| Page Range | 55439-55444 | |
| FR Document | 2018-24069 |
[Federal Register Volume 83, Number 214 (Monday, November 5, 2018)] [Notices] [Pages 55439-55444] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-24069] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-84504; File No. SR-NYSEArca-2018-43] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Regarding Investments of the First Trust TCW Unconstrained Plus Bond ETF October 30, 2018. On July 11, 2018, NYSE Arca, Inc. (``NYSE Arca'' or ``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 seeking to modify investments of the First Trust TCW Unconstrained Plus Bond ETF, the shares of which are currently listed and traded on the Exchange pursuant to NYSE Arca Rule 8.600-E. The proposed rule change was published for comment in the Federal Register on August 1, 2018.\3\ --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 83720 (July 26, 2018), 83 FR 37560 (``Notice''). --------------------------------------------------------------------------- On September 14, 2018, pursuant to Section 19(b)(2) of the Act,\4\ the Commission extended the time 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.\5\ The Commission has received no comment letters on the proposed rule change. The Commission is publishing this order to institute proceedings under Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or disapprove the proposed rule change. --------------------------------------------------------------------------- \4\ 15 U.S.C. 78s(b)(2). \5\ See Securities Exchange Act Release No. 84123 (September 14, 2018), 83 FR 47654 (September 20, 2018). The Commission designated October 30, 2018, as the date by which it should approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. \6\ 15 U.S.C. 78s(b)(2)(B). --------------------------------------------------------------------------- I. Summary of the Proposal 7 --------------------------------------------------------------------------- \7\ The Commission notes that additional information regarding, among other things, the Shares, Fund, investment objective, permitted investments, investment strategies and methodology, investment restrictions, investment adviser and sub-adviser, creation and redemption procedures, availability of information, trading rules and halts, and surveillance procedures, can be found in the Notice (see supra note 3) and the Registration Statement (see infra note 8), as applicable. --------------------------------------------------------------------------- The Exchange proposes to make changes to the investments of the First Trust TCW Unconstrained Plus Bond ETF (``Fund''), the shares (``Shares'') of which are currently listed and traded on the Exchange under NYSE Arca Rule 8.600-E, which governs the listing and trading of Managed Fund Shares on the Exchange. According to the Exchange, the Shares of the Fund commenced trading on the Exchange on June 5, 2018 pursuant to the generic listing standards in Commentary .01 to NYSE Arca Rule 8.600-E. The Shares are offered by First Trust Exchange-Traded Fund VIII (``Trust''), which is registered with the Commission as an open-end management investment company.\8\ The Fund is a series of the Trust. First Trust Advisors L.P. is the investment adviser (``Adviser'') to the Fund. TCW Investment Management Company LLC (``TCW'' or the ``Sub- Adviser''), serves as the Fund's investment sub-adviser.\9\ First Trust Portfolios L.P. is the distributor for the Fund's Shares. The Bank of New York Mellon acts as the administrator, custodian and transfer agent for the Fund. --------------------------------------------------------------------------- \8\ The Exchange represents that the Trust is registered under the Investment Company Act of 1940 (``1940 Act''). On May 29, 2018, the Trust filed with the Commission its registration statement (``Registration Statement'') on Form N-1A under the Securities Act of 1933 and under the 1940 Act relating to the Fund (File Nos. 333- 210186 and 811-23147). In addition, the Exchange represents that the Trust has obtained an order from the Commission granting certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 30029 (April 10, 2012) (File No. 812-13795). \9\ According to the Exchange, the Adviser and Sub-Adviser are not registered as broker-dealers. The Adviser is affiliated with First Trust Portfolios L.P., a broker-dealer, and has implemented and will maintain a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio. The Sub-Adviser is affiliated with multiple broker-dealers and has implemented and will maintain a fire wall with respect to its broker-dealer affiliates regarding access to information concerning the composition and/or changes to the portfolio. In the event (a) the Adviser or the 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 relevant personnel and any 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. --------------------------------------------------------------------------- A. Principal Investments of the Fund According to the Exchange, the investment objective of the Fund is to seek to maximize