[Federal Register Volume 75, Number 226 (Wednesday, November 24, 2010)]
[Notices]
[Pages 71760-71762]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29560]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63329; File No. SR-NYSEArca-2010-86]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change Relating to the Listing and Trading of
Shares of the Peritus High Yield ETF
November 17, 2010.
I. Introduction
On September 23, 2010, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
Peritus High Yield ETF (``Fund''). The proposed rule change was
published for comment in the Federal Register on October 13, 2010.\3\
The Commission received no comments on the proposal. This order grants
approval of the proposed rule change.
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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. 63041 (October 5,
2010), 75 FR 62905 (``Notice'').
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II. Description of the Proposal
The Exchange proposes to list and trade the Shares pursuant to NYSE
Arca Equities Rule 8.600, which governs the listing and trading of
Managed Fund Shares.\4\ The Shares will be offered by AdvisorShares
Trust (``Trust''), a statutory trust organized under the laws of the
State of Delaware and registered with the Commission as an open-end
management investment company.\5\ The investment advisor to the Fund is
AdvisorShares Investments, LLC (``Advisor''), and Peritus I Asset
Management, LLC is the Fund's sub-advisor (``Peritus'' or ``Sub-
Advisor'').\6\
[[Page 71761]]
The Exchange represents that the Shares will conform to the initial and
continued listing criteria under NYSE Arca Equities Rule 8.600 and
that, for initial and/or continued listing, the Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\7\ as provided by
NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be
outstanding at the commencement of trading on the Exchange.
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\4\ A Managed Fund Share is a security that, among other things,
represents an interest in an investment company registered under the
Investment Company Act of 1940 (``1940 Act'') organized as an open-
end investment company or similar entity that invests in a portfolio
of securities selected by its investment advisor consistent with its
investment objectives and policies. See NYSE Arca Equities Rule
8.600(c)(1).
\5\ The Trust is registered under the 1940 Act. On May 11, 2010,
the Trust filed with the Commission Post-Effective Amendment No. 6
to Form N-1A relating to the Fund (File Nos. 333-157876 and 811-
22110) (``Registration Statement'').
\6\ The Exchange represents that the Advisor and Sub-Advisor are
not affiliated with a broker-dealer. See Commentary .06 to NYSE Arca
Equities Rule 8.600 (requiring that, if the investment adviser is
affiliated with a broker-dealer, the investment adviser erect a
``fire wall'' between the investment adviser and the broker-dealer
with respect to access to information concerning the composition
and/or changes to the portfolio).
\7\ 17 CFR 240.10A-3.
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The Fund's investment objective is high current income with a
secondary goal of capital appreciation. The Fund, under normal
circumstances, will invest at least 80% of its net assets, plus any
borrowings for investment purposes, in high-yield debt securities,
which include senior and subordinated corporate debt obligations (such
as bonds, debentures, notes and commercial paper). The Fund does not
have any portfolio maturity limitation and may invest its assets from
time to time primarily in instruments with short-term, medium-term or
long-term maturities.
In selecting securities for the Fund's portfolio, Peritus will
perform its own independent investment analysis of each issuer to
determine its creditworthiness. Peritus will focus on the secondary
market, predominantly investing in assets at a discount to par ($100),
allowing for a potential opportunity to generate capital gains in
addition to current yield. Peritus will place limited value on credit
ratings and instead will focus on true cash flow while looking to buy
credit at prices that it feels provide a margin of safety. Additional
factors will be considered when constructing the portfolio including,
but not limited to, excess cash on the balance sheet and/or a history
of producing real free cash flow, as well as a capital structure that
can be sustained on conservative forecasts. The Fund's portfolio will
typically consist of 40-60 holdings,\8\ which will be disclosed on its
Web site (http://www.advisorshares.com) daily after the close of
trading on the Exchange and prior to the opening of trading on the
Exchange the following day.
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\8\ The Fund represents that the portfolio will include a
minimum of 13 non-affiliated issuers.
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The Fund may seek investments in corporate debt securities
representative of one or more high-yield bond or credit derivative
indices, which may change from time to time. Selection will generally
be dependent on independent credit analysis or fundamental analysis
performed by the Sub-Advisor. The Fund may invest in all grades of
corporate securities, including those below investment grade.\9\ The
Fund will only invest in liquid securities and only purchase performing
securities and not distressed debt.\10\ To a lesser extent, the Fund
also may invest in unrated securities. The Fund may invest in the
securities of other investment companies to the extent that such an
investment would be consistent with the requirements of Section
12(d)(1) of the 1940 Act, or any rule, regulation or order of the
Commission.
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\9\ The Fund has represented that it will invest only in U.S.-
registered bonds that are listed or traded in the United States.
However, certain of the Fund's debt holdings may be issued by
corporations domiciled outside the United States.
\10\ Distressed debt is debt that is currently in default and is
not expected to pay the current coupon.
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To respond to adverse market, economic, political or other
conditions, the Fund may invest 100% of its total assets, without
limitation, in high-quality short-term debt securities and money market
instruments. The Fund may be invested in these instruments for extended
periods, depending on the Sub-Advisor's assessment of market
conditions. These short-term debt securities and money market
instruments include shares of other mutual funds, commercial paper,
certificates of deposit, bankers' acceptances, and U.S. Government
securities.
