Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade Shares of the First Trust Emerging Markets Local Currency Bond ETF of First Trust Exchange-Traded Fund III, 57144-57150 [2014-22670]
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<![CDATA[
57144
Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Notices
The NRC does not routinely edit
comment submissions to remove
identifying or contact information.
If you are requesting or aggregating
comments from other persons for
submission to the NRC, then you should
inform those persons not to include
identifying or contact information that
they do not want to be publicly
disclosed in their comment submission.
Your request should state that the NRC
does not routinely edit comment
submissions to remove such information
before making the comment
submissions available to the public or
entering the comment submissions into
ADAMS.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
II. Further Information
The NRC is seeking public comment
on the proposed revision to SRP Section
17.5. This section has been developed to
assist the NRC’s staff review Quality
Assurance (QA) program descriptions
under part 50 of Title 10 of the Code of
Federal Regulations (10 CFR). The
revisions to this SRP section reflect no
changes in staff position, nor are new
SRP acceptance criteria introduced. The
changes simplify and reflect plain
language throughout in accordance with
the NRC’s Plain Writing Action Plan.
Additionally, the staff has aligned SRP
Section 17.5 with Regulatory Guide (RG)
1.28, ‘‘Quality Assurance Program
Criteria (Design and Construction),’’
Revision 4 and RG 1.33, ‘‘Quality
Assurance Program Requirements
(Operation),’’ Revision 2. The changes
also reflect alignment with the latest
edition of NQA–1–2008/2009a which
the staff found acceptable for meeting
the requirement of Appendix B to 10
CFR part 50.
Following the NRC staff’s evaluation
of public comments, the NRC intends to
finalize SRP Section 17.5, Revision 1 in
ADAMS and post it on the NRC’s public
Web site at https://www.nrc.gov/readingrm/doc-collections/nuregs/staff/sr0800/.
The SRP is guidance for the NRC staff.
The SRP is not a substitute for the
NRC’s regulations, and compliance with
the SRP is not required.
III. Backfitting and Issue Finality
Issuance of this draft SRP, if finalized,
would not constitute backfitting as
defined in 10 CFR 50.109 (the Backfit
Rule) or otherwise be inconsistent with
the issue finality provisions in 10 CFR
part 52. The NRC’s position is based
upon the following considerations:
1. The draft SRP positions, if
finalized, would not constitute
backfitting, inasmuch as the SRP is
internal guidance to the NRC staff.
The SRP provides internal guidance
to the NRC staff on how to review an
VerDate Sep<11>2014
18:41 Sep 23, 2014
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application for NRC regulatory approval
in the form of licensing. Changes in
internal staff guidance are not matters
for which either nuclear power plant
applicants or licensees are protected
under either the Backfit Rule or the
issue finality provisions of 10 CFR part
52.
2. The NRC staff has no intention to
impose the SRP positions on existing
licensees either now or in the future.
The NRC staff does not intend to
impose or apply the positions described
in the draft SRP to existing licenses and
regulatory approvals. Hence, the
issuance of a final SRP—even if
considered guidance within the purview
of the issue finality provisions in 10
CFR part 52—would not need to be
evaluated as if it were a backfit or as
being inconsistent with issue finality
provisions. If, in the future, the NRC
staff seeks to impose a position in the
SRP on holders of already issued
licenses in a manner that does not
provide issue finality as described in the
applicable issue finality provision, then
the staff must make the showing as set
forth in the Backfit Rule or address the
criteria for avoiding issue finality as
described in the applicable issue finality
provision.
3. Backfitting and issue finality do
not—with limited exceptions not
applicable here—protect current or
future applicants.
Applicants and potential applicants
are not, with certain exceptions,
protected by either the Backfit Rule or
any issue finality provisions under 10
CFR part 52. Neither the Backfit Rule
nor the issue finality provisions under
10 CFR part 52—with certain
exclusions—were intended to apply to
every NRC action that substantially
changes the expectations of current and
future applicants. The exceptions to the
general principle are applicable
whenever an applicant references a 10
CFR part 52 license (e.g., an early site
permit) and/or NRC regulatory approval
(e.g., a design certification rule) with
specified issue finality provisions.
The NRC staff does not, at this time,
intend to impose the positions
represented in the draft SRP in a
manner that is inconsistent with any
issue finality provisions. If, in the
future, the staff seeks to impose a
position in the draft SRP in a manner
that does not provide issue finality as
described in the applicable issue finality
provision, then the staff must address
the criteria for avoiding issue finality as
described in the applicable issue finality
provision.
Dated at Rockville, Maryland, this 12th day
of September, 2014.
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For the Nuclear Regulatory Commission.
Joseph Colaccino,
Chief, New Reactor Rulemaking and
Guidance Branch, Division of Advanced
Reactors and Rulemaking, Office of New
Reactors.
[FR Doc. 2014–22728 Filed 9–23–14; 8:45 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73140; File No. SR–
NASDAQ–2014–073]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule
Change, as Modified by Amendment
No. 1, To List and Trade Shares of the
First Trust Emerging Markets Local
Currency Bond ETF of First Trust
Exchange-Traded Fund III
September 18, 2014.
I. Introduction
On July 18, 2014, The NASDAQ Stock
Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the First Trust Emerging
Markets Local Currency Bond ETF
(‘‘Fund’’) under Nasdaq Rule 5735. The
Exchange filed Amendment No. 1 to the
proposal on July 25, 2014.3 The
proposed rule change, as modified by
Amendment No. 1, was published for
comment in the Federal Register on
August 5, 2014.4 The Commission
received no comments on the proposed
rule change. This order grants approval
of the proposed rule change, as
modified by Amendment No. 1.
II. Description of the Proposed Rule
Change
The Exchange proposes to list and
trade Shares of the Fund pursuant to
Nasdaq Rule 5735, which governs the
listing and trading of Managed Fund
Shares on the Exchange. The Shares will
be offered by First Trust ExchangeTraded Fund III (‘‘Trust’’), which was
established as a Massachusetts business
trust on January 9, 2008.5 The Fund will
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 clarified that reverse
repurchase agreements will not be used by the Fund
to enhance leverage.
4 See Securities Exchange Act Release No. 72716
(July 30, 2014), 79 FR 45535 (‘‘Notice’’).
5 According to the Exchange, the Trust is
registered with the Commission as an investment
2 17
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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Notices
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be a series of the Trust. First Trust
Advisors L.P. will be the investment
adviser (‘‘Adviser’’) to the Fund. First
Trust Global Portfolios Ltd will serve as
investment sub-adviser (‘‘Sub-Adviser’’)
to the Fund and provide day-to-day
portfolio management.6 First Trust
Portfolios L.P. (‘‘Distributor’’) will be
the principal underwriter and
distributor of the Fund’s Shares. Brown
Brothers Harriman & Co. will act as the
administrator, accounting agent,
custodian, and transfer agent to the
Fund.