long-term total return. Under normal market conditions,\10\ the Fund intends to invest at least 80% of its net assets (including investment [[Page 55440]] borrowings) in a portfolio of ``Fixed Income Securities'' (described below). --------------------------------------------------------------------------- \10\ The term ``normal market conditions'' is defined in NYSE Arca Rule 8.600-E(c)(5). On a temporary basis, including for defensive purposes, during the initial invest-up period (i.e., the six-week period following the commencement of trading of Shares on the Exchange) and during periods of high cash inflows or outflows (i.e., rolling periods of seven calendar days during which inflows or outflows of cash, in the aggregate, exceed 10% of the Fund's net assets as of the opening of business on the first day of such periods), the Fund may depart from its principal investment strategies; for example, it may hold a higher than normal proportion of its assets in cash. During such periods, the Fund may not be able to achieve its investment objective. The Fund may adopt a defensive strategy when the Adviser and/or the Sub-Adviser believes securities in which the Fund normally invests have elevated risks due to market, political or economic factors and in other extraordinary circumstances. --------------------------------------------------------------------------- In managing the Fund's portfolio, TCW intends to employ a flexible approach that allocates the Fund's investments across a range of global investment opportunities and actively manage exposure to interest rates, credit sectors, and currencies. TCW seeks to utilize independent, bottom-up research to identify securities that are undervalued and that offer a superior risk/return profile. Pursuant to this investment strategy, the Fund may invest in the following Fixed Income Securities, which may be represented by derivatives relating to such securities, as discussed below:Securities issued or guaranteed by the U.S. government or its agencies, instrumentalities or U.S. government-sponsored entities; Treasury Inflation Protected Securities; agency and non-agency residential mortgage-backed securities (``RMBS''); agency and non-agency commercial mortgage-backed securities (``CMBS''); agency and non-agency asset-backed securities (``ABS''); \11\ --------------------------------------------------------------------------- \11\ Non-agency RMBS, CMBS, and ABS are referred to collectively herein as ``Private ABS/MBS.'' --------------------------------------------------------------------------- domestic corporate bonds; Fixed Income Securities issued by non-U.S. corporations and non-U.S. governments; bank loans, including first lien senior secured floating rate bank loans (``Senior Loans''), secured and unsecured loans, second lien or more junior loans, and bridge loans; fixed income convertible securities; fixed income preferred securities; municipal bonds; collateralized loan obligations; and Rule 144A securities. In addition, the Fund may invest in agency RMBS and CMBS by investing in to-be-announced transactions. The Fund may hold cash and cash equivalents,\12\ as well as the following short-term instruments with maturities of three months or more: Certificates of deposit; bankers' acceptances; repurchase agreements and reverse repurchase agreements; bank time deposits; and commercial paper. The Fund also may enter into short sales of any securities in which the Fund may invest. --------------------------------------------------------------------------- \12\ For purposes of this filing, cash equivalents are the short-term instruments with maturities of less than 3 months enumerated in Commentary .01(c) to NYSE Arca Rule 8.600-E. --------------------------------------------------------------------------- The Fund may utilize exchange-listed and over-the-counter (``OTC'') traded derivatives instruments for duration/yield curve management and/ or hedging purposes, for risk management purposes, or as part of its investment strategies. The Fund will use derivative instruments primarily to hedge interest rate risk, actively manage interest rate exposure, hedge foreign currency risk, and actively manage foreign currency exposure. The Fund may also use derivative instruments to enhance returns, as a substitute for, or to gain exposure to, a position in an underlying asset, to reduce transaction costs, to maintain full market exposure, to manage cash flows, or to preserve capital. Derivatives may also be used to hedge risks associated with the Fund's other portfolio investments. Derivatives that the Fund may enter into are the following: Futures on interest rates, currencies, fixed income securities, and fixed income indices; exchange-traded and OTC options on interest rates, currencies, fixed income securities, and fixed income indices; swap agreements on interest rates, currencies, fixed income securities, and fixed income indices; credit default swaps; and currency forward contracts. B. Other Investments of the Fund While the Fund, under normal market conditions, invests at least 80% of its net assets in the principal investments described above, the Fund may invest its remaining assets in the following non-principal investments. The Fund may invest in exchange-traded common stock, exchange- traded preferred stock, and exchange-traded real estate investment trusts (``REITs''), and securities of other investment companies registered under the 1940 Act, including money market funds, exchange- traded funds (``ETFs''), open-end funds (other than money market funds and other ETFs), and U.S. exchange-traded closed-end funds.