Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of the Shares of the Arrow DWA Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield ETF of Arrow Investments Trust, 48264-48269 [2014-19335]
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–19337 Filed 8–14–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72809; File No. SR–
NASDAQ–2014–063]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Granting Approval of a Proposed Rule
Change, as Modified by Amendment
No. 1, Relating to the Listing and
Trading of the Shares of the Arrow
DWA Balanced ETF, Arrow DWA
Tactical ETF and Arrow DWA Tactical
Yield ETF of Arrow Investments Trust
August 11, 2014.
I. Introduction
On June 23, 2014, The NASDAQ
Stock Market LLC (‘‘Nasdaq’’ or the
‘‘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
Arrow DWA Balanced ETF, Arrow DWA
Tactical ETF and Arrow DWA Tactical
Yield ETF (each a ‘‘Fund’’ and,
collectively, ‘‘Funds’’) under Nasdaq
Rule 5735. On June 26, 2014, the
Exchange filed Amendment No. 1 to the
proposed rule change.3 The proposed
rule change, as modified by Amendment
No. 1, was published for comment in
the Federal Register on July 3, 2014.4
The Commission received no comments
on the proposed rule change. This order
approves the proposed rule change, as
modified by Amendment No. 1.
II. Description of the Proposal
The Exchange has made the following
representations and statements in
describing the Funds and their
respective investment strategies,
including other portfolio holdings and
investment restrictions.5
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 In Amendment No. 1, the Exchange clarified
that the Arrow Investments Trust will issue and sell
shares of the Arrow DWA Balanced ETF, Arrow
DWA Tactical ETF and Arrow DWA Tactical Yield
ETF only in aggregations of 100,000 shares.
4 See Securities Exchange Act Release No. 72493
(June 27, 2014), 79 FR 38088 (‘‘Notice’’).
5 The Commission notes that additional
information regarding the Trust, the Funds, and the
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The Exchange proposes to list and
trade the Shares under Nasdaq Rule
5735 (‘‘Managed Fund Shares’’), which
governs the listing and trading of
Managed Fund Shares. Each Fund is a
series of the Arrow Investments Trust
(‘‘Trust’’).6 Arrow Investment Advisors,
LLC is the investment adviser
(‘‘Adviser’’) to the Funds.7 Gemini Fund
Services, LLC will act as the
administrator and transfer agent to the
Funds. Brown Brothers Harriman & Co.
(‘‘Custodian’’) will act as the custodian
and transfer agent to the Funds.
Northern Lights Distributors, LLC is the
principal underwriter and distributor of
each Fund’s Shares.
Arrow DWA Balanced ETF
The Exchange represents that the
Fund’s primary investment objective is
to seek to achieve an appropriate
balance between long-term capital
appreciation and capital preservation. In
pursuing its investment objective, the
Fund will invest in other ETFs 8 that
each invests primarily in domestic and
foreign (including emerging markets) (i)
equity securities 9 of any market
capitalization, (ii) fixed income
securities 10 of any credit quality, or (iii)
alternative assets.11 In addition, the
Shares, including investment strategies, risks, net
asset value (‘‘NAV’’) calculation, creation and
redemption procedures, fees, portfolio holdings
disclosure policies, distributions, and taxes, among
other information, is included in the Notice and the
Registration Statement, as applicable. See Notice
and Registration Statement, supra note 4 and infra
note 6, respectively.
6 See Post-Effective Amendment No. 7 to
Registration Statement on Form N–1A for the Trust
(File Nos. 333–178164 and 811–22638)
(‘‘Registration Statement’’).
7 The Exchange states that the Adviser is not a
broker-dealer, but it is affiliated with a brokerdealer. The Exchange states that the Adviser has
implemented a fire wall with respect to its brokerdealer affiliate regarding access to information
concerning the composition of or changes to the
portfolio. The Exchange further states that, in the
event (a) the Adviser becomes newly affiliated with
a broker-dealer or registers as a broker-dealer, or (b)
any new adviser or sub-adviser is a registered
broker-dealer or becomes affiliated with a brokerdealer, the adviser or sub-adviser, as applicable,
will implement a fire wall with respect to its
relevant personnel or its broker-dealer affiliate, as
applicable, regarding access to information
concerning the composition of or changes to the
portfolio and will be subject to procedures designed
to prevent the use and dissemination of material
non-public information regarding the portfolio.
8 The ETFs in which the Fund may invest include
Index Fund Shares and Portfolio Depositary
Receipts (as described in Nasdaq Rule 5705(a) and
(b)) and Managed Fund Shares (as described in
Nasdaq Rule 5735).
9 The Fund defines ‘‘equity securities’’ to be
exchange-traded common and preferred stocks.
10 The Fund defines ‘‘fixed income securities’’ to
be bonds, notes or debentures.
11 The Fund defines ‘‘alternative assets’’ to be
investments that are historically uncorrelated to
either equity or fixed income investments, which
are commodity futures, exchange-traded master
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Fund will invest in commodity futures
through a wholly-owned and controlled
Cayman subsidiary (‘‘Balanced
Subsidiary’’). The Fund’s fixed income
securities may be rated below
investment grade (rated BB+ or lower by
Standard & Poor’s Ratings Services
(‘‘S&P’’) or comparably rated by another
nationally recognized statistical rating
organization (‘‘NRSRO’’), also known as
‘‘high yield’’ or ‘‘junk’’ bonds, and in
unrated debt securities determined by
the Adviser to be of comparable quality.
The Exchange states that the Fund is
a ‘‘fund of funds,’’ which means that it
primarily invests in ETFs; however, the
Adviser may elect to invest directly in
the types of securities described above.
The Adviser may elect to make these
direct investments when it is cost
effective for the Fund to do so (such as
when the Fund reaches a size sufficient
to effectively purchase the underlying
securities held by the ETFs in which it
invests, allowing the Fund to avoid the
costs associated with indirect
investments). The Adviser uses
technical analysis 12 to allocate the
Fund’s portfolio among the asset classes
described above.
The Exchange states that under
normal market conditions,13 the Fund
will invest:
• From 25% to 65% in ETFs that
invest in equity securities;
• from 25% to 65% in ETFs that
invest in fixed income securities; and
• from 10% to 40% in ETFs that
invest in alternative assets.
The Fund will have the ability to
invest up to 25% of its total assets in the
Balanced Subsidiary. The Balanced
Subsidiary will invest primarily in
commodity futures, as well as fixed
income securities and cash equivalents,
which are intended to serve as margin
limited partnerships (‘‘MLPs’’) and real estaterelated securities, which include foreign and
domestic exchange-traded real estate investment
trusts (‘‘REITs’’) or exchange-traded real estate
operating companies (‘‘REOCs’’).
12 Technical analysis is the method of evaluating
securities by analyzing statistics generated by
market activity, such as past prices and trading
volume, in an effort to determine probable future
prices.
13 The term ‘‘under normal market conditions’’ as
used herein includes, but is not limited to, the
absence of adverse market, economic, political or
other conditions, including extreme volatility or
trading halts in the securities markets or the
financial markets generally; operational issues
causing dissemination of inaccurate market
information; or force majeure type events such as
systems failure, natural or man-made disaster, act
of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance.
In periods of extreme market disturbance, the Fund
may take temporary defensive positions, by
overweighting its portfolio in cash/cash-like
instruments; however, to the extent possible, the
Adviser would continue to seek to achieve the
Fund’s investment objective.
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or collateral for the Balanced
Subsidiary’s investments in commodity
futures.
The Fund will invest in ETFs within
specific asset classes when the technical
models used by the Adviser indicate a
high probability that the applicable
asset classes and ETFs are likely to
outperform the applicable universe. The
Fund will sell interests or reduce
investment exposure among an asset
class or ETF when the technical models
used by the Adviser indicate that such
asset class or ETF is likely to
underperform the applicable universe.
The Fund may be more heavily invested
in fixed-income ETFs, cash positions
and similar securities when the
technical models indicate these assets
should significantly outperform the
equity and/or alternative asset classes.