The Exchange has made the following
representations and statements in
describing the Fund and its principal
investments, investments in derivatives
and foreign currencies, and other
investments and investment
restrictions.7
company and has filed a registration statement on
Form N–1A (‘‘Registration Statement’’) with the
Commission. See Post-Effective Amendment No. 10
to Registration Statement on Form N–1A for the
Trust, dated July 8, 2014 (File Nos. 333–176976 and
811–22245). The Exchange states that the
Commission has issued an order granting certain
exemptive relief to the Trust under the Investment
Company Act of 1940 (‘‘1940 Act’’). See Investment
Company Act Release No. 30029 (April 10, 2012)
(File No. 812–13795) (‘‘Exemptive Relief’’). In
addition, the Exchange states that the Commission
has issued no-action relief pertaining to the Fund’s
ability to invest in derivatives, notwithstanding
certain representations in the application for the
Exemptive Relief. See Commission No-Action Letter
(December 6, 2012).
6 The Exchange states that neither the Adviser nor
the Sub-Adviser is a broker-dealer; however, both
the Adviser and the Sub-Adviser are affiliated with
the Distributor (as defined herein), which is a
broker-dealer. The Exchange represents that the
Adviser and the Sub-Adviser have each
implemented a fire wall with respect to their
broker-dealer affiliate regarding access to
information concerning the composition of or
changes to the portfolio. The Exchange further
represents that personnel who make decisions on
the Fund’s portfolio composition will be subject to
procedures designed to prevent the use and
dissemination of material non-public information
regarding the Fund’s portfolio. In addition, the
Exchange represents that in the event (a) the
Adviser or the Sub-Adviser becomes, or becomes
newly affiliated with, a broker-dealer or registers as
a broker-dealer; or (b) any new adviser or subadviser is a registered broker-dealer or becomes
affiliated with a broker-dealer, the Adviser or SubAdviser or any new adviser or sub-adviser, as
applicable, will implement a fire wall with respect
to its relevant personnel and/or such broker-dealer
affiliate, as applicable, regarding access to
information concerning the composition of or
changes to the portfolio, and the Adviser or SubAdviser or any new adviser or sub-adviser, as
applicable, will be subject to procedures designed
to prevent the use and dissemination of material
non-public information regarding the portfolio.
7 The Commission notes that additional
information regarding the Trust, the Fund, and the
Shares, including investment strategies, risks,
creation and redemption procedures, calculation of
net asset value (‘‘NAV’’), fees, portfolio holdings
disclosure policies, distributions, and taxes, among
other things, can be found in the Notice and
Registration Statement, as applicable. See supra
notes 4 and 5, respectively.
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18:41 Sep 23, 2014
Jkt 232001
Principal Investments
The investment objective of the Fund
will be to seek maximum total return
and current income. Under normal
market conditions,8 the Fund will invest
at least 80% of its net assets (including
investment borrowings) in bonds, notes,
bills, certificates of deposit, time
deposits, commercial paper, and loans
issued by issuers in emerging market 9
countries (‘‘Debt Instruments’’) that are
denominated in the local currency of
the issuer. Debt Instruments will be
issued or guaranteed (as applicable) by:
(i) Foreign governments (which may be
local foreign governments); (ii)
instrumentalities, agencies, or other
political subdivisions of foreign
governments (which may be local
foreign governments); (iii) central banks,
sovereign entities, supranational issuers,
or development agencies; or (iv) entities
or enterprises organized, owned,
backed, or sponsored by any of the
entities set forth in the foregoing clauses
(i)–(iii).10 The Fund will invest in Debt
Instruments issued by at least 13 nonaffiliated issuers.
In implementing the Fund’s
investment strategy, the Sub-Adviser
will seek to provide current income and
8 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 fixed income 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.
9 According to the Adviser and the Sub-Adviser,
while there is no universally accepted definition of
what constitutes an ‘‘emerging market,’’ in general,
emerging market countries are characterized by
developing commercial and financial infrastructure
with significant potential for economic growth and
increased capital market participation by foreign
investors. The Adviser and Sub-Adviser will look
at a variety of commonly-used factors when
determining whether a country is an ‘‘emerging’’
market. In general, the Adviser and Sub-Adviser
will consider a country to be an emerging market
if it is classified by the World Bank in the lower,
lower middle, or upper middle income designation
for one of the past three years. This definition could
be expanded or exceptions could be made
depending on the evolution of market and
economic conditions.
10 Debt Instruments include fixed rate, floating
rate, and index-linked debt obligations. In addition,
Debt Instruments include inflation-linked bonds.
Inflation-linked bonds are fixed income securities
that are structured to provide protection against
inflation. The value of the inflation-linked bond’s
principal or the interest income paid on the bond
is adjusted to track changes in an official inflation
measure. The value of inflation-linked bonds is
expected to change in response to changes in real
interest rates. Real interest rates are tied to the
relationship between nominal interest rates and the
rate of inflation. If nominal interest rates increase
at a faster rate than inflation, real interest rates may
rise, leading to a decrease in the value of inflationlinked bonds.
PO 00000
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57145
enhance capital, while minimizing
volatility. The Sub-Adviser will
continually review fundamental
economic and structural themes that
impact long- and medium-term asset
returns in emerging markets. The SubAdviser will also consider shorter-term
market drivers such as valuations,
liquidity conditions, and sentiment to
determine the appropriate positioning of
the Fund’s investments. The SubAdviser will adjust the portfolio’s
country allocations, duration, and
individual security positioning to reflect
the most attractive opportunities on a
continuous basis.
The Fund’s exposure to any single
country generally will be limited to 20%
of the Fund’s net assets (although this
percentage may change from time to
time in response to economic events).
The percentage of Fund assets invested
in a specific region, country, or issuer
will change from time to time. The Fund
intends, initially, to invest in Debt
Instruments of issuers in the following
countries: Brazil, Chile, Colombia,
Hungary, Indonesia, Israel, Malaysia,
Mexico, Nigeria, Peru, Philippines,
Poland, Romania, Russia, South Africa,
South Korea, Thailand, Turkey, and
Uruguay. This list may change as market
developments occur and may include
additional issuers. The Fund will invest
only in Debt Instruments that, at the
time of purchase, are performing, and
not in default or distressed; however,
the Debt Instruments in which the Fund
invests may become non-performing,
distressed, or defaulted subsequent to
purchase and the Fund may continue to
hold such Debt Instruments. The Fund
may invest in Debt Instruments of any
credit quality,11 including unrated
securities, and with effective or final
maturities of any length.
