[Federal Register Volume 85, Number 129 (Monday, July 6, 2020)]
[Notices]
[Pages 40328-40342]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14388]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89185; File No. SR-NYSEArca-2019-95]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 6 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 6, To Adopt NYSE
Arca Rule 8.601-E To Permit the Listing and Trading of Active Proxy
Portfolio Shares and To List and Trade Shares of the Natixis U.S.
Equity Opportunities ETF Under Proposed NYSE Arca Rule 8.601-E
June 29, 2020.
I. Introduction
On December 23, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to (1) adopt NYSE Arca Rule
8.601-E to permit the Exchange to list and trade Active Proxy Portfolio
Shares, which are shares of actively managed exchange-traded funds for
which the portfolio is disclosed in accordance with standard mutual
fund disclosure rules; and (2) list and trade shares (``Shares'') of
the Natixis U.S. Equity Opportunities ETF (``Fund'') under NYSE Arca
Rule 8.601-E. The proposed rule change was published for comment in the
Federal Register on January 3, 2020.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87866 (December 30,
2019), 85 FR 357.
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On February 13, 2020, pursuant to Section 19(b)(2) of the Act,\4\
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.\5\ On March 31, 2020, the Exchange filed Amendment No. 2 to the
proposed rule change, which replaced and superseded the proposed rule
change as originally filed.\6\ On April 1, 2020, the Commission
published Amendment No. 2 for notice and comment and instituted
proceedings under Section 19(b)(2)(B) of the Act \7\ to determine
whether to approve or disapprove the proposed rule change.\8\ On May
19, 2020, the Exchange filed Amendment No. 3 to the proposed rule
change, which replaced and superseded the proposed rule change, as
amended by Amendment No. 2.\9\ On May 27, 2020, the Exchange filed
Amendment No. 4 to the proposed rule change, which replaced and
superseded the proposed rule change, as amended by Amendment No. 3.\10\
On June 11, 2020, the Exchange filed Amendment No. 5 to the proposed
rule change, which replaced and superseded the proposed rule change, as
amended by Amendment No. 4.\11\ On June 19, 2020, the Exchange filed
Amendment No. 6 to the proposed rule change, which replaced and
superseded the proposed rule change, as amended by Amendment No. 5.\12\
The Commission has received no comments on the proposed rule change.
The Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Amendment No. 6, from interested
persons and is approving the proposed rule change, as modified by
Amendment No. 6, on an accelerated basis.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 88199, 85 FR 9888
(February 20, 2020). The Commission designated April 2, 2020, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ Amendment No. 1 to the proposed rule change was filed on
March 26, 2020, and subsequently withdrawn on March 31, 2020.
Amendment No. 2 is available on the Commission's website at https://www.sec.gov/comments/sr-nysearca-2019-95/srnysearca201995-7015545-214987.pdf.
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 88533, 85 FR 19526
(April 7, 2020).
\9\ Amendment No. 3 is available on the Commission's website
https://www.sec.gov/comments/sr-nysearca-2019-95/srnysearca201995-7214369-216889.pdf.
\10\ Amendment No. 4 is available on the Commission's website at
https://www.sec.gov/comments/sr-nysearca-2019-95/srnysearca201995-7245193-217209.pdf.
\11\ Amendment No. 5 is available on the Commission's website at
https://www.sec.gov/comments/sr-nysearca-2019-95/srnysearca201995-7306918-218149.pdf.
\12\ Amendment No. 6 is available on the Commission's website at
https://www.sec.gov/comments/sr-nysearca-2019-95/srnysearca201995-7329866-218548.pdf.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change, as Modified by Amendment
No. 6
In its filing with the Commission, the Exchange 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 these 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to add new NYSE Arca Rule 8.601-E for the
purpose of permitting the listing and trading, or trading pursuant to
unlisted trading privileges (``UTP''), of Active Proxy Portfolio
Shares, which are securities issued by an actively managed open-end
investment management company. The Exchange also proposes to list and
trade shares (``Shares'') of the following under proposed NYSE Arca
Rule 8.601-E: Natixis U.S. Equity Opportunities ETF (the ``Fund'').\13\
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\13\ The Natixis U.S. Equity Opportunities ETF was referred to
as the Natixis ETF in SR-NYSEArca-2019-95 as originally filed and in
Amendment 2 thereto.
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Proposed Listing Rules
Proposed Rule 8.601-E (a) provides that the Exchange will consider
for trading, whether by listing or pursuant to UTP, Active Proxy
Portfolio Shares that meet the criteria of Rule 8.601-E.
Proposed Rule 8.601-E (b) provides that Rule 8.601-E is applicable
only to Active Proxy Portfolio Shares and that, except to the extent
inconsistent with Rule 8.601-E, or unless the context otherwise
requires, the rules and procedures of the Exchange's Board of Directors
shall be applicable to the trading on the Exchange of such securities.
Proposed Rule 8.601-E (b) provides further that Active Proxy Portfolio
Shares are included within the definition of ``security'' or
``securities'' as such terms are used in the Rules of the Exchange.
Proposed Rule 8.601-E(c)(1) defines the ``Active Proxy Portfolio
Share'' as a security that (a) is issued by an investment company
registered under the Investment Company Act of 1940 (``Investment
Company'') organized as
[[Page 40329]]
an open-end management investment company that invests in a portfolio
of securities selected by the Investment Company's investment adviser
consistent with the Investment Company's investment objectives and
policies; (b) is issued in a specified minimum number of shares, or
multiples thereof, in return for a deposit by the purchaser of the
Proxy Portfolio and/or cash with a value equal to the next determined
net asset value (``NAV''); (c) when aggregated in the same specified
minimum number of Active Proxy Portfolio Shares, or multiples thereof,
may be redeemed at a holder's request in return for the Proxy Portfolio
and/or cash to the holder by the issuer with a value equal to the next
determined NAV; and (d) the portfolio holdings for which are disclosed
within at least 60 days following the end of every fiscal quarter.
Proposed Rule 8.601-E(c)(2) defines the term ``Actual Portfolio''
as the identities and quantities of the securities and other assets
held by the Investment Company that shall form the basis for the
Investment Company's calculation of NAV at the end of the business day.
Proposed Rule 8.601-E(c)(3) defines the term ``Proxy Portfolio'' as
a specified portfolio of securities, other financial instruments and/or
cash designed to track closely the daily performance of the Actual
Portfolio of a series of Active Proxy Portfolio Shares as provided in
the exemptive relief pursuant to the Investment Company Act of 1940
applicable to such series. The website for each series of Active Proxy
Portfolio Shares shall disclose the information regarding the Proxy
Portfolio as provided in the exemptive relief pursuant to the
Investment Company Act of 1940 applicable to such series, including the
following, to the extent applicable:
(i) Ticker symbol;
(ii) CUSIP or other identifier;
(iii) Description of holding;
(iv) Quantity of each security or other asset held; and
(v) Percentage weighting of the holding in the portfolio.\14\
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\14\ The information required in proposed Rule 8.601-E(c)(3) for
the Proxy Portfolio is the same as that required in SEC Rule 6c-
11(c)(1)(i)(A) through (E) under the 1940 Act for exchange-traded
funds operating in compliance with Rule 6c-11. See Release Nos. 33-
10695; IC-33646; File No. S7-15-18 (Exchange-Traded Funds)
(September 25, 2019), 84 FR 57162 (October 24, 2019) (the ``Rule 6c-
11 Release''). The Exchange believes it is appropriate to require
such information, rather than all information required under Rule
8.600-E(c)(2). In adopting this requirement for funds operating in
compliance with Rule 6c-11, the Commission stated that ``a more
streamlined requirement will provide standardized portfolio holdings
disclosure in a more efficient, less costly, and less burdensome
format, while still providing market participants with relevant
information. Accordingly, rule 6c-11 will require an ETF to post a
subset of the information required by the listing exchanges' current
generic listing standards for actively managed ETFs.'' The
Commission stated further that ``this framework will provide market
participants with the information necessary to support an effective
arbitrage mechanism and eliminate potential investor confusion due
to a lack of standardization.'' See Rule 6c-11 Release, notes 249-
260 and accompanying text.
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Proposed Rule 8.601-E(c)(4) defines the term ``Reporting
Authority'' in respect of a particular series of Active Proxy Portfolio
Shares as the Exchange, an institution, or a reporting service
designated by the Exchange or by the exchange that lists a particular
series of Active Proxy Portfolio Shares (if the Exchange is trading
such series pursuant to unlisted trading privileges) as the official
source for calculating and reporting information relating to such
series, including, but not limited to, NAV, the Actual Portfolio, Proxy
Portfolio, or other information relating to the issuance, redemption or
trading of Active Proxy Portfolio Shares. A series of Active Proxy
Portfolio Shares may have more than one Reporting Authority, each
having different functions.
Proposed Rule 8.601-E(c)(5) defines the term ``normal market
conditions'' as including, but not limited to, the absence of trading
halts in the applicable financial markets generally; operational issues
(e.g., systems failure) causing dissemination of inaccurate market
information; or force majeure type events such as natural or manmade
disaster, act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance.
Proposed Rule 8.601-E (d) sets forth initial and continued listing
criteria applicable to Active Proxy Portfolio Shares. Proposed Rule
8.601-E(d)(1) provides that each series of Active Proxy Portfolio
Shares shall be listed and traded on the Exchange subject to
application of the following initial listing criteria:
(A) For each series, the Exchange shall establish a minimum number
of Active Proxy Portfolio Shares required to be outstanding at the time
of commencement of trading on the Exchange.
(B) The Exchange shall obtain a representation from the issuer of
each series of Active Proxy Portfolio Shares that the NAV per share for
the series shall be calculated daily and that the NAV, the Proxy
Portfolio, and the Actual Portfolio shall be made publicly available to
all market participants at the same time.
(C) All Active Proxy Portfolio Shares shall have a stated
investment objective, which shall be adhered to under normal market
conditions.
Proposed Rule 8.601-E(d)(2) provides that each series of Active
Proxy Portfolio Shares shall be listed and traded subject to
application of the following continued listing criteria: the Actual
Portfolio shall be publicly disseminated within at least 60 days
following the end of every fiscal quarter and shall be made publicly
available to all market participants at the same time (proposed Rule
8.601-E(d)(2)(A)(i)), and the Proxy Portfolio will be made publicly
available on the website for each series of Active Proxy Portfolio
Shares at least once daily and will be made available to all market
participants at the same time (proposed Rule 8.601-E(d)(2)(B)(i)).