The Exchange states that, in general,
the Fund’s investments in equity
securities are intended to achieve the
capital appreciation component of its
investment objective and the Fund’s
investments in fixed income securities
are intended to achieve the capital
preservation component of its
investment objective. Under normal
market conditions, the Adviser expects
that the Fund will invest a combined
minimum of 35% in fixed-income
securities and in alternative assets. The
Fund’s investments in alternative assets
are intended to enable the portfolio to
be less reliant on fixed-income
investments for reducing volatility and
equities for increasing returns. The
Adviser may engage in frequent buying
and selling of portfolio securities to
achieve the Fund’s investment
objective.
The Exchange states that the Fund
seeks to achieve its investment objective
by implementing a proprietary technical
asset allocation (‘‘TAA’’) model. The
Adviser will overweight asset classes,
rotation strategies, and underlying ETFs
exhibiting positive relative strength, and
underweight asset classes, rotation
strategies, and underlying ETFs
exhibiting negative relative strength. In
essence, TAA works by reallocating at
different times in response to the
changing patterns of returns available in
the markets. This methodology does not
attempt to predict the future; it simply
reacts to pattern changes in the
marketplace at any given time. This
methodology allows the Fund to be
adaptive to current market conditions.
The tactical model relies on a number
of technical indicators when making
allocation decisions for the Fund. The
Adviser utilizes relative strength as the
primary technical indicator to tactically
allocate assets both within and across
asset classes and rotation strategies. The
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relative strength indicator is important
because it adapts to the changing market
conditions. Relative strength measures
the likelihood that an ETF or a group of
ETFs will outperform the appropriate
base index. When the indicator is
moving up, it shows that the ETF or
group of ETFs is performing better than
the base index. When the indicator is
moving down, it shows that the ETF or
group of ETFs is performing worse than
the base index (i.e., not rising as fast or
falling faster).14
The Exchange states that the Adviser
has discretion to add to or delete from
the universe of eligible ETFs for each
strategy based on holdings, expense
ratio, volume, liquidity, new product
availability, and other factors that can
positively contribute to achieving the
Fund’s investment objectives.
Arrow DWA Tactical ETF
The Exchange states that the Fund’s
primary investment objective is to seek
to achieve long-term capital
appreciation with capital preservation
as a secondary objective. In pursuing its
investment objective, the Fund will
invest in other ETFs 15 that each invests
primarily in domestic and foreign
(including emerging markets) (i) equity
securities 16 of any market
capitalization, (ii) fixed-income
securities 17 of any credit quality, or (iii)
alternative assets.18 In addition, the
Fund will invest in commodity futures
through a wholly-owned and controlled
Cayman subsidiary (‘‘Tactical
Subsidiary’’). The Fund’s fixed income
securities may be rated below
investment grade (rated BB+ or lower by
S&P or comparably rated by another
NRSRO, also known as ‘‘high yield’’ or
‘‘junk’’ bonds, and in unrated debt
securities determined by the Adviser to
be of comparable quality.
The Exchange represents that the
Fund is a ‘‘fund of funds,’’ which means
that it primarily invests in ETFs;
however, the Adviser may elect to
invest directly in the types of securities
described above. The Adviser may elect
to make these direct investments when
it is cost effective for the Fund to do so
(such as when the Fund reaches a size
sufficient to effectively purchase the
underlying securities held by the ETFs
14 For example, in the sector rotation strategy, the
Adviser creates a sector-based index to compare all
available sector ETFs for investment in the Fund.
The performance of each ETF is compared to the
base index and ranked. The Adviser generally
purchases the ETFs that demonstrate the highestranked relative strength and sells any positions that
are not included in that list.
15 See supra note 8.
16 See supra note 9.
17 See supra note 10.
18 See supra note 11.
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48265
in which it invests, allowing the Fund
to avoid the costs associated with
indirect investments). The Adviser uses
technical analysis to allocate the Fund’s
assets among the asset classes described
above.19
The Exchange states that under
normal market conditions, the Fund
will invest:
• From 0% to 100% of its assets in
ETFs that invest in equity securities;
• From 0% to 100% of its assets in
ETFs that invest in fixed-income
securities; and
• From 0% up to 90% of its assets in
ETFs that invest in alternative assets.
The Exchange states that the Fund
will have the ability to invest up to 25%
of its total assets in the Tactical
Subsidiary. The Tactical Subsidiary will
invest primarily in commodity futures,
as well as fixed-income securities and
cash equivalents, which are intended to
serve as margin or collateral for the
Tactical Subsidiary’s investments in
commodity futures.
The Exchange states that the Fund
will invest in ETFs within specific asset
classes when the technical models used
by the Adviser indicate a high
probability that the applicable asset
classes and ETFs are likely to
outperform the applicable universe. The
Fund will sell interests or reduce
investment exposure among an asset
class or ETF when the technical models
used by the Adviser indicate that such
asset class or ETF is likely to
underperform the applicable universe.
The Fund may invest more heavily in
fixed-income ETFs, cash positions and
similar securities when the technical
models indicate these assets should
significantly outperform the equity and/
or alternative asset classes.
The Exchange states that, in general,
the Fund’s investments in equity
securities are intended to achieve the
capital appreciation component of the
Fund’s investment objectives. At times,
the Fund may invest in fixed-income
securities in order to achieve the capital
preservation component of the Fund’s
investment objectives. The Fund’s
investments in alternative assets are
intended to enable the portfolio to be
less reliant on fixed-income investments
for reducing volatility and equities for
increasing returns. The Adviser may
engage in frequent buying and selling of
portfolio securities to achieve the
Fund’s investment objectives.
The Exchange states that the Fund
seeks to achieve its investment
objectives by implementing a
proprietary TAA model. The Adviser
will overweight asset classes, rotation
19 See
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strategies and underlying ETFs
exhibiting positive relative strength and
underweight asset classes, rotation
strategies and underlying ETFs
exhibiting negative relative strength.
The tactical model relies on a number
of technical indicators when making
allocation decisions for the Fund. The
Adviser utilizes relative strength as the
primary technical indicator to tactically
allocate assets both within and across
asset classes and rotation strategies. The
relative strength indicator is important
because it adapts to the changing market
conditions. Relative strength measures
the likelihood that an ETF or a group of
ETFs will outperform the appropriate
base index. When the indicator is
moving up, it shows that the ETF or
group of ETFs is performing better than
the base index. When the indicator is
moving down, it shows that the ETF or
group of ETFs is performing worse than
the base index (i.e., not rising as fast or
falling faster).20
The Exchange states that the Adviser
has discretion to add to or subtract from
the universe of eligible ETFs for each
strategy based on holdings, expense
ratio, volume, liquidity, new product
availability and other factors that can
positively contribute to achieving the
Fund’s investment objectives.
The Subsidiaries
The Exchange represents that the
Balanced Fund and Tactical Fund each
has the ability to invest up to 25% of its
total assets in the Balanced Subsidiary
and the Tactical Subsidiary,
respectively (each a ‘‘Subsidiary’’;
together, ‘‘Subsidiaries’’). Each
Subsidiary will invest primarily in
commodity futures, as well as fixedincome securities and cash equivalents,
which are intended to serve as margin
or collateral for each Subsidiary’s
investments in commodity futures. Each
Subsidiary may have both long and
short positions in commodities futures.
However, for a given commodity, each
Subsidiary will have a net long
exposure. Each Subsidiary will also be
advised by the Adviser.21
20 See
supra note 14.
Subsidiary will be registered under the
Investment Company Act of 1940 (15 U.S.C. 80a–
1) (‘‘1940 Act’’) nor will be directly subject to its
investor protections, except as noted in the
Registration Statement. However, each Subsidiary
will be wholly-owned and controlled by the
applicable Fund and will be advised by the
Adviser. Therefore, each Fund’s ownership and
control of its respective Subsidiary will prevent the
applicable Subsidiary from taking action contrary to
the interests of the Fund or its shareholders. The
Board of Trustees of the Trust (‘‘Board’’) will have
oversight responsibility for the investment activities
of each Fund, including its expected investment in
the applicable Subsidiary, and the Fund’s role as
the sole shareholder of the applicable Subsidiary.