\13\ --------------------------------------------------------------------------- \13\ 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. While the Fund may invest in inverse ETFs, the Fund will not invest in leveraged (e.g., 2X, -2X, 3X, or - 3X) ETFs. --------------------------------------------------------------------------- In addition, the Fund may hold exchange-traded notes (``ETNs''),\14\ exchange-traded or OTC ``Work Out Securities,'' \15\ and exchange-traded or OTC equity securities issued upon conversion of fixed income convertible securities. --------------------------------------------------------------------------- \14\ ETNs include Index-Linked Securities (as described in NYSE Arca Rule 5.2-E(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 this filing, Work Out Securities include U.S. or foreign equity securities of any type acquired in connection with restructurings related to issuers of Fixed Income Securities held by the Fund. Work Out Securities are generally traded OTC, but may be traded on a U.S. or foreign exchange. --------------------------------------------------------------------------- C. Investment Restrictions of the Fund 16 --------------------------------------------------------------------------- \16\ The Exchange represents that the Fund will not invest in securities or other financial instruments that have not been described in this proposed rule change. --------------------------------------------------------------------------- The Exchange proposes that the Fund may invest up to 50% of its total assets (calculated as the aggregate gross notional value) in Private ABS/MBS, provided that the Fund may not invest more than 30% of its total assets (calculated as the aggregate gross notional value) in non-agency RMBS. The Exchange proposes that up to 25% of the Fund's assets may be invested in OTC derivatives that are used to reduce currency, interest rate or credit risk arising from the Fund's investments (that is, ``hedge''). The Fund's investments in OTC derivatives other than OTC derivatives used to hedge the Fund's portfolio against currency, interest rate or credit risk will be limited to 20% of the assets in the Fund's portfolio. For purposes of these percentage limitations on OTC derivatives, the weight of such OTC derivatives will be calculated as the aggregate gross notional value of such OTC derivatives. The Fund's holdings of bank loans will not exceed 15% of the Fund's total assets, and the Fund's holdings of bank loans other than Senior Loans will not exceed 5% of the Fund's total assets. The Fund's holdings in fixed income convertible securities and in equity securities issued upon conversion of such convertible securities will not exceed 10% of the Fund's total assets. The Fund's holdings in Work Out Securities will not exceed 5% of the Fund's total assets. The Fund's investments, including derivatives, will be consistent with the Fund's investment objective and will not be used to enhance leverage (although certain derivatives and other investments may result in leverage). That is, the Fund's investments will not be used to seek performance that is the multiple or inverse multiple (e.g., 2X or -3X) of the Fund's primary broad-based securities benchmark index (as defined in Form N-1A). D. Use of Derivatives by the Fund The Fund may invest in the types of derivatives described in the principal investments above. Investments in derivative instruments will be made in accordance with the Fund's investment objective and policies. To limit the potential risk associated with such transactions, the Fund will enter into [[Page 55441]] offsetting transactions or segregate or ``earmark'' assets determined to be liquid by the Adviser in accordance with procedures established by the Trust's Board of Trustees (``Board''). In addition, the Fund has included appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that certain transactions of the Fund, including the Fund's use of derivatives, may give rise to leverage, causing the Fund to be more volatile than if it had not been leveraged. E. Impact on Arbitrage Mechanism The Adviser and the Sub-Adviser believe there will be minimal, if any, impact to the arbitrage mechanism as a result of the Fund's use of derivatives. The Adviser and the Sub-Adviser understand that market makers and participants should be able to value derivatives as long as the positions are disclosed with relevant information. The Adviser and the Sub-Adviser believe that the price at which Shares of the Fund trade will continue