Liquidity will be a substantial factor
in the Fund’s security selection
process.12 Under normal market
conditions, at least 80% of the Fund’s
net assets that are invested in Debt
11 The universe of emerging markets local
currency debt currently includes securities that are
rated ‘‘investment grade’’ as well as ‘‘noninvestment grade’’ securities. The Fund will invest
in both investment-grade and non-investment-grade
securities, as well as unrated securities. There is no
limit on the amount of the Fund’s assets that may
be invested in non-investment grade and unrated
securities.
12 In reaching liquidity decisions, the Adviser
and/or the Sub-Adviser may consider the following
factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase
or sell the security and the number of other
potential purchasers; dealer undertakings to make
a market in the security; and the nature of the
security and the nature of the marketplace in which
it trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the
mechanics of transfer).
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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Notices
Instruments will be invested in Debt
Instruments that are issued by issuers
with outstanding debt of at least $200
million (or the foreign currency
equivalent thereof).
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Investments in Derivative Instruments
and Foreign Currencies
The Fund’s investments in derivative
instruments will be made in accordance
with the 1940 Act and consistent with
the Fund’s investment objective and
policies. Under normal market
conditions, no more than 20% of the
value of the Fund’s net assets will be
invested in derivative instruments.
Derivatives are financial contracts
whose value depends upon, or is
derived from, the value of an underlying
asset, reference rate, or index, and may
relate to, among other things, interest
rates, currencies, or currency exchange
rates. The Fund may, but is not required
to, use derivative instruments for risk
management purposes or as part of its
investment strategies. The Fund may
invest in exchange-listed futures
contracts,13 exchange-listed options,14
exchange-listed options on futures
contracts, forward currency contracts,
non-deliverable forward currency
contracts, and exchange-listed currency
options.15
The Fund will use derivative
instruments primarily to hedge interest
rate and foreign currency risk and to
actively manage interest rate and foreign
currency exposure. The Fund may also
use derivative instruments to enhance
returns, as a substitute for, or to gain
exposure to, a position in an underlying
asset, to reduce transaction costs, to
maintain full market exposure (i.e., to
adjust the characteristics of its
investments to more closely
approximate those of the markets in
which it invests), to manage cash flows,
or to preserve capital.16 The Fund’s
13 The Fund will use futures contracts to hedge
interest rate risk and to actively manage interest rate
exposure.
14 Option purchases and sales can be used to help
manage exposures (i.e., exposures to interest rates
and/or currencies) more efficiently in the portfolio,
while limiting downside.
15 At least 90% of the Fund’s net assets that are
invested in exchange-traded derivative instruments
will be invested in instruments that trade in
markets that are members of the Intermarket
Surveillance Group (‘‘ISG’’) or are parties to a
comprehensive surveillance sharing agreement with
the Exchange.
16 The Fund will seek, where possible, to use
counterparties whose financial status is such that
the risk of default is reduced; however, the risk of
losses resulting from default is still possible. The
Adviser and/or the Sub-Adviser will evaluate the
creditworthiness of counterparties on an ongoing
basis. In addition to information provided by credit
agencies, the Adviser’s and/or the Sub-Adviser’s
analysis will evaluate each approved counterparty
using various methods of analysis and may consider
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18:41 Sep 23, 2014
Jkt 232001
investments in derivative instruments
will not be used to seek to achieve a
multiple or inverse multiple of an
index.
The Fund will invest in foreign
currencies and Debt Instruments
denominated in foreign (non-U.S.)
currencies, and will receive revenues in
foreign currencies. In addition, the Fund
may engage in foreign currency
transactions on a spot (cash) basis and,
as indicated above, enter into forward
currency contracts.17 A forward
currency contract, which involves an
obligation to purchase or sell a specific
currency at a future date at a price set
at the time of the contract, reduces the
Fund’s exposure to changes in the value
of the currency it will deliver and
increases its exposure to changes in the
value of the currency it will receive for
the duration of the contract. Certain
foreign currency transactions (i.e., nondeliverable forward currency contracts)
may also be settled in cash rather than
the actual delivery of the relevant
currency. The effect on the value of the
Fund is similar to selling securities
denominated in one currency and
purchasing securities denominated in
another currency. A contract to sell
foreign currency would limit any
potential gain which might be realized
if the value of the hedged currency
increases. The Fund may enter into
these contracts to hedge against foreign
exchange risk, to increase exposure to a
foreign currency, or to shift exposure to
foreign currency fluctuations from one
currency to another. Suitable hedging
transactions may not be available in all
circumstances and there can be no
assurance that the Fund will engage in
such transactions at any given time or
from time to time.
The Fund will comply with the
regulatory requirements of the
Commission to maintain assets as
‘‘cover,’’ maintain segregated accounts,
and/or make margin payments when it
takes positions in derivative
instruments involving obligations to
third parties (i.e., instruments other
than purchase options). If the applicable
guidelines prescribed under the 1940
such factors as the counterparty’s liquidity, its
reputation, the Adviser’s and/or Sub-Adviser’s past
experience with the counterparty, its known
disciplinary history, and its share of market
participation.
17 At least 90% of the Fund’s net assets that are
invested in foreign currencies will be invested in
currencies with a minimum average daily foreign
exchange turnover of USD $1 billion as determined
by the Bank for International Settlements (‘‘BIS’’)
Triennial Central Bank Survey. As of the most
recent BIS Triennial Central Bank Survey, at least
52 separate currencies had minimum average daily
foreign exchange turnover of USD $1 billion. For a
list of eligible BIS currencies, see www.bis.org.
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
Act so require, the Fund will earmark or
set aside cash, U.S. government
securities, high grade liquid debt
securities, and/or other liquid assets
permitted by the Commission in a
segregated custodial account in the
amount prescribed.
Other Investments and Investment
Restrictions
Under normal market conditions, the
Fund will invest substantially all of its
assets to meet its investment objective
and, as described above, the Fund may
invest in derivative instruments and
foreign currencies. In addition, the Fund
may invest its remaining assets as
described below.
The Fund may invest up to 20% of its
net assets in non-U.S. corporate bonds
that are not included within the
meaning of the term ‘‘Debt Instruments’’
(referred to as ‘‘Corporate Bonds’’). The
Fund will invest only in Corporate
Bonds that the Adviser and/or the SubAdviser deems to be sufficiently
liquid.18 Under normal market
conditions, a Corporate Bond must have
$200 million (or the foreign currency
equivalent thereof) or more par amount
outstanding and significant par value
traded to be considered as an eligible
investment. Economic and other
conditions may, from time to time, lead
to a decrease in the average par amount
outstanding of non-U.S. corporate bond
issuances. Therefore, although the Fund
does not intend to do so, the Fund may
invest up to 5% of its net assets in
Corporate Bonds with less than $200
million (or the foreign currency
equivalent thereof) par amount
outstanding if (i) the Adviser and/or the
Sub-Adviser deems such securities to be
sufficiently liquid and (ii) such
investment is deemed by the Adviser
and/or the Sub-Adviser to be in the best
interest of the Fund.