Proposed Rule 8.601-E(d)(2)(C) provides that the Exchange will
consider the suspension of trading in, and will commence delisting
proceedings under Rule 5.5-E(m) for, a series of Active Proxy Portfolio
Shares under any of the following circumstances:
(i) if any of the continued listing requirements set forth in Rule
8.601-E are not continuously maintained;
(ii) if either the Proxy Portfolio or Actual Portfolio is not made
available to all market participants at the same time;
(iii) if, following the initial twelve month period after
commencement of trading on the Exchange of a series of Active Proxy
Portfolio Shares, there are fewer than 50 beneficial holders of such
series of Active Proxy Portfolio Shares;
(iv) if the Exchange is notified, or otherwise becomes aware, that
the Investment Company has failed to file any filings required by the
Commission or is not in compliance with the conditions of any currently
applicable exemptive order or no-action relief granted by the
Commission or Commission staff to the Investment Company with respect
to a series of Active Proxy Portfolio Shares;
(v) if any of the statements or representations regarding (a) the
description of the portfolio, (b) limitations on portfolio holdings, or
(c) the applicability of Exchange listing rules, specified in the
Exchange's rule filing pursuant to Section 19(b) of the Act to permit
the listing and trading of a series of Active Proxy Portfolio Shares,
is not continuously maintained; or
(vi) if such other event shall occur or condition exists which, in
the opinion of the Exchange, makes further dealings on the Exchange
inadvisable.
Proposed Rule 8.601-E(d)(2)(D) (Trading Halt) provides that (i) The
[[Page 40330]]
Exchange may consider all relevant factors in exercising its discretion
to halt trading in a series of Active Proxy Portfolio Shares. Trading
may be halted because of market conditions or for reasons that, in the
view of the Exchange, make trading in the series of Active Proxy
Portfolio Shares inadvisable. These may include: (a) The extent to
which trading is not occurring in the securities and/or the financial
instruments composing the Proxy Portfolio and/or Actual Portfolio; or
(b) whether other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market are present; (ii) If a
series of Active Proxy Portfolio Shares is trading on the Exchange
pursuant to unlisted trading privileges, the Exchange shall halt
trading in that series as specified in Rule 7.18-E(d)(1); and (iii) If
the Exchange becomes aware that the NAV, Proxy Portfolio or Actual
Portfolio with respect to a series of Active Proxy Portfolio Shares is
not made available to all market participants at the same time, the
Exchange shall halt trading in such series until such time as the NAV,
Proxy Portfolio or Actual Portfolio is available to all market
participants at the same time, as applicable.
Proposed Rule 8.601-E(d)(2)(E) provides that, upon termination of
an Investment Company, the Exchange requires that Active Proxy
Portfolio Shares issued in connection with such entity be removed from
Exchange listing.
Proposed Rule 8.601-E(d)(2)(F) provides that voting rights shall be
as set forth in the applicable Investment Company prospectus.
Proposed Rule 8.601-E(e) (Limitation of Exchange Liability)
provides that neither the Exchange, the Reporting Authority, when the
Exchange is acting in the capacity of a Reporting Authority, nor any
agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions, or delays in
calculating or disseminating any current portfolio value; the current
value of the portfolio of securities required to be deposited to the
Investment Company in connection with issuance of Active Proxy
Portfolio Shares; the amount of any dividend equivalent payment or cash
distribution to holders of Active Proxy Portfolio Shares; NAV; or other
information relating to the purchase, redemption, or trading of Active
Proxy Portfolio Shares, resulting from any negligent act or omission by
the Exchange, the Reporting Authority, when the Exchange is acting in
the capacity of a Reporting Authority, or any agent of the Exchange, or
any act, condition, or cause beyond the reasonable control of the
Exchange, its agent, or the Reporting Authority, when the Exchange is
acting in the capacity of a Reporting Authority, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission, or delay in the reports of
transactions in one or more underlying securities.
Proposed Commentary .01 to Rule 8.601-E provides that the Exchange
will file separate proposals under Section 19(b) of the Act before the
listing and trading of a series of Active Proxy Portfolio Shares. All
statements or representations contained in such rule filing regarding
(a) the description of the portfolio, (b) limitations on portfolio
holdings, or (c) the applicability of Exchange listing rules specified
in such rule filing will constitute continued listing requirements. An
issuer of such securities must notify the Exchange of any failure to
comply with such continued listing requirements.
Proposed Commentary .02 provides that transactions in Active Proxy
Portfolio Shares shall occur during the trading hours specified in NYSE
Arca Rule 7.34-E(a).
Proposed Commentary .03 provides that the Exchange will implement
and maintain written surveillance procedures for Active Proxy Portfolio
Shares. As part of these surveillance procedures, the Investment
Company's investment adviser will upon request by the Exchange or
FINRA, on behalf of the Exchange, make available to the Exchange or
FINRA the daily Actual Portfolio holdings of each series of Active
Proxy Portfolio Shares.
Proposed Commentary.04 provides that, if the investment adviser to
the Investment Company issuing Active Proxy Portfolio Shares is
registered as a broker-dealer or is affiliated with a broker-dealer,
such investment adviser will erect and maintain a ``fire wall'' between
the investment adviser and personnel of the broker-dealer or broker-
dealer affiliate, as applicable, with respect to access to information
concerning the composition and/or changes to such Investment Company's
Actual Portfolio and/or Proxy Portfolio. Any person related to the
investment adviser or Investment Company who makes decisions pertaining
to the Investment Company's Actual Portfolio and/or Proxy Portfolio or
has access to non-public information regarding the Investment Company's
Actual Portfolio and/or the Proxy Portfolio or changes thereto must be
subject to procedures reasonably designed to prevent the use and
dissemination of material non-public information regarding the Actual
Portfolio and/or the Proxy Portfolio or changes thereto.\15\
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\15\ The Exchange will propose applicable NYSE Arca listing fees
for Active Proxy Portfolio Shares in the NYSE Arca Equities Schedule
of Fees and Charges via a separate proposed rule change.
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Proposed Commentary .05 provides that any person or entity,
including a custodian, Reporting Authority, distributor, or
administrator, who has access to non-public information regarding the
Investment Company's Actual Portfolio or the Proxy Portfolio or changes
thereto, must be subject to procedures reasonably designed to prevent
the use and dissemination of material non-public information regarding
the applicable Investment Company Actual Portfolio or the Proxy
Portfolio or changes thereto. Moreover, if any such person or entity is
registered as a broker-dealer or affiliated with a broker-dealer, such
person or entity will erect and maintain a ``fire wall'' between the
person or entity and the broker-dealer with respect to access to
information concerning the composition and/or changes to such
Investment Company Actual Portfolio or Proxy Portfolio.
The Exchange also proposes non-substantive amendments to include
Active Proxy Portfolio Shares in other Exchange rules. Specifically,
the Exchange proposes to amend current Rule 5.3-E to include Active
Proxy Portfolio Shares listed pursuant to proposed Rule 8.601-E among
the derivative or special purpose securities that are subject to a
limited set of corporate governance and disclosure policies. Similarly,
the Exchange proposes to amend Rule 5.3-E(e) to include Active Proxy
Portfolio Shares listed pursuant to proposed Rule 8.601-E among the
derivative or special purpose securities to which the requirements
concerning shareholder/annual meetings do not apply.
Key Features of Active Proxy Portfolio Shares
While funds issuing Active Proxy Portfolio Shares will be actively-
managed and, to that extent, will be similar to Managed Fund Shares,
Active Proxy Portfolio Shares differ from Managed Fund Shares in the
following important respects. First, in contrast to Managed Fund
Shares, which are actively-managed funds listed and traded under NYSE
Arca Rule 8.600-E \16\ and for which a ``Disclosed
[[Page 40331]]
Portfolio'' is required to be disseminated at least once daily,\17\ the
portfolio for an issue of Active Proxy Portfolio Shares will be
publicly disclosed within at least 60 days following the end of every
fiscal quarter in accordance with normal disclosure requirements
otherwise applicable to open-end management investment companies
registered under the 1940 Act.\18\ The composition of the portfolio of
an issue of Active Proxy Portfolio Shares would not be available at
commencement of Exchange listing and trading. Second, in connection
with the creation and redemption of Active Proxy Portfolio Shares, such
creation or redemption may be exchanged for a Proxy Portfolio with a
value equal to the next-determined NAV. A series of Active Proxy
Portfolio Shares will disclose the Proxy Portfolio on a daily basis,
which, as described above, is designed to track closely the daily
performance of the Actual Portfolio of a series of Active Proxy
Portfolio Shares, instead of the actual holdings of the Investment
Company, as provided by a series of Managed Fund Shares.
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\16\ The Commission has previously approved listing and trading
on the Exchange of a number of issues of Managed Fund Shares under
NYSE Arca Rule 8.600-E. See, e.g., Securities Exchange Act Release
Nos. 57801 (May 8, 2008), 73 FR 27878 (May 14, 2008) (SR-NYSEArca-
2008-31) (order approving Exchange listing and trading of twelve
actively-managed funds of the WisdomTree Trust); 60460 (August 7,
2009), 74 FR 41468 (August 17, 2009) (SR-NYSEArca-2009-55) (order
approving listing of Dent Tactical ETF); 63076 (October 12, 2010),
75 FR 63874 (October 18, 2010) (SR-NYSEArca-2010-79) (order
approving Exchange listing and trading of Cambria Global Tactical
ETF); 63802 (January 31, 2011), 76 FR 6503 (February 4, 2011) (SR-
NYSEArca-2010-118) (order approving Exchange listing and trading of
the SiM Dynamic Allocation Diversified Income ETF and SiM Dynamic
Allocation Growth Income ETF). The Commission also has approved a
proposed rule change relating to generic listing standards for
Managed Fund Shares. Securities Exchange Act Release No. 78397 (July
22, 2016), 81 FR 49320 (July 27, 2016 (SR-NYSEArca-2015-110)
(amending NYSE Arca Equities Rule 8.600 to adopt generic listing
standards for Managed Fund Shares).
\17\ NYSE Arca Rule 8.600-E(c)(2) defines the term ``Disclosed
Portfolio'' as the identities and quantities of the securities and
other assets held by the Investment Company that will form the basis
for the Investment Company's calculation of net asset value at the
end of the business day. NYSE Arca Rule 8.600-E(d)(2)(B)(i) requires
that the Disclosed Portfolio will be disseminated at least once
daily and will be made available to all market participants at the
same time.
\18\ A mutual fund is required to file with the Commission its
complete portfolio schedules for the second and fourth fiscal
quarters on Form N-CSR under the 1940 Act. Information reported on
Form N-PORT for the third month of a fund's fiscal quarter will be
made publicly available 60 days after the end of a fund's fiscal
quarter. Form N-PORT requires reporting of a fund's complete
portfolio holdings on a position-by-position basis on a quarterly
basis within 60 days after fiscal quarter end. Investors can obtain
a series of Active Proxy Portfolio Shares' Statement of Additional
Information (``SAI''), its Shareholder Reports, its Form N-CSR,
filed twice a year, and its Form N-CEN, filed annually. A series of
Active Proxy Portfolio Shares' SAI and Shareholder Reports will be
available free upon request from the Investment Company, and those
documents and the Form N-PORT, Form N-CSR, and Form N-CEN may be
viewed on-screen or downloaded from the Commission's website at
www.sec.gov.