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By investing in commodities futures
indirectly through the applicable
Subsidiary, the Exchange states that
each of the Balanced Fund and the
Tactical Fund will obtain exposure to
the commodities markets within the
federal tax requirements that apply to
the Fund. Investment in each Subsidiary
is expected to provide the applicable
Fund with exposure to the commodities
markets within the limitations of the
federal tax requirements of Subchapter
M of the Internal Revenue Code.
Because each of the Balanced Fund
and the Tactical Fund may invest up to
25% of its assets in its respective
Subsidiary, each Fund may be
considered to be investing indirectly in
such investments through its
Subsidiary, and references to each of the
Balanced Fund and Tactical Fund may
also include its Subsidiary. When
viewed on a consolidated basis, each
Subsidiary will be subject to the same
investment restrictions and limitations,
and follow the same compliance
policies and procedures, as the
applicable Fund.
The Exchange represents that as a
result of the instruments that will be
indirectly held by each of the Balanced
Fund and the Tactical Fund, the
Adviser has registered as a commodity
pool operator 22 and is also a member of
the National Futures Association
(‘‘NFA’’). Each of the Balanced Fund,
Tactical Fund, and the Subsidiaries are
subject to regulation by the Commodity
Futures Trading Commission and NFA,
and to additional disclosure, reporting,
and recordkeeping rules imposed upon
commodity pools.
Arrow DWA Tactical Yield ETF
The Exchange states that the Fund’s
primary investment objective is to seek
high current income with an
appropriate balance between long-term
capital appreciation and capital
preservation. In pursuing its investment
objective, the Fund will invest in other
ETFs 23 that each invest in domestic and
foreign (including emerging markets) (i)
equity securities 24 of any market
capitalization or (ii) fixed-income
securities 25 of any credit quality. The
The Adviser will receive no additional
compensation for managing the assets of each
Subsidiary. Each Subsidiary will also enter into
separate contracts for the provision of custody,
transfer agency, and accounting agent services with
the same, or with affiliates of the same, service
providers that provide those services to the Funds.
22 As defined in Section 1a(11) of the Commodity
Exchange Act.
23 See supra note 8.
24 The Fund defines equity securities to be
exchange-traded common and preferred stocks and
exchange-traded REITs.
25 See supra note 10.
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Fund also invests indirectly in these
asset classes through various exchangetraded products (‘‘ETPs’’) 26 and
exchange-traded closed-end funds, and
directly through individual securities.
In order to mitigate the settlement risk
of the foreign denominated securities in
which it invests due to currency
fluctuations, the Fund may also invest
up to 25% of its net assets in Spot Forex
futures.
The Exchange states that the Fund
will maintain two income strategies that
focus on (i) securities that generate
‘‘high beta yield,’’ consisting of
securities correlated to equities based on
a proprietary methodology, and (ii)
securities that generate ‘‘low beta
yield,’’ consisting of securities less
correlated to equities based on a
proprietary methodology. Beta is a
measure of the price volatility, or risk,
of a security or a portfolio in
comparison to the market as a whole. A
security’s correlation to equities is a
measure of the performance similarity of
the security to the S&P 500 index. The
high beta strategy is a composite of
securities that are selected based on
their credit and equity risk premiums
characteristics. The low beta yield
strategy is a composite of securities that
are selected based on their inflation,
interest, and credit risk characteristics.
The Fund uses a proprietary selection
methodology designed to identify
securities that demonstrate strong
relative strength characteristics within
each strategy. The Fund will then utilize
a quantitative methodology that relies
on economic and fundamental factors to
tactically underweight and overweight
the income strategies.
The Exchange represents that the
Fund will, under normal market
conditions, invest as follows:
• From 20% to 80% in the Low Beta
(LB). The LB will be comprised of
equity and fixed income securities,
including ETPs that invest in
international and domestic securities;
and
• From 20% to 80% in the High Beta
(HB). The HB will be in equity and fixed
income securities, including ETPs that
invest in international and domestic
securities.
The Exchange states that the Fund
expects to be a ‘‘fund of funds,’’ which
means that it primarily invests in ETFs,
ETPs, and closed-end funds; however,
the Adviser may elect to invest directly
in the asset classes described above. The
Adviser may elect to make these direct
26 The ETPs in which the Fund may invest
include exchange-traded currency trusts (as
described in Nasdaq Rule 5711(e)) and exchangetraded notes (‘‘ETNs’’) (as described in Nasdaq Rule
5730).
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investments when it is cost effective for
the Fund to do so (such as when the
Fund reaches a size sufficient to
effectively purchase the underlying
securities held by the ETFs, ETPs, or
closed-end Funds in which it invests,
allowing the Fund to avoid the costs
associated with indirect investments).
and, although certain derivative
investments will have a leveraging effect
on the Funds and Subsidiaries, the
Funds and Subsidiaries will not seek
leveraged returns (e.g., 2X or ¥3X).
All Funds
The Exchange represents that in
certain situations or market conditions,
a Fund may temporarily depart from its
normal investment policies and
strategies, provided that the alternative
is consistent with the Fund’s investment
objective and is in the best interest of
the Fund. For example, a Fund may
hold a higher than normal proportion of
its assets in cash in times of extreme
market stress. The Funds may borrow
money from a bank as permitted by the
1940 Act or other governing statute, by
applicable rules thereunder, or by
Commission or other regulatory agency
with authority over the Funds, but only
for temporary or emergency purposes.
The use of temporary investments is not
a part of a principal investment strategy
of the Funds.
The Exchange represents that each
Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment). Each Fund will monitor its
portfolio liquidity on an ongoing basis
to determine whether, in light of current
circumstances, an adequate level of
liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of a Fund’s net assets are held in
illiquid assets. Illiquid assets include
securities subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
The Exchange represents that each
Fund will not invest 25% or more of the
value of its total assets in securities of
issuers in any one industry.
The Exchange states that the Funds
will be classified as ‘‘non-diversified’’
investment companies under the 1940
Act, and that the Funds intend to
qualify for and to elect treatment as a
separate regulated investment company
under Subchapter M of the Internal
Revenue Code.
The Funds will not invest in options
or swaps.
The Exchange represents that each
Fund’s investments and each
Subsidiary’s investments will be
consistent with its (or its applicable
Fund’s) respective investment objective
After careful review, the Commission
finds that the Exchange’s proposal to list
and trade the Shares is consistent with
the Act and the rules and regulations
thereunder applicable to a national
securities exchange.27 In particular, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act,28 which requires, among
other things, that the Exchange’s rules
be designed 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. The Commission notes
that the Funds and the Shares must
comply with the requirements of
Nasdaq Rule 5735 to be listed and
traded on the Exchange.
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,29 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 available via Nasdaq proprietary
quote and trade services, as well as in
accordance with the Unlisted Trading
Privileges and the Consolidated Tape
Association plans for the Shares. In
addition, the Intraday Indicative
Value,30 as defined in Nasdaq Rule
5735(c)(3), of each Fund will be
available on the NASDAQ OMX
Information LLC proprietary index data
service, and will be widely
disseminated by one or more major
market data vendors and broadly
displayed at least every 15 seconds
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III. Discussion and Commission
Findings
27 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition and capital
formation. See 15 U.S.C. 78c(f).
28 15 U.S.C. 78f(b)(5).
29 15 U.S.C. 78k–1(a)(1)(C)(iii).
30 According to the Exchange, the Intraday
Indicative Value reflects an estimated intraday
value of each Fund’s portfolio. The Intraday
Indicative Value will be based upon the current
value for the components of a Disclosed Portfolio.