The Fund may invest up to 20% of its
net assets in short-term debt securities
(as described in the following
paragraph) that are not included within
the meaning of the term ‘‘Debt
Instruments,’’ 19 money market funds,
and other cash equivalents, or it may
hold cash. For temporary defensive
purposes, during the initial invest-up
period, and during periods of high cash
inflows or outflows, the Fund may
depart from its principal investment
18 See
supra note 12.
debt securities are securities from
issuers having a long-term debt rating of at least A
by Standard & Poor’s Ratings Services (‘‘S&P
Ratings’’), Moody’s Investors Service, Inc.
(‘‘Moody’s’’), or Fitch Ratings (‘‘Fitch’’) and having
a maturity of one year or less. For the sake of
clarity, the foregoing parameters do not apply to
Debt Instruments.
19 Short-term
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strategies and invest part or all of its
assets in these securities or it may hold
cash. During such periods, the Fund
may not be able to achieve its
investment objective. The Fund may
adopt a defensive strategy when the
Adviser and/or Sub-Adviser believes
that securities in which the Fund
normally invests have elevated risks due
to political or economic factors and in
other extraordinary circumstances. The
use of temporary investments will not
be a part of a principal investment
strategy of the Fund.
Short-term debt securities are the
following: (1) Fixed rate and floating
rate U.S. government securities,
including bills, notes, and bonds
differing as to maturity and rates of
interest, which are either issued or
guaranteed by the U.S. Treasury or by
U.S. government agencies or
instrumentalities; (2) short-term
securities issued or guaranteed by nonU.S. governments or by their agencies or
instrumentalities; 20 (3) certificates of
deposit issued against funds deposited
in a bank or savings and loan
association; (4) bankers’ acceptances,
which are short-term credit instruments
used to finance commercial
transactions; (5) repurchase
agreements,21 which involve purchases
of debt securities; (6) bank time
deposits, which are monies kept on
deposit with banks or savings and loan
associations for a stated period of time
at a fixed rate of interest; (7) commercial
paper, which is short-term unsecured
promissory notes; 22 and (8) other
securities that are similar to the
foregoing.
The Fund may invest up to 20% of its
net assets in the securities of money
market funds (as noted above) and other
exchange-traded funds (‘‘ETFs’’) 23 that
20 The relevant non-U.S. government, agency, or
instrumentality must have a long-term debt rating
of at least A by S&P Ratings, Moody’s, or Fitch. For
the sake of clarity, the foregoing ratings requirement
does not apply to Debt Instruments.
21 The Fund intends to enter into repurchase
agreements only with financial institutions and
dealers believed by the Sub-Adviser to present
minimal credit risks in accordance with criteria
approved by the Board of Trustees of the Trust
(‘‘Trust Board’’). The Sub-Adviser will review and
monitor the creditworthiness of such institutions.
The Sub-Adviser will monitor the value of the
collateral at the time the transaction is entered into
and at all times during the term of the repurchase
agreement.
22 Except for commercial paper that is included
within the meaning of the term ‘‘Debt Instruments,’’
the Fund will only invest in commercial paper
rated A–1 or higher by S&P Ratings, Prime-1 or
higher by Moody’s, or F1 or higher by Fitch.
23 An ETF is an investment company registered
under the 1940 Act that holds a portfolio of
securities. Many ETFs are designed to track the
performance of a securities index, including
industry, sector, country, and region indexes. ETFs
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18:41 Sep 23, 2014
Jkt 232001
invest primarily in short-term debt
securities or Debt Instruments. Except
for these investments in other
investment companies, the Fund will
not invest directly in equity securities.24
The ETFs in which the Fund will invest
will be exchange-listed and trade in
markets that are members of ISG or are
parties to a comprehensive surveillance
sharing agreement with the Exchange.
The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment), including Rule 144A
securities deemed illiquid by the
Adviser and/or the Sub-Adviser.25 The
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 the 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 Fund may not invest 25% or
more of the value of its total assets in
securities of issuers in any one industry.
This restriction does not apply to (a)
obligations issued or guaranteed by the
U.S. government, its agencies, or
instrumentalities, or (b) securities of
other investment companies.
The Fund may purchase securities on
a when-issued or other delayed delivery
basis and may enter into reverse
repurchase agreements. Reverse
repurchase agreements will not be used
by the Fund to enhance leverage.
The Fund will seek to qualify for
treatment as a Regulated Investment
included in the Fund will be listed and traded in
the U.S. on registered exchanges. The Fund may
invest in the securities of ETFs in excess of the
limits imposed under the 1940 Act pursuant to
exemptive orders obtained by other ETFs and their
sponsors from the Commission. In addition, the
Fund may invest in the securities of certain other
investment companies (including without
limitation ETFs) in excess of the limits imposed
under the 1940 Act pursuant to an exemptive order
that the Trust has obtained from the Commission.
See Investment Company Act Release No. 30377
(February 5, 2013) (File No. 812–13895). The ETFs
in which the Fund may invest include Index Fund
Shares (as described in Nasdaq Rule 5705), Portfolio
Depository Receipts (as described in Nasdaq Rule
5705), and Managed Fund Shares (as described in
Nasdaq Rule 5735). While the Fund may invest in
inverse ETFs, the Fund will not invest in leveraged
or inverse leveraged (e.g., 2X or –3X) ETFs.
24 It is possible, however, that an investment
company in which the Fund invests will invest a
portion of its assets in foreign and/or domestic
equity securities.
25 See supra note 12.
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57147
Company under Subchapter M of the
Internal Revenue Code of 1986, as
amended.
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.26 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,27 which requires, among
other things, that the Exchange’s rules
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission notes
that the Fund 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,28 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,29 as defined in Nasdaq Rule
26 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).
27 15 U.S.C. 78f(b)(5).
28 15 U.S.C. 78k–1(a)(1)(C)(iii).
29 According to the Exchange, the Intraday
Indicative Value reflects an estimated intraday
value of the Fund’s Disclosed Portfolio and will be
based upon the current value for the components
of a Disclosed Portfolio. The Exchange states that
the Intraday Indicative Value will be based on
quotes and closing prices from the securities’ local
market and may not reflect events that occur
subsequent to the local market’s close, that
premiums and discounts between the Intraday
Indicative Value and the market price may occur,
and that the Intraday Indicative Value should not
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asabaliauskas on DSK5VPTVN1PROD with NOTICES
5735(c)(3), for the Fund will be
available on the NASDAQ OMX
Information LLC proprietary index data
service, and will be updated and widely
disseminated by one or more major
market data vendors and broadly
displayed at least every 15 seconds
during the Regular Market Session.30 On
each business day, before
commencement of trading in Shares in
the Regular Market Session 31 on the
Exchange, the Fund will disclose on its
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 the
Fund that will form the basis for the
Fund’s calculation of NAV at the end of
the business day.32 The Fund’s
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
the estimated amount of cash (if any),
constituting the creation basket for the
Fund for that day. The NAV of the Fund
will be determined as of the close of
trading (normally 4:00 p.m., Eastern
Time) on each day the New York Stock
Exchange is open for business.33
be viewed as a ‘‘real time’’ update of the NAV per
Share of the Fund, which is calculated only once
a day.
