Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) and Rule 19b-4 thereunder, notice is hereby given that, on May 27, 2016, NYSE Arca, Inc. (the “Exchange” or “NYSE Arca”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
15 U.S.C. 78a.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to reflect a change to the benchmark index applicable to the WisdomTree Managed Futures Strategy Fund. The proposed rule change is available on the Exchange's Web site at www.nyse.com,, at the principal office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change
1. Purpose
The Commission previously approved the listing and trading of the shares (“Shares”) of the Fund on the Exchange under NYSE Arca Equities Rule 8.600, which governs the listing and trading of “Managed Fund Shares,” on the Exchange. The Fund is an actively-managed exchange traded fund. WisdomTree Asset Management, Inc. (“WisdomTree Asset Management”) is the investment adviser (“Adviser”) to the Fund. WisdomTree Investments, Inc. (“WisdomTree Investments”) is the parent company of WisdomTree Asset Management. Mellon Capital Management Corporation (“Mellon” or “Sub-Adviser”) serves as the sub-adviser for the Fund. State Street Bank and Trust Company is the administrator, custodian and transfer agent for the Fund. Foreside Fund Services, LLC (“Distributor”) serves as distributor for the Fund. The Shares are offered by the Trust, which is registered with the Commission as an investment company.
NYSE Arca Equities Rule 8.600 (c)(1) provides that, among other criteria, a Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a) (“1940 Act”) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Investment Company Units, listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(3), seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof.
See Securities Exchange Act Release No. 63598 (December 22, 2010), 75 FR 82106 (December 29, 2010)(SR-NYSEArca-2010-98) (“Prior Order”). See also Securities Exchange Act Release No. 63292 (November 9, 2010), 75 FR 70319 (November 17, 2010) (“Prior Notice”, and with the Prior Order, the “Prior Releases”).
The Prior Releases identified The Bank of New York Mellon as the administrator, custodian and transfer agent for the Fund and ALPS Distributors, Inc. as the distributor for the Fund.
The Trust is registered under the 1940 Act. The Trust intends to file a prospectus supplement with the Commission or a post-effective amendment to its registration statement on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a) (“Securities Act”) and under the 1940 Act relating to the Fund (File Nos. 333-132380 and 811-21864) (the “Registration Statement”), to reflect the changes in this proposed rule change upon effectiveness of such proposed rule change. The descriptions of the operation of the Trust and the Fund will be reflected in any such filing. In addition, the Commission has issued an order granting certain exemptive relief to the Trust under the 1940 Act. See Investment Company Act Release No. 28471 (October 27, 2008) (File No. 812-13458) (“Exemptive Order”). Investments by the Fund will comply with the conditions in the Exemptive Order. Share [sic] of the Fund are currently listed and traded on the Exchange in compliance with all original and continued listing standards of the Exchange and requirements of the Prior Releases.
The Prior Releases stated that the Adviser would manage the Fund using a strategy designed to correspond to the performance of the Diversified Trends IndicatorTM (“Original Benchmark”). In this proposed rule change, the Exchange proposes to reflect a change to the benchmark index applicable to the Fund. The new benchmark will be the WisdomTree Managed Futures Index (“New Benchmark,” and together with the Original Benchmark, the “Benchmarks”), a proprietary index developed by WisdomTree Investments. Upon implementation of the proposed rule change, the Adviser will manage the Fund using a strategy designed to correspond to the performance of the New Benchmark. The Adviser anticipates investing Fund assets through the Sub-Adviser based on the New Benchmark on or around June 30, 2016.
The changes described herein will be effected contingent upon filing of a prospectus supplement or upon effectiveness of the Trust's most recent post-effective amendment to its Registration Statement. See note 7, supra. The Adviser represents that the Adviser will not implement the changes described herein until the instant proposed rule change is operative.
The Adviser believes that it is in the best interest of the Fund and its shareholders to replace the Original Benchmark with the New Benchmark while keeping the Fund's asset exposure and investment strategies similar, and without changing the Fund's investment objective. The Adviser believes that the New Benchmark will serve to optimize the Fund's investment strategy, while seeking to provide enhanced risk-adjusted returns over time.
Description of the Shares, the Benchmark and the Fund
According to the Prior Releases, the WisdomTree Managed Futures Strategy Fund seeks to provide investors with positive total returns in rising or falling markets that are not directly correlated to broad market equity or fixed income returns. The Fund is currently managed using a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the Original Benchmark. The Original Benchmark is a widely used indicator designed to capture the economic benefit derived from rising or declining price trends in commodity, currency, and U.S. Treasury futures markets.
Under this proposed rule change, the Exchange seeks to permit the Fund to be managed using a different, quantitative, rules-based strategy, described below, that is designed to provide returns that correspond to the New Benchmark. The New Benchmark is a proprietary index, developed and owned by WisdomTree Investments that is also designed to capture the economic benefit derived from rising or declining price trends in commodity, currency, and U.S. Treasury futures markets.