to be disciplined by arbitrage opportunities created by the ability to purchase or redeem Shares of the Fund at their net asset value (``NAV''), which should ensure that Shares of the Fund will not trade at a material discount or premium in relation to their NAV. The Adviser and Sub-Adviser do not believe there will be any significant impacts to the settlement or operational aspects of the Fund's arbitrage mechanism due to the use of derivatives. F. Application of Generic Listing Requirements The Exchange represents that the portfolio for the Fund will not meet all of the ``generic'' listing requirements of Commentary .01 to NYSE Arca Rule 8.600-E applicable to the listing of Managed Fund Shares. The Fund's portfolio will meet all such requirements except for those set forth in Commentary .01(a)(1), (a)(2), (b)(5), and (e), as described below. (1) Diversification Requirements for Investments in Equity Securities. According to the Exchange, the Fund will not comply with the requirements set forth in Commentary .01(a)(1) \17\ and (a)(2) \18\ to NYSE Arca Rule 8.600-E with respect to the Fund's investments in equity securities.\19\ Specifically, the Exchange proposes that the Fund's investments in equity securities will meet the requirements of Commentary .01(a) with the exception of (i) Commentary .01(a)(1)(C) and .01(a)(1)(D) (with respect to U.S. Component Stocks), and (ii) Commentary .01(a)(2)(C) and .01(a)(2)(D) (with respect to Non-U.S. Component Stocks). Any Fund investment in exchange-traded common stocks, preferred stocks, REITS, ETFs, ETNs, exchange-traded equity securities issued upon conversion of fixed income convertible securities, exchange-traded Work Out Securities, and U.S. exchange- traded closed-end funds would provide for enhanced diversification of the Fund's portfolio and, in any case, would be non-principal Fund investments and would not exceed 20% of the Fund's net assets in the aggregate. With respect to any Fund holdings of exchange-traded equity securities issued upon conversion of fixed income convertible securities and exchange-traded Work Out Securities, such securities will not exceed 10% and 5%, respectively, of the Fund's total assets. The Adviser and Sub-Adviser represent that the Fund generally will not actively invest in equity securities issued upon conversion of fixed income convertible securities or Work Out Securities, but may, at times, receive a distribution of such securities in connection with the Fund's holdings in other securities. Therefore, the Fund's holdings in equity securities issued upon conversion of fixed income convertible securities and Work Out Securities generally would not be acquired as the result of the Fund's voluntary investment decisions. The Adviser and Sub-Adviser represent that, under these circumstances, application of the weighting requirements of Commentary .01(a)(1)(C) and Commentary .01(a)(2)(C) and the minimum number of components requirements of Commentary .01(a)(1)(D) and Commentary .01(a)(2)(D) would impose an unnecessary burden on the Fund's ability to hold such equity securities. --------------------------------------------------------------------------- \17\ Commentary .01(a)(1) to NYSE Arca Rule 8.600-E provides that the component stocks of the equity portion of a portfolio that are U.S. Component Stocks shall meet the following criteria initially and on a continuing basis: (A) Component stocks (excluding Derivative Securities Products and Index-Linked Securities) that in the aggregate account for at least 90% of the equity weight of the portfolio (excluding such Derivative Securities Products and Index- Linked Securities) each shall have a minimum market value of at least $75 million; (B) Component stocks (excluding Derivative Securities Products and Index-Linked Securities) that in the aggregate account for at least 70% of the equity weight of the portfolio (excluding such Derivative Securities Products and Index- Linked Securities) each shall have a minimum monthly trading volume of 250,000 shares, or minimum notional volume traded per month of $25,000,000, averaged over the last six months; (C) The most heavily weighted component stock (excluding Derivative Securities Products and Index-Linked Securities) shall not exceed 30% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Derivative Securities Products and Index-Linked Securities) shall not exceed 65% of the equity weight of the portfolio; (D) Where the equity portion of the portfolio does not include Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 13 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Derivative Securities Products or Index-Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (ii) one or more series of Derivative Securities Products or Index- Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; (E) Except as provided herein, equity securities in the portfolio shall be U.S. Component Stocks listed on a national securities exchange and shall be NMS Stocks as defined in Rule 600 of Regulation NMS under the Securities Exchange Act of 1934; and (F) American Depositary