30 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.
31 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).
32 On a daily basis, the Fund will disclose on the
Fund’s Web site the following information
regarding each portfolio holding, as applicable to
the type of holding: ticker symbol, CUSIP number
or other identifier, if any; a description of the
holding (including the type of holding); the identity
of the security or other asset or instrument
underlying the holding, if any; for options, the
option strike price; quantity held (as measured by,
for example, par value, notional value or number
of shares, contracts or units); maturity date, if any;
coupon rate, if any; effective date, if any; market
value of the holding; and the percentage weighting
of the holding in the Fund’s portfolio. The Fund’s
disclosure of derivative positions in the Disclosed
Portfolio will include information that market
participants can use to value these positions
intraday. This Web site information will be publicly
available at no charge.
33 NAV per Share will be calculated for the Fund
by taking the market price of the Fund’s total assets,
including interest or dividends accrued but not yet
collected, less all liabilities, dividing such amount
by the total number of Shares outstanding, and
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18:41 Sep 23, 2014
Jkt 232001
rounding to the nearest cent. The Fund’s
investments will be valued daily at market value or,
in the absence of market value with respect to any
investment, at fair value, in each case in accordance
with valuation procedures, which may be revised
from time to time, adopted by the Trust Board
(‘‘Valuation Procedures’’) and in accordance with
the 1940 Act. A market valuation generally means
a valuation (i) obtained from an exchange, an
independent pricing service (‘‘Pricing Service’’), or
a major market maker or dealer, or (ii) based on a
price quotation or other equivalent indication of
value supplied by an exchange, a Pricing Service,
or a major market maker or dealer. Certain
securities, including Debt Instruments, in which the
Fund will invest will not be listed on any securities
exchange or board of trade. Such securities will
typically be bought and sold by institutional
investors in individually negotiated private
transactions that function in many respects like an
over-the-counter secondary market, although
typically no formal market makers will exist.
Certain securities, particularly debt securities, will
have few or no trades, or trade infrequently, and
information regarding a specific security may not be
widely available or may be incomplete.
Accordingly, determinations of the fair value of
debt securities may be based on infrequent and
dated information. Because there is less reliable,
objective data available, elements of judgment may
play a greater role in valuation of debt securities
than for other types of securities. Typically, Debt
Instruments and other debt securities in which the
Fund may invest will be valued using information
provided by a Pricing Service. To the extent debt
securities have a remaining maturity of 60 days or
less when purchased, they will be valued at cost
adjusted for amortization of premiums and
accretion of discounts. Overnight repurchase
agreements will be valued at cost. Term repurchase
agreements (i.e., those whose maturity exceeds
seven days) will be valued at the average of the bid
quotations obtained daily from at least two
recognized dealers. ETFs listed on any exchange
other than the Exchange will be valued at the last
sale price on the exchange on which they are
principally traded on the business day as of which
such value is being determined. ETFs listed on the
Exchange will be valued at the official closing price
on the business day as of which such value is being
determined. If there has been no sale on such day,
or no official closing price in the case of ETFs
traded on the Exchange, the ETFs will be valued
using fair value pricing. ETFs traded on more than
one securities exchange will be valued at the last
sale price or official closing price, as applicable, on
the business day as of which such value is being
determined at the close of the exchange
representing the principal market for such ETFs.
Shares of money market funds will be valued at
their net asset values as reported by such funds to
Pricing Services. Exchange-traded options and
futures contracts will be valued at the closing price
in the market where such contracts are principally
traded. Forward currency contracts and nondeliverable forward currency contracts will be
valued at the current day’s interpolated foreign
exchange rate, as calculated using the current day’s
spot rate, and the thirty, sixty, ninety, and onehundred-eighty day forward rates provided by a
Pricing Service or by certain independent dealers in
such contracts. Certain securities may not be able
to be priced by pre-established pricing methods.
Such securities may be valued by the Trust Board
or its delegate at fair value. The use of fair value
pricing by the Fund will be governed by the
Valuation Procedures and conducted in accordance
with the provisions of the 1940 Act. Valuing the
Fund’s securities using fair value pricing will result
in using prices for those securities that may differ
from current market valuations or official closing
prices on the applicable exchange. Because foreign
securities exchanges may be open on different days
than the days during which an investor may
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Information regarding market price and
trading volume of the Shares will be
continually available on a real-time
basis throughout the day on brokers’
computer screens and other electronic
services. Information regarding the
previous day’s closing price and trading
volume information for the Shares will
be published daily in the financial
section of newspapers. Quotation and
last sale information for ETFs will be
available via the CTA high-speed line,
and will be available from the national
securities exchange on which they are
listed. Pricing information for ETFs and
exchange-traded derivative instruments
will be available from the exchanges on
which they trade and from major market
data vendors. Pricing information for
Debt Instruments, forward currency
contracts, non-deliverable forward
currency contracts, and other debt
securities in which the Fund may invest
will be available from major brokerdealer firms, major market data vendors
and/or Pricing Services. Money market
funds are typically priced once each
business day and their prices will be
available through the applicable fund’s
Web site or major market data vendors.
The Fund’s Web site, which will be
publicly available prior to the public
offering of Shares, will include a form
of the prospectus for the Fund 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 Fund 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
purchase or sell Shares, the value of the Fund’s
securities may change on days when investors are
not able to purchase or sell Shares. Assets
denominated in foreign currencies will be
translated into U.S. dollars at the exchange rate of
such currencies against the U.S. dollar as provided
by a Pricing Service. The value of assets
denominated in foreign currencies will be
converted into U.S. dollars at the exchange rates in
effect at the time of valuation.
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asabaliauskas on DSK5VPTVN1PROD with NOTICES
Exchange, make trading in the Shares
inadvisable,34 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 Fund 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
components of the portfolio.35 In
addition, the Exchange states that, while
neither the Adviser nor the Sub-Adviser
is registered as a broker-dealer, each of
the Adviser and the Sub-Adviser is
affiliated with a broker-dealer and has
implemented a fire wall with respect to
that broker-dealer regarding access to
information concerning the composition
of, or changes to, the portfolio, and that
personnel who make decisions on the
Fund’s portfolio composition will be
subject to procedures designed to
prevent the use and dissemination of
material non-public information
regarding the Fund’s portfolio.36 The
Exchange represents that trading in the
Shares will be subject to the existing
trading surveillances, administered by
34 These reasons may include: (1) the extent to
which trading is not occurring in the securities or
other assets constituting the Disclosed Portfolio of
the Fund; 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 Fund.
