On April 25, 2014, NYSE Arca, Inc. (“Exchange” or “NYSE Arca”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1)
The Funds are series of the PowerShares Exchange-Traded Fund Trust II (“Trust”).
Currently, the Exchange lists and trades the Shares under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, which governs the listing and trading of Units based on fixed income securities indexes. As described further below, the Exchange states that it recently became aware that the indexes underlying the Funds do not meet all of the generic listing criteria applicable to these Units. Accordingly, by this proposed rule change, NYSE Arca seeks to permit the continued listing and trading of the Shares. Additionally, and as discussed further below, in the future, the Exchange expects that the indexes underlying the Funds will be changed again, and the Exchange states that those new indexes also fail to meet the generic listing criteria of NYSE Arca Equities Rule 5.2(j)(3), Commentary .02. Accordingly, by this proposed rule change, NYSE Arca also seeks to permit the listing and trading of the Shares once the Funds transition to the new underlying indexes.
The Exchange states that, on May 28, 2009, the municipal bond indexes underlying the CA Portfolio; the National Portfolio; and the NY Portfolio were changed to the Merrill Lynch California Insured Long-Term Core Plus Municipal Securities Index, the Merrill Lynch National Insured Long-Term Core Plus Municipal Securities Index, and the Merrill Lynch New York Insured Long-Term Core Plus Municipal Securities Index, respectively.
According to the Exchange, the Municipal Bond Indexes meet all of the applicable requirements for the generic listing under NYSE Arca Equities Rule 5.2(j)(3) except for the requirement of Commentary .02(a)(2), which requires that components that in the aggregate account for 75% or more of the weight of the index or portfolio each have a minimum original principal amount outstanding of $100 million or more. Specifically, as of March 6, 2014, approximately 34.84%, and 37.16%, and 59.22% of the weight of the components of the CA Index, National Index and NY Index, respectively, had a minimum original principal amount outstanding of $100 million or more.
The CA Portfolio seeks investment results that generally correspond (before fees and expenses) to the price and yield performance of the CA Index.
As of January 31, 2014, the total dollar amount outstanding of issues in the CA Index was approximately $17.201 billion and the average dollar amount outstanding of issues in the CA Index was approximately $64.42 million. The most heavily weighted component
The National Portfolio seeks investment results that generally correspond (before fees and expenses) to the price and yield performance of the National Index. The National Index is designed to track the performance of U.S. dollar-denominated investment grade insured tax-exempt debt publicly issued by U.S. states and territories (including Puerto Rico), or their political subdivision, in the U.S. domestic market and includes approximately 1,238 bonds (as of January 31, 2014). The National Index is adjusted monthly.
As of January 31, 2014, the total dollar amount outstanding of issues in the National Index was approximately $78.69 billion and the average dollar amount outstanding of issues in the National Index was approximately $63.56 million. Further, the most heavily weighted component represented 0.88% of the weight of the National Index and the five most heavily weighted components represented 3.51% of the weight of the National Index. The National Index is composed of approximately 1,238 issues and 521 unique issuers. In addition, the average daily notional trading volume for National Index components for the calendar year 2013 was approximately $101.99 million and the sum of the notional trading volumes for the same period was approximately $25.7 billion.
According to the Registration Statement, the NY Portfolio seeks investment results that generally correspond (before fees and expenses) to the price and yield performance of the NY Index. The NY Index is designed to track the performance of U.S. dollar-denominated, investment grade, tax-exempt debt publicly issued by New York or U.S. territories (including Puerto Rico), or their political subdivisions, included in the U.S. domestic market and includes approximately 130 bonds (as of January 31, 2014). The NY Index is adjusted monthly.
As of January 31, 2014, the total dollar amount outstanding of issues in the NY Index was approximately $17.76 billion and the average dollar amount outstanding of issues in the NY Index was approximately $90.58 million. Further, the most heavily weighted component represented 6.14% of the weight of the NY Index and the five most heavily weighted components represented 20.15% of the weight of the NY Index. The NY Index is composed of approximately 130 issues and 25 unique issuers. In addition, the average daily notional trading volume for NY Index components for the calendar year 2013 was approximately $19.41 million and the sum of the notional trading volumes for the same period was approximately $4.89 billion.
As stated above, currently the Municipal Bond Indexes underlie the Municipal Bond Portfolios. The Trust has proposed to its shareholders to, among other things, change the indexes underlying the Funds (and the name of the Funds). On May 10, 2013, the Trust filed with the Commission on Schedule 14A a definitive proxy statement and notice of shareholders meeting calling a meeting on June 20, 2013 (“Proxy Statement”).
In addition, each Fund would change its name by removing the word “Insured” and adding the term “AMT-Free” to reflect that the proposed underlying indexes would include primarily municipal securities that are exempt from the alternative minimum tax.
The shareholders of each Fund have approved these changes contingent upon approval of this proposed rule change.
