Citation: "79 FR 50720"
Document Number: "Release No. 34-72867; File No. SR-NYSEArca-2014-56"
Page Number: "50720"
August 19, 2014.
FOOTNOTE 1 15 U.S.C. 78s(b)(1). END FOOTNOTE
FOOTNOTE 2 17 CFR 240.19b-4. END FOOTNOTE
FOOTNOTE 3 See Securities Exchange Act Release No. 72170 (
FOOTNOTE 4 See Securities Exchange Act Release No. 72458, 79 FR 36849 (
FOOTNOTE 5 15 U.S.C. 78s(b)(2)(B). END FOOTNOTE
I. Description of the Proposal
The Exchange proposes to list and trade Shares of the Fund pursuant to NYSE Arca Equities Rule 8.600, which governs the listing and trading of Managed Fund Shares on the Exchange. The Shares will be offered by
FOOTNOTE 6 The Trust is registered under the Investment Company Act of 1940 ("1940 Act"). According to the Exchange, on
The investment manager to the Fund will be
FOOTNOTE 7 See Commentary .06 to NYSE Arca Equities Rule 8.600. The Exchange represents that in the event (a) the 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, such Adviser, new adviser, or new sub-adviser will implement a fire wall with respect to its relevant personnel or its broker-dealer affiliate, as applicable, regarding access to information concerning the composition and 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. END FOOTNOTE
The Exchange has made the following representations and statements describing the Fund and its investment strategy, including portfolio holdings and investment restrictions. /8/
FOOTNOTE 8 Additional information regarding the Trust, the Fund, and the Shares, investment strategies, investment restrictions, risks, net asset value ("NAV") calculation, creation and redemption procedures, fees, portfolio holdings, disclosure policies, distributions, and taxes, among other information, is included in the Notice and the Registration Statement, as applicable. See Notice and Registration Statement, supra notes 3 and 6, respectively. END FOOTNOTE
Characteristics of the Fund
In selecting investments for the Fund,
In seeking to identify undervalued currencies,
Fixed Income Instruments
Among other investments described in more detail herein, the Fund may invest in Fixed Income Instruments, which include:
* Securities issued or guaranteed by the
* corporate debt securities of U.S. and non-U.S. issuers, including convertible securities and corporate commercial paper; /9/
FOOTNOTE 9 With respect to the Fund, while non-emerging markets corporate debt securities (excluding commercial paper) generally must have
* mortgage-backed and other asset-backed securities; /10/
FOOTNOTE 10 Mortgage-related and other asset-backed securities include collateralized mortgage obligations ("CMOs"), commercial mortgage-backed securities, mortgage dollar rolls, CMO residuals, stripped mortgage-backed securities, and other securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. A to-be-announced ("TBA") transaction is a method of trading mortgage-backed securities. In a TBA transaction, the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount, and price. The actual pools delivered generally are determined two days prior to the settlement date. END FOOTNOTE
* inflation-indexed bonds issued both by governments and corporations; /11/
FOOTNOTE 11 Inflation-indexed bonds (other than municipal inflation-indexed bonds and certain corporate inflation-indexed bonds) are fixed income securities whose principal value is periodically adjusted according to the rate of inflation (e.g.,
* structured notes, including hybrid or "indexed" securities and event-linked bonds; /12/
FOOTNOTE 12 The Fund may obtain event-linked exposure by investing in "event-linked bonds" or "event-linked swaps" or by implementing "event-linked strategies." Event-linked exposure results in gains or losses that typically are contingent, or formulaically related to defined trigger events. Examples of trigger events include hurricanes, earthquakes, weather-related phenomena, or statistics relating to such events. Some event-linked bonds are commonly referred to as "catastrophe bonds." If a trigger event occurs, the Fund may lose a portion or its entire principal invested in the bond or notional amount on a swap. END FOOTNOTE
* bank capital and trust preferred securities; /13/
FOOTNOTE 13 There are two common types of bank capital: Tier I and Tier II. Bank capital is generally, but not always, of investment grade quality. According to the Exchange, Tier I securities often take the form of trust preferred securities. Tier II securities are commonly thought of as hybrids of debt and preferred stock, are often perpetual (with no maturity date), callable, and, under certain conditions, allow for the issuer bank to withhold payment of interest until a later date. However, such deferred interest payments generally earn interest. END FOOTNOTE
* loan participations and assignments; /14/
FOOTNOTE 14 The Fund may invest in fixed- and floating-rate loans, which investments generally will be in the form of loan participations and assignments of portions of such loans. END FOOTNOTE
* delayed funding loans and revolving credit facilities;
* bank certificates of deposit, fixed time deposits, and bankers' acceptances;
* repurchase agreements on Fixed Income Instruments and reverse repurchase agreements on Fixed Income Instruments;
* debt securities issued by states or local governments and their agencies, authorities, and other government-sponsored enterprises ("Municipal Bonds");
* obligations of non-U.S. governments or their subdivisions, agencies, and government-sponsored enterprises; and
* obligations of international agencies or supranational entities.