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The Exchange, after consulting with various Lead Market Makers
(``LMMs'') \19\ that trade exchange-traded funds (``ETFs'') on the
Exchange, believes that market makers will be able to make efficient
and liquid markets priced near the ETF's intraday value, and market
makers employ market making techniques such as ``statistical
arbitrage,'' including correlation hedging, beta hedging, and
dispersion trading, which is currently used throughout the financial
services industry, to make efficient markets in exchange-traded
products.\20\ For Active Proxy Portfolio Shares, market makers may use
the knowledge of a fund's means of achieving its investment objective,
as described in the applicable fund registration statement, as well as
a fund's disclosed Proxy Portfolio, to construct a hedging proxy for a
fund to manage a market maker's quoting risk in connection with trading
fund shares. Market makers can then conduct statistical arbitrage
between their hedging proxy (for example, the Russell 1000 Index) and
shares of a fund, buying and selling one against the other over the
course of the trading day. This ability should permit market makers to
make efficient markets in an issue of Active Proxy Portfolio Shares
without precise knowledge of a fund's underlying portfolio. This is
similar to certain other existing exchange-traded products (for
example, ETFs that invest in foreign securities that do not trade
during U.S. trading hours), in which spreads may be generally wider in
the early days of trading and then narrow as market makers gain more
confidence in their real-time hedges.
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\19\ The term ``Lead Market Maker'' is defined in Rule 1.1(w) to
mean a registered Market Maker that is the exclusive Designated
Market Maker in listings for which the Exchange is the primary
market.
\20\ Statistical arbitrage enables a trader to construct an
accurate proxy for another instrument, allowing it to hedge the
other instrument or buy or sell the instrument when it is cheap or
expensive in relation to the proxy. Statistical analysis permits
traders to discover correlations based purely on trading data
without regard to other fundamental drivers. These correlations are
a function of differentials, over time, between one instrument or
group of instruments and one or more other instruments. Once the
nature of these price deviations have been quantified, a universe of
securities is searched in an effort to, in the case of a hedging
strategy, minimize the differential. Once a suitable hedging proxy
has been identified, a trader can minimize portfolio risk by
executing the hedging basket. The trader then can monitor the
performance of this hedge throughout the trade period making
corrections where warranted. In the case of correlation hedging, the
analysis seeks to find a proxy that matches the pricing behavior of
a fund. In the case of beta hedging, the analysis seeks to determine
the relationship between the price movement over time of a fund and
that of another stock. Dispersion trading is a hedged strategy
designed to take advantage of relative value differences in implied
volatilities between an index and the component stocks of that
index. Such trading strategies will allow market participants to
engage in arbitrage between series of Active Proxy Portfolio Shares
and other instruments, both through the creation and redemption
process and strictly through arbitrage without such processes.
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Description of the Fund and the Trust
The Fund will be a series of Natixis ETF Trust II (``Trust''),
which will be registered with the Commission as an open-end management
investment company.\21\
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\21\ The Trust is registered under the 1940 Act. On April 24,
2020, the Trust filed a registration statement on Form N-1A under
the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 77a), and
under the 1940 Act relating to the Fund (File Nos. 333-235466 and
811-23500) (the ``Registration Statement''). The Trust and NYSE
Group, Inc. filed a Seventh Amended and Restated Application for an
Order under Section 6(c) of the 1940 Act for exemptions from various
provisions of the 1940 Act and rules thereunder (File No. 812-
14870), dated October 21, 2019 (``Application''). On November 14,
2019, the Commission issued a notice regarding the Application.
Investment Company Release No. 33684 (File No. 812-14870). On
December 10, 2019, the Commission issued an order (``Exemptive
Order'') under the 1940 Act granting the exemptions requested in the
Application (Investment Company Act Release No. 33711 (December 10,
2019)). The description of the operation of the Trust and the Fund
herein is based, in part, on the Registration Statement and the
Application.
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Natixis Advisors, L.P. (``Adviser'') will be the investment adviser
to the Fund. Harris Associates L.P and Loomis, Sayles & Company are
sub-advisers (``Sub-Advisers'') for the Fund. ALPS Distributors, Inc.
will act as the distributor and principal underwriter (``Distributor'')
for the Fund.
As noted above, proposed Commentary.04 provides that, if the
investment adviser to the Investment Company issuing Active Proxy
Portfolio Shares is registered as a broker-dealer or is affiliated with
a broker-dealer, such investment adviser will erect and maintain a
``fire wall'' between the investment adviser and personnel of the
broker-dealer or broker-dealer affiliate, as applicable, with respect
to access to information concerning the composition and/or changes to
such Investment Company's Actual Portfolio and/or Proxy Portfolio. Any
person related to the investment adviser or Investment Company who
makes decisions pertaining to the Investment Company's Actual Portfolio
and/or Proxy Portfolio or has access to non-public information
regarding the Investment Company's Actual Portfolio and/or Proxy
Portfolio or changes thereto must be subject to procedures reasonably
designed to prevent the use and dissemination of
[[Page 40332]]
material non-public information regarding the Actual Portfolio and/or
Proxy Portfolio or changes thereto. Proposed Commentary .04 is similar
to Commentary .03(a)(i) and (iii) to NYSE Arca Rule 5.2-E(j)(3);
however, proposed Commentary .04, in connection with the establishment
of a ``fire wall'' between the investment adviser and the broker-
dealer, reflects the applicable open-end fund's portfolio, not an
underlying benchmark index, as is the case with index-based funds.\22\
Proposed Commentary .04 is also similar to Commentary .06 to Rule
8.600-E related to Managed Fund Shares, except that proposed Commentary
.04 relates to establishment and maintenance of a ``fire wall'' between
the investment adviser and personnel of the broker-dealer or broker-
dealer affiliate, as applicable, applicable to an Investment Company's
Actual Portfolio and/or Proxy Portfolio or changes thereto, and not
just to the underlying portfolio, as is the case with Managed Fund
Shares.
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\22\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and Sub-Advisers and their related
personnel will be subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violations, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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In addition, proposed Commentary.05 provides that any person or
entity, including a custodian, Reporting Authority, distributor, or
administrator, who has access to non-public information regarding the
Investment Company's Actual Portfolio or the Proxy Portfolio or changes
thereto, must be subject to procedures reasonably designed to prevent
the use and dissemination of material non-public information regarding
the applicable Investment Company Actual Portfolio or the Proxy
Portfolio or changes thereto. Moreover, if any such person or entity is
registered as a broker-dealer or affiliated with a broker-dealer, such
person or entity will erect and maintain a ``fire wall'' between the
person or entity and the broker-dealer with respect to access to
information concerning the composition and/or changes to such
Investment Company Actual Portfolio or Proxy Portfolio.
The Adviser is not registered as a broker-dealer but is affiliated
with a broker-dealer. The Adviser has implemented and will maintain a
``fire wall'' with respect to such broker-dealer affiliate regarding
access to information concerning the composition of and/or changes to
the Fund's Actual Portfolio and/or Proxy Portfolio. Harris Associates
L.P. and Loomis, Sayles & Company are not registered as a broker-dealer
but are affiliated with a broker-dealer. Each of the Sub-Advisers has
implemented and will maintain a ``fire wall'' with respect to its
respective broker-dealer affiliate regarding access to information
concerning the composition of and/or changes to the Fund's Actual
Portfolio and/or Proxy Portfolio.
In the event (a) the Adviser or a Sub-Adviser becomes registered as
a broker-dealer or becomes newly affiliated with a broker-dealer, or
(b) any new adviser or sub-adviser is a registered broker-dealer, or
becomes affiliated with a broker-dealer, it will implement and maintain
a fire wall with respect to its relevant personnel or its broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the Fund's Actual Portfolio and/or Proxy Portfolio,
and will be subject to procedures designed to prevent the use and
dissemination of material non-public information regarding the Fund's
Actual Portfolio and/or Proxy Portfolio or changes thereto. Any person
related to the Adviser, each Sub-Adviser or the Fund who makes
decisions pertaining to the Fund's Actual Portfolio or the Proxy
Portfolio or has access to non-public information regarding the Fund's
Actual Portfolio and/or the Proxy Portfolio or changes thereto are
subject to procedures reasonably designed to prevent the use and
dissemination of material non-public information regarding the Fund's
Actual Portfolio and/or the Proxy Portfolio or changes thereto.
In addition, any person or entity, including any service provider
for the Fund, who has access to non-public information regarding the
Fund's Actual Portfolio or the Proxy Portfolio or changes thereto, will
be subject to procedures reasonably designed to prevent the use and
dissemination of material non-public information regarding the Fund's
Actual Portfolio and/or the Proxy Portfolio or changes thereto.
Moreover, if any such person or entity is registered as a broker-dealer
or affiliated with a broker-dealer, such person or entity has erected
and will maintain a ``fire wall'' between the person or entity and the
broker-dealer with respect to access to information concerning the
composition and/or changes to the Fund's Actual Portfolio and/or Proxy
Portfolio.
Natixis U.S. Equity Opportunities ETF
According to the Application, the Adviser believes the Fund would
allow for efficient trading of Shares through an effective Fund
portfolio transparency substitute and publication of related
information metrics, while still shielding the identity of the full
Fund portfolio contents to protect the Fund's performance-seeking
strategies. Even though the Fund would not publish its full portfolio
contents daily, the Adviser believes that the NYSE Proxy Portfolio
Methodology would allow market participants to assess the intraday
value and associated risk of the Fund's Actual Portfolio. As a result,
the Adviser believes that investors would be able to purchase and sell
Shares in the secondary market at prices that are close to their NAV.
In this regard, the Fund will utilize a proxy portfolio
methodology-- the ``NYSE Proxy Portfolio Methodology''-- that would
allow market participants to assess the intraday value and associated
risk of the Fund's Actual Portfolio and thereby facilitate the purchase
and sale of Shares by investors in the secondary market at prices that
do not vary materially from their NAV.\23\ The NYSE Proxy Portfolio
Methodology would utilize creation of a Proxy Portfolio for hedging and
arbitrage purposes.\24\
---------------------------------------------------------------------------
\23\ The NYSE Proxy Portfolio Methodology is owned by the NYSE
Group, Inc. and licensed for use by the Fund. NYSE Group, Inc. is
not affiliated with the Fund, Adviser or Distributor. Not all series
of Active Proxy Portfolio Shares will utilize the NYSE Proxy
Portfolio Methodology.
\24\ With respect to the Fund, the Fund will have in place
policies and procedures regarding the construction and composition
of its Proxy Portfolio. Such policies and procedures will be covered
by the Fund's compliance program and other requirements under Rule
38a-1 under the 1940 Act.
