81 FR 57981 - Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List and Trade Shares of the AdvisorShares KIM Korea Equity ETF

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 164 (August 24, 2016)

[Federal Register Volume 81, Number 164 (Wednesday, August 24, 2016)]
[Notices]
[Pages 57981-57983]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-20208]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78614; File No. SR-NYSEArca-2016-64]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove Proposed Rule 
Change, as Modified by Amendment Nos. 1 and 2, To List and Trade Shares 
of the AdvisorShares KIM Korea Equity ETF

August 18, 2016.
    On May 2, 2016, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of the AdvisorShares KIM Korea Equity ETF 
(``Fund'') under NYSE Arca Equities Rule 8.600. On May 13, 2016, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ The 
Commission published notice of the proposed rule change, as modified by 
Amendment No. 1, in the Federal Register on May 23, 2016.\4\ On May 23, 
2016, the Exchange submitted Amendment No. 2 to the proposed rule 
change.\5\ On July 7, 2016, pursuant to Section 19(b)(2) of the Act,\6\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\7\ The Commission received no comments on the proposed rule 
change. This order institutes proceedings under Section 19(b)(2)(B) of 
the Act \8\ to determine whether to approve or disapprove the proposed 
rule change, as modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety. Amendment No. 1 is available at https://www.sec.gov/comments/sr-nysearca-2016-64/nysearca201664-1.pdf.
    \4\ See Securities Exchange Act Release No. 34-77847 (May 17, 
2016), 81 FR 32364 (NYSEArca-2016-64) (``Notice'').
    \5\ In Amendment No. 2, which replaced and superseded the 
original filing in its entirety, the Exchange clarified certain 
statements relating to the Fund's investments in Depositary Receipts 
and certain representations by the Exchange relating to 
surveillance. Amendment No. 2 is available at https://www.sec.gov/comments/sr-nysearca-2016-64/nysearca201664-2.pdf. Because Amendment 
No. 2 does not materially alter the substance of the proposed rule 
change or raise unique or novel regulatory issues, Amendment No. 2 
is not subject to notice and comment.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 78240, 81 FR 45332 
(July 13, 2016). The Commission designated August 21, 2016, as the 
date by which the Commission would either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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I. The Exchange's Description of the Proposal \9\
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    \9\ Additional information regarding the Fund, the Shares, and 
the Trust (as defined herein), including investment strategies, 
risks, creation and redemption procedures, fees, portfolio holdings, 
disclosure policies, calculation of net asset value, distributions, 
and taxes, among other things, can be found in the Notice and the 
Registration Statement, as applicable. See Notice, supra note 4, and 
Registration Statement, infra note 10.
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    The Exchange proposes to list and trade the Shares under 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 
AdvisorShares Trust (``Trust''), an open-end management investment 
company.\10\ The investment adviser to the Fund will be AdvisorShares 
Investments LLC (``Adviser'') and Korea Investment Management Co., Ltd. 
will be the Fund's sub-adviser (``Sub-Adviser''). Foreside Fund 
Services, LLC will be the principal underwriter and distributor of the 
Fund's Shares, and the Bank of New York Mellon will serve as the 
administrator, custodian, and transfer agent for the Fund.
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    \10\ The Exchange states that the Trust is registered under the 
Investment Company Act of 1940 (``1940 Act'') and that on March 25, 
2016, the Trust filed with the Commission amendments to its 
registration statement on Form N-1A under the Securities Act of 1933 
(``Securities Act'') and under the 1940 Act relating to the Fund 
(File Nos. 333-157876 and 811-22110) (``Registration Statement''). 
In addition, the Exchange states that the Commission has issued an 
order granting certain exemptive relief to the Trust under the 1940 
Act. See Investment Company Act Release No. 29291(May 28, 2010) 
(File No. 812-13677).
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The Fund's Principal Investments