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48267
during the Regular Market Session.31 On
each business day, before
commencement of trading in Shares in
the Regular Market Session 32 on the
Exchange, the Funds will disclose on
their Web site the identities and
quantities of the portfolio of securities
and other assets (‘‘Disclosed Portfolio’’
as defined in Nasdaq Rule 5735(c)(2))
held by each Fund that will form the
basis for each Fund’s calculation of
NAV at the end of the business day.33
The Custodian, through the National
Securities Clearing Corporation, will
make available on each business day,
prior to the opening of business of the
Exchange, the list of the names and
quantities of the instruments, as well as
amount of cash (if any), constituting the
creation basket for each Fund for that
day. The NAV of each Fund will be
determined once each business day,
normally as of the close of trading of the
New York Stock Exchange, generally,
4:00 p.m. Eastern Time.34 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. Intraday, executable
price quotations on the securities and
other assets held by the Funds and
Subsidiaries will be available from
major broker-dealer firms or on the
exchange on which they are traded, as
applicable. Intraday price information
will also be available through
subscription services, such as
Bloomberg, Markit, and Thomson
Reuters, which can be accessed by
authorized participants and other
31 Currently, the NASDAQ OMX Global Index
Data Service (‘‘GIDS’’) is the NASDAQ OMX global
index data feed service. The Exchange represents
that GIDS offers real-time updates, daily summary
messages, and access to widely followed indexes
and Intraday Indicative Values for ETFs and that
GIDS provides investment professionals with the
daily information needed to track or trade NASDAQ
OMX indexes, listed ETFs, or third-party partner
indexes and ETFs.
32 See Nasdaq Rule 4120(b)(4) (describing the
three trading sessions on the Exchange: (1) PreMarket Session from 4 a.m. to 9:30 a.m., Eastern
Time; (2) Regular Market Session from 9:30 a.m. to
4:00 p.m. or 4:15 p.m., Eastern Time; and (3) PostMarket Session from 4:00 p.m. or 4:15 p.m. to 8:00
p.m., Eastern Time).
33 The Disclosed Portfolio will include, as
applicable, the names, quantity, percentage
weighting and market value of securities and other
assets held by each Fund and each Subsidiary and
the characteristics of such assets. The Web site and
information will be publicly available at no charge.
34 NAV will be calculated by deducting all of a
Fund’s liabilities from the total value of its assets
and dividing the result by the number of Shares
outstanding, rounding to the nearest cent.
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emcdonald on DSK67QTVN1PROD with NOTICES
investors. Pricing information for
exchange-traded securities such as
common and preferred stocks, ETFs,
ETPs, ETNs, closed-end funds, futures
contracts, REITs, MLPs, and REOCs will
be publicly available from the Web sites
of the exchanges on which they trade,
on public financial Web sites, and
through subscription services such as
Bloomberg and Thompson Reuters.
Pricing information regarding debt
securities (including high yield fixedincome securities, bonds, notes, and
debentures) will be available through
subscription services such as Markit,
Bloomberg, and Thompson Reuters. The
Funds’ Web site will include a form of
the prospectus for the Funds and
additional data relating to NAV and
other applicable quantitative
information.
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
Exchange will obtain a representation
from the issuer of the Shares that the
NAV per Share will be calculated daily
and that the NAV and the Disclosed
Portfolio will be made available to all
market participants at the same time.
Trading in Shares of the Funds will be
halted under the conditions specified in
Nasdaq Rules 4120 and 4121, including
the trading pause provisions under
Nasdaq Rules 4120(a)(11) and (12).
Trading 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,35 and trading in the Shares
will be subject to Nasdaq Rule
5735(d)(2)(D), which sets forth
circumstances under which trading in
Shares of the Funds may be halted. The
Exchange states that it has a general
policy prohibiting the distribution of
material, non-public information by its
employees. Further, the Commission
notes that the Reporting Authority that
provides the Disclosed Portfolio must
implement and maintain, or be subject
to, procedures designed to prevent the
use and dissemination of material, nonpublic information regarding the actual
35 These reasons may include: (1) The extent to
which trading is not occurring in the securities and
other assets constituting the Disclosed Portfolios of
the Funds; or (2) whether other unusual conditions
or circumstances detrimental to the maintenance of
a fair and orderly market are present. 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 Funds.
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17:31 Aug 14, 2014
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components of the portfolio.36 In
addition, the Exchange states that the
Adviser is not a broker-dealer, but it is
affiliated with a broker-dealer and has
implemented a fire wall with respect to
its broker-dealer affiliate regarding
access to information concerning the
composition of or changes to the
portfolio.37 The Exchange represents
that trading in the Shares will be subject
to the existing trading surveillances,
administered by both Nasdaq and also
the Financial Industry Regulatory
Authority (‘‘FINRA’’) on behalf of the
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws.38 The
Exchange further 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
applicable federal securities laws. The
Exchange represents that FINRA, on
behalf of the Exchange, will
communicate as needed regarding
trading information it can obtain
relating to the Shares and other
exchange-traded securities and
instruments held by the Funds with
other markets and other entities that are
members of the Intermarket
Surveillance Group (‘‘ISG’’), and FINRA
may obtain trading information
regarding trading in the Shares and
exchange-traded securities and
instruments held by the Fund from such
markets and other entities. In addition,
the Exchange may obtain information
36 See
Nasdaq Rule 5735(d)(2)(B)(ii).
supra note 7. The Exchange states that an
investment adviser to an open-end fund is required
to be registered under the Investment Advisers Act
of 1940 (‘‘Advisers Act’’). As a result, the Adviser
and its related personnel are 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 nonpublic 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 violation, 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.
38 The Exchange states that FINRA surveils
trading on the Exchange pursuant to a regulatory
services agreement and that the Exchange is
responsible for FINRA’s performance under this
regulatory services agreement.
37 See
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Sfmt 4703
regarding trading in the Shares and
exchange-traded securities and
instruments held by the Fund from
markets and other entities that are
members of ISG, which includes all U.S.
national securities and certain futures
exchanges, or are parties to a
comprehensive surveillance sharing
agreement. Moreover, FINRA, on behalf
of the Exchange, will be able to access,
as needed, trade information for certain
fixed income securities held by each
Fund reported to FINRA’s Trade
Reporting and Compliance Engine. Prior
to the commencement of trading, the
Exchange states that it will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
The Exchange represents 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 the
following:
(1) The Shares will be subject to Rule
5735, which sets forth the initial and
continued listing criteria applicable to
Managed Fund Shares.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) Trading in the Shares will be
subject to the existing trading
surveillances, administered by both
Nasdaq and FINRA, on behalf of the
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws, and
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 applicable federal securities
laws.
(4) At all times, 90% of each Fund’s
exchange-traded assets will be securities
that trade in markets that are members
of the ISG, which includes all U.S.
national securities and certain futures
exchanges, or are parties to a
comprehensive surveillance sharing
agreement.
(5) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in creation units
(and that Shares are not individually
redeemable); (b) Nasdaq Rule 2111A,
which imposes suitability obligations on
Nasdaq members with respect to
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recommending transactions in the
Shares to customers; (c) how and by
whom information regarding the
Intraday Indicative Value and Disclosed
Portfolio is disseminated; (d) the risks
involved in trading the Shares during
the Pre-Market and Post-Market
Sessions when an updated Intraday
Indicative Value will not be calculated
or publicly disseminated; (e) the
requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (f) trading information.
(6) For initial and continued listing,
the Funds will be in compliance with
Rule 10A–3 under the Act.39
(7) Each Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment). Each Fund will
monitor its portfolio liquidity on an
ongoing basis to determine whether, in
light of current circumstances, an
adequate level of liquidity is being
maintained, and will consider taking
appropriate steps in order to maintain
adequate liquidity if, through a change
in values, net assets, or other
circumstances, more than 15% of a
Fund’s net assets are held in illiquid
assets.
(8) The Funds will not invest in
options or swaps.
(9) Each Fund’s investments and each
Subsidiary’s investments will be
consistent with its (or its applicable
Fund’s) respective investment objective
and, although certain derivative
investments will have a leveraging effect
on the Funds and Subsidiaries, the
Funds and Subsidiaries will not seek
leveraged returns (e.g., 2X or ¥3X).
(10) A minimum of 100,000 Shares of
each Fund will be outstanding at the
commencement of trading on the
Exchange.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice, and the Exchange’s
description of the Fund.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1 thereto, is consistent with Section
6(b)(5) of the Act 40 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,41 that the
proposed rule change (SR–NASDAQ–
39 See
17 CFR 240.10A–3.
U.S.C. 78f(b)(5).
41 15 U.S.C. 78s(b)(2).
40 15
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17:31 Aug 14, 2014
Jkt 232001
2014–063), as modified by Amendment
No. 1 thereto, be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–19335 Filed 8–14–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72806; File No. SR–Phlx–
2014–51]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Singly Listed Options
August 11, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August 1,
2014, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
Section III of the Pricing Schedule
which pertains to Singly Listed Options
fees.3
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.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
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
42 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Singly Listed Options fees includes options
overlying currencies, equities, ETFs, ETNs treasury
securities and indexes not listed on another
exchange.