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The Fund's holdings will conform to the permissible investments as
set forth in the Application and Exemptive Order and the holdings will
be consistent with all requirements in the Application and Exemptive
Order.\25\ Any foreign
[[Page 40333]]
common stocks held by the Fund will be traded on an exchange that is a
member of the Intermarket Surveillance Group (``ISG'') or with which
the Exchange has in place a comprehensive surveillance sharing
agreement.
---------------------------------------------------------------------------
\25\ Pursuant to the Application and Exemptive Order, the
permissible investments for the Fund include only the following
instruments: ETFs traded on a U.S. exchange; exchange-traded notes
(``ETNs'') traded on a U.S. exchange; U.S. exchange-traded common
stocks; common stocks listed on a foreign exchange that trade on
such exchange contemporaneously with the Shares (``foreign common
stocks'') in the Exchange's Core Trading Session (normally 9:30 a.m.
and 4:00 p.m. Eastern time (``E.T.'')); U.S. exchange-traded
preferred stocks; U.S. exchange-traded American Depositary Receipts
(``ADRs''); U.S. exchange-traded real estate investment trusts; U.S.
exchange-traded commodity pools; U.S. exchange-traded metals trusts;
U.S. exchange-traded currency trusts; and U.S. exchange-traded
futures that trade contemporaneously with the Fund's Shares. In
addition, the Fund may hold cash and cash equivalents (short-term
U.S. Treasury securities, government money market funds, and
repurchase agreements). Pursuant to the Application and Exemptive
Order, the Fund will not hold short positions or invest in
derivatives other than U.S. exchange-traded futures, will not borrow
for investment purposes, and will not purchase any securities that
are illiquid investments at the time of purchase.
---------------------------------------------------------------------------
According to the Registration Statement, the Fund's investment
objective is to seek long-term growth of capital. The Fund, under
normal market conditions,\26\ will invest at least 80% of its net
assets (plus any borrowings made for investment purposes) in equity
securities, including exchange-traded common stocks and exchange-traded
preferred stocks. Under normal market conditions, the Fund will invest
at least 80% of its net assets (plus any borrowings made for investment
purposes) in securities of U.S. issuers.
---------------------------------------------------------------------------
\26\ The term ``normal market conditions'' is defined in
proposed Rule 8.601-E(c)(6).
---------------------------------------------------------------------------
Creations and Redemptions of Shares
According to the Registration Statement, the Trust will offer,
issue and sell Shares of the Fund to investors only in specified
minimum size ``Creation Units'' through the Distributor on a continuous
basis at the NAV per Share next determined after an order in proper
form is received. The NAV of the Fund is expected to be determined as
of 4:00 p.m. E.T. on each Business Day. The Trust will sell and redeem
Creation Units of the Fund only on a Business Day. Creation Units of
the Fund may be purchased and/or redeemed entirely for cash, as
permissible under the procedures described below.
The ``Creation Basket'' (as defined below) for the Fund's Shares
will be based on the Fund's Proxy Portfolio, which is designed to
approximate the value and performance of the Actual Portfolio. All
Creation Basket instruments will be valued in the same manner as they
are valued for purposes of calculating the Fund's NAV, and such
valuation will be made in the same manner regardless of the identity of
the purchaser or redeemer. Further, the total consideration paid for
the purchase or redemption of a Creation Unit of Shares will be based
on the NAV of the Fund, as calculated in accordance with the policies
and procedures set forth in the Registration Statement.
According to the Application, Shares will be purchased and redeemed
in Creation Units and generally on an in-kind basis. Accordingly,
except where the purchase or redemption will include cash under the
circumstances specified below, purchasers will be required to purchase
Creation Units by making an in-kind deposit of specified instruments
(``Deposit Instruments''), and shareholders redeeming their Shares will
receive an in-kind transfer of specified instruments (``Redemption
Instruments''). The names and quantities of the instruments that
constitute the Deposit Instruments and the Redemption Instruments for
the Fund (collectively, the ``Creation Basket'') will be the same as
the Fund's Proxy Portfolio, except to the extent purchases and
redemptions are made entirely or in part on a cash basis.
If there is a difference between the NAV attributable to a Creation
Unit and the aggregate market value of the Creation Basket exchanged
for the Creation Unit, the party conveying instruments with the lower
value will also pay to the other an amount in cash equal to that
difference (the ``Cash Amount'').
While the Fund normally will issue and redeem Shares in kind, the
Fund may require purchases and redemptions to be made entirely or in
part on a cash basis. In such an instance, the Fund will announce,
before the open of trading in the Core Trading Session (normally, 9:30
a.m. to 4:00 p.m. E.T.) on a given Business Day, that all purchases,
all redemptions, or all purchases and redemptions on that day will be
made wholly or partly in cash. The Fund may also determine, upon
receiving a purchase or redemption order from an Authorized
Participant, to have the purchase or redemption, as applicable, be made
entirely or in part in cash.\27\ Each Business Day, before the open of
trading on the Exchange, the Fund will cause to be published through
the National Securities Clearing Corporation (``NSCC'') the names and
quantities of the instruments comprising the Creation Basket, as well
as the estimated Cash Amount (if any), for that day. The published
Creation Basket will apply until a new Creation Basket is announced on
the following Business Day, and there will be no intra-day changes to
the Creation Basket except to correct errors in the published Creation
Basket.
---------------------------------------------------------------------------
\27\ The Adviser represents that, to the extent the Trust
effects the creation or redemption of Shares in cash on any given
day, such transactions will be effected in the same manner for all
Authorized Participants placing trades with the Fund on that day.
---------------------------------------------------------------------------
All orders to purchase Creation Units must be placed with the
Distributor by or through an Authorized Participant, which is either:
(1) A ``participating party'' (i.e., a broker or other participant), in
the Continuous Net Settlement (``CNS'') System of the NSCC, a clearing
agency registered with the Commission and affiliated with the
Depository Trust Company (``DTC''), or (2) a DTC Participant, which in
any case has executed a participant agreement with the Distributor and
the transfer agent.
Timing and Transmission of Purchase Orders
All orders to purchase (or redeem) Creation Units, whether using
the NSCC Process or the DTC Process, must be received by the
Distributor no later than the NAV calculation time (``NAV Calculation
Time''), generally 4:00 p.m. E.T. on the date the order is placed
(``Transmittal Date'') in order for the purchaser (or redeemer) to
receive the NAV determined on the Transmittal Date.
Daily Disclosures
With respect to the Fund, the following information will comprise
the ``Proxy Portfolio Disclosures'' and, pursuant to the Application
and Exemptive Order, will be publicly available on the Fund's website
before the commencement of trading in Shares on each Business Day:
The Proxy Portfolio holdings (including the identity and
quantity of investments in the Proxy Portfolio) will be publicly
available on the Fund's website before the commencement of trading in
Shares on each Business Day.
The historical ``Tracking Error'' between the Fund's last
published NAV per share and the value, on a per Share basis, of the
Fund's Proxy Portfolio calculated as of the close of trading on the
prior Business Day will be publicly available on the Fund's website
before the commencement of trading in Shares each Business Day.
The ``Proxy Overlap'' will be publicly available on the
Fund's website before the commencement of trading in Shares on each
Business Day. The Proxy Overlap is the percentage weight overlap
between the Proxy Portfolio's holdings compared to the Actual
Portfolio's holdings that formed the basis for the Fund's calculation
of NAV
[[Page 40334]]
at the end of the prior Business Day. The Proxy Overlap will be
calculated by taking the lesser weight of each asset held in common
between the Actual Portfolio and the Proxy Portfolio and adding the
totals.
Availability of Information
The Fund's website (www.im.natixis.com), which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund that may be downloaded. The Fund's
website will include on a daily basis, per Share for the Fund, the
prior Business Day's NAV and the ``Closing Price'' or ``Bid/Ask
Price,'' \28\ and a calculation of the premium/discount of the Closing
Price or Bid/Ask Price against such NAV. The Adviser has represented
that the Fund's website will also provide: (1) Any other information
regarding premiums/discounts as may be required for other ETFs under
Rule 6c-11 under the 1940 Act, as amended, and (2) any information
regarding the bid/ask spread for the Fund as may be required for other
ETFs under Rule 6c-11 under the 1940 Act, as amended. The website and
information will be publicly available at no charge.
---------------------------------------------------------------------------
\28\ The records relating to Bid/Ask Prices will be retained by
the Fund or its service providers. The ``Bid/Ask Price'' is the
midpoint of the highest bid and lowest offer based upon the National
Best Bid and Offer as of the time of calculation of the Fund's NAV.
The ``National Best Bid and Offer'' is the current national best bid
and national best offer as disseminated by the Consolidated
Quotation System or UTP Plan Securities Information Processor. The
``Closing Price'' of Shares is the official closing price of the
Shares on the Exchange.
---------------------------------------------------------------------------
The Proxy Portfolio holdings (including the identity and quantity
of investments in the Proxy Portfolio) will be publicly available on
the Fund's website before the commencement of trading in Shares on each
Business Day.
Typical mutual fund-style annual, semi-annual and quarterly
disclosures contained in the Fund's Commission filings will be provided
on the Fund's website on a current basis.\29\ Thus, the Fund will
publish the portfolio contents of its Actual Portfolio on a periodic
basis, and no less than 60 days after the end of every fiscal quarter.
---------------------------------------------------------------------------
\29\ See note 18, supra.
---------------------------------------------------------------------------
Investors can also obtain the Fund's SAI, Shareholder Reports, Form
N-CSR, N-PORT and Form N-CEN. The prospectus, SAI and Shareholder
Reports are available free upon request from the Trust, and those
documents and the Form N-CSR, N-PORT, and Form N-CEN may be viewed on-
screen or downloaded from the Commission's website. The Exchange also
notes that pursuant to its Exemptive Order, the Fund must comply with
Regulation Fair Disclosure, which prohibits selective disclosure of any
material non-public information.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares, equity securities and ETFs will be available via the
Consolidated Tape Association (``CTA'') high-speed line or from the
exchange on which such securities trade. Intraday pricing information
for all constituents of the Proxy Portfolio that are exchange-traded,
which includes all eligible instruments except cash and cash
equivalents, will be available on the exchanges on which they are
traded and through subscription services. Intraday pricing information
for cash equivalents will be available through subscription services
and/or pricing services.
Investment Restrictions
The Shares of the Fund will conform to the initial and continued
listing criteria under proposed Rule 8.601-E. The Fund's holdings will
be limited to and consistent with permissible holdings as described in
the Application and all requirements in the Application and Exemptive
Order.\30\
---------------------------------------------------------------------------
\30\ See note 25, supra.
---------------------------------------------------------------------------
The Fund's investments, including derivatives, will be consistent
with its 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).\31\
---------------------------------------------------------------------------
\31\ The Fund's broad-based securities benchmark index will be
identified in a future amendment to its Registration Statement
following the Fund's first full calendar year of performance.
---------------------------------------------------------------------------
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\32\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. Trading in the Shares will be
subject to NYSE Arca Rule 8.601-E(d)(2)(D), which sets forth
circumstances under which Shares of the Fund will be halted.