    The Exchange states that the investment objective of the Fund will 
be to seek to provide long-term capital appreciation above the capital 
appreciation of its primary benchmark, the MSCI Korea Index, and other 
Korea-focused indexes. The Fund will seek to achieve its investment 
objective by investing primarily in growth-oriented stocks of any 
capitalization range listed on the Korea Exchange. Under normal 
circumstances,\11\ the Fund will invest at least 80% of its net assets 
(plus any borrowings for investment purposes) in equity securities 
listed on the Korea Exchange.\12\
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    \11\ The Exchange states that the term ``under normal 
circumstances'' means, without limitation, the absence of extreme 
volatility or trading halts in the equity markets or the financial 
markets generally; operational issues causing dissemination of 
inaccurate market information; or force majeure type events such as 
systems failure, natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot or labor disruption or any similar 
intervening circumstance.
    \12\ The Korea Exchange is a member of the Intermarket 
Surveillance Group (``ISG'').
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    The Exchange states that the Sub-Adviser will manage the Fund's 
portfolio by buying and holding stocks of companies at attractive 
valuation that it believes have growth potential. The Sub-Adviser will 
focus on corporate fundamental research in its stock selection, often 
called ``bottom up'' analysis. The Sub-Adviser will invest the Fund's 
assets with a mid- to- long-term view, typically seeking to avoid 
short-term trading. In selecting investments for the Fund's portfolio, 
the Sub-Adviser will place emphasis on fundamentals rather than on 
short-term momentum and continuously monitor market risks. In deciding 
whether to sell

[[Page 57982]]

investments in the Fund's portfolio, the Sub-Adviser will consider the 
following factors: A company's stock price reaches its target price; a 
company in the portfolio experiences negative fundamental changes; 
errors are found in the previous assumptions or forecasts of a company; 
and more profitable alternatives are found.
    In addition to individual stock selection, the Exchange states that 
the Sub-Adviser will engage in sector allocation based on analysis of 
the macro economy and its effect on corporate competitiveness and 
industry cycles. This is often called ``top down'' analysis. The Sub-
Adviser will strive to invest with large economic cycles as compared to 
short-term market trends and short-term supply and demand.