Differences between the Original Benchmark and the New Benchmark are described below.
The Benchmarks
The Original Benchmark is a rules-based indicator designed to capture rising and falling price trends in the commodity, currency and U.S. Treasury futures markets through long and short positions on U.S. listed futures contracts. The Original Benchmark consists of U.S. listed futures contracts on 16 tangible commodities and 8 financial futures. The 16 commodity futures contracts are: Light crude oil, natural gas, RBOB gas (“Gasoline”), heating oil, soybeans, corn, wheat, gold, silver, copper, live cattle, lean hogs, coffee, cocoa, cotton and sugar. The 8 financial futures contracts are: the Australian dollar (“AUD”), British pound sterling (“GBP”), Canadian dollar (“CAD”), Euro (“EUR”), Japanese yen (“JPY”), Swiss franc (“CHF”), 10-year U.S. Treasury note and 30-year U.S. Treasury bond. Each contract is sometimes referred to as a “Component” of the Original Benchmark.
The New Benchmark also is a rules-based indicator designed to capture rising and falling price trends in the commodity, currency and U.S. Treasury futures markets through long and short positions on U.S. listed futures contracts. The New Benchmark consists of U.S. listed futures contracts on 16 tangible commodities and 8 financial futures. The 16 commodity futures contracts are: Light crude oil, natural gas, Gasoline, heating oil, soybeans, corn, wheat, gold, silver, copper, live cattle, lean hogs, coffee, cocoa, cotton and sugar. The 8 financial futures contracts are: the AUD, GBP, CAD, EUR, JPY, CHF, 10-year U.S. Treasury note and 30-year U.S. Treasury bond. Each contract is sometimes referred to as a “Component” of the New Benchmark.
(1) Asset Treatment
Under the Original Benchmark, Components that are similar in nature (such as gas and oil or gold and silver) are aggregated into “Sectors.” There are nine commodity Sectors in the Original Benchmark: Energy (light crude oil, natural gas, Gasoline, and heating oil), Grains (soybeans, corn), Precious Metals (gold and silver), Industrial Metals (copper), Livestock (live cattle, lean hogs), Coffee, Cocoa, Cotton, and Sugar. Each financial futures contract is considered to be its own Sector. As a result, there are eight financial Sectors in the Original Benchmark: The AUD, GBP, CAD, EUR, JPY, CHF, 10-year U.S. Treasury note and 30-year U.S. Treasury bond.
Under the New Benchmark, there are no Sectors, but rather each of the 24 Components is treated separately for weighting and long, short or flat position determinations. The twenty Components with the lowest 36-month rolling volatility are included. All Components may be long, short or flat, except for Energy futures (i.e., light crude oil, natural gas, Gasoline and heating oil), which are held either long or flat.
(2) Weighting Methodology
Within the Original Benchmark, Components may be positioned as long or short, except that the Energy Sector and its Components may never be positioned short. The Original Benchmark's methodology provides that, due to significant levels of continuous consumption, limited reserves and other factors, the Energy Sector can only be long or flat (i.e., no exposure).
At the beginning of each calendar year and month, the Original Benchmark is weighted evenly (i.e., 50/50) between commodity futures contracts and financial futures contracts. If the Energy Sector is flat, financial futures represent approximately 61.5% of the weight of the original Benchmark and commodity futures represent approximately 38.5% of weighting of the Original Benchmark. When Energy is long, financial futures and commodity futures each represent 50% of the weight of the Original Benchmark.
If the Energy Sector is flat then the weighting of the other Sectors and Components within the Benchmark is increased on a pro-rata basis. As a result, at the beginning of each calendar year and month, if Energy is flat, financial futures will represent approximately 61.5% of the weight of the Original Benchmark and commodities will represent approximately 38.5% of the weight of the Original Benchmark.
To arrive at the Sector weightings when Energy is flat, divide the Sector Base Weight by one minus the Energy Sector Base Weight (i.e., Sector Base Weight/1—0.1875)).
At the beginning of each calendar year and month, each Component and Sector within the Original Benchmark also has a “Base Weight,” depending on whether the Energy Sector is long or flat. If the Energy Sector is flat, then the Base Weight of the other Sectors and Components within the Original Benchmark is increased on a pro-rata basis. Commodity Sector weights are based on, but not exactly proportional to, historical world production levels. Commodity Sectors that have higher historical production levels are weighted higher in the Original Benchmark. Weightings of the financial futures Sectors are based on, but not directly proportional to, historical gross domestic product (“GDP”). Larger economic regions (i.e., Europe as measured by the Euro) should get a higher weighting than smaller regions (i.e., Australia as measured by AUD).