35 See Nasdaq Rule 5735(d)(2)(B)(ii).
36 See supra note 6. 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,
the Sub-Adviser and their 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.
VerDate Sep<11>2014
18:41 Sep 23, 2014
Jkt 232001
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.37 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. 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 the
following representations:
(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
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. FINRA, on behalf of the Exchange,
will communicate as needed regarding
trading in the Shares and the exchangetraded securities and instruments held
by the Fund with other markets and
other entities that are members of ISG,
and FINRA may obtain trading
information regarding trading in the
Shares and the 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 the exchange-traded
securities and instruments held by the
Fund from markets and other entities
that are members of ISG, which includes
securities and futures exchanges, or
with which the Exchange has in place
a comprehensive surveillance sharing
37 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.
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Sfmt 4703
57149
agreement. Moreover, FINRA, on behalf
of the Exchange, will be able to access,
as needed, trade information for certain
fixed income securities held by the
Fund reported to FINRA’s Trade
Reporting and Compliance Engine.
(4) 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
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.
(5) For initial and continued listing,
the Fund must be in compliance with
Rule 10A–3 under the Act.38
(6) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment), including Rule
144A securities deemed illiquid by the
Adviser and/or the Sub-Adviser. The
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 the Fund’s net assets are held in
illiquid assets.
(7) Under normal market conditions,
the Fund will invest at least 80% of its
net assets (including investment
borrowings) in Debt Instruments. The
Fund will invest in Debt Instruments
issued by at least 13 non-affiliated
issuers. The Fund’s exposure to any
single country generally will be limited
to 20% of the Fund’s net assets
(although this percentage may change
from time to time in response to
economic events). The Fund will invest
38 See
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24SEN1
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only in Debt Instruments that, at the
time of purchase, are performing.
(8) Under normal market conditions,
at least 80% of the Fund’s net assets that
are invested in Debt Instruments will be
invested in Debt Instruments that are
issued by issuers with outstanding debt
of at least $200 million (or the foreign
currency equivalent thereof).
(9) Under normal market conditions,
no more than 20% of the value of the
Fund’s net assets will be invested in
derivative instruments. The Fund’s
investments in derivative instruments
will be made in accordance with the
1940 Act and consistent with the Fund’s
investment objective and policies. The
Fund’s investments in derivative
instruments will not be used to seek to
achieve a multiple or inverse multiple
of an index.
(10) At least 90% of the Fund’s net
assets that are invested in exchangetraded derivative instruments will be
invested in instruments that trade in
markets that are members of ISG or are
parties to a comprehensive surveillance
sharing agreement with the Exchange.
(11) The Fund will seek, where
possible, to use counterparties whose
financial status is such that the risk of
default is reduced. The Adviser and/or
the Sub-Adviser will evaluate the
creditworthiness of counterparties on an
ongoing basis.
(12) At least 90% of the Fund’s net
assets that are invested in foreign
currencies will be invested in currencies
with a minimum average daily foreign
exchange turnover of USD $1 billion as
determined by the BIS Triennial Central
Bank Survey.
(13) The Fund will comply with the
regulatory requirements of the
Commission to maintain assets as
‘‘cover,’’ maintain segregated accounts,
and/or make margin payments when it
takes positions in derivative
instruments involving obligations to
third parties (i.e., instruments other
than purchase options). If the applicable
guidelines prescribed under the 1940
Act so require, the Fund will earmark or
set aside cash, U.S. government
securities, high grade liquid debt
securities, and/or other liquid assets
permitted by the Commission in a
segregated custodial account in the
amount prescribed.
(14) The Fund may invest up to 20%
of its net assets in Corporate Bonds.
Under normal market conditions, a
Corporate Bond must have $200 million
(or the foreign currency equivalent
thereof) or more par amount outstanding
and significant par value traded to be
considered as an eligible investment.
Although the Fund does not intend to
do so, the Fund may invest up to 5% of
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18:41 Sep 23, 2014
Jkt 232001
its net assets in Corporate Bonds with
less than $200 million (or the foreign
currency equivalent thereof) par amount
outstanding if (i) the Adviser and/or the
Sub-Adviser deems such securities to be
sufficiently liquid and (ii) such
investment is deemed by the Adviser
and/or the Sub-Adviser to be in the best
interest of the Fund.
(15) The Fund intends to enter into
repurchase agreements only with
financial institutions and dealers
believed by the Sub-Adviser to present
minimal credit risks in accordance with
criteria approved by the Trust Board.
The Sub-Adviser will review and
monitor the creditworthiness of such
institutions. The Sub-Adviser will
monitor the value of the collateral at the
time the transaction is entered into and
at all times during the term of the
repurchase agreement.
(16) The ETFs in which the Fund will
invest will be exchange-listed and trade
in markets that are members of ISG or
are parties to a comprehensive
surveillance sharing agreement with the
Exchange.
(17) Reverse repurchase agreements
will not be used by the Fund to enhance
leverage.
(18) A minimum of 100,000 Shares
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 39 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,40 that the
proposed rule change (SR–NASDAQ–
2014–073), 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.41
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–22670 Filed 9–23–14; 8:45 am]
BILLING CODE 8011–01–P
39 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
41 17 CFR 200.30–3(a)(12).
40 15
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73142; File No. SR–
NASDAQ–2014–065]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove
Proposed Rule Change To Adopt New
Rule 5713 and List Paired Class Shares
Issued by AccuShares® Commodities
Trust I
September 18, 2014.
On June 11, 2014, The NASDAQ
Stock Market LLC (‘‘NASDAQ’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to:
(1) adopt listing standards for Paired
Class Shares in new Rule 5713; and (2)
list and trade Paired Class Shares
(‘‘Shares’’) issued by AccuShares®
Commodities Trust I (‘‘Trust’’) relating
to the following funds pursuant to new
Rule 5713: (a) AccuShares S&P GSCI®
Spot Fund; (b) AccuShares S&P GSCI®
Agriculture and Livestock Spot Fund;
(c) AccuShares S&P GSCI® Industrial
Metals Spot Fund; (d) AccuShares S&P
GSCI® Crude Oil Spot Fund; (e)
AccuShares S&P GSCI® Brent Oil Spot
Fund; (f) AccuShares S&P GSCI®
Natural Gas Spot Fund; and (g)
AccuShares Spot CBOE® VIX® Fund
(each individually, ‘‘Fund,’’ and,
collectively, ‘‘Funds’’). The proposed
rule change was published for comment
in the Federal Register on June 23,
2014.3 On August 6, 2014, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change.5
The Commission received no comments
on the proposal. This Order institutes
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 72412
(June 17, 2014), 79 FR 35610 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 72779,
79 FR 47162 (August 12, 2014). The Commission
designated a longer period within which to take
action on the proposed rule change and designated
September 19, 2014 as the date by which it should
approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule
change.