Use of Derivatives by the Fund
The Fund's investments in derivative instruments will be made in accordance with the 1940 Act and consistent with the Fund's investment objective and policies. With respect to the Fund, derivative instruments primarily will include forwards, /15/ exchange-traded and over-the-counter options contracts, exchange-traded futures contracts, swap agreements, and options on futures contracts and swap agreements. Generally, derivatives are financial contracts, the values of which depend upon, or are derived from, the value of an underlying asset, reference rate, or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes. The Fund may, but is not required to, use derivative instruments for risk management purposes or as part of its investment strategies.
FOOTNOTE 15 Forwards are contracts to purchase or sell securities for a fixed price at a future date beyond normal settlement time (forward commitments). END FOOTNOTE
According to the Exchange, the Fund will typically use derivative instruments as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The Fund may also use derivative instruments to enhance returns. To limit the potential risk associated with such transactions, the Fund will segregate or "earmark" assets determined to be liquid by
FOOTNOTE 16 To mitigate leveraging risk, the Adviser will segregate or "earmark" liquid assets or otherwise cover the transactions that may give rise to such risk. END FOOTNOTE
The Exchange states that derivatives can be an economically attractive substitute for an underlying physical security that the Fund would otherwise purchase. For example, the Fund could purchase Treasury futures contracts instead of physical Treasuries or could sell credit default protection on a corporate bond instead of buying a physical bond. Economic benefits include potentially lower transaction costs or attractive relative valuation of a derivative versus a physical bond (e.g., differences in yields).
The Exchange further states that derivatives can be used as a more liquid means of adjusting portfolio duration as well as targeting specific areas of yield curve exposure, with potentially lower transaction costs than the underlying securities (e.g., interest rate swaps may have lower transaction costs than physical bonds). Similarly, money market futures can be used to gain exposure to short-term interest rates in order to express views on anticipated changes in central bank policy rates. In addition, derivatives can be used to protect client assets through selectively hedging downside (or tail risks) in the Fund.
The Fund also can use derivatives to increase or decrease credit exposure. Index credit default swaps (CDX) can be used to gain exposure to a basket of credit risk by "selling protection" against default or other credit events, or to hedge broad market credit risk by "buying protection." Single name credit default swaps (CDS) can be used to allow the Fund to increase or decrease exposure to specific issuers, saving investor capital through lower trading costs. The Fund can use total return swap contracts to obtain the total return of a reference asset or index in exchange for paying a financing cost. A total return swap may be much more efficient than buying underlying securities of an index, potentially lowering transaction costs. /17/
FOOTNOTE 17 The Fund will seek, where possible, to use counterparties whose financial status is such that the risk of default is reduced; however, the risk of losses resulting from default is still possible.
The Exchange states that the use of derivatives will allow the Fund to selectively add diversifying sources of return from selling options. Option purchases and sales can also be used to hedge specific exposures in the portfolio, and can provide access to return streams available to long-term investors, such as the persistent difference between implied and realized volatility. Option strategies can generate income or improve execution prices (i.e., covered calls).
Principal Investments of the Fund
The Fund will seek to maximize current income, and long-term capital appreciation will be a secondary objective. The Fund will seek to maintain a high and consistent level of dividend income by investing in a broad array of fixed income sectors and utilizing income efficient implementation strategies. The capital appreciation sought by the Fund generally will arise from decreases in interest rates or improving credit fundamentals for a particular sector or security.