The Adviser represents that, as of March 31, 2016, the Fund's investment in the Components of the Original Benchmark are as follows: (i) Silver, corn, wheat and coffee were not selected into the portfolio for April (Nominal exposure, 0.00%) due to their high realized volatilities, and (ii) although selected into the portfolio, crude oil, natural gas, heating oil and Gasoline were not given any weight (nominal exposure, 0.00%) as short positions in those commodities were not allowed. The selected commodities were given equal nominal weight (6.25%): Copper, soybeans, cocoa, lean hogs, CHF and CAD were not fully invested due to lack of total conviction based on the Composite Momentum Signal methodology. Only 2/3 of the nominal exposure was invested into their respective futures contract (effective weight: 4.17%). Gold, sugar, cotton, live cattle, EUR, JPY, GBP, AUD, 30-year Treasury bond and 10-year Treasury note were fully invested (effective weight: 6.25%).
Under the New Benchmark, the 20 Components with the lowest realized 36 month rolling volatility will be included. If Energy futures are flat, then Energy assets will be excluded. The remaining assets will be weighted equally prior to the “Composite Momentum Signal” (described below) being applied.
The Adviser represents that the commodity futures contracts included in the New Benchmark (and therefore anticipated to be included in the Fund) are heavily traded and are based on some of the world's most liquid and actively-traded commodities. According to the Adviser, as of January 1, 2016, the 3-month average daily trading volume (“ADTV”) of the commodity futures contracts representing Components in the New Benchmark were as follows: Crude oil: $20,402,707,680; natural gas: $3,613,649,760); heating oil: $2,489,853,660; Gasoline: $3,367,039,200; copper: $434,060,000; sugar: $707,097,600; cotton: $285,940,000; wheat: $1,085,637,500; corn: $3,619,192,500; soybeans: $3,826,910,000; gold: $14,866,492,080; silver: $3,122,181,600; cocoa: $429,350,900; coffee: $452,838,750; live cattle: $1,786,550,000; and lean hogs: $437,824,000.
The listed financial futures contracts included in the New Benchmark (and therefore anticipated to be included in the Fund) are heavily traded and represent six of the world's most liquid and actively-traded currencies (as well as the U.S. dollar through futures on 30-year Treasury bonds and 10-year Treasury notes). According to the Adviser, as of January 1, 2016, the 3-month ADTV of the financial futures contracts representing Components in the New Benchmark were as follows: EUR: $33,014,630,700; AUD: $7,428,685,500; CAD: $6,686,911,000; GBP: $8,644,461,188; CHF: $9,904,476,250; 10-year Treasury note: $148,389,752,565; and 30-year Treasury bond: $38,918,903,603.
The New Benchmark determines a Composite Momentum Signal for each asset, based on the 3-month, 6-month, and 12-month returns (each, a “Signal”) for the asset, based on its rolling schedule. If the return is positive, the New Benchmark will assign positive one (+1) to it; if the return is negative, the New Benchmark will assign a negative one (−1) to it. The three Signals are aggregated by the New Benchmark, and if all signals are in the same direction, the Fund will invest the assigned weight. Otherwise, the Fund will invest two-thirds of the assigned weight. The direction of the trade (i.e., long or short) will be based on the direction of the majority of the Signals.
The current weighting of the New Benchmark as of January 1, 2016, is as follows. Silver, corn, wheat and coffee were not selected due to high volatility. The Energy group is flat as Signals indicate a short position. The weight of the Energy group is therefore proportionately assigned to the included assets. Each of copper, gold, soybeans, sugar, cotton, cocoa, live cattle, lean hogs, EUR, JPY, GBP, CHF, AUD, CAD, 30-year Treasury bond, and 10-year Treasury note futures were therefore weighted at 6.25%.
(3) Rebalancing
The weight of each Component and Sector in the Original Benchmark changes throughout each month based upon performance. At the end of each month, each Sector is reset back to its applicable Base Weight depending on whether the Energy Sector is long or flat. Within Sectors that have multiple Components, the weight of each Component relative to the others is allowed to fluctuate throughout the year and Component weights are reset back to their respective Base Weights only at year-end.
Under the New Benchmark, each month, the 20 assets with the lowest 36-month volatility on a rolling basis are included. If an asset within the Energy group is short, the value of that asset is flat and allocated proportionately to the included assets. Weighing is then determined as discussed above.
