
Shares may be halted for market conditions or for reasons that, in the
view of the Exchange, make trading inadvisable. 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. The Exchange has appropriate rules to facilitate
trading in the shares during all trading sessions.
Surveillance
The Exchange represents that trading in the Shares are subject to
the existing trading surveillances, administered by FINRA on behalf of
the Exchange, or by regulatory staff 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
[[Page 58767]]
violations of Exchange rules and federal securities laws applicable to
trading on the Exchange.\19\
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\19\ 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.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, U.S. Component
Stocks, ETFs, ADRs and certain of the Non-U.S. Component Stocks that
are held by each Fund 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 in
such securities and financial instruments from such markets and other
entities.\20\ 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.
In addition, FINRA, on behalf of the Exchange, is able to access, as
needed, trade information for certain fixed income securities held by
the Fund reported to FINRA's TRACE.
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\20\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio may trade on markets that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
the description of the portfolio or reference assets, limitations on
portfolio holdings or reference assets, dissemination and availability
of reference assets and portfolio indicative values, and the
applicability of Exchange listing rules specified in this filing shall
constitute continued listing requirements for the Funds.
The issuer must notify the Exchange of any failure by a 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 a
Fund is not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures under NYSE Arca Rule 5.5-
E(m).
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \21\ in general and Section 6(b)(5) of the Act \22\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\21\ 15 U.S.C. 78f.
\22\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that the proposal is consistent
with Rule 6(b)(5) of the Act in that is designed to prevent fraudulent
and manipulative acts and practices because the policy concerns about
limiting exposure to potentially manipulable underlying reference
assets that the Generic Listing Standards are intended to address,
specifically Commentary .01(e) to Rule 8.600-E, related to OTC
derivatives holdings, are otherwise mitigated by the liquidity in the
underlying spot currency market that prevents manipulation of the
reference prices used by the Currency Hedge. Specifically, the Exchange
believes that the policy issues that Commentary .01(e) to Rule 8.600-E
is intended to address are mitigated by the way that the Funds would
use OTC currency forwards and OTC currency swaps. The rule is intended
to mitigate concerns around the manipulability of a particular
underlying reference asset or derivatives contract and to minimize
counterparty risk. As noted above, while the Currency Hedge positions
that might be taken by the Funds may not meet the Generic Listing
Standards related to OTC derivatives holdings, the policy concerns
about limiting exposure to potentially manipulable underlying reference
assets that the Generic Listing Standards are intended to address are
otherwise mitigated by the liquidity in the underlying spot currency
market that prevents manipulation of the reference prices used by the
Currency Hedge. The Funds will attempt to limit counterparty risk in
OTC currency forwards and OTC currency swaps by: (i) Entering into such
contracts only with counterparties the Adviser and/or Sub-Adviser
believes are creditworthy; (ii) limiting a Fund's exposure to each
counterparty; and (iii) monitoring the creditworthiness of each
counterparty and the Fund's exposure to each counterparty on an ongoing
basis.
The Exchange also notes that there are numerous filings that were
either effective upon filing or that the Commission has approved for
the listing and trading of series of Managed Fund Shares that employ
similar hedging strategies.\23\
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\23\ See note 17, supra.
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The Exchange believes that it is appropriate and in the public
interest to allow the Funds, for hedging purposes only, to exceed the
20% limit in Commentary .01(e) to Rule 8.600-E of portfolio assets that
may be invested in OTC derivatives to a maximum of 50% of Fund assets
(calculated as the aggregate gross notional value of the OTC
derivatives). Under Commentary .01(e), a series of Managed Fund Shares
listed under the Generic Listing Standards may invest up to 20% of its
assets (calculated as the aggregate gross notional value) in OTC
derivatives. Because the Funds, in furtherance of their investment
objective, may invest a substantial percentage of their investments in
OTC currency forwards and OTC currency swaps, the 20% limit in
Commentary .01(e) to Rule 8.600 could result in the Funds being unable
to fully pursue their investment objective while attempting to
sufficiently mitigate investment risks. The inability of the Funds to
adequately hedge their holdings would effectively limit the Funds'
ability to invest in certain instruments, or could expose the Funds to
additional investment risk.
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Funds on the Exchange during all
trading sessions and to deter and detect violations of Exchange rules
and the applicable federal securities laws.
Trading of the Funds through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products, including
Managed Fund Shares. All statements and representations made in this
filing regarding the description of the portfolio or reference assets,
limitations on portfolio holdings or reference assets, dissemination
and availability of reference assets and portfolio indicative values,
and the applicability of Exchange listing rules specified in this
filing shall constitute continued listing requirements for the Funds.
The Trust,
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on behalf of the Funds, has represented to the Exchange that it will
advise the Exchange of any failure by a Fund or the Shares to comply
with the continued listing requirements, and, pursuant to its
obligations under Section 19(g)(1) of the Act, the Exchange will
surveil for compliance with the continued listing requirements. If a
Fund or the Shares are not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under
Exchange Rule 5.5-E(m).
As described above, all ADRs and ETFs will be listed on a U.S.
national securities exchange, all of which are members of ISG or are
exchanges with which the Exchange has in place a comprehensive
surveillance sharing agreement. The Exchange may obtain information
regarding trading in the Funds, U.S. Component Stocks, ETFs, ADRs, and
certain Non-U.S. Component Stocks held by each Fund via the ISG, from
other exchanges that are members or affiliates of the ISG, or with
which the Exchange has entered into a comprehensive surveillance
sharing agreement. Additionally, the Exchange or FINRA, on behalf of
the Exchange, are able to access, as needed, trade information for
certain fixed income instruments reported to TRACE.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
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 continued listing and trading
of Managed Fund Shares 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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \24\ and Rule 19b-4(f)(6) thereunder.\25\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \26\ and Rule 19b-
4(f)(6)(iii) thereunder.\27\
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\24\ 15 U.S.C. 78s(b)(3)(A)(iii).
\25\ 17 CFR 240.19b-4(f)(6).
\26\ 15 U.S.C. 78s(b)(3)(A)(iii).
\27\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \28\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \29\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission waive the 30-day operative delay so
that the proposed rule change may become operative upon filing. The
Commission notes that there are numerous filings that were either
effective upon filing or that the Commission approved for the listing
and trading of series of Managed Fund Shares that employ similar
hedging strategies \30\ and does not believe this proposal raises new
or novel issues. The Commission also notes that, except for the changes
in this proposed rule change, the Funds comply with, and will continue
to comply with, all other listing requirements on an initial and
continued listing basis under Commentary .01(e) to Rule 8.600-E. The
Commission therefore believes that waiver of the 30-day operative delay
is consistent with the protection of investors and the public interest
and hereby waives the operative delay and designates the proposed rule
change operative upon filing.\31\
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\28\ Id.
\29\ 17 CFR 240.19b-4(f)(6)(iii).
\30\ See note 17, supra.
\31\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-2019-73 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-2019-73. 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-2019-73 and should be submitted
on or before November 22, 2019.
[[Page 58769]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23859 Filed 10-31-19; 8:45 am]
BILLING CODE 8011-01-P