1 15
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48269
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 purpose of this filing is to amend
Section III of the Exchange’s Pricing
Schedule entitled ‘‘Singly Listed
Options’’ to: (1) Amend Options
Transaction Charges; (ii) delete
NASDAQ OMX Alpha Indexes(TM)
(‘‘Alpha Indexes’’),4 MSCI Index
Options,5 and Treasury Securities 6
4 Alpha Indexes measure relative total returns of
one stock and one exchange-traded fund share
(‘‘ETF’’) underlying options which are also traded
on the Exchange (each such combination of two
components is referred to as an ‘‘Alpha Pair’’). The
first component identified in an Alpha Pair (the
‘‘Target Component’’) is measured against the
second component identified in the Alpha Pair (the
‘‘Benchmark Component’’). Alpha Index Options
contracts will be exercised European-style and
settled in U.S. dollars. See Securities Exchange Act
Release No. 63860 (February 7, 2011), 76 FR 7888
(February 11, 2001) (SR–Phlx–2010–176).
5 The Exchange filed to list options on the MSCI
EM Index. The MSCI EM Index is a free floatadjusted market capitalization index consisting of
large and midcap component securities from
countries classified by MSCI as ‘‘emerging
markets,’’ and is designed to measure equity market
performance of emerging markets. The index
consists of component securities from the following
21 emerging market countries: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India,
Indonesia, Korea, Malaysia, Mexico, Morocco, Peru,
Philippines, Poland, Russia, South Africa, Taiwan,
Thailand, and Turkey. See Securities Exchange Act
Release No. 66420 (February 17, 2012), 77 FR 11177
(February 24, 2012) (SR–Phlx–2011–179) (an order
granting approval of the proposal to list and trade
options on the MSCI EM Index). The Exchange also
filed to list options on the MSCI EAFE Index. The
MSCI EAFE Index is a free float-adjusted market
capitalization index that is designed to measure the
equity market performance of developed markets,
excluding the U.S. and Canada. The MSCI EAFE
Index consists of component securities from the
following twenty-two (22) developed market
countries: Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Hong Kong,
Ireland, Israel, Italy, Japan, the Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland, and the United Kingdom. See
Securities Exchange Act Release No. 66569 (March
9, 2012), 77 FR 15409 (March 15, 2014) (SR–Phlx–
2012–28).
6 Subsection (a)(1) of Phlx Rule 1001D states that
the term ‘‘Treasury securities’’ (also known as
Treasury debt securities) means a bond or note or
other evidence of indebtedness that is a direct
obligation of, or an obligation guaranteed as to
principal or interest by, the United States or a
corporation in which the United States has a direct
or indirect interest (except debt securities
guaranteed as to timely payment of principal and
interest by the Government National Mortgage
E:\FR\FM\15AUN1.SGM
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]]>Agencies
[Federal Register Volume 79, Number 158 (Friday, August 15, 2014)]
[Notices]
[Pages 48264-48269]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19335]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72809; File No. SR-NASDAQ-2014-063]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
No. 1, Relating to the Listing and Trading of the Shares of the Arrow
DWA Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield
ETF of Arrow Investments Trust
August 11, 2014.
I. Introduction
On June 23, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or the
``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 Arrow
DWA Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield
ETF (each a ``Fund'' and, collectively, ``Funds'') under Nasdaq Rule
5735. On June 26, 2014, the Exchange filed Amendment No. 1 to the
proposed rule change.\3\ The proposed rule change, as modified by
Amendment No. 1, was published for comment in the Federal Register on
July 3, 2014.\4\ The Commission received no comments on the proposed
rule change. This order approves the proposed rule change, as modified
by Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange clarified that the Arrow
Investments Trust will issue and sell shares of the Arrow DWA
Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield
ETF only in aggregations of 100,000 shares.
\4\ See Securities Exchange Act Release No. 72493 (June 27,
2014), 79 FR 38088 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange has made the following representations and statements
in describing the Funds and their respective investment strategies,
including other portfolio holdings and investment restrictions.\5\
---------------------------------------------------------------------------
\5\ The Commission notes that additional information regarding
the Trust, the Funds, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, portfolio holdings disclosure
policies, distributions, and taxes, among other information, is
included in the Notice and the Registration Statement, as
applicable. See Notice and Registration Statement, supra note 4 and
infra note 6, respectively.
---------------------------------------------------------------------------
The Exchange proposes to list and trade the Shares under Nasdaq
Rule 5735 (``Managed Fund Shares''), which governs the listing and
trading of Managed Fund Shares. Each Fund is a series of the Arrow
Investments Trust (``Trust'').\6\ Arrow Investment Advisors, LLC is the
investment adviser (``Adviser'') to the Funds.\7\ Gemini Fund Services,
LLC will act as the administrator and transfer agent to the Funds.
Brown Brothers Harriman & Co. (``Custodian'') will act as the custodian
and transfer agent to the Funds. Northern Lights Distributors, LLC is
the principal underwriter and distributor of each Fund's Shares.
---------------------------------------------------------------------------
\6\ See Post-Effective Amendment No. 7 to Registration Statement
on Form N-1A for the Trust (File Nos. 333-178164 and 811-22638)
(``Registration Statement'').
\7\ The Exchange states that the Adviser is not a broker-dealer,
but it is affiliated with a broker-dealer. The Exchange states that
the Adviser has implemented a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the
composition of or changes to the portfolio. The Exchange further
states that, in the event (a) the Adviser becomes newly affiliated
with a broker-dealer or registers as a broker-dealer, or (b) any new
adviser or sub-adviser is a registered broker-dealer or becomes
affiliated with a broker-dealer, the adviser or sub-adviser, as
applicable, will implement a fire wall with respect to its relevant
personnel or its broker-dealer affiliate, as applicable, regarding
access to information concerning the composition of or changes to
the portfolio and will be subject to procedures designed to prevent
the use and dissemination of material non-public information
regarding the portfolio.
---------------------------------------------------------------------------
Arrow DWA Balanced ETF
The Exchange represents that the Fund's primary investment
objective is to seek to achieve an appropriate balance between long-
term capital appreciation and capital preservation. In pursuing its
investment objective, the Fund will invest in other ETFs \8\ that each
invests primarily in domestic and foreign (including emerging markets)
(i) equity securities \9\ of any market capitalization, (ii) fixed
income securities \10\ of any credit quality, or (iii) alternative
assets.\11\ In addition, the Fund will invest in commodity futures
through a wholly-owned and controlled Cayman subsidiary (``Balanced
Subsidiary''). The Fund's fixed income securities may be rated below
investment grade (rated BB+ or lower by Standard & Poor's Ratings
Services (``S&P'') or comparably rated by another nationally recognized
statistical rating organization (``NRSRO''), also known as ``high
yield'' or ``junk'' bonds, and in unrated debt securities determined by
the Adviser to be of comparable quality.
---------------------------------------------------------------------------
\8\ The ETFs in which the Fund may invest include Index Fund
Shares and Portfolio Depositary Receipts (as described in Nasdaq
Rule 5705(a) and (b)) and Managed Fund Shares (as described in
Nasdaq Rule 5735).
\9\ The Fund defines ``equity securities'' to be exchange-traded
common and preferred stocks.
\10\ The Fund defines ``fixed income securities'' to be bonds,
notes or debentures.
\11\ The Fund defines ``alternative assets'' to be investments
that are historically uncorrelated to either equity or fixed income
investments, which are commodity futures, exchange-traded master
limited partnerships (``MLPs'') and real estate-related securities,
which include foreign and domestic exchange-traded real estate
investment trusts (``REITs'') or exchange-traded real estate
operating companies (``REOCs'').
---------------------------------------------------------------------------
The Exchange states that the Fund is a ``fund of funds,'' which
means that it primarily invests in ETFs; however, the Adviser may elect
to invest directly in the types of securities described above. The
Adviser may elect to make these direct investments when it is cost
effective for the Fund to do so (such as when the Fund reaches a size
sufficient to effectively purchase the underlying securities held by
the ETFs in which it invests, allowing the Fund to avoid the costs
associated with indirect investments). The Adviser uses technical
analysis \12\ to allocate the Fund's portfolio among the asset classes
described above.