---------------------------------------------------------------------------
\32\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------
Specifically, proposed Rule 8.601-E(d)(2)(D) provides that the
Exchange may consider all relevant factors in exercising its discretion
to halt trading in a series of Active Proxy Portfolio Shares. Trading
may be halted because of market conditions or for reasons that, in the
view of the Exchange, make trading in the series of Active Proxy
Portfolio Shares inadvisable. These may include: (a) The extent to
which trading is not occurring in the securities and/or the financial
instruments composing the Proxy Portfolio and/or Actual Portfolio; or
(b) whether other unusual conditions or circumstances detrimental to
the maintenance of a fair and orderly market are present. If a series
of Active Proxy Portfolio Shares is trading on the Exchange pursuant to
unlisted trading privileges, the Exchange shall halt trading in that
series as specified in Rule 7.18-E(d)(1). If the Exchange becomes aware
that the NAV, Proxy Portfolio or Actual Portfolio with respect to a
series of Active Proxy Portfolio Shares is not disseminated to all
market participants at the same time, the Exchange shall halt trading
in such series until such time as the NAV, Proxy Portfolio or Actual
Portfolio is available to all market participants at the same time.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace in all trading sessions in accordance with
NYSE Arca Rule 7.34-E(a). As provided in NYSE Arca Rule 7.6-E, the
minimum price variation (``MPV'') for quoting and entry of orders in
equity securities traded on the NYSE Arca Marketplace is $0.01, with
the exception of securities that are priced less than $1.00 for which
the MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under proposed NYSE Arca Rule 8.601-E. The Exchange has
appropriate rules to facilitate trading in the Shares during all
trading sessions.
A minimum of 100,000 Shares for the Fund will be outstanding at the
commencement of trading on the Exchange. In addition, pursuant to
proposed Rule 8.601-E(d)(1)(B), the Exchange, prior to commencement of
[[Page 40335]]
trading in the Shares, will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the
NAV, Proxy Portfolio and the Actual Portfolio for the Fund will be made
available to all market participants at the same time.
With respect to Active Proxy Portfolio Shares, all of the Exchange
member obligations relating to product description and prospectus
delivery requirements will continue to apply in accordance with
Exchange rules and federal securities laws, and the Exchange and the
Financial Industry Regulatory Authority, Inc. (``FINRA'') will continue
to monitor Exchange members for compliance with such requirements.
Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Exchange, as
well as cross-market surveillances administered by FINRA on behalf of
the Exchange, which are designed to detect violations of Exchange rules
and applicable federal securities laws.\33\ The Exchange represents
that these procedures are adequate to properly monitor Exchange trading
of the Shares in all trading sessions and to deter and detect
violations of Exchange rules and federal securities laws applicable to
trading on the Exchange.
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\33\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
---------------------------------------------------------------------------
The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and underlying
exchange-traded instruments with other markets and other entities that
are members of the ISG, and the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading information regarding trading
such securities and exchange-traded instruments from such markets and
other entities. In addition, the Exchange may obtain information
regarding trading in such securities and exchange-traded instruments
from markets and other entities that are members of ISG or with which
the Exchange has in place a comprehensive surveillance sharing
agreement.\34\
---------------------------------------------------------------------------
\34\ For a list of the current members of ISG, see
www.isgportal.org.
---------------------------------------------------------------------------
The Adviser will make available daily to FINRA and the Exchange the
Actual Portfolio of the Fund, upon request, in order to facilitate the
performance of the surveillances referred to above.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
As noted above, proposed Commentary .03 to NYSE Arca Rule 8.601-E
provides that the Exchange will implement and maintain written
surveillance procedures for Active Proxy Portfolio Shares. As part of
these surveillance procedures, the Investment Company's investment
adviser will upon request by the Exchange or FINRA, on behalf of the
Exchange, make available to the Exchange or FINRA the daily Actual
Portfolio holdings of each series of Active Proxy Portfolio Shares. The
Exchange believes that the ability to access the information on an as
needed basis will provide it with sufficient information to perform the
necessary regulatory functions associated with listing and trading
series of Active Proxy Portfolio Shares on the Exchange, including the
ability to monitor compliance with the initial and continued listing
requirements as well as the ability to surveil for manipulation of
Active Proxy Portfolio Shares.
The Exchange will utilize its existing procedures to monitor issuer
compliance with the requirements of proposed Rule 8.601-E. For example,
the Exchange will continue to use intraday alerts that will notify
Exchange personnel of trading activity throughout the day that may
indicate that unusual conditions or circumstances are present that
could be detrimental to the maintenance of a fair and orderly market.
The Exchange will require from the issuer of Active Proxy Portfolio
Shares, upon initial listing and periodically thereafter, a
representation that it is in compliance with Rule 8.601-E. The Exchange
notes that proposed Commentary .01 to Rule 8.601-E would require an
issuer of Active Proxy Portfolio Shares to notify the Exchange of any
failure to comply with the continued listing requirements of Rule
8.601-E. In addition, the Exchange will require issuers to represent
that they will notify the Exchange of any failure to comply with the
terms of applicable exemptive and no-action relief. As part of its
surveillance procedures, the Exchange will rely on the foregoing
procedures to become aware of any non-compliance with the requirements
of Rule 8.601-E.
With respect to the Fund, all statements and representations made
in this filing regarding (a) the description of the portfolio or
reference asset, (b) limitations on portfolio holdings or reference
assets, or (c) the applicability of Exchange listing rules specified in
this rule filing shall constitute continued listing requirements for
listing the Shares on the Exchange. The Adviser has represented to the
Exchange that it will advise the Exchange of any failure by the Fund to
comply with the continued listing requirements, and, pursuant to its
obligations under Section 19(g)(1) of the Act, the Exchange will
monitor for compliance with the continued listing requirements. If the
Fund is not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures under NYSE Arca Rule 5.5-
E(m).
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\35\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\36\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78f(b).
\36\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that proposed Rule 8.601-E is designed to
prevent fraudulent and manipulative acts and practices in that the
proposed rules relating to listing and trading of Active Proxy
Portfolio Shares provide specific initial and continued listing
criteria required to be met by such securities.\37\
---------------------------------------------------------------------------
\37\ The Exchange represents that, for initial and continued
listing, the Fund will be in compliance with Rule 10A-3 under the
Act, as provided by NYSE Arca Rule 5.3-E.
---------------------------------------------------------------------------
Proposed Rule 8.601-E (d) sets forth initial and continued listing
criteria applicable to Active Proxy Portfolio Shares. Proposed Rule
8.601-E(d)(1)(A) provides that, for each series of Active Proxy
Portfolio Shares, the Exchange will establish a minimum number of
Active Proxy Portfolio Shares required to be outstanding at the time of
commencement of trading on the Exchange. In addition, proposed Rule
8.601-E(d)(1)(B) provides, and the Exchange represents, that the
Exchange will obtain a representation from the
[[Page 40336]]
issuer of each series of Active Proxy Portfolio Shares that the NAV per
share for the series will be calculated daily and that the NAV, Proxy
Portfolio and the Actual Portfolio will be made available to all market
participants at the same time. Proposed Rule 8.601-E(d)(1)(C) provides
that all Active Proxy Portfolio Shares shall have a stated investment
objective, which shall be adhered to under normal market conditions.
Proposed Rule 8.601-E(d)(2) provides that each series of Active Proxy
Portfolio Shares will be listed and traded subject to application of
specified continued listing criteria, as set forth above.
Proposed Rule 8.601-E(d)(2)(D)(i) provides that the Exchange may
consider all relevant factors in exercising its discretion to halt
trading in a series of Active Proxy Portfolio Shares. Trading may be
halted because of market conditions or for reasons that, in the view of
the Exchange, make trading in the series of Active Proxy Portfolio
Shares inadvisable. These may include: (a) The extent to which trading
is not occurring in the securities and/or the financial instruments
composing the Proxy Portfolio and/or Actual Portfolio; or (b) whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. Proposed Rule
8.601-E(d)(2)(D)(iii) provides that, if the Exchange becomes aware that
the NAV, Proxy Portfolio or Actual Portfolio with respect to a series
of Active Proxy Portfolio Shares is not made available to all market
participants at the same time, the Exchange shall halt trading in such
series until such time as the NAV, Proxy Portfolio or Actual Portfolio
is available to all market participants at the same time, as
applicable. The Exchange believes that these proposed halt procedures
will help ensure that market participants have fair and uniform access
to information regarding a fund's NAV, Proxy Portfolio or Actual
Portfolio and, therefore, reduce the potential for manipulation and
help ensure a fair and orderly market in trading of Active Proxy
Portfolio Shares.
Proposed Commentary .01 to NYSE Arca Rule 8.601-E provides that the
Exchange will file separate proposals under Section 19(b) of the Act
before the listing and trading of Active Proxy Portfolio Shares. All
statements or representations contained in such rule filing regarding
(a) the description of the portfolio, (b) limitations on portfolio
holdings, or (c) the applicability of Exchange listing rules specified
in such rule filing will constitute continued listing requirements. An
issuer of such securities must notify the Exchange of any failure to
comply with such continued listing requirements.
Proposed Commentary .03 to NYSE Arca Rule 8.601-E provides that the
Exchange will implement and maintain written surveillance procedures
for Active Proxy Portfolio Shares. As part of these surveillance
procedures, the Investment Company's investment adviser will, upon
request by the Exchange or FINRA, on behalf of the Exchange, make
available to the Exchange or FINRA the daily Actual Portfolio holdings
of each series of Active Proxy Portfolio Shares.
Proposed Commentary .04 provides that, if the investment adviser to
the Investment Company issuing Active Proxy Portfolio Shares is
registered as a broker-dealer or is affiliated with a broker-dealer,
such investment adviser will erect and maintain a ``fire wall'' between
the investment adviser and personnel of the broker-dealer or broker-
dealer affiliate, as applicable, with respect to access to information
concerning the composition and/or changes to such Investment Company's
Actual Portfolio and/or Proxy Portfolio. Any person related to the
investment adviser or Investment Company who makes decisions pertaining
to the Investment Company's Actual Portfolio and/or Actual Portfolio or
has access to non-public information regarding the Investment Company's
Actual Portfolio and/or the Proxy Portfolio or changes thereto must be
subject to procedures reasonably designed to prevent the use and
dissemination of material non-public information regarding the Actual
Portfolio or to the Proxy Portfolio and/or changes thereto.
Proposed Commentary .05 provides that any person or entity,
including a custodian, Reporting Authority, distributor, or
administrator, who has access to non-public information regarding the
Investment Company's Actual Portfolio or the Proxy Portfolio or changes
thereto, must be subject to procedures reasonably designed to prevent
the use and dissemination of material non-public information regarding
the applicable Investment Company Actual Portfolio or the Proxy
Portfolio or changes thereto. Moreover, if any such person or entity is
registered as a broker-dealer or affiliated with a broker-dealer, such
person or entity will erect and maintain a ``fire wall'' between the
person or entity and the broker-dealer with respect to access to
information concerning the composition and/or changes to such
Investment Company Actual Portfolio or Proxy Portfolio.