6 15 U.S.C. 78s(b)(2)(B).
2 17
E:\FR\FM\24SEN1.SGM
24SEN1
]]>Agencies
[Federal Register Volume 79, Number 185 (Wednesday, September 24, 2014)]
[Notices]
[Pages 57144-57150]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22670]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73140; File No. SR-NASDAQ-2014-073]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule Change, as Modified by Amendment No.
1, To List and Trade Shares of the First Trust Emerging Markets Local
Currency Bond ETF of First Trust Exchange-Traded Fund III
September 18, 2014.
I. Introduction
On July 18, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the First
Trust Emerging Markets Local Currency Bond ETF (``Fund'') under Nasdaq
Rule 5735. The Exchange filed Amendment No. 1 to the proposal on July
25, 2014.\3\ The proposed rule change, as modified by Amendment No. 1,
was published for comment in the Federal Register on August 5, 2014.\4\
The Commission received no comments on the proposed rule change. This
order grants approval of the proposed rule change, as modified by
Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 clarified that reverse repurchase agreements
will not be used by the Fund to enhance leverage.
\4\ See Securities Exchange Act Release No. 72716 (July 30,
2014), 79 FR 45535 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant
to Nasdaq Rule 5735, which governs the listing and trading of Managed
Fund Shares on the Exchange. The Shares will be offered by First Trust
Exchange-Traded Fund III (``Trust''), which was established as a
Massachusetts business trust on January 9, 2008.\5\ The Fund will
[[Page 57145]]
be a series of the Trust. First Trust Advisors L.P. will be the
investment adviser (``Adviser'') to the Fund. First Trust Global
Portfolios Ltd will serve as investment sub-adviser (``Sub-Adviser'')
to the Fund and provide day-to-day portfolio management.\6\ First Trust
Portfolios L.P. (``Distributor'') will be the principal underwriter and
distributor of the Fund's Shares. Brown Brothers Harriman & Co. will
act as the administrator, accounting agent, custodian, and transfer
agent to the Fund.
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\5\ According to the Exchange, the Trust is registered with the
Commission as an investment company and has filed a registration
statement on Form N-1A (``Registration Statement'') with the
Commission. See Post-Effective Amendment No. 10 to Registration
Statement on Form N-1A for the Trust, dated July 8, 2014 (File Nos.
333-176976 and 811-22245). The Exchange states that the Commission
has issued an order granting certain exemptive relief to the Trust
under the Investment Company Act of 1940 (``1940 Act''). See
Investment Company Act Release No. 30029 (April 10, 2012) (File No.
812-13795) (``Exemptive Relief''). In addition, the Exchange states
that the Commission has issued no-action relief pertaining to the
Fund's ability to invest in derivatives, notwithstanding certain
representations in the application for the Exemptive Relief. See
Commission No-Action Letter (December 6, 2012).
\6\ The Exchange states that neither the Adviser nor the Sub-
Adviser is a broker-dealer; however, both the Adviser and the Sub-
Adviser are affiliated with the Distributor (as defined herein),
which is a broker-dealer. The Exchange represents that the Adviser
and the Sub-Adviser have each implemented a fire wall with respect
to their broker-dealer affiliate regarding access to information
concerning the composition of or changes to the portfolio. The
Exchange further represents that personnel who make decisions on the
Fund's portfolio composition will be subject to procedures designed
to prevent the use and dissemination of material non-public
information regarding the Fund's portfolio. In addition, the
Exchange represents that in the event (a) the Adviser or the Sub-
Adviser becomes, or 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 or any new adviser or sub-
adviser, as applicable, will implement a fire wall with respect to
its relevant personnel and/or such broker-dealer affiliate, as
applicable, regarding access to information concerning the
composition of or changes to the portfolio, and the Adviser or Sub-
Adviser or any new adviser or sub-adviser, as applicable, will be
subject to procedures designed to prevent the use and dissemination
of material non-public information regarding the portfolio.
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The Exchange has made the following representations and statements
in describing the Fund and its principal investments, investments in
derivatives and foreign currencies, and other investments and
investment restrictions.\7\
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\7\ The Commission notes that additional information regarding
the Trust, the Fund, and the Shares, including investment
strategies, risks, creation and redemption procedures, calculation
of net asset value (``NAV''), fees, portfolio holdings disclosure
policies, distributions, and taxes, among other things, can be found
in the Notice and Registration Statement, as applicable. See supra
notes 4 and 5, respectively.
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Principal Investments
The investment objective of the Fund will be to seek maximum total
return and current income. Under normal market conditions,\8\ the Fund
will invest at least 80% of its net assets (including investment
borrowings) in bonds, notes, bills, certificates of deposit, time
deposits, commercial paper, and loans issued by issuers in emerging
market \9\ countries (``Debt Instruments'') that are denominated in the
local currency of the issuer. Debt Instruments will be issued or
guaranteed (as applicable) by: (i) Foreign governments (which may be
local foreign governments); (ii) instrumentalities, agencies, or other
political subdivisions of foreign governments (which may be local
foreign governments); (iii) central banks, sovereign entities,
supranational issuers, or development agencies; or (iv) entities or
enterprises organized, owned, backed, or sponsored by any of the
entities set forth in the foregoing clauses (i)-(iii).\10\ The Fund
will invest in Debt Instruments issued by at least 13 non-affiliated
issuers.
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\8\ 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 fixed income 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.
\9\ According to the Adviser and the Sub-Adviser, while there is
no universally accepted definition of what constitutes an ``emerging
market,'' in general, emerging market countries are characterized by
developing commercial and financial infrastructure with significant
potential for economic growth and increased capital market
participation by foreign investors. The Adviser and Sub-Adviser will
look at a variety of commonly-used factors when determining whether
a country is an ``emerging'' market. In general, the Adviser and
Sub-Adviser will consider a country to be an emerging market if it
is classified by the World Bank in the lower, lower middle, or upper
middle income designation for one of the past three years. This
definition could be expanded or exceptions could be made depending
on the evolution of market and economic conditions.
\10\ Debt Instruments include fixed rate, floating rate, and
index-linked debt obligations. In addition, Debt Instruments include
inflation-linked bonds. Inflation-linked bonds are fixed income
securities that are structured to provide protection against
inflation. The value of the inflation-linked bond's principal or the
interest income paid on the bond is adjusted to track changes in an
official inflation measure. The value of inflation-linked bonds is
expected to change in response to changes in real interest rates.