The Fund will seek to achieve its investment objective by investing, under normal circumstances, /18/ at least 65% of its total assets in a multi-sector portfolio of Fixed Income Instruments of varying maturities, which may be represented by derivatives based on Fixed Income Instruments ("65% policy"). The average portfolio duration /19/ of the Fund normally will vary from zero to eight years based on
FOOTNOTE 18 The term "under normal circumstances" includes, but is not limited to, the absence of extreme volatility or trading halts in the fixed income markets or the financial markets generally; operational issues causing dissemination of inaccurate market information; or force majeure type events such as a systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance. END FOOTNOTE
FOOTNOTE 19 Duration is a measure used to determine the sensitivity of a security's price to changes in interest rates. The longer a security's duration, the more sensitive it will be to changes in interest rates. END FOOTNOTE
The Fund will generally allocate its assets among several investment sectors, without limitation, which may include: (i) High yield securities ("junk bonds") and investment grade corporate bonds of issuers located in
The Fund may invest up to 50% of its total assets in high yield securities rated below investment grade, but rated at least Caa by
FOOTNOTE 20 Securities rated Ba or lower by Moody's, or equivalently rated by S&P or Fitch, are sometimes referred to as "high yield securities" or "junk bonds" while securities rated Baa or higher are referred to as "investment grade." Unrated securities may be less liquid than comparable rated securities and involve the risk that the Fund's portfolio manager may not accurately evaluate the security's comparative credit rating. To the extent that the Fund invests in unrated securities, the Fund's success in achieving its investment objective may depend more heavily on the portfolio manager's creditworthiness analysis than if that Fund invested exclusively in rated securities. In determining whether a security is of comparable quality, the Adviser will consider, for example, whether the issuer of the security has issued other rated securities; whether the obligations under the security are guaranteed by another entity and the rating of such guarantor (if any); whether and (if applicable) how the security is collateralized; other forms of credit enhancement (if any); the security's maturity date; liquidity features (if any); relevant cash flow(s); valuation features; other structural analysis; macroeconomic analysis; and sector or industry analysis. END FOOTNOTE
The Fund may invest up to 20% of its total assets in securities and instruments that are economically tied to emerging market countries. /21/
PIMCO will have broad discretion to identify countries that it would consider to qualify as emerging markets. In making investments in emerging market securities, the Fund will emphasize those countries with relatively low gross national product per capita and with the potential for rapid economic growth. Emerging market countries are generally located in
The Fund may invest in securities and instruments that are economically tied to foreign (non-U.S.) countries. /22/ The Fund may invest, without limitation, in securities denominated in foreign currencies. The Fund will normally limit its foreign currency exposure (from non-U.S. dollar-denominated securities or currencies) to 10% of its total assets.
In furtherance of the 65% policy, or with respect to the Fund's other investments, the Fund may invest in derivative instruments, subject to applicable law and any other restrictions described herein.
The Fund may invest up to 25% of its assets in mortgage-related and other asset-backed securities, although this 25% limitation does not apply to securities issued or guaranteed by Federal agencies and/or U.S. government sponsored instrumentalities.
The Fund may engage in foreign currency transactions on a spot (cash) basis and forward basis and invest in foreign currency futures and options contracts. The Fund may enter into these contracts to hedge against foreign exchange risk, to increase exposure to a foreign currency, or to shift exposure to foreign currency fluctuations from one currency to another. Suitable hedging transactions may not be available in all circumstances, and there can be no assurance that the Fund will engage in such transactions at any given time or from time to time.
The Fund may, without limitation, seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls).
Other (Non-Principal) Investments of the Fund
The Fund may invest up to 10% of its total assets in preferred stocks, convertible securities, and other equity-related securities. /23/
FOOTNOTE 23 Convertible securities are generally preferred stocks and other securities, including fixed income securities and warrants, that are convertible into or exercisable for common stock at a stated price or rate. Equity-related investments may include investments in small-capitalization ("small-cap"), mid-capitalization ("mid-cap"), and large-capitalization ("large-cap") companies. A small-cap company will be defined as a company with a market capitalization of up to
The Fund may invest in variable and floating rate securities, which are securities that pay interest at rates that adjust whenever a specified interest rate changes and/or that reset on predetermined dates (such as the last day of a month or calendar quarter). The Fund may invest in floating rate debt instruments (floaters) and inverse floating rate debt instruments (inverse floaters) and may engage in credit spread trades.
The Fund may also invest in trade claims, /24/ privately placed and unregistered securities, and structured products, including credit-linked securities, commodity-linked notes, and structured notes. The Fund may invest in
FOOTNOTE 24 Trade claims are non-securitized rights of payment arising from obligations that typically arise when vendors and suppliers extend credit to a company by offering payment terms for products and services. If the company files for bankruptcy, payments on these trade claims stop, and the claims are subject to compromise along with the other debts of the company. Trade claims may be purchased directly from the creditor or through brokers. END FOOTNOTE
The Fund may purchase or sell securities which the Fund is eligible to purchase or sell on a when-issued basis, may purchase and sell such securities for delayed delivery, and may make contracts to purchase or sell such securities for a fixed price at a future date beyond normal settlement time (forward commitments). The Fund may make short sales as part of its overall portfolio management strategies or to offset a potential decline in value of a security.