The Exchange believes proposed Commentary .04 and proposed
Commentary .05 will act as a safeguard against any misuse and improper
dissemination of non-public information related to the Fund's Actual
Portfolio or Proxy Portfolio or changes thereto. The requirement that
any person or entity implement procedures reasonably designed to
prevent the use and dissemination of material non-public information
regarding the Actual Portfolio or Proxy Portfolio will act to prevent
any individual or entity from sharing such information externally and
the internal ``fire wall'' requirements applicable where an entity is a
registered broker-dealer or affiliated with a broker-dealer will act to
make sure that no entity will be able to misuse the data for their own
purpose. As such, the Exchange believes that this proposal is designed
to prevent fraudulent and manipulative acts and practices.
The proposed addition of Active Proxy Portfolio Shares to the
enumerated derivative and special purpose securities that are subject
to the provisions of Rule 5.3-E (Corporate Governance and Disclosure
Policies) and Rule 5.3-E (e) (Shareholder/Annual Meetings) would
subject Active Proxy Portfolio Shares to the same requirements
currently applicable to other 1940 Act-registered investment company
securities (i.e., Investment Company Units, Managed Fund Shares and
Portfolio Depositary Receipts.
With respect to the proposed listing and trading of Shares of the
Fund, the Exchange believes that the proposed rule change is designed
to prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Rule 8.601-E. The
Fund's holdings will conform to the permissible investments as set
forth in the Application and Exemptive Order and the holdings will be
consistent with all requirements in the Application and Exemptive
Order.\38\ Any foreign common stocks held by the Fund will be traded on
an exchange that is a member of the ISG or with which the Exchange has
in place a comprehensive surveillance sharing agreement. The Adviser
has represented to the Exchange that it will advise the Exchange of any
failure by the Fund to comply with the continued listing requirements,
and, pursuant to its obligations under Section 19(g)(1) of the Act, the
Exchange will monitor for compliance with the continued listing
requirements. If the Fund is not in compliance with the applicable
listing requirements, the Exchange will
[[Page 40337]]
commence delisting procedures under NYSE Arca Rule 5.5-E(m).
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\38\ See note 25, supra.
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The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and underlying
exchange-traded instruments with other markets and other entities that
are members of the ISG, and the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading information regarding trading
such securities and exchange-traded instruments from such markets and
other entities. In addition, the Exchange may obtain information
regarding trading in such securities and exchange-traded instruments
from markets and other entities that are members of ISG or with which
the Exchange has in place a comprehensive surveillance sharing
agreement.
The Exchange, after consulting with various LMMs that trade ETFs on
the Exchange, believes that market makers will be able to make
efficient and liquid markets priced near the ETF's intraday value, and
market makers employ market making techniques such as ``statistical
arbitrage,'' including correlation hedging, beta hedging, and
dispersion trading, which is currently used throughout the financial
services industry, to make efficient markets in exchange-traded
products.\39\ For Active Proxy Portfolio Shares, market makers may use
the knowledge of a fund's means of achieving its investment objective,
as described in the applicable fund registration statement, as well as
a fund's disclosed Proxy Portfolio, to construct a hedging proxy for a
fund to manage a market maker's quoting risk in connection with trading
fund shares. Market makers can then conduct statistical arbitrage
between their hedging proxy and shares of a fund, buying and selling
one against the other over the course of the trading day. This ability
should permit market makers to make efficient markets in an issue of
Active Proxy Portfolio Shares without precise knowledge of a fund's
underlying portfolio. This is similar to certain other existing
exchange-traded products (for example, ETFs that invest in foreign
securities that do not trade during U.S. trading hours), in which
spreads may be generally wider in the early days of trading and then
narrow as market makers gain more confidence in their real-time hedges.
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\39\ See note 20, supra.
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The daily dissemination of the identity and quantity of Proxy
Portfolio component investments, together with the right of Authorized
Participants to create and redeem each day at the NAV, will be
sufficient for market participants to value and trade shares in a
manner that will not lead to significant deviations between the Bid/Ask
Price and NAV of shares of a series of Active Proxy Portfolio Shares.
The pricing efficiency with respect to trading a series of Active
Proxy Portfolio Shares will generally rest on the ability of market
participants to arbitrage between the shares and a fund's portfolio, in
addition to the ability of market participants to assess a fund's
underlying value accurately enough throughout the trading day in order
to hedge positions in shares effectively. Professional traders can buy
shares that they perceive to be trading at a price less than that which
will be available at a subsequent time and sell shares they perceive to
be trading at a price higher than that which will be available at a
subsequent time. It is expected that, as part of their normal day-to-
day trading activity, market makers assigned to shares by the Exchange,
off-exchange market makers, firms that specialize in electronic
trading, hedge funds and other professionals specializing in short-
term, non-fundamental trading strategies will assume the risk of being
``long'' or ``short'' shares through such trading and will hedge such
risk wholly or partly by simultaneously taking positions in correlated
assets \40\ or by netting the exposure against other, offsetting
trading positions--much as such firms do with existing ETFs and other
equities. Disclosure of a fund's investment objective and principal
investment strategies in its prospectus and SAI should permit
professional investors to engage easily in this type of hedging
activity.
---------------------------------------------------------------------------
\40\ Price correlation trading is used throughout the financial
industry. It is used to discover both trading opportunities to be
exploited, such as currency pairs and statistical arbitrage, as well
as for risk mitigation such as dispersion trading and beta hedging.
These correlations are a function of differentials, over time,
between one or multiple securities pricing. Once the nature of these
price deviations have been quantified, a universe of securities is
searched in an effort to, in the case of a hedging strategy,
minimize the differential. Once a suitable hedging basket has been
identified, a trader can minimize portfolio risk by executing the
hedging basket. The trader then can monitor the performance of this
hedge throughout the trade period, making corrections where
warranted.
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The Exchange believes that the Fund and Active Proxy Portfolio
Shares generally, will provide investors with a greater choice of
active portfolio managers and active strategies through which they can
manage their assets in an ETF structure. This greater choice of active
asset management is expected to be similar to the diversity of active
managers and strategies available to mutual fund investors. Unlike
mutual fund investors, investors in Active Proxy Portfolio Shares would
also accrue the benefits derived from the ETF structure, such as lower
fund costs, tax efficiencies, intraday liquidity, and pricing that
reflects current market conditions rather than end-of-day pricing.
The Adviser represents that, unlike ETFs that publish their
portfolios on a daily basis, the Fund, as Active Proxy Portfolio
Shares, proposes to allow for efficient trading of Shares through an
effective Fund portfolio transparency substitute--Proxy Portfolio
transparency. The Adviser believes that this approach will provide an
important benefit to investors by protecting the Fund from the
potential for front-running of portfolio transactions and the potential
for free-riding on the Fund's portfolio strategies, each of which could
adversely impact the performance of the Fund.
The Fund will utilize the NYSE Proxy Portfolio Methodology,
allowing market participants to assess the intraday value and
associated risk of the Fund's Actual Portfolio and thereby facilitate
the purchase and sale of Shares by investors in the secondary market at
prices that do not vary materially from their NAV.
The Exchange believes that Active Proxy Portfolio Shares will
provide the platform for many more asset managers to launch ETFs,
increasing the investment choices for consumers of actively managed
funds, which should lead to a greater competitive landscape that can
help to reduce the overall costs of active investment management for
retail investors. Unlike mutual funds, Active Proxy Portfolio Shares
would be able to use the efficient share settlement system in place for
ETFs today, translating into a lower cost of maintaining shareholder
accounts and processing transactions.
The Fund's investments, including derivatives, will be consistent
with its 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).
The Adviser represents that investors will also benefit because the
Fund's operating costs, such as transfer agency costs, are generally
lower in ETFs than in mutual funds. The Fund will have access to the
identical clearing and settlement procedures now used by U.S. domiciled
ETFs, and therefore, should experience many of the operational and
[[Page 40338]]
cost efficiencies benefitting current ETF investors.
The Adviser represents further that in-kind Share creation/
redemption orders will allow the Fund to enjoy overall transaction
costs lower than those experienced by mutual funds. The Fund's in-kind
Share creation and redemption process will facilitate and enhance
active management strategies by generally limiting the portfolio
manager's need to transact in a large volume of trades in order to
maintain desired investment exposures. In addition, the Adviser
represents that the Fund will receive tax efficiency benefits of the
ETF structure because of in-kind Share creation and redemption
activity.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of a
series of Active Proxy Portfolio Shares that the NAV per share of a
fund will be calculated daily and that the NAV, Proxy Portfolio and
Actual Portfolio will be made available to all market participants at
the same time. With respect to the Fund, investors can also obtain the
Fund's SAI, shareholder reports, and its Form N-CSR, Form N-PORT and
Form N-CEN. The Fund's SAI and shareholder reports will be available
free upon request from the Fund, and those documents and the Form N-
CSR, Form N-PORT and Form N-CEN may be viewed on-screen or downloaded
from the Commission's website. In addition, with respect to the Fund, a
large amount of information will be publicly available regarding the
Fund and the Shares, thereby promoting market transparency. Quotation
and last sale information for the Shares will be available via the CTA
high-speed line. The website for the Fund will include a form of the
prospectus for the Fund that may be downloaded, and additional data
relating to NAV and other applicable quantitative information, updated
on a daily basis. The Proxy Portfolio holdings (including the identity
and quantity of investments in the Proxy Portfolio) will be publicly
available on the Fund's website before the commencement of trading in
Shares on each Business Day.
Trading in Shares of the Fund will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12-E have been reached or because of
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. Trading in the Shares will be
subject to NYSE Arca Rule 8.601-E (d)(2)(D), which sets forth
circumstances under which Shares of the Fund will be halted. In
addition, as noted above, investors will have ready access to quotation
and last sale information for the Shares. The Shares will conform to
the initial and continued listing criteria under proposed Rule 8.601-E.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, as noted above, investors
will have ready access to information regarding quotation and last sale
information for the Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes the
proposed rule change would permit listing and trading of another type
of actively-managed ETF that has characteristics different from
existing actively-managed and index ETFs and would introduce additional
competition among various ETF products to the benefit of investors.