Receipts (``ADRs'') in a portfolio may be exchange-traded or non- exchange- traded. However, no more than 10% of the equity weight of a portfolio shall consist of non-exchange-traded ADRs. \18\ Commentary .01(a)(2) to NYSE Arca Rule 8.600-E provides that the component stocks of the equity portion of a portfolio that are Non-U.S. Component Stocks shall meet the following criteria initially and on a continuing basis: (A) Non-U.S. Component Stocks each shall have a minimum market value of at least $100 million; (B) Non-U.S. Component Stocks each shall have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; (C) The most heavily weighted Non-U.S. Component stock shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks shall not exceed 60% of the equity weight of the portfolio; (D) Where the equity portion of the portfolio includes Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Derivative Securities Products or Index-Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (ii) one or more series of Derivative Securities Products or Index-Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; and (E) Each Non-U.S. Component Stock shall be listed and traded on an exchange that has last-sale reporting. \19\ The Exchange represents that, for purposes of these exceptions, investments in equity securities that are OTC Work Out Securities, OTC equity securities issued upon conversion of fixed income convertible securities, or non-exchange-traded securities of other open-end investment companies (e.g., mutual funds) are excluded. --------------------------------------------------------------------------- (2) Investments in Private ABS/MBS. The Exchange further represents that the Fund will not comply with the requirement in Commentary .01(b)(5) to NYSE Arca Rule 8.600-E that Private ABS/MBS in the Fund's portfolio account, in the aggregate, for no more than 20% of the weight of the fixed income portion of the Fund's portfolio.\20\ Instead, the Exchange [[Page 55442]] proposes that, in order to enable the portfolio to be more diversified and provide the Fund with an opportunity to earn higher returns, the Fund may invest up to 50% of its total assets in Private ABS/MBS (calculated as the aggregate gross notional value), provided that the Fund may not invest more than 30% of its total assets in non-agency RMBS (calculated as the aggregate gross notional value). --------------------------------------------------------------------------- \20\ Commentary .01(b)(5) to NYSE Arca Rule 8.600-E provides that non-agency, non-GSE and privately-issued mortgage-related and other asset-backed securities components of a portfolio shall not account, in the aggregate, for more than 20% of the weight of the fixed income portion of the portfolio. --------------------------------------------------------------------------- The Adviser and Sub-Adviser represent that the non-agency RMBS sector can be an important component of the Fund's investment strategy because of the potential for attractive risk-adjusted returns relative to other fixed income sectors and the potential to add significantly to the diversification in the Fund's portfolio. Similarly, the CMBS and ABS sectors also have the potential for attractive risk-adjusted returns and added portfolio diversification. (3) Investments in OTC Derivatives. The Fund's portfolio will not comply with the requirements set forth in Commentary .01(e) to NYSE Arca Rule 8.600-E.\21\ Specifically, the Fund's investments in OTC derivatives may exceed 20% of Fund assets, calculated as the aggregate gross notional value of such OTC derivatives. The Exchange proposes that up to 25% of the Fund's assets (calculated as the aggregate gross notional value) may be invested in OTC derivatives that are used to reduce currency, interest rate or credit risk arising from the Fund's investments (that is, ``hedge''). The Fund's investments in OTC derivatives other than OTC derivatives used to hedge the Fund's portfolio against currency, interest rate or credit risk will be limited to 20% of the assets in the Fund's portfolio, calculated as the aggregate gross notional value of such OTC derivatives. --------------------------------------------------------------------------- \21\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that the 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. --------------------------------------------------------------------------- The Adviser and Sub-Adviser believe that it is important to provide the Fund with additional flexibility to manage risk associated with its investments. Depending on market conditions, it may be critical that the Fund be able to utilize available OTC derivatives for this purpose to attempt to reduce impact of currency, interest rate or credit fluctuations on Fund assets. Therefore, the Exchange believes it is appropriate to apply a limit of up to 25% of the Fund's assets to the Fund's investments in OTC derivatives (calculated as the aggregate gross notional value of such OTC derivatives), including forwards, options and swaps, that are used for hedging