(4) Long/Short/Flat Determination
As stated in the Prior Releases, in order to capture both rising and falling price trends, at the end of each month each Sector in the Original Benchmark (other than the Energy Sector) is positioned as either “long” or “short.” This determination is made using an algorithm that compares the Sector's monthly return to the Sector's historic weighted moving average returns. If the Sector's returns are above its moving average returns, the Sector is positioned as “long” throughout the following month. If the Sector's returns are below its moving average, the Sector is positioned as “short” throughout the following month (with the exception of the Energy Sector, which would be positioned flat). All Components within a Sector are held in the same direction. The value of a Sector and the value of the Original Benchmark should increase if a long position increases in value or if a short position decreases in value. For example, if a Sector is long in the Original Benchmark and the value of its Components goes up intra-month, the return of the Sector (and therefore the Original Benchmark) should increase. If a Sector is short in the Original Benchmark, and the value of its Components goes down intra-month, the return of the Sector (and therefore the Original Benchmark) should increase.
Under the New Benchmark, the Fund will be rebalanced each month based on the Composite Momentum Signal framework described above. Just as under the Original Benchmark, the New Benchmark should increase if a long position increases in value or if a short position decreases in value. For example, if a Component is long in the New Benchmark and its value goes up intra-month, the return of the Component (and therefore the New Benchmark) should increase. If a Component is short in the New Benchmark, and its value goes down intra-month, the return of the Component (and therefore the New Benchmark) should increase.
Because the New Benchmark does not classify Components into Sectors, the above explanation of the impact of changes in the value of long or short assets in the New Benchmark is discussed with respect to Components, rather than with respect to Sectors.
The Adviser represents that the Sub-Adviser will continue to invest the Fund in the same assets as are contained in the Prior Releases and will remain subject to, and invest the Fund assets, in accordance [sic] all of the other requirements and limitations identified in the Prior Releases. As a condition to continued listing and trading Shares of the Fund on the Exchange, the Fund will continue to comply with all initial and continued listing requirements under NYSE Arca Rule 8.600.
Except for the changes noted above, all other facts presented and representations made in the Prior Releases are unchanged.
2. Statutory Basis
The basis under the Exchange Act for this proposed rule change is the requirement under Section 6(b)(5) that an exchange have rules that are 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, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices. The Adviser is changing the representation that it will seek investment returns that correspond to the Original Benchmark to that it will seek investment returns that correspond to the New Benchmark.
The Adviser represents that there is no change to the Fund's investment objective or to the securities or other assets identified in the Prior Releases that the Fund utilizes in seeking to achieve its investment objective. The Fund's use of such securities and other assets will remain subject to all requirements and applicable limitations identified in the Prior Releases. As a condition to the continued listing and trading of the Shares on the Exchange, the Fund will continue to comply with all initial and continued listing requirements under NYSE Arca Rule 8.600.
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 Adviser represents that there is no change to the Fund's investment objective. The Adviser represents that the allocations of the Fund's portfolio will remain consistent with the allocation limitations discussed in the Prior Releases, and that the Fund may invest in the same instruments as are contained in the Original Benchmark, as discussed in the Prior Release. However, the Adviser now represents that the Fund will use portfolio management strategies in seeking to achieve its investment objective in a manner that allocates the Fund's investments in those same instruments in a manner to correspond to the New Benchmark, rather than the Original Benchmark.
All statements and representations made in this filing and the Prior Releases regarding (a) the description of the Fund's portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange rules and surveillance procedures 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(m).
The Commission notes that certain other proposals for the listing and trading of Managed Fund Shares 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 (April 7, 2016) (Notice of Filing of Amendment No. 2, and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, to List and Trade Shares of the SPDR DoubleLine Short Duration Total Return Tactical ETF of the SSgA Active Trust), available at: http://www.sec.gov/rules/sro/bats/2016/34-77499.pdf. In the context of this representation, it is the Commission's view that “monitor” and “surveil” both mean ongoing oversight of the Fund's 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.
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 the Fund will continue to comply with all initial and continued listing requirements under NYSE Arca Rule 8.600. The proposed rule change will permit the Fund to continue to operate in a manner similar to other Managed Fund Shares that invest primarily in futures contracts, and will permit continued listing on the Exchange for the Fund after it begins to utilize the quantitative, rules-based strategy designed to seek performance that corresponds to the New Benchmark, which will enhance competition among issues Managed Fund Shares currently trading on the Exchange. Except for the changes noted above, all other representations made in the Prior Releases are unchanged.
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 purpose of the Exchange Act. The proposed rule change will permit the continued listing on the Exchange of the Fund after it begins to utilize the quantitative, rules-based strategy designed to correspond to the New Benchmark, which will enhance competition among issues of Managed Fund Shares.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
17 CFR 240.19b-4(f)(6). As required under Rule 19b-4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change, along with a brief description and the text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission.
At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) of the Act to determine whether the proposed rule change should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
- Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
- Send an email to rule-comments@sec.gov. Please include File Number SR-NYSEArca-2016-83 on the subject line.
Paper Comments
- Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2016-83. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 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; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEArca-2016-83 and should be submitted on or before June 27, 2016.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2016-13212 Filed 6-3-16; 8:45 am]
BILLING CODE 8011-01-P