The Fund's Non-Principal Investments

    The Exchange represents that while the Fund, under normal 
circumstances, will invest at least 80% of its assets in the securities 
described above in the ``Principal Investments of the Fund,'' the Fund 
may invest its remaining assets in the securities and financial 
instruments as described below.
    The Fund may invest in the following equity securities traded on a 
U.S. or foreign exchange or over-the-counter, including equity 
securities of foreign issuers in emerging countries: Common stocks, 
preferred stocks, warrants, rights, securities convertible into common 
stock, and investments in master limited partnerships.
    The Fund may invest in issuers located outside the United States 
directly and may invest in exchange-traded funds (``ETFs''),\13\ 
exchange-traded notes (``ETNs''),\14\ and exchange-traded products 
(``ETPs'') \15\ that are indirectly linked to the performance of 
foreign issuers. The Fund may invest in ``Depositary Receipts,'' 
consisting of American Depositary Receipts (``ADRs''), Global 
Depositary Receipts, European Depositary Receipts, International 
Depositary Receipts, ``ordinary shares,'' and ``New York shares'' 
issued and traded in the U.S.\16\
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    \13\ For purposes of the proposed rule change, ETFs are 
Investment Company Units (as described in NYSE Arca Equities Rule 
5.2(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca 
Equities Rule 8.100); and Managed Fund Shares (as described in NYSE 
Arca Equities Rule 8.600). The ETFs that the Fund invests in all 
will be listed and traded in the U.S. on registered exchanges. The 
Fund will invest in the securities of ETFs registered under the 1940 
Act consistent with the requirements of Section 12(d)(1) of the 1940 
Act, or any rule, regulation or order of the Commission or 
interpretation thereof. The Fund will only make ETF investments in 
conformity with the requirements of Regulation M of the Internal 
Revenue Code of 1986, as amended. While the Fund may invest in 
inverse ETFs, the Fund will not invest in leveraged or inverse 
leveraged ETFs (e.g., 2X or 3X).
    \14\ For purposes of the proposed rule change, ETNs include 
Index-Linked Securities (as described in NYSE Arca Equities 
Rule5.2(j)(6)). While the Fund may invest in inverse ETNs, the Fund 
will not invest in leveraged or inverse leveraged ETNs (e.g., 2X or 
3X).
    \15\ For purposes of the proposed rule change, ETPs include 
Trust Issued Receipts (as described in NYSE Arca Equities Rule 
8.200) and Currency Trust Shares (as described in NYSE Arca Equities 
Rule 8.202). While the Fund may invest in inverse ETPs, the Fund 
will not invest in leveraged or inverse leveraged ETPs (e.g., 2X or 
3X).
    \16\ The Exchange represents that not more than 10% of the 
Fund's assets will be invested in non-exchange-traded ADRs. In 
addition, the Exchange represents that other Depositary Receipts in 
which the Fund invests will be exchange-traded.
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    The Fund may invest in non-exchange-traded investment company 
securities to the extent that such investments would be consistent with 
the requirements of Section 12(d)(1) of the 1940 Act or any rule, 
regulation, or order of the Commission or interpretation thereof. 
Consistent with the restrictions discussed above, the Fund may invest 
in U.S. and non-U.S. exchange-listed closed-end funds and business 
development companies. Except with respect to inverse ETFs as described 
above,\17\ the Fund will not invest in inverse, leveraged, or inverse 
leveraged investment company securities.
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    \17\ See note 13, supra.
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    The Fund may invest in U.S. government securities and may invest in 
certain U.S. government securities that are issued or guaranteed by 
agencies or instrumentalities of the U.S. government.\18\ The Fund also 
may invest in non-exchange-traded convertible securities that are 
bonds, debentures, notes, or other securities that may be converted or 
exchanged (by the holder or by the issuer) into shares of the 
underlying common stock (or cash or securities of equivalent value) at 
a stated exchange ratio. Finally, the Fund may invest in shares of U.S. 
or non-U.S. exchange-traded real estate investment trusts and 
repurchase agreements and reverse repurchase agreements.\19\
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    \18\ According to the Exchange, securities issued or guaranteed 
by the U.S. government or its agencies or instrumentalities include 
the following: U.S. Treasury securities, which are backed by the 
full faith and credit of the U.S. Treasury and which differ only in 
their interest rates, maturities, and times of issuance; U.S. 
Treasury bills, which have initial maturities of one year or less; 
U.S. Treasury notes, which have initial maturities of one to ten 
years; U.S. Treasury bonds, which generally have initial maturities 
of greater than ten years; and U.S. Treasury zero-coupon bonds.
    \19\ The Fund may purchase securities on a when-issued, delayed-
delivery or forward commitment basis (i.e., delivery and payment can 
take place between a month and 120 days after the date of the 
transaction).
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The Fund's Investment Restrictions