Additional details regarding the Shares and the Fund including,
among other things, the organization and structure of the Fund, the
investment objectives and methodologies, investment risks,
dissemination and availability of key information about the Fund, the
Shares, and the portfolio, creations and redemptions of Shares, trading
halts, trading rules, surveillance, and the Information Bulletin can be
found in the Notice and the Registration Statement, as applicable.\11\
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\11\ See supra notes 3 and 5.
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III. Discussion and Commission's Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\12\ In particular, the Commission finds that the proposed
rule change is consistent with the requirements of Section 6(b)(5) of
the Act,\13\ which requires, among other things, that the Exchange's
rules be designed to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
facilitating transactions in securities, 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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\12\ 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).
\13\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\14\ which sets forth Congress' 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. Quotation and last-sale
information for the Shares will be disseminated through the facilities
of the Consolidated Tape Association. In addition, the Portfolio
Indicative Value (``PIV'') will be disseminated at least every 15
seconds during the Core Trading Session by one or more major market
data vendors. On each business day before commencement of trading in
Shares in the Core Trading Session on the Exchange, the Fund will
disclose on its Web site the Disclosed Portfolio, as defined in NYSE
Arca Equities Rule 8.600(c)(2), that will form the basis for the Fund's
calculation of net asset value (``NAV'') at the end of the business
day.\15\ In addition, information regarding market price and trading
volume of the Shares is and will be continually available on a real-
time basis throughout the day on brokers' computer screens and other
electronic services, and the previous day's closing price and trading
volume information will be published daily in the financial section of
newspapers. The Fund will also make available on its Web site daily
trading volume of the Shares, closing prices of the Shares, NAV, and
other related quantitative and trading information. A basket
composition file, which includes the security names and share
quantities required to be delivered in exchange for Fund shares,
together with estimates and actual cash components, will be publicly
disseminated daily prior to the opening of the New York Stock Exchange
(``NYSE'') via the National Securities
[[Page 71762]]
Clearing Corporation. The basket represents one Creation Unit of the
Fund. The NAV of the Fund will normally be determined as of the close
of the regular trading session on the NYSE (ordinarily 4 p.m. Eastern
Time) on each business day.
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\14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\15\ On a daily basis, the Advisor will disclose for each
portfolio security or other financial instrument of the Fund the
following information: Ticker symbol (if applicable), name of
security or financial instrument, number of shares or dollar value
of financial instruments held in the portfolio, and percentage
weighting of the security or financial instrument in the portfolio.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the issuer of the Shares that the NAV and the
Disclosed Portfolio will be made available to all market participants
at the same time.\16\\\ The Exchange may halt trading in the Shares if
the value of the Portfolio Indicative Value is no longer calculated or
available or the Disclosed Portfolio is not made available to all
market participants at the same time.\17\\\ In addition, NYSE Arca
Equities Rule 8.600(d)(2)(B)(ii) requires that the Reporting Authority
that provides the Disclosed Portfolio implement and maintain, or be
subject to, procedures designed to prevent the use and dissemination of
material non-public information regarding the actual components of the
portfolio. Lastly, the Commission notes that the Exchange will halt
trading in the Shares under the specific circumstances set forth in
NYSE Arca Equities Rule 8.600(d)(2)(D) and that, if there is an
additional Fund sub-advisor that is affiliated with a broker-dealer,
that sub-advisor must erect a fire wall between it and such broker-
dealer with respect to access to information concerning the composition
and/or changes to the investment portfolio of the Fund.\18\
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\16\ See NYSE Arca Equities Rule 8.600(d)(1)(B) (also requiring
that the Exchange obtain a representation from the issuer that the
NAV per Share will be calculated daily).
\17\ See NYSE Arca Equities Rule 8.600(d)(2)(C)(ii). With
respect to trading halts, the Exchange may consider other relevant
factors in exercising its discretion to halt or suspend trading in
the Shares. Trading on the Exchange in the Shares may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. These may include:
(1) The extent to which trading is not occurring in the securities
comprising the Disclosed Portfolio and/or the financial instruments
of the Fund; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.
\18\ The Commission notes that the Exchange has represented that
neither the Fund's Advisor nor Sub-Advisor is affiliated with a
broker-dealer. See supra note 6.
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The Exchange has represented that the Shares are deemed 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 has made representations,
including:
(1) The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange's 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 applicable federal
securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (a)
The procedures for purchases and redemptions of Shares in Creation Unit
aggregations (including noting that Shares are not individually
redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (c) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated PIV will not be calculated or publicly
disseminated; (d) how information regarding the PIV is disseminated;
(e) the requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (f) trading information.
(5) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
(6) For initial and continued listing, the Shares must comply with
Rule 10A-3 under the Act.\19\
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\19\ 17 CFR 240.10A-3.
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This approval order is based on the Exchange's representations.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \20\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\20\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-NYSEArca-2010-86), be, and
it hereby is, approved.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29560 Filed 11-23-10; 8:45 am]
BILLING CODE 8011-01-P