Currently, the New Municipal Bond Indexes do not meet the generic listing criteria of NYSE Arca Equities Rule 5.2(j)(3). Accordingly, the Exchange submitted this proposed rule change to permit the continued listing and trading the Shares in the event they overlie the New Municipal Bond Indexes. Specifically, the Exchange states that the New Municipal Bond Indexes meet all of the requirements of the generic listing criteria of NYSE Arca Equities Rule 5.2(j)(3), except for those set forth in Commentary .02(a)(2);
The New CA Portfolio would generally seek investment results that correspond (before fees and expenses) to the price and yield performance of the New CA Index.
As of January 31, 2014, the total dollar amount outstanding of issues in the New CA Index was approximately $100.76 billion and the average dollar amount outstanding of issues in the Index was approximately $92.81 million. Further, the most heavily weighted component represented 1.39% of the weight of the New CA Index and the five most heavily weighted components represented 5.17% of the weight of the CA Index. The New CA Index is composed of approximately 1,086 issues and 229 unique issuers. In addition, the average daily notional trading volume for New CA Index components for the calendar year 2013 was approximately $364.22 million and the sum of the notional trading volumes for the same period was approximately $91.78 billion.
The New National Portfolio generally would seek investment results that correspond (before fees and expenses) to the price and yield performance of the New National Index.
As of January 31, 2014, the total dollar amount outstanding of issues in the New National Index was approximately $ 394.04 billion and the average dollar amount outstanding of issues in the New National Index was approximately $71.96 million. Additionally, the most heavily weighted component represented 0.34% of the weight of the New National Index and the five most heavily weighted components represented 1.47% of the weight of the New National Index. The New National Index is composed of approximately 5,476 issues and 1,259 unique issuers. Further, the average daily notional trading volume for New National Index components for the calendar year 2013 was approximately $1.26 billion and the sum of the notional trading volumes for the same period was approximately $317.73 billion.
The New NY Portfolio would seek investment results that correspond (before fees and expenses) generally to the price and yield performance of the New NY Index.
As of January 31, 2014, the total dollar amount outstanding of issues in the New NY Index was approximately $86.75 billion and the average dollar amount outstanding of issues in the New NY Index was approximately $91.13 million. Further, the most heavily weighted component represents 1.61% of the weight of the New NY Index and the five most heavily weighted components represented 5.07% of the weight of the New NY Index. The New NY Index is composed of approximately 952 issues and 67 unique issuers. In addition, the average daily notional trading volume for New NY Index components for the calendar year 2013 was approximately $334.68 million and the sum of the notional trading volumes for the same period was approximately $84.34 billion.
Additional information regarding the Trust, the Funds, the Underlying Indexes, and the Shares, including investment strategies, risks, creation and redemption procedures, fees, portfolio holdings disclosure policies, distributions, and taxes, among other things, is included in the Notice and Registration Statements, as applicable.
After careful review, the Commission finds that the Exchange's proposal to continue listing and trading the Shares is consistent with the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.
The Commission finds that the proposal to continue trading the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the Exchange Act,
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 when a reasonable degree of transparency cannot be assured. The Exchange states that the Index Provider is a broker-dealer and has implemented a firewall and will maintain procedures designed to prevent the use and dissemination of material, non-public information regarding the Underlying Indexes.
With respect to trading halts, if the Exchange becomes aware that the NAV is not being disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants.
The Exchange states that it has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws.
In support of this proposal, the Exchange has made additional representations, including:
(1) Except for Commentary .02(a)(2) to NYSE Arca Equities Rule 5.2(j)(3), the Shares of the Funds currently satisfy all of the generic listing standards under NYSE Arca Equities Rule 5.2(j)(3).
(2) The continued listing standards under NYSE Arca Equities Rules 5.2(j)(3) and 5.5(g)(2) applicable to Units shall apply to the Shares of the Funds.
(3) The Shares will comply with all other requirements applicable to Units including, but not limited to, requirements relating to the dissemination of key information such as the value of the Underlying Indexes and the applicable value of the IIV, rules governing the trading of equity securities, trading hours, trading halts, surveillance, information barriers, and the Information Bulletin to Equity Trading Permit Holders (each as described in more detail herein and in the Notice and Registration Statements, as applicable), as set forth in Exchange rules applicable to Units and prior Commission orders approving the generic listing rules applicable to the listing and trading of Units.
(4) For continued listing of the Shares, the Trust is required to comply with Rule 10A–3 under the Exchange Act.
(5) Each Fund generally will invest at least 80% of its assets in the securities that compose each Fund's respective underlying index.
(6) Each Fund may at times invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents, including money market funds, as well as in municipal securities not included in a Fund's respective underlying index to the extent that the Adviser believes investment in such instruments will facilitate the Fund's ability to achieve its investment objective.
This order is based on all of the Exchange's representations, including those set forth above and in the Notice.
Lastly, the Commission notes that the approval of this proposed rule change permits only the prospective continued listing of the Shares. No retroactive relief is granted to the Exchange regarding its listing and trading of the Shares during the time period in which not all of the generic listing criteria in Commentary .02 to NYSE Arca Equities Rule 5.2(j)(3) were satisfied.
For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Exchange Act.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.