purposes. (4) Investments in OTC Equity Securities. As noted above, the Fund may hold equity securities that are Work Out Securities, which generally are traded OTC (but that may be traded on a U.S. or foreign exchange), exchange-traded or OTC equity securities issued upon conversion of fixed income convertible securities, and non-exchange- traded securities of other open-end investment company securities (e.g., mutual funds). The Exchange believes that it is appropriate and in the public interest to approve listing and trading of Shares of the Fund on the Exchange notwithstanding that the Fund would not meet the requirements of Commentary .01(a)(1)(A) through (E) to NYSE Arca Rule 8.600-E with respect to the Fund's investments in non-exchange-traded securities of open-end investment company securities,\22\ and notwithstanding that the Fund's holdings of OTC equity securities issued upon conversion of fixed income convertible securities and OTC Work Out Securities would not meet the requirements of Commentary .01(a)(1)(A) through (E) and Commentary .01(a)(2) (A) through (E) to NYSE Arca Rule 8.600-E. Investments in non-exchange-traded securities of open-end investment company securities will not be principal investments of the Fund.\23\ Such investments, which may include mutual funds that invest, for example, principally in fixed income securities, would be utilized to help the Fund meet its investment objective and to equitize cash in the short term. With respect to any Fund holdings of OTC equity securities issued upon conversion of fixed income convertible securities and OTC Work Out Securities, such securities will not exceed 10% and 5%, respectively, of the Fund's total assets. According to the Exchange, the Adviser and Sub-Adviser represent that the Fund generally will not actively invest in OTC equity securities issued upon conversion of fixed income convertible securities or OTC Work Out Securities, but may, at times, receive a distribution of such securities in connection with the Fund's holdings in other securities. Therefore, the Fund's holdings in equity securities issued upon conversion of fixed income convertible securities and Work Out Securities generally would not be acquired as the result of the Fund's voluntary investment decisions. --------------------------------------------------------------------------- \22\ Commentary .01 (a) to NYSE Arca Rule 8.600-E specifies the equity securities accommodated by the generic criteria in Commentary .01(a), namely, U.S. Component Stocks (as described in Rule 5.2- E(j)(3)); Non-U.S. Component Stocks (as described in Rule 5.2- E(j)(3)); Derivative Securities Products (i.e., Investment Company Units and securities described in Section 2 of Rule 8-E); and Index- Linked Securities that qualify for Exchange listing and trading under Rule 5.2-E(j)(6). \23\ For purposes of this section of the filing, non-exchange- traded securities of other registered investment companies do not include money market funds, which are cash equivalents under Commentary .01(c) to NYSE Arca Rule 8.600-E and for which there is no limitation in the percentage of the portfolio invested in such securities. --------------------------------------------------------------------------- With respect to investments in non-exchange-traded investment company securities, because such securities have a net asset value based on the value of securities and financial assets the investment company holds, the Exchange believes it is both unnecessary and inappropriate to apply to such investment company securities the criteria in Commentary .01(a)(1). The Exchange notes that the Commission has previously approved listing and trading of an issue of Managed Fund Shares that may invest in equity securities that are non- exchange-traded securities of other open-end investment company securities. The Exchange believes that it is appropriate to permit the Fund to invest in non-exchange-traded open-end management investment company securities. The Exchange notes that, other than Commentary .01(a)(1), (a)(2), (b)(5), and (e) to NYSE Arca Rule 8.600-E, the Fund's portfolio will meet all other requirements of NYSE Arca Rule 8.600-E. II. Proceedings To Determine Whether To Approve or Disapprove SR- NYSEArca-2018-43 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act \24\ 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 [[Page 55443]] provide comments on the proposed rule change. --------------------------------------------------------------------------- \24\ 15 U.S.C. 78s(b)(2)(B). --------------------------------------------------------------------------- Pursuant to Section 19(b)(2)(B) of the Act,\25\ 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.'' \26\ --------------------------------------------------------------------------- \25\ Id. \26\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- 1. In its filing, the Exchange proposes that the Fund may invest up to 50% of its total assets (calculated as the aggregate gross notional value) in Private ABS/MBS, provided that the Fund may not invest more than 