82 FR 18067 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To Amend Commentary .01 and Commentary .02 to NYSE Arca Equities Rule 5.2(j)(3) To Provide for the Inclusion of Cash in an Index Underlying a Series of Investment Company Units

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 71 (April 14, 2017)

[Federal Register Volume 82, Number 71 (Friday, April 14, 2017)]
[Notices]
[Pages 18067-18070]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-07528]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80415; File No. SR-NYSEArca-2017-30]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Amend Commentary .01 and Commentary .02 to 
NYSE Arca Equities Rule 5.2(j)(3) To Provide for the Inclusion of Cash 
in an Index Underlying a Series of Investment Company Units

April 10, 2017.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on March 29, 2017, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``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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[[Page 18068]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Commentary .01 and Commentary .02 to 
NYSE Arca Equities Rule 5.2(j)(3) to provide for the inclusion of cash 
in an index underlying a series of Investment Company Units. The 
proposed change is available on the Exchange's Web site at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Commentary .01 and Commentary .02 to 
NYSE Arca Equities Rule 5.2(j)(3) to provide for the inclusion of cash 
in an index underlying a series of Investment Company Units 
(``Units'').\4\ NYSE Arca Equities Rule 5.2(j)(3) provides ``generic'' 
criteria permitting listing and trading of Units pursuant to Rule 19b-
4(e) under the Act \5\ when the underlying index or portfolio satisfies 
the criteria set forth in NYSE Arca Equities Rule 5.2(j)(3).
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    \4\ Investment Company Units are securities that represent 
interests in a unit investment trust, an open-end management 
investment company securities or a similar entity registered under 
the investment Company Act of 1940 (15 U.S.C. 80a-1). A series of 
Investment Company Units seeks to provide investment results that 
correspond generally to the price and yield performance of a 
specific foreign or domestic stock index, fixed income securities 
index or combination thereof.
    \5\ 17 CFR 240.19b-4(e).
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    The Exchange understands that certain index providers have 
included, or intend to include, cash as a component in indexes that 
also include equity or fixed income securities components. An index 
provider may, for example, provide a certain index weighting allocation 
to cash or may periodically change an allocation to cash based on the 
index provider's assessment of market risk associated with other asset 
classes in the applicable index.\6\
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    \6\ The Exchange notes that shares of the following exchange-
traded funds based on indexes that include cash as a component are 
currently listed and traded on the BATS BZX Exchange, Inc.: QuantX 
Risk Managed Growth ETF; QuantX Risk Managed Multi-Asset Income ETF; 
QuantX Risk Managed Multi-Asset Total Return ETF; and QuantX Risk 
Managed Real Return ETF.
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    Accordingly, the Exchange proposes to amend Commentaries .01 and 
.02 to permit listing and trading of Units based on an index or 
portfolio that includes cash as a component. While Units, like mutual 
funds, will generally hold an amount of cash, NYSE Arca Equities Rule 
5.2(j)(3) currently provides that components of an index or portfolio 
underlying a series of Units consist of securities--namely, U.S. 
Component Stocks, Non-U.S. Component Stocks, Fixed Income Securities or 
a combination thereof. As described below, the proposed amendments to 
Commentary .01 and Commentary .02 to Rule 5.2(j)(3)would permit 
inclusion of cash as an index or portfolio component.
    Currently, Commentary .01(a)(A) provides that an underlying index 
or portfolio of U.S. Component Stocks \7\ must meet specified criteria. 
The Exchange proposes to amend Commentary .01(a)(A) to provide that the 
components of an index or portfolio underlying a series of Units may 
also include cash. In addition, the percentage weighting criteria in 
Commentary .01(a)(A)(1) through (4) each would be amended to make clear 
that such criteria would be applied only to the U.S. Component Stocks 
portion of an index or portfolio. For example, in applying the criteria 
in proposed Commentary .01(a)(A)(1),\8\ if 85% of the weight of an 
index consists of U.S. Component Stocks and 15% of the index weight is 
cash, the requirement that component stocks accounting for 90% of the 
weight of the index or portfolio have a minimum market value of $75 
million minimum would be applied only to the 85% portion consisting of 
U.S. Component Stocks.
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    \7\ Rule 5.2(j)(3) defines ``U.S. Component Stock'' as an equity 
security that is registered under Sections 12(b) or 12(g) of the Act 
or an American Depositary Receipt, the underlying equity security of 
which is registered under Sections 12(b) or 12(g) of the Act.
    \8\ Proposed Commentary .01(a)(A)(1) would provide that 
component stocks (excluding Units and Derivative Securities 
Products) that in the aggregate account for at least 90% of the 
weight of the U.S. Component Stocks portion of the index or 
portfolio (excluding such Derivative Securities Products) each shall 
have a minimum market value of at least $75 million.
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    Commentary .01(a)(B), which relates to international or global 
indexes or portfolios, would be amended to provide that components of 
an index or portfolio underlying a series of Units may consist of (a) 
only Non-U.S. Component Stocks, (b) Non-U.S. Component Stocks and cash, 
(c) both U.S. Component Stocks and Non-U.S. Component Stocks, or (d) 
U.S. Component Stocks, Non-U.S. Component Stocks and cash. In addition, 
the percentage weighting criteria in Commentary .01(a)(B)(1) through 
(4) each would be amended to make clear that such criteria would be 
applied only to the combined U.S. and Non-U.S. Component Stocks 
portions of an index or portfolio.
    Commentary .02 to NYSE Arca Equities Rule 5.2(j)(3) provides 
generic criteria applicable to listing and trading of Units whose 
underlying index or portfolio includes Fixed Income Securities.\9\ 
Currently, Commentary .02(a)(1) provides that an underlying index or 
portfolio must consist of Fixed Income Securities. The Exchange 
proposes to amend Commentary .02(a)(1) to provide that the index or 
portfolio may also include cash. In addition, the percentage weighting 
criteria in Commentary .02(a)(2), (a)(4) and (a)(6) each would be 
amended to make clear that such criteria would be applied only to the 
Fixed Income Securities portion of an index or portfolio. For example, 
in applying the criteria in proposed Commentary .01(a)(2),\10\ if 90% 
of the weight of an index or portfolio consists of Fixed Income 
Securities and 10% of the index weight is cash, the requirement that 
Fixed Income Securities accounting for at least 75% of the weight of 
the index or portfolio have a minimum original principal amount 
outstanding of $100 million would be applied only to the 90% portion 
consisting of Fixed Income Securities.
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    \9\ As defined in Commentary .02 to NYSE Arca Equities Rule 
5.2(j)(3), Fixed Income Securities are debt securities that are 
notes, bonds, debentures or evidence of indebtedness that include, 
but are not limited to, U.S. Department of Treasury securities 
(``Treasury Securities''), government-sponsored entity securities 
(``GSE Securities''), municipal securities, trust preferred 
securities, supranational debt and debt of a foreign country or a 
subdivision thereof.
    \10\ Proposed Commentary .01(a)(2) would provide that Fixed 
Income Security components that in aggregate account for at least 
75% of the Fixed Income Securities portion of the weight of the 
index or portfolio each shall have a minimum original principal 
amount outstanding of $100 million or more.
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    The Exchange notes that the Commission has previously approved 
Exchange rules allowing portfolios held by issues of Managed Fund 
Shares