---------------------------------------------------------------------------
\12\ Technical analysis is the method of evaluating securities
by analyzing statistics generated by market activity, such as past
prices and trading volume, in an effort to determine probable future
prices.
---------------------------------------------------------------------------
The Exchange states that under normal market conditions,\13\ the
Fund will invest:
---------------------------------------------------------------------------
\13\ The term ``under normal market conditions'' as used herein
includes, but is not limited to, the absence of adverse market,
economic, political or other conditions, including extreme
volatility or trading halts in the securities markets or the
financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
type events such as systems failure, natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance. In periods of
extreme market disturbance, the Fund may take temporary defensive
positions, by overweighting its portfolio in cash/cash-like
instruments; however, to the extent possible, the Adviser would
continue to seek to achieve the Fund's investment objective.
---------------------------------------------------------------------------
From 25% to 65% in ETFs that invest in equity securities;
from 25% to 65% in ETFs that invest in fixed income
securities; and
from 10% to 40% in ETFs that invest in alternative assets.
The Fund will have the ability to invest up to 25% of its total
assets in the Balanced Subsidiary. The Balanced Subsidiary will invest
primarily in commodity futures, as well as fixed income securities and
cash equivalents, which are intended to serve as margin
[[Page 48265]]
or collateral for the Balanced Subsidiary's investments in commodity
futures.
The Fund will invest in ETFs within specific asset classes when the
technical models used by the Adviser indicate a high probability that
the applicable asset classes and ETFs are likely to outperform the
applicable universe. The Fund will sell interests or reduce investment
exposure among an asset class or ETF when the technical models used by
the Adviser indicate that such asset class or ETF is likely to
underperform the applicable universe. The Fund may be more heavily
invested in fixed-income ETFs, cash positions and similar securities
when the technical models indicate these assets should significantly
outperform the equity and/or alternative asset classes.
The Exchange states that, in general, the Fund's investments in
equity securities are intended to achieve the capital appreciation
component of its investment objective and the Fund's investments in
fixed income securities are intended to achieve the capital
preservation component of its investment objective. Under normal market
conditions, the Adviser expects that the Fund will invest a combined
minimum of 35% in fixed-income securities and in alternative assets.
The Fund's investments in alternative assets are intended to enable the
portfolio to be less reliant on fixed-income investments for reducing
volatility and equities for increasing returns. The Adviser may engage
in frequent buying and selling of portfolio securities to achieve the
Fund's investment objective.
The Exchange states that the Fund seeks to achieve its investment
objective by implementing a proprietary technical asset allocation
(``TAA'') model. The Adviser will overweight asset classes, rotation
strategies, and underlying ETFs exhibiting positive relative strength,
and underweight asset classes, rotation strategies, and underlying ETFs
exhibiting negative relative strength. In essence, TAA works by
reallocating at different times in response to the changing patterns of
returns available in the markets. This methodology does not attempt to
predict the future; it simply reacts to pattern changes in the
marketplace at any given time. This methodology allows the Fund to be
adaptive to current market conditions. The tactical model relies on a
number of technical indicators when making allocation decisions for the
Fund. The Adviser utilizes relative strength as the primary technical
indicator to tactically allocate assets both within and across asset
classes and rotation strategies. The relative strength indicator is
important because it adapts to the changing market conditions. Relative
strength measures the likelihood that an ETF or a group of ETFs will
outperform the appropriate base index. When the indicator is moving up,
it shows that the ETF or group of ETFs is performing better than the
base index. When the indicator is moving down, it shows that the ETF or
group of ETFs is performing worse than the base index (i.e., not rising
as fast or falling faster).\14\
---------------------------------------------------------------------------
\14\ For example, in the sector rotation strategy, the Adviser
creates a sector-based index to compare all available sector ETFs
for investment in the Fund. The performance of each ETF is compared
to the base index and ranked. The Adviser generally purchases the
ETFs that demonstrate the highest-ranked relative strength and sells
any positions that are not included in that list.
---------------------------------------------------------------------------
The Exchange states that the Adviser has discretion to add to or
delete from the universe of eligible ETFs for each strategy based on
holdings, expense ratio, volume, liquidity, new product availability,
and other factors that can positively contribute to achieving the
Fund's investment objectives.
Arrow DWA Tactical ETF
The Exchange states that the Fund's primary investment objective is
to seek to achieve long-term capital appreciation with capital
preservation as a secondary objective. In pursuing its investment
objective, the Fund will invest in other ETFs \15\ that each invests
primarily in domestic and foreign (including emerging markets) (i)
equity securities \16\ of any market capitalization, (ii) fixed-income
securities \17\ of any credit quality, or (iii) alternative assets.\18\
In addition, the Fund will invest in commodity futures through a
wholly-owned and controlled Cayman subsidiary (``Tactical
Subsidiary''). The Fund's fixed income securities may be rated below
investment grade (rated BB+ or lower by S&P or comparably rated by
another NRSRO, also known as ``high yield'' or ``junk'' bonds, and in
unrated debt securities determined by the Adviser to be of comparable
quality.
---------------------------------------------------------------------------
\15\ See supra note 8.
\16\ See supra note 9.
\17\ See supra note 10.
\18\ See supra note 11.
---------------------------------------------------------------------------
The Exchange represents that the Fund is a ``fund of funds,'' which
means that it primarily invests in ETFs; however, the Adviser may elect
to invest directly in the types of securities described above. The
Adviser may elect to make these direct investments when it is cost
effective for the Fund to do so (such as when the Fund reaches a size
sufficient to effectively purchase the underlying securities held by
the ETFs in which it invests, allowing the Fund to avoid the costs
associated with indirect investments). The Adviser uses technical
analysis to allocate the Fund's assets among the asset classes
described above.\19\
---------------------------------------------------------------------------
\19\ See supra note 12.
---------------------------------------------------------------------------
The Exchange states that under normal market conditions, the Fund
will invest:
From 0% to 100% of its assets in ETFs that invest in
equity securities;
From 0% to 100% of its assets in ETFs that invest in
fixed-income securities; and
From 0% up to 90% of its assets in ETFs that invest in
alternative assets.
The Exchange states that the Fund will have the ability to invest
up to 25% of its total assets in the Tactical Subsidiary. The Tactical
Subsidiary will invest primarily in commodity futures, as well as
fixed-income securities and cash equivalents, which are intended to
serve as margin or collateral for the Tactical Subsidiary's investments
in commodity futures.
The Exchange states that the Fund will invest in ETFs within
specific asset classes when the technical models used by the Adviser
indicate a high probability that the applicable asset classes and ETFs
are likely to outperform the applicable universe. The Fund will sell
interests or reduce investment exposure among an asset class or ETF
when the technical models used by the Adviser indicate that such asset
class or ETF is likely to underperform the applicable universe. The
Fund may invest more heavily in fixed-income ETFs, cash positions and
similar securities when the technical models indicate these assets
should significantly outperform the equity and/or alternative asset
classes.
The Exchange states that, in general, the Fund's investments in
equity securities are intended to achieve the capital appreciation
component of the Fund's investment objectives. At times, the Fund may
invest in fixed-income securities in order to achieve the capital
preservation component of the Fund's investment objectives. The Fund's
investments in alternative assets are intended to enable the portfolio
to be less reliant on fixed-income investments for reducing volatility
and equities for increasing returns. The Adviser may engage in frequent
buying and selling of portfolio securities to achieve the Fund's
investment objectives.
The Exchange states that the Fund seeks to achieve its investment
objectives by implementing a proprietary TAA model. The Adviser will
overweight asset classes, rotation
[[Page 48266]]
strategies and underlying ETFs exhibiting positive relative strength
and underweight asset classes, rotation strategies and underlying ETFs
exhibiting negative relative strength. The tactical model relies on a
number of technical indicators when making allocation decisions for the
Fund. The Adviser utilizes relative strength as the primary technical
indicator to tactically allocate assets both within and across asset
classes and rotation strategies. The relative strength indicator is
important because it adapts to the changing market conditions. Relative
strength measures the likelihood that an ETF or a group of ETFs will
outperform the appropriate base index. When the indicator is moving up,
it shows that the ETF or group of ETFs is performing better than the
base index. When the indicator is moving down, it shows that the ETF or
group of ETFs is performing worse than the base index (i.e., not rising
as fast or falling faster).\20\
---------------------------------------------------------------------------
\20\ See supra note 14.