30% of its total assets (calculated as the aggregate gross notional value) in non-agency RMBS. Accordingly, the Exchange states that the Fund will not comply with the requirement in Commentary .01(b)(5) to NYSE Arca Rule 8.600-E that Private ABS/MBS in the Fund's portfolio account, in the aggregate, for no more than 20% of the weight of the fixed income portion of the Fund's portfolio. The Exchange also represents that, other than Commentary .01(a)(1), (a)(2), (b)(5), and (e) to NYSE Arca Rule 8.600-E, the Fund's portfolio will meet all other requirements of NYSE Arca Rule 8.600-E. a. The Commission seeks commenters' views on whether the Private ABS/MBS will meet the requirements of Commentary .01(b)(4) to NYSE Arca Rule 8.600-E, which requires that ``[c]omponent securities that in aggregate account for at least 90% of the fixed income weight of the portfolio must be either (a) from issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Securities Exchange Act of 1934; or (e) from issuers that are a government of a foreign country or a political subdivision of a foreign country.'' b. The Commission further seeks commenters' views on whether the Fund will meet the requirements of Commentary .01(f) to NYSE Arca Rule 8.600-E, which requires that ``[to] the extent that listed or OTC derivatives are used to gain exposure to individual equities and/or fixed income securities, or to indexes of equities and/or indexes of fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Commentary .01(a) and .01(b) (including gross notional exposures), respectively.'' 2. With respect to the Fund's permitted investments in Private ABS/ MBS, the Exchange claims that it is appropriate and in the public interest to approve listing and trading of Shares of the Fund notwithstanding that the Fund's holdings in such Private ABS/MBS do not comply with the requirements set forth in Commentary .01(b)(5) to NYSE Arca Rule 8.600-E because the Fund's investment in Private ABS/MBS is expected to provide the Fund with benefits associated with increased diversification, as Private ABS/MBS investments tend to be less correlated to interest rates than many other fixed income securities. The Exchange further states that the Fund's investment in Private ABS/ MBS will be subject to the Fund's liquidity procedures as adopted by the Board, and the Adviser and Sub-Adviser do not expect that investments in Private ABS/MBS of up to 50% of the total assets of the Fund will have any material impact on the liquidity of the Fund's investments. In addition, according to the Exchange, the non-agency RMBS sector can be an important component of the Fund's investment strategy because of the potential for attractive risk-adjusted returns relative to other fixed income sectors and the potential to add significantly to the diversification in the Fund's portfolio. Similarly, the CMBS and ABS sectors also have the potential for attractive risk-adjusted returns and added portfolio diversification. a. The Commission seeks commenters' views on an investor's ability to evaluate or discern pricing accuracy of the underlying Private ABS/ MBS to be held by the Fund. b. The Commission seeks commenters' views on the potential for susceptibility to manipulation or other fraudulent behavior of the Private ABS/MBS in the Fund's portfolio. c. Given the potentially significant holdings in Private ABS/MBS of the Fund, the Commission seeks commenters' views on possible factors that might impair the ability of the arbitrage mechanism to keep the trading price of the Shares tied to the NAV of the Fund. Specifically, the Commission seeks commenters' views on whether or how these potential impairments of the arbitrage mechanism may affect the Fund's ability to ensure adequate participation by Authorized Participants. What are commenters' views on the potential effects on investors if the arbitrage mechanism is impaired? 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.\27\ --------------------------------------------------------------------------- \27\ 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). --------------------------------------------------------------------------- Interested persons are invited to submit written data, views, and arguments regarding whether the proposal should be approved or disapproved by November 26, 2018. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by December 10, 2018. 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-2018-43 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. [[Page 55444]] All submissions should refer to File Number SR-NYSEArca-2018-43. 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-2018-43 and should be submitted by November 26, 2018. Rebuttal comments should be submitted by December 10, 2018. --------------------------------------------------------------------------- \28\ 17 CFR 200.30-3(a)(57). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\28\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-24069 Filed 11-2-18; 8:45 am] BILLING CODE 8011-01-P
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 55439 |