[[Page 18069]]

(actively-managed exchange-traded funds) under Commentary .01 to NYSE 
Arca Equities Rule 8.600 to include cash.\11\ Like the provision in 
Commentary .01(c) to Rule 8.600, which states that there is no limit to 
cash holdings by an issue of Managed Fund Shares listed under 
Commentary .01 to Rule 8.600, there is no proposed limit to the 
weighting of cash in an index underlying a series of Units. The 
Exchange believes this is appropriate in that cash does not, in itself, 
impose investment or market risk.
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    \11\ See Commentary .01(c) to NYSE Arca Equities Rule 8.600.
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    The Exchange believes the proposed amendments, by permitting 
inclusion of cash as a component of indexes underlying series of Units, 
would provide issuers of Units with additional choice in indexes 
permitted to underlie Units that are permitted to list and trade on the 
Exchange pursuant to the Rule 19b-4(e), which would enhance competition 
among market participants, to the benefit of investors and the 
marketplace. In addition, the proposed amendments would provide 
investors with greater ability to hold Units based on underlying 
indexes that may accord more closely with an investor's assessment of 
market risk, in that some investors may view cash as a desirable 
component of an underlying index under certain market conditions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\12\ in general, and furthers the 
objectives of Sections 6(b)(5) of the Act,\13\ in particular, because 
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 regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system and, in general, to protect investors and the public interest 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange has in place surveillance procedures that are adequate 
to properly monitor trading in Units in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws.
    The Exchange notes that, as described above, the percentage 
weighting criteria in Commentary .01(a)(B)(1) through (4) to Rule 
5.2(j)(3) each would be amended to make clear that such criteria would 
be applied only to the combined U.S. and Non-U.S. Component Stocks 
portions of an index or portfolio. The percentage weighting criteria in 
Commentary .02(a)(2), (a)(4) and (a)(6) to Rule 5.2(j)(3) each would be 
amended to make clear that such criteria would be applied only to the 
Fixed Income Securities portion of an index or portfolio. Such 
applications of the proposed amendments would assure that the weighting 
requirements in Commentary .01 and Commentary .02 would continue to be 
applied only to securities in an index or portfolio, and would not be 
diluted as a result of inclusion of a cash component. In addition, the 
addition of cash as a permitted component of indexes underlying Units 
listed and traded on the Exchange pursuant to Rule 19b-4(e) does not 
raise regulatory issues because cash does not, in itself, impose 
investment or market risk and is not susceptible to manipulation.
    The Exchange believes the proposed amendments, by permitting 
inclusion of cash as a component of indexes underlying series of Units, 
would provide issuers of Units with additional choice in indexes 
permitted to underlie Units that are permitted to list and trade on the 
Exchange pursuant to the Rule 19b-4(e), which would enhance competition 
among market participants, to the benefit of investors and the 
marketplace. In addition, the proposed amendments would provide 
investors with greater ability to hold Units based on underlying 
indexes that may accord more closely with an investor's assessment of 
market risk.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\14\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed rule change would permit Exchange 
listing and trading under Rule 19b-4(e) of Units based on indexes that 
include cash as a component, which would enhance competition among 
market participants, to the benefit of investors and the marketplace.
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    \14\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(a) By order approve or disapprove such proposed rule change; or (b) 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2017-30 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-2017-30. 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

[[Page 18070]]

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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2017-30, and should 
be submitted on or before May 5, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07528 Filed 4-13-17; 8:45 am]
BILLING CODE 8011-01-P