---------------------------------------------------------------------------
The Exchange states that the Adviser has discretion to add to or
subtract from the universe of eligible ETFs for each strategy based on
holdings, expense ratio, volume, liquidity, new product availability
and other factors that can positively contribute to achieving the
Fund's investment objectives.
The Subsidiaries
The Exchange represents that the Balanced Fund and Tactical Fund
each has the ability to invest up to 25% of its total assets in the
Balanced Subsidiary and the Tactical Subsidiary, respectively (each a
``Subsidiary''; together, ``Subsidiaries''). Each Subsidiary will
invest primarily in commodity futures, as well as fixed-income
securities and cash equivalents, which are intended to serve as margin
or collateral for each Subsidiary's investments in commodity futures.
Each Subsidiary may have both long and short positions in commodities
futures. However, for a given commodity, each Subsidiary will have a
net long exposure. Each Subsidiary will also be advised by the
Adviser.\21\
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\21\ Neither Subsidiary will be registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') nor will be
directly subject to its investor protections, except as noted in the
Registration Statement. However, each Subsidiary will be wholly-
owned and controlled by the applicable Fund and will be advised by
the Adviser. Therefore, each Fund's ownership and control of its
respective Subsidiary will prevent the applicable Subsidiary from
taking action contrary to the interests of the Fund or its
shareholders. The Board of Trustees of the Trust (``Board'') will
have oversight responsibility for the investment activities of each
Fund, including its expected investment in the applicable
Subsidiary, and the Fund's role as the sole shareholder of the
applicable Subsidiary. The Adviser will receive no additional
compensation for managing the assets of each Subsidiary. Each
Subsidiary will also enter into separate contracts for the provision
of custody, transfer agency, and accounting agent services with the
same, or with affiliates of the same, service providers that provide
those services to the Funds.
---------------------------------------------------------------------------
By investing in commodities futures indirectly through the
applicable Subsidiary, the Exchange states that each of the Balanced
Fund and the Tactical Fund will obtain exposure to the commodities
markets within the federal tax requirements that apply to the Fund.
Investment in each Subsidiary is expected to provide the applicable
Fund with exposure to the commodities markets within the limitations of
the federal tax requirements of Subchapter M of the Internal Revenue
Code.
Because each of the Balanced Fund and the Tactical Fund may invest
up to 25% of its assets in its respective Subsidiary, each Fund may be
considered to be investing indirectly in such investments through its
Subsidiary, and references to each of the Balanced Fund and Tactical
Fund may also include its Subsidiary. When viewed on a consolidated
basis, each Subsidiary will be subject to the same investment
restrictions and limitations, and follow the same compliance policies
and procedures, as the applicable Fund.
The Exchange represents that as a result of the instruments that
will be indirectly held by each of the Balanced Fund and the Tactical
Fund, the Adviser has registered as a commodity pool operator \22\ and
is also a member of the National Futures Association (``NFA''). Each of
the Balanced Fund, Tactical Fund, and the Subsidiaries are subject to
regulation by the Commodity Futures Trading Commission and NFA, and to
additional disclosure, reporting, and recordkeeping rules imposed upon
commodity pools.
---------------------------------------------------------------------------
\22\ As defined in Section 1a(11) of the Commodity Exchange Act.
---------------------------------------------------------------------------
Arrow DWA Tactical Yield ETF
The Exchange states that the Fund's primary investment objective is
to seek high current income with an appropriate balance between long-
term capital appreciation and capital preservation. In pursuing its
investment objective, the Fund will invest in other ETFs \23\ that each
invest in domestic and foreign (including emerging markets) (i) equity
securities \24\ of any market capitalization or (ii) fixed-income
securities \25\ of any credit quality. The Fund also invests indirectly
in these asset classes through various exchange-traded products
(``ETPs'') \26\ and exchange-traded closed-end funds, and directly
through individual securities. In order to mitigate the settlement risk
of the foreign denominated securities in which it invests due to
currency fluctuations, the Fund may also invest up to 25% of its net
assets in Spot Forex futures.
---------------------------------------------------------------------------
\23\ See supra note 8.
\24\ The Fund defines equity securities to be exchange-traded
common and preferred stocks and exchange-traded REITs.
\25\ See supra note 10.
\26\ The ETPs in which the Fund may invest include exchange-
traded currency trusts (as described in Nasdaq Rule 5711(e)) and
exchange-traded notes (``ETNs'') (as described in Nasdaq Rule 5730).
---------------------------------------------------------------------------
The Exchange states that the Fund will maintain two income
strategies that focus on (i) securities that generate ``high beta
yield,'' consisting of securities correlated to equities based on a
proprietary methodology, and (ii) securities that generate ``low beta
yield,'' consisting of securities less correlated to equities based on
a proprietary methodology. Beta is a measure of the price volatility,
or risk, of a security or a portfolio in comparison to the market as a
whole. A security's correlation to equities is a measure of the
performance similarity of the security to the S&P 500 index. The high
beta strategy is a composite of securities that are selected based on
their credit and equity risk premiums characteristics. The low beta
yield strategy is a composite of securities that are selected based on
their inflation, interest, and credit risk characteristics. The Fund
uses a proprietary selection methodology designed to identify
securities that demonstrate strong relative strength characteristics
within each strategy. The Fund will then utilize a quantitative
methodology that relies on economic and fundamental factors to
tactically underweight and overweight the income strategies.
The Exchange represents that the Fund will, under normal market
conditions, invest as follows:
From 20% to 80% in the Low Beta (LB). The LB will be
comprised of equity and fixed income securities, including ETPs that
invest in international and domestic securities; and
From 20% to 80% in the High Beta (HB). The HB will be in
equity and fixed income securities, including ETPs that invest in
international and domestic securities.
The Exchange states that the Fund expects to be a ``fund of
funds,'' which means that it primarily invests in ETFs, ETPs, and
closed-end funds; however, the Adviser may elect to invest directly in
the asset classes described above. The Adviser may elect to make these
direct
[[Page 48267]]
investments when it is cost effective for the Fund to do so (such as
when the Fund reaches a size sufficient to effectively purchase the
underlying securities held by the ETFs, ETPs, or closed-end Funds in
which it invests, allowing the Fund to avoid the costs associated with
indirect investments).
All Funds
The Exchange represents that in certain situations or market
conditions, a Fund may temporarily depart from its normal investment
policies and strategies, provided that the alternative is consistent
with the Fund's investment objective and is in the best interest of the
Fund. For example, a Fund may hold a higher than normal proportion of
its assets in cash in times of extreme market stress. The Funds may
borrow money from a bank as permitted by the 1940 Act or other
governing statute, by applicable rules thereunder, or by Commission or
other regulatory agency with authority over the Funds, but only for
temporary or emergency purposes. The use of temporary investments is
not a part of a principal investment strategy of the Funds.
The Exchange represents that each Fund may hold up to an aggregate
amount of 15% of its net assets in illiquid assets (calculated at the
time of investment). Each Fund will monitor its portfolio liquidity on
an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained, and
will consider taking appropriate steps in order to maintain adequate
liquidity if, through a change in values, net assets, or other
circumstances, more than 15% of a Fund's net assets are held in
illiquid assets. Illiquid assets include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
The Exchange represents that each Fund will not invest 25% or more
of the value of its total assets in securities of issuers in any one
industry.
The Exchange states that the Funds will be classified as ``non-
diversified'' investment companies under the 1940 Act, and that the
Funds intend to qualify for and to elect treatment as a separate
regulated investment company under Subchapter M of the Internal Revenue
Code.
The Funds will not invest in options or swaps.