The Fund may enter into repurchase agreements, in which the Fund purchases a security from a bank or broker-dealer, which agrees to purchase the security at the Fund's cost, plus interest within a specified time. Repurchase agreements maturing in more than seven days and which may not be terminated within seven days at approximately the amount at which the Fund has valued the agreements will be considered illiquid securities. The Fund may enter into reverse repurchase agreements and dollar rolls subject to the Fund's limitations on borrowings. /25/ Reverse repurchase agreements and dollar rolls may be considered borrowing for some purposes. The Fund will segregate or "earmark" assets determined to be liquid by
FOOTNOTE 25 A reverse repurchase agreement involves the sale of a security by the Fund and its agreement to repurchase the instrument at a specified time and price. A dollar roll is similar except that the counterparty is not obligated to return the same securities as those originally sold by the Fund but only securities that are substantially identical. END FOOTNOTE
The Fund may invest, without limit, for temporary or defensive purposes, in U.S. debt securities, including taxable securities and short-term money market securities, if
To the extent permitted by Section 12(d)(1)(A) of the 1940 Act, the Fund may invest in other affiliated and unaffiliated funds, such as open-end or closed-end management investment companies, including other exchange traded funds, provided that the Fund's investment in units or shares of investment companies and other open-end collective investment vehicles will not exceed 10% of the Fund's total assets. The Fund may invest securities lending collateral in one or more money market funds to the extent permitted by Rule 12d1-1 under the 1940 Act, including series of
The Fund's investments, including investments in derivative instruments, will be subject to all of the restrictions under the 1940 Act, including restrictions with respect to investments in illiquid securities, that is, the limitation that a fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser, in accordance with Commission guidance. /26/ The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of the Fund's net assets are held in illiquid securities. Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets as determined in accordance with Commission staff guidance.
FOOTNOTE 26 In reaching liquidity decisions, the Adviser may consider the following factors: The frequency of trades and quotes for the security; the number of dealers willing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). END FOOTNOTE
The Fund is non-diversified, which means that it may invest its assets in a smaller number of issuers than a diversified fund, will include a minimum of 13 non-affiliated issuers, and intends to qualify annually and elect to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code. In addition, the Fund will not concentrate its investments in a particular industry, as that term is used in the 1940 Act, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction from time to time. The Fund's investments, including derivatives, will be consistent with the Fund's investment objective, and the Fund's use of derivatives may be used to enhance leverage. However, the Fund's investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Fund's broad-based securities market index (as defined in Form N-1A). /27/
FOOTNOTE 27 The Exchange states that the Fund's broad-based securities market index will be identified in a future amendment to the Registration Statement following the Fund's first full calendar year of performance. END FOOTNOTE
The Exchange represents that the Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rule 8.600. Consistent with NYSE Arca Equities Rule 8.600(d)(2)(B)(ii), the Fund's Reporting Authority will implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material, non-public information regarding the actual components of the Fund's portfolio. The Exchange represents that, for initial and/or continued listing, the Fund will be in compliance with Rule 10A-3 under the Act, /28/ as provided by NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio (as defined in NYSE Arca Equities Rule 8.600) will be made available to all market participants at the same time.
FOOTNOTE 28 17 CFR 240.10A-3. END FOOTNOTE
II. Proceedings To Determine Whether To Approve or Disapprove SR-NYSEArca-2014-56 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act /29/ to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change.
FOOTNOTE 29 15 U.S.C. 78s(b)(2)(B). END FOOTNOTE
Pursuant to Section 19(b)(2)(B) of the Act, /30/ the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change's consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be "designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade," and "to protect investors and the public interest." /31/
FOOTNOTE 30 Id. END FOOTNOTE
FOOTNOTE 31 15 U.S.C. 78f(b)(5). END FOOTNOTE
III. Procedure: Request for Written Comments
The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the information described in the Notice, /32/ as summarized above, as well as any other concerns they may have with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposal is consistent with Section 6(b)(5) or any other provision of the Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation. /33/
FOOTNOTE 32 See supra note 3. END FOOTNOTE
FOOTNOTE 33 Section 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 94-29 (
Interested persons are invited to submit written data, views, and arguments regarding whether the proposal should be approved or disapproved by
Comments may be submitted by any of the following methods:
* Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
* Send an email to email@example.com. Please include File Number SR-NYSEArca-2014-56 on the subject line.
* Send paper comments in triplicate to Secretary,
All submissions should refer to File Numbers SR-NYSEArca-2014-56. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the
For the Commission, by the
FOOTNOTE 34 17 CFR 200.30-3(a)(57). END FOOTNOTE
Kevin M. O'Neill,
[FR Doc. 2014-20083 Filed 8-22-14;
BILLING CODE 8011-01-P
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