    The Exchange represents that the Fund may hold up to an aggregate 
amount of 15% of its net assets in assets deemed illiquid by the 
Adviser.\20\ The Fund will monitor its portfolio liquidity on an 
ongoing basis to determine whether, in light of current circumstances, 
an adequate level of liquidity is being maintained, and will consider 
taking appropriate steps in order to maintain adequate liquidity if, 
through a change in values, net assets, or other circumstances, more 
than 15% of the Fund's net assets are held in illiquid assets.\21\
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    \20\ The Exchange states that, under the supervision of the 
Fund's Board of Trustees, the Adviser determines the liquidity of 
the Fund's investments. In determining the liquidity of the Fund's 
investments, the Adviser may consider various factors, including (1) 
the frequency and volume of trades and quotations; (2) the number of 
dealers and prospective purchasers in the marketplace; (3) dealer 
undertakings to make a market; and (4) the nature of the security 
and the market in which it trades (including any demand, put or 
tender features, the mechanics and other requirements for transfer, 
any letters of credit or other credit enhancement features, any 
ratings, the number of holders, the method of soliciting offers, the 
time required to dispose of the security, and the ability to assign 
or offset the rights and obligations of the security).
    \21\ Illiquid assets include securities subject to contractual 
or other restrictions on resale and other instruments that lack 
readily available markets as determined in accordance with 
Commission staff guidance.
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    The Exchange also represents that the Fund will not invest in 
options, futures, swaps, or forward contracts. Further, the Fund's 
investments will be consistent with its investment objective and will 
not be used to provide multiple returns of a benchmark or to produce 
leveraged returns. Finally, the Exchange represents that not more than 
10% of the net assets of the Fund in the aggregate invested in equity 
securities (other than non-exchange-traded investment company 
securities) shall consist of equity securities whose principal market 
is not a member of the ISG or is a market with which the Exchange does 
not have a comprehensive surveillance sharing agreement.

II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-64 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule 
change, as modified by Amendment Nos. 1 and 2, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the

[[Page 57983]]

legal and policy issues raised by the proposed rule change, as modified 
by Amendment Nos. 1 and 2. Institution of proceedings does not indicate 
that the Commission has reached any conclusions with respect to any of 
the issues involved. Rather, as described below, the Commission seeks 
and encourages interested persons to provide comments on the proposed 
rule change, as modified by Amendment Nos. 1 and 2.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for the submission 
of additional analysis regarding 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.'' \24\
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    \23\ Id.
    \24\ 15 U.S.C. 78f(b)(5).
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    The Exchange provides that the Fund will invest at least 80% of its 
net assets in equity securities listed on the Korea Exchange. The 
Exchange, however, proposes no other quantitative standards with 
respect to the types of equity securities listed on the Korea Exchange 
in which the Fund, at the Sub-Adviser's discretion, may invest. The 
Commission has recently noted that appropriate quantitative standards, 
such as minimum market value and trading volume requirements, ``should 
reduce the extent to which Managed Fund Shares holding Non-U.S. 
Component Stocks may be susceptible to manipulation.'' \25\ 
Accordingly, the Commission seeks comment on whether the Exchange's 
representations relating to the Korean equity securities held by the 
Fund are sufficient to prevent the susceptibility of the Fund's 
portfolio to manipulation and are thereby consistent with the 
requirements of Section 6(b)(5) of the Act, which, among other things, 
requires that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices and to protect investors 
and the public interest.
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    \25\ See Securities Exchange Act Release No. 78397 (July 22, 
2016), 81 FR 49320, at 49325 (July 27, 2016). The term ``Non-U.S. 
Component Stocks'' is defined in NYSE Arca Equities Rule 5.2(j)(3) 
as an equity security that is not registered under Sections 12(b) or 
12(g) of the Act and that is issued by an entity that (a) is not 
organized, domiciled, or incorporated in the United States, and (b) 
is an operating company (including Real Estate Investment Trusts and 
income trusts, but excluding investment trusts, unit trusts, mutual 
funds, and derivatives). See NYSE Arca Equities Rule 5.2(j)(3).
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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 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\26\
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    \26\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by September 14, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 28, 2016. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice \27\ and in Amendment No. 2 to the 
proposed rule change,\28\ in addition to any other comments they may 
wish to submit about the proposed rule change, as modified by Amendment 
Nos. 1 and 2.
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    \27\ Supra note 4.
    \28\ Supra note 5.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2016-64 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 Numbers SR-NYSEArca-2016-64. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of these filings also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2016-64 and should 
be submitted on or before September 14, 2016. Rebuttal comments should 
be submitted by September 28, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20208 Filed 8-23-16; 8:45 am]
BILLING CODE 8011-01-P