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. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 6, is consistent with the Act and
rules and regulations thereunder applicable to a national securities
exchange.\41\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 6 is consistent with Section
6(b)(5) of the Act,\42\ which requires, among other things, that the
Exchange's rules be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\41\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Proposed NYSE Arca Rule 8.601-E
Pursuant to the Exemptive Order,\43\ Active Proxy Portfolio Shares
would not be required to disclose the actual holdings of the Investment
Company on a daily basis. Instead, Active Proxy Portfolio Shares would
be required to publicly disclose the Proxy Portfolio, which is designed
to closely track the performance of the holdings of the Investment
Company, on a daily basis. Like other registered management investment
companies, Active Proxy Portfolio Shares would be required to disclose
the actual holdings of the Investment Company within at least 60 days
following the end of every fiscal quarter. For reasons described below,
the Commission believes that NYSE Arca Rule 8.601-E is sufficiently
designed to be consistent with the Act and to help prevent fraudulent
and manipulative acts and practices and to maintain a fair and orderly
market for Active Proxy Portfolio Shares.
---------------------------------------------------------------------------
\43\ See supra note 21.
---------------------------------------------------------------------------
The Commission finds that the Exchange's proposal contains adequate
rules and procedures to govern the listing and trading of Active Proxy
Portfolio Shares on the Exchange. The Commission notes that the
proposed listing and trading rules for Active Proxy Portfolio Shares,
where appropriate, are similar to existing Exchange rules relating to
exchange-traded funds, in particular, Managed Fund Shares and Managed
Portfolio Shares.\44\ The Commission also notes that it recently
approved Cboe BZX Exchange, Inc.'s proposed listing requirements for
Tracking Fund Shares that are substantively identical to the Exchange's
proposal.\45\ Moreover, prior to listing and/or trading on the
Exchange, the Exchange must file a
[[Page 40339]]
separate proposed rule change pursuant to Section 19(b) of the Act for
each series of Active Proxy Portfolio Shares.\46\ All such shares
listed and/or traded under proposed NYSE Arca Rule 8.601-E will be
subject to the full panoply of NYSE Arca rules and procedures that
currently govern the trading of equity securities on the Exchange.
---------------------------------------------------------------------------
\44\ The proposed rules relating to limitation of liability
(proposed NYSE Arca Rule 8.601-E(e)), termination (proposed NYSE
Arca Rule 8.601-E(d)(2)(E)), and voting (proposed NYSE Arca Rule
8.601-E(d)(2)(F)) are substantively similar or identical to existing
provisions for Managed Fund Shares and Managed Portfolio Shares. See
NYSE Arca Rule 8.600-E(e) and NYSE Arca Rule 8.900-E(e), NYSE Arca
Rule 8.600-E(d)(2)(E) and NYSE Arca Rule 8.900-E(d)(2)(D), and NYSE
Arca Rule 8.600-E(d)(2)(F) and NYSE Arca Rule 8.900-E(d)(2)(E),
respectively.
\45\ See Securities Exchange Act Release No. 88887 (May 15,
2020), 85 FR 30990 (May 21, 2020) (SR-CboeBZX-2019-107).
\46\ See proposed NYSE Arca Rule 8.601-E, Commentary .01.
---------------------------------------------------------------------------
For the initial listing of each series of Active Proxy Portfolio
Shares under proposed NYSE Arca Rule 8.601-E, the Exchange must
establish a minimum number of Active Proxy Portfolio Shares required to
be outstanding at the commencement of trading. In addition, the
Exchange must obtain a representation from the issuer of each series of
Active Proxy Portfolio Shares that the NAV per share for the series
will be calculated daily and that the NAV, Proxy Portfolio, and Actual
Portfolio will be made publicly available to all market participants at
the same time. Moreover, all Active Proxy Portfolio Shares must have a
stated investment objective, which must be adhered to under normal
market conditions.\47\
---------------------------------------------------------------------------
\47\ See proposed NYSE Arca Rule 8.601-E(d)(1).
---------------------------------------------------------------------------
Although the actual portfolio holdings of the Active Proxy
Portfolio Shares are not publicly disclosed on a daily basis, the
Commission believes that the proposed listing standards under proposed
NYSE Arca Rule 8.601-E, along with the required dissemination of the
Proxy Portfolio, are adequate to ensure transparency of key information
regarding the Active Proxy Portfolio Shares and that such information
is made available to market participants at the same time. Namely, the
Proxy Portfolio would be made publicly available on the website for
each series of Active Proxy Portfolio Shares at least once daily and
would be made available to all market participants at the same
time.\48\ In addition, like all other registered management investment
companies, each series of Active Proxy Portfolio Shares would be
required to publicly disclose its portfolio holdings information on a
quarterly basis, within at least 60 days following the end of every
fiscal quarter.\49\ If the Exchange becomes aware that the NAV, Proxy
Portfolio, or Actual Portfolio is not being made available to all
market participants at the same time, then the Exchange will halt
trading in such series until such time as the NAV, Proxy Portfolio, or
Actual Portfolio is available to all market participants at the same
time, as applicable.\50\ Further, if either the Proxy Portfolio or
Actual Portfolio is not made available to all market participants at
the same time, the Exchange will consider the suspension of trading in
and will commence delisting proceedings for a series of Active Proxy
Portfolio Shares.\51\ Moreover, the Exchange represents that a series
of Active Proxy Portfolio Shares' Statement of Additional Information
and shareholder reports will be available for free upon request from
the Investment Company, and that those documents and the Form N-PORT,
Form N-CSR, and Form N-CEN may be viewed on-screen or downloaded from
the Commission's website at www.sec.gov.
---------------------------------------------------------------------------
\48\ See proposed NYSE Arca Rule 8.601-E(d)(2)(B)(i).
\49\ See proposed NYSE Arca Rule 8.601-E(d)(2)(A)(i). See also
Rules 30e-1, 30d-1, and 30b1-5 under the 1940 Act.
\50\ See proposed NYSE Arca Rule 8.601-E(d)(2)(D)(iii).
\51\ See proposed NYSE Arca Rule 8.601-E(d)(2)(C)(ii).
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The Commission also finds that the Exchange's rules with respect to
trading halts and suspensions under proposed NYSE Arca Rule 8.601-E are
designed to help maintain a fair and orderly market. According to the
proposal, the Exchange may consider all relevant factors in exercising
its discretion to halt trading in a series of Active Proxy Portfolio
Shares. Further, trading may be halted because of market conditions or
for reasons that, in the view of the Exchange, make trading in the
series of Active Proxy Portfolio Shares inadvisable. These may include
the extent to which trading is not occurring in the securities and/or
the financial instruments comprising the Proxy Portfolio and/or Actual
Portfolio, or whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present.\52\
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\52\ See proposed NYSE Arca Rule 8.601-E(d)(2)(D)(i). In
addition, if a series of Active Proxy Portfolio Shares is trading on
the Exchange pursuant to unlisted trading privileges, the Exchange
shall halt trading in that series as specified in NYSE Arca Rule
7.18-E(d)(1) (Trading Halts for UTP Derivative Securities Products).
See proposed NYSE Arca Rule 8.601-E(d)(2)(D)(ii).
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Other provisions of the Exchange's rule pertaining to suspension
are substantially consistent with provisions that currently exist for
Managed Fund Shares and Managed Portfolio Shares. Those provisions
state that the Exchange will consider the suspension of trading in, and
will commence delisting proceedings under NYSE Arca Rule 5.5-E(m) for,
a series of Active Proxy Portfolio Shares if: (1) Any of the continued
listing requirements set forth in NYSE Arca Rule 8.601-E are not
continuously maintained; (2) following the initial twelve-month period
after commencement of trading on the Exchange of a series of Active
Proxy Portfolio Shares, there are fewer than 50 beneficial holders of
the series of Active Proxy Portfolio Shares; (3) the Exchange is
notified, or otherwise becomes aware, that the Investment Company has
failed to file any filings required by the Commission or is not in
compliance with the conditions of any currently applicable exemptive
order or no-action relief granted by the Commission or Commission staff
to the Investment Company with respect to the series of Active Proxy
Portfolio Shares; (4) any of the statements or representations
regarding the description of the portfolio, limitations on portfolio
holdings, or the applicability of Exchange listing rules, specified in
the Exchange's rule filing pursuant to Section 19(b) of the Act to
permit the listing and trading of a series of Active Proxy Portfolio
Shares, is not continuously maintained; or (5) such other event shall
occur or condition exists which, in the opinion of the Exchange, makes
further dealings of the Active Proxy Portfolio Shares on the Exchange
inadvisable.\53\
---------------------------------------------------------------------------
\53\ See proposed NYSE Arca Rule 8.601-E(d)(2)(C). See also
supra note 51 and accompanying text.
---------------------------------------------------------------------------
Finally, the Commission believes that the requirements of proposed
NYSE Arca Rule 8.601-E are consistent with the Act and, more
specifically, are reasonably designed to help prevent fraudulent and
manipulative acts and practices. The Commission notes that, because
Actual Proxy Portfolio Shares would not publicly disclose on a daily
basis information about the holdings of the Actual Portfolio, it is
vital that such information be kept confidential and not be subject to
misuse. Accordingly, to help ensure that the portfolio information be
kept confidential and the shares not be susceptible to fraud or
manipulation, proposed NYSE Arca Rule 8.601-E, Commentary .04 requires
that, if the investment adviser to the Investment Company issuing
Active Proxy Portfolio Shares is registered as a broker-dealer or is
affiliated with a broker-dealer, such investment adviser must erect and
maintain a ``fire wall'' between the investment adviser and personnel
of the broker-dealer or broker-dealer affiliate, as applicable, with
respect to access to information concerning the composition of and/or
changes to such Investment Company's Actual Portfolio and/or Proxy
Portfolio. Further, proposed Commentary .04 also requires that any
person related to the
[[Page 40340]]
investment adviser or Investment Company who makes decisions pertaining
to the Investment Company's Actual Portfolio and/or Proxy Portfolio or
has access to non-public information regarding the Investment Company's
Actual Portfolio and/or the Proxy Portfolio or changes thereto must be
subject to procedures reasonably designed to prevent the use and
dissemination of material non-public information regarding the Actual
Portfolio and/or the Proxy Portfolio or changes thereto. In addition,
proposed NYSE Arca Rule 8.601-E, Commentary .05 provides that any
person or entity, including a custodian, Reporting Authority,
distributor, or administrator, who has access to non-public information
regarding the Investment Company's Actual Portfolio or the Proxy
Portfolio or changes thereto, must be subject to procedures reasonably
designed to prevent the use and dissemination of material non-public
information regarding the applicable Investment Company Actual
Portfolio or the Proxy Portfolio or changes thereto. Moreover, if any
such person or entity is registered as a broker-dealer or affiliated
with a broker-dealer, such person or entity must erect and maintain a
``fire wall'' between the person or entity and the broker-dealer with
respect to access to information concerning the composition of and/or
changes to such Investment Company Actual Portfolio or Proxy Portfolio.
The proposed rules also require that the Exchange implement and
maintain written surveillance procedures for Active Proxy Portfolio
Shares.\54\ Finally, to ensure that the Exchange has the appropriate
information to monitor and surveil its market, proposed NYSE Arca Rule
8.601-E, Commentary .03 also requires that the Investment Company's
investment adviser will, upon request by the Exchange or FINRA, on
behalf of the Exchange, make available to the Exchange or FINRA the
daily Actual Portfolio holdings of each series of Active Proxy
Portfolio Shares.