The Exchange represents that each Fund's investments and each
Subsidiary's investments will be consistent with its (or its applicable
Fund's) respective investment objective and, although certain
derivative investments will have a leveraging effect on the Funds and
Subsidiaries, the Funds and Subsidiaries will not seek leveraged
returns (e.g., 2X or -3X).
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\27\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Act,\28\ which requires, among other
things, that the Exchange's rules be designed 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. The
Commission notes that the Funds and the Shares must comply with the
requirements of Nasdaq Rule 5735 to be listed and traded on the
Exchange.
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\27\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. See 15 U.S.C. 78c(f).
\28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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,\29\ 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 available via Nasdaq
proprietary quote and trade services, as well as in accordance with the
Unlisted Trading Privileges and the Consolidated Tape Association plans
for the Shares. In addition, the Intraday Indicative Value,\30\ as
defined in Nasdaq Rule 5735(c)(3), of each Fund will be available on
the NASDAQ OMX Information LLC proprietary index data service, and will
be widely disseminated by one or more major market data vendors and
broadly displayed at least every 15 seconds during the Regular Market
Session.\31\ On each business day, before commencement of trading in
Shares in the Regular Market Session \32\ on the Exchange, the Funds
will disclose on their Web site the identities and quantities of the
portfolio of securities and other assets (``Disclosed Portfolio'' as
defined in Nasdaq Rule 5735(c)(2)) held by each Fund that will form the
basis for each Fund's calculation of NAV at the end of the business
day.\33\ The Custodian, through the National Securities Clearing
Corporation, will make available on each business day, prior to the
opening of business of the Exchange, the list of the names and
quantities of the instruments, as well as amount of cash (if any),
constituting the creation basket for each Fund for that day. The NAV of
each Fund will be determined once each business day, normally as of the
close of trading of the New York Stock Exchange, generally, 4:00 p.m.
Eastern Time.\34\ 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. Intraday, executable price
quotations on the securities and other assets held by the Funds and
Subsidiaries will be available from major broker-dealer firms or on the
exchange on which they are traded, as applicable. Intraday price
information will also be available through subscription services, such
as Bloomberg, Markit, and Thomson Reuters, which can be accessed by
authorized participants and other
[[Page 48268]]
investors. Pricing information for exchange-traded securities such as
common and preferred stocks, ETFs, ETPs, ETNs, closed-end funds,
futures contracts, REITs, MLPs, and REOCs will be publicly available
from the Web sites of the exchanges on which they trade, on public
financial Web sites, and through subscription services such as
Bloomberg and Thompson Reuters. Pricing information regarding debt
securities (including high yield fixed-income securities, bonds, notes,
and debentures) will be available through subscription services such as
Markit, Bloomberg, and Thompson Reuters. The Funds' Web site will
include a form of the prospectus for the Funds and additional data
relating to NAV and other applicable quantitative information.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\30\ According to the Exchange, the Intraday Indicative Value
reflects an estimated intraday value of each Fund's portfolio. The
Intraday Indicative Value will be based upon the current value for
the components of a Disclosed Portfolio.
\31\ Currently, the NASDAQ OMX Global Index Data Service
(``GIDS'') is the NASDAQ OMX global index data feed service. The
Exchange represents that GIDS offers real-time updates, daily
summary messages, and access to widely followed indexes and Intraday
Indicative Values for ETFs and that GIDS provides investment
professionals with the daily information needed to track or trade
NASDAQ OMX indexes, listed ETFs, or third-party partner indexes and
ETFs.
\32\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to
4:00 p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session
from 4:00 p.m. or 4:15 p.m. to 8:00 p.m., Eastern Time).
\33\ The Disclosed Portfolio will include, as applicable, the
names, quantity, percentage weighting and market value of securities
and other assets held by each Fund and each Subsidiary and the
characteristics of such assets. The Web site and information will be
publicly available at no charge.
\34\ NAV will be calculated by deducting all of a Fund's
liabilities from the total value of its assets and dividing the
result by the number of Shares outstanding, rounding to the nearest
cent.
---------------------------------------------------------------------------
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 Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the
NAV and the Disclosed Portfolio will be made available to all market
participants at the same time. Trading in Shares of the Funds will be
halted under the conditions specified in Nasdaq Rules 4120 and 4121,
including the trading pause provisions under Nasdaq Rules 4120(a)(11)
and (12). Trading 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,\35\ and trading in the Shares will
be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances
under which trading in Shares of the Funds may be halted. The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees. Further, the
Commission notes that the Reporting Authority that provides the
Disclosed Portfolio must 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.\36\ In addition, the Exchange states that the Adviser is not
a broker-dealer, but it is affiliated with a broker-dealer and has
implemented a fire wall with respect to its broker-dealer affiliate
regarding access to information concerning the composition of or
changes to the portfolio.\37\ The Exchange represents that trading in
the Shares will be subject to the existing trading surveillances,
administered by both Nasdaq and also the Financial Industry Regulatory
Authority (``FINRA'') on behalf of the Exchange, which are designed to
detect violations of Exchange rules and applicable federal securities
laws.\38\ The Exchange further 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 applicable federal securities laws. The Exchange represents that
FINRA, on behalf of the Exchange, will communicate as needed regarding
trading information it can obtain relating to the Shares and other
exchange-traded securities and instruments held by the Funds with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), and FINRA may obtain trading information
regarding trading in the Shares and exchange-traded securities and
instruments held by the Fund from such markets and other entities. In
addition, the Exchange may obtain information regarding trading in the
Shares and exchange-traded securities and instruments held by the Fund
from markets and other entities that are members of ISG, which includes
all U.S. national securities and certain futures exchanges, or are
parties to a comprehensive surveillance sharing agreement. Moreover,
FINRA, on behalf of the Exchange, will be able to access, as needed,
trade information for certain fixed income securities held by each Fund
reported to FINRA's Trade Reporting and Compliance Engine. Prior to the
commencement of trading, the Exchange states that it will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares.
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\35\ These reasons may include: (1) The extent to which trading
is not occurring in the securities and other assets constituting the
Disclosed Portfolios of the Funds; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present. 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 Funds.
\36\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\37\ See supra note 7. The Exchange states that an investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and its related personnel are 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 violation, 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.
\38\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
---------------------------------------------------------------------------
The Exchange represents 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 the following:
(1) The Shares will be subject to Rule 5735, which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) Trading in the Shares will be subject to the existing trading
surveillances, administered by both Nasdaq and FINRA, on behalf of the
Exchange, which are designed to detect violations of Exchange rules and
applicable federal securities laws, and 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
applicable federal securities laws.
(4) At all times, 90% of each Fund's exchange-traded assets will be
securities that trade in markets that are members of the ISG, which
includes all U.S. national securities and certain futures exchanges, or
are parties to a comprehensive surveillance sharing agreement.
(5) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in creation units (and that Shares
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes
suitability obligations on Nasdaq members with respect to
[[Page 48269]]
recommending transactions in the Shares to customers; (c) how and by
whom information regarding the Intraday Indicative Value and Disclosed
Portfolio is disseminated; (d) the risks involved in trading the Shares
during the Pre-Market and Post-Market Sessions when an updated Intraday
Indicative Value will not be calculated or publicly disseminated; (e)
the requirement that members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (f) trading information.
(6) For initial and continued listing, the Funds will be in
compliance with Rule 10A-3 under the Act.\39\
---------------------------------------------------------------------------
\39\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(7) Each Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment). Each
Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether, in light of current circumstances, an adequate level
of liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of a Fund's
net assets are held in illiquid assets.
(8) The Funds will not invest in options or swaps.
(9) Each Fund's investments and each Subsidiary's investments will
be consistent with its (or its applicable Fund's) respective investment
objective and, although certain derivative investments will have a
leveraging effect on the Funds and Subsidiaries, the Funds and
Subsidiaries will not seek leveraged returns (e.g., 2X or -3X).
(10) A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange.
This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice, and
the Exchange's description of the Fund.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1 thereto, is consistent with
Section 6(b)(5) of the Act \40\ and the rules and regulations
thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\41\ that the proposed rule change (SR-NASDAQ-2014-063), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\41\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
---------------------------------------------------------------------------
\42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19335 Filed 8-14-14; 8:45 am]
BILLING CODE 8011-01-P