---------------------------------------------------------------------------
\54\ See proposed NYSE Arca Rule 8.601-E, Commentary .03.
---------------------------------------------------------------------------
For the reasons discussed above, the Commission finds that proposed
NYSE Arca Rule 8.601-E for Active Proxy Portfolio Shares is consistent
with Section 6(b)(5) of the Act.
Further, the Commission finds that the proposed amendments to NYSE
Arca Rule 5.3-E and NYSE Arca Rule 5.3-E(e) to include Active Proxy
Portfolio Shares among the list of derivative or special purpose
securities that are subject to a limited set of corporate governance
and disclosure policies, and among the derivative or special purpose
securities to which the requirements concerning shareholder annual
meetings do not apply, are consistent with Section 6(b)(5) of the Act
because these amendments will provide that Active Proxy Portfolio
Shares will be treated in a manner consistent with other derivative
securities listed and traded on the Exchange.
B. Listing and Trading of Natixis U.S. Equity Opportunities ETF
The Commission believes that the proposal is reasonably designed to
promote fair disclosure of information that may be necessary to price
the Shares appropriately and to prevent trading in the Shares when a
reasonable degree of certain pricing transparency cannot be assured. As
such, the Commission believes the proposal is reasonably designed to
maintain a fair and orderly market for trading the Shares. The
Commission also finds that the proposal is consistent with Section
11A(a)(1)(C)(iii) of the Act, which sets forth Congress's finding that
it is in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets to assure the
availability to brokers, dealers, and investors of information with
respect to quotations for, and transactions in, securities.
Specifically, the Commission notes that the Exchange, prior to
commencement of trading in the Shares, will obtain a representation
from the issuer of the Shares that the NAV per Share of the Fund will
be calculated daily and that the NAV, Proxy Portfolio, and Actual
Portfolio of the Fund will be made available to all market participants
at the same time.\55\ Information regarding market price and trading
volume of the Shares will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services. Quotation and last-sale information for the Shares, equity
securities, and ETFs will be available via the Consolidated Tape
Association high-speed line or from the exchange on which such
securities trade. Moreover, the Fund's website will include additional
information updated on a daily basis, including, on a per Share basis
for the Fund, the prior business day's NAV, the closing price or bid/
ask price at the time of calculation of such NAV, and a calculation of
the premium or discount of the closing price or bid/ask price against
such NAV. The website will also disclose the percentage weight overlap
between the holdings of the Proxy Portfolio compared to the Actual
Portfolio holdings for the prior business day, and any other
information regarding premiums and discounts and the bid/ask spread for
the Fund as may be required for other ETFs under Rule 6c-11 under the
1940 Act. The website and information will be publicly available at no
charge.
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\55\ See NYSE Arca Rule 8.601-E(d)(1)(B).
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In addition, the Exchange states that intraday pricing information
for all constituents of the Proxy Portfolio that are exchange-traded,
which includes all eligible instruments except cash and cash
equivalents, will be available on the exchanges on which they are
traded and through subscription services, and that intraday pricing
information for cash equivalents will be available through subscription
services and/or pricing services.
The Commission also believes that the proposal is reasonably
designed to help prevent fraudulent and manipulative acts and
practices. Specifically, the Exchange provides that:
The Adviser is not registered as a broker-dealer but is
affiliated with a broker-dealer and has implemented and will maintain a
``fire wall'' with respect to such broker-dealer affiliate regarding
access to information concerning the composition of and/or changes to
the Fund's Actual Portfolio and/or Proxy Portfolio;
The Fund's Sub-Advisers are not registered as a broker-
dealer but are affiliated with a broker-dealer, and each Sub-Adviser
has implemented and will maintain a ``fire wall'' with respect to its
respective broker-dealer affiliate regarding access to information
concerning the composition of and/or changes to the Fund's Actual
Portfolio and/or Proxy Portfolio;
Any person related to the Adviser, each Sub-Adviser, or
the Fund who makes decisions pertaining to the Fund's Actual Portfolio
or Proxy Portfolio or who has access to non-public information
regarding the Fund's Actual Portfolio and/or the Proxy Portfolio or
changes thereto are subject to procedures reasonably designed to
prevent the use and dissemination of material non-public information
regarding the Fund's Actual Portfolio and/or the Proxy Portfolio or
changes thereto;
In the event (a) the Adviser or a Sub-Adviser becomes
registered as a broker-dealer or becomes newly affiliated with a
broker-dealer or (b) any new adviser or sub-adviser is a registered
broker-dealer, or becomes affiliated with a broker-dealer, it will
implement and maintain a fire wall with respect to its relevant
personnel or its
[[Page 40341]]
broker-dealer affiliate regarding access to information concerning the
composition of and/or changes to the Fund's Actual Portfolio and/or
Proxy Portfolio, and will be subject to procedures designed to prevent
the use and dissemination of material non-public information regarding
the Fund's Actual Portfolio and/or Proxy Portfolio or changes thereto;
and
Any person or entity, including any service provider for
the Fund, who has access to non-public information regarding the Fund's
Actual Portfolio or the Proxy Portfolio or changes thereto will be
subject to procedures reasonably designed to prevent the use and
dissemination of material non-public information regarding the Fund's
Actual Portfolio and/or the Proxy Portfolio or changes thereto, and if
any such person or entity is registered as a broker-dealer or
affiliated with a broker-dealer, such person or entity has erected and
will maintain a ``fire wall'' between the person or entity and the
broker-dealer with respect to access to information concerning the
composition of and/or changes to the Fund's Actual Portfolio and/or
Proxy Portfolio.
Finally, the Exchange represents that trading in the Shares will be
subject to the existing trading surveillances, administered by the
Exchange, as well as cross-market surveillances administered by FINRA
on behalf of the Exchange,\56\ and that these surveillance procedures
are adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and federal securities laws applicable to trading on the Exchange.
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\56\ See NYSE Arca Rule 8.601-E, Commentary .03, which requires,
as part of the surveillance procedures for Active Proxy Portfolio
Shares, the Fund's investment adviser to, upon request by the
Exchange or FINRA, on behalf of the Exchange, make available to the
Exchange or FINRA the daily Actual Portfolio holdings of the Fund.
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The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities.
In support of this proposal, the Exchange represents that:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.601-E.
(2) A minimum of 100,000 Shares for the Fund will be outstanding at
the commencement of trading on the Exchange.
(3) The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed, and may obtain information, regarding trading in
the Shares and underlying exchange-traded instruments with other
markets and other entities that are members of the ISG. In addition,
the Exchange may obtain information regarding trading in such
securities and exchange-traded instruments from markets and other
entities with which the Exchange has in place a comprehensive
surveillance sharing agreement. Any foreign common stocks held by the
Fund will be traded on an exchange that is a member of the ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement.
(4) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(5) For initial and continued listing, the Fund will be in
compliance with Rule 10A-3 under the Act.\57\
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\57\ See 17 CFR 240.10A-3.
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(6) The Fund's holdings will conform to the permissible investments
as set forth in the Application and Exemptive Order and the holdings
will be consistent with all requirements set forth in the Application
and Exemptive Order. The Fund's investments, including derivatives,
will be consistent with its investment objective and will not be used
to enhance leverage (although certain derivatives and other investments
may result in leverage).
(7) With respect to Active Proxy Portfolio Shares, all of the
Exchange member obligations relating to product description and
prospectus delivery requirements will continue to apply in accordance
with Exchange rules and federal securities laws, and the Exchange and
FINRA will continue to monitor Exchange members for compliance with
such requirements.
The Exchange also represents that all statements and
representations made in the filing regarding: (1) The description of
the portfolio or reference assets; (2) limitations on portfolio
holdings or reference assets; or (3) the applicability of Exchange
listing rules specified in the filing constitute continued listing
requirements for listing the Shares on the Exchange. In addition, the
Exchange represents that the Adviser will advise the Exchange of any
failure by the Fund to comply with the continued listing requirements
and, pursuant to its obligations under Section 19(g)(1) of the Act, the
Exchange will monitor \58\ for compliance with the continued listing
requirements. If the Fund is not in compliance with the applicable
listing requirements, the Exchange will commence delisting procedures
under NYSE Arca Rule 5.5-E(m).
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\58\ The Commission notes that certain proposals for the listing
and trading of exchange-traded products include a representation
that the exchange will ``surveil'' for compliance with the continued
listing requirements. See, e.g., Securities Exchange Act Release No.
77499 (April 1, 2016), 81 FR 20428, 20432 (April 7, 2016) (SR-BATS-
2016-04). In the context of this representation, it is the
Commission's view that ``monitor'' and ``surveil'' both mean ongoing
oversight of compliance with the continued listing requirements.
Therefore, the Commission does not view ``monitor'' as a more or
less stringent obligation than ``surveil'' with respect to the
continued listing requirements.
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IV. Solicitation of Comments on Amendment No. 6 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether the proposed rule change, as modified by
Amendment No. 6, is consistent with the Exchange Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2019-95 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2019-95.
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
[[Page 40342]]
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2019-95, and should
be submitted on or before July 27, 2020.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 6
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 6, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
6 in the Federal Register. In Amendment No. 6, the Exchange amended
proposed Rule 8.601-E to, among other things, (i) revise the
circumstances under which it would consider the suspension of trading
in, and commence delisting proceedings for, a series of Active Proxy
Portfolio Shares; (ii) require that any person or entity who has access
to non-public information regarding the Investment Company's Actual
Portfolio or the Proxy Portfolio or changes thereto, (a) be subject to
procedures reasonably designed to prevent the use and dissemination of
material non-public information regarding the applicable Investment
Company Actual Portfolio or the Proxy Portfolio or changes thereto, and
(b) if such person or entity is registered as a broker-dealer or
affiliated with a broker-dealer, to erect and maintain a ``fire wall''
between the person or entity and the broker-dealer with respect to
access to information concerning the composition of and/or changes to
such Investment Company Actual Portfolio or Proxy Portfolio; and (iii)
remove unnecessary discussion about an information bulletin to be
provided to the Exchange's members regarding trading in the Shares.
Amendment No. 6 also provides other clarifications and additional
information related to the Fund.\59\ The changes and additional
information in Amendment No. 6 assist the Commission in finding that
the proposal is consistent with the Exchange Act. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Exchange Act,\60\ to approve the proposed rule change, as modified by
Amendment No. 6, on an accelerated basis.
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\59\ See Amendment No. 6, supra note 12.
\60\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\61\ that the proposed rule change (SR-NYSEArca-2019-95), as modified
by Amendment No. 6, be, and it hereby is, approved on an accelerated
basis.
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\61\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
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\62\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14388 Filed 7-2-20; 8:45 am]
BILLING CODE 8011-01-P