Real interest rates are tied to the relationship between nominal
interest rates and the rate of inflation. If nominal interest rates
increase at a faster rate than inflation, real interest rates may
rise, leading to a decrease in the value of inflation-linked bonds.
---------------------------------------------------------------------------
In implementing the Fund's investment strategy, the Sub-Adviser
will seek to provide current income and enhance capital, while
minimizing volatility. The Sub-Adviser will continually review
fundamental economic and structural themes that impact long- and
medium-term asset returns in emerging markets. The Sub-Adviser will
also consider shorter-term market drivers such as valuations, liquidity
conditions, and sentiment to determine the appropriate positioning of
the Fund's investments. The Sub-Adviser will adjust the portfolio's
country allocations, duration, and individual security positioning to
reflect the most attractive opportunities on a continuous basis.
The Fund's exposure to any single country generally will be limited
to 20% of the Fund's net assets (although this percentage may change
from time to time in response to economic events). The percentage of
Fund assets invested in a specific region, country, or issuer will
change from time to time. The Fund intends, initially, to invest in
Debt Instruments of issuers in the following countries: Brazil, Chile,
Colombia, Hungary, Indonesia, Israel, Malaysia, Mexico, Nigeria, Peru,
Philippines, Poland, Romania, Russia, South Africa, South Korea,
Thailand, Turkey, and Uruguay. This list may change as market
developments occur and may include additional issuers. The Fund will
invest only in Debt Instruments that, at the time of purchase, are
performing, and not in default or distressed; however, the Debt
Instruments in which the Fund invests may become non-performing,
distressed, or defaulted subsequent to purchase and the Fund may
continue to hold such Debt Instruments. The Fund may invest in Debt
Instruments of any credit quality,\11\ including unrated securities,
and with effective or final maturities of any length.
---------------------------------------------------------------------------
\11\ The universe of emerging markets local currency debt
currently includes securities that are rated ``investment grade'' as
well as ``non-investment grade'' securities. The Fund will invest in
both investment-grade and non-investment-grade securities, as well
as unrated securities. There is no limit on the amount of the Fund's
assets that may be invested in non-investment grade and unrated
securities.
---------------------------------------------------------------------------
Liquidity will be a substantial factor in the Fund's security
selection process.\12\ Under normal market conditions, at least 80% of
the Fund's net assets that are invested in Debt
[[Page 57146]]
Instruments will be invested in Debt Instruments that are issued by
issuers with outstanding debt of at least $200 million (or the foreign
currency equivalent thereof).
---------------------------------------------------------------------------
\12\ In reaching liquidity decisions, the Adviser and/or the
Sub-Adviser may consider the following factors: the frequency of
trades and quotes for the security; the number of dealers wishing to
purchase or sell the security and the number of other potential
purchasers; dealer undertakings to make a market in the security;
and the nature of the security and the nature of the marketplace in
which it trades (e.g., the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of transfer).
---------------------------------------------------------------------------
Investments in Derivative Instruments and Foreign Currencies
The Fund's investments in derivative instruments will be made in
accordance with the 1940 Act and consistent with the Fund's investment
objective and policies. Under normal market conditions, no more than
20% of the value of the Fund's net assets will be invested in
derivative instruments. Derivatives are financial contracts whose value
depends upon, or is derived from, the value of an underlying asset,
reference rate, or index, and may relate to, among other things,
interest rates, currencies, or currency exchange rates. The Fund may,
but is not required to, use derivative instruments for risk management
purposes or as part of its investment strategies. The Fund may invest
in exchange-listed futures contracts,\13\ exchange-listed options,\14\
exchange-listed options on futures contracts, forward currency
contracts, non-deliverable forward currency contracts, and exchange-
listed currency options.\15\
---------------------------------------------------------------------------
\13\ The Fund will use futures contracts to hedge interest rate
risk and to actively manage interest rate exposure.
\14\ Option purchases and sales can be used to help manage
exposures (i.e., exposures to interest rates and/or currencies) more
efficiently in the portfolio, while limiting downside.
\15\ At least 90% of the Fund's net assets that are invested in
exchange-traded derivative instruments will be invested in
instruments that trade in markets that are members of the
Intermarket Surveillance Group (``ISG'') or are parties to a
comprehensive surveillance sharing agreement with the Exchange.
---------------------------------------------------------------------------
The Fund will use derivative instruments primarily to hedge
interest rate and foreign currency risk and to actively manage interest
rate and foreign currency exposure. The Fund may also use derivative
instruments to enhance returns, as a substitute for, or to gain
exposure to, a position in an underlying asset, to reduce transaction
costs, to maintain full market exposure (i.e., to adjust the
characteristics of its investments to more closely approximate those of
the markets in which it invests), to manage cash flows, or to preserve
capital.\16\ The Fund's investments in derivative instruments will not
be used to seek to achieve a multiple or inverse multiple of an index.
---------------------------------------------------------------------------
\16\ The Fund will seek, where possible, to use counterparties
whose financial status is such that the risk of default is reduced;
however, the risk of losses resulting from default is still
possible. The Adviser and/or the Sub-Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser's and/or the
Sub-Adviser's analysis will evaluate each approved counterparty
using various methods of analysis and may consider such factors as
the counterparty's liquidity, its reputation, the Adviser's and/or
Sub-Adviser's past experience with the counterparty, its known
disciplinary history, and its share of market participation.
---------------------------------------------------------------------------
The Fund will invest in foreign currencies and Debt Instruments
denominated in foreign (non-U.S.) currencies, and will receive revenues
in foreign currencies. In addition, the Fund may engage in foreign
currency transactions on a spot (cash) basis and, as indicated above,
enter into forward currency contracts.\17\ A forward currency contract,
which involves an obligation to purchase or sell a specific currency at
a future date at a price set at the time of the contract, reduces the
Fund's exposure to changes in the value of the currency it will deliver
and increases its exposure to changes in the value of the currency it
will receive for the duration of the contract. Certain foreign currency
transactions (i.e., non-deliverable forward currency contracts) may
also be settled in cash rather than the actual delivery of the relevant
currency. The effect on the value of the Fund is similar to selling
securities denominated in one currency and purchasing securities
denominated in another currency. A contract to sell foreign currency
would limit any potential gain which might be realized if the value of
the hedged currency increases. The Fund may enter into these contracts
to hedge against foreign exchange risk, to increase exposure to a
foreign currency, or to shift exposure to foreign currency fluctuations
from one currency to another. Suitable hedging transactions may not be
available in all circumstances and there can be no assurance that the
Fund will engage in such transactions at any given time or from time to
time.
---------------------------------------------------------------------------
\17\ At least 90% of the Fund's net assets that are invested in
foreign currencies will be invested in currencies with a minimum
average daily foreign exchange turnover of USD $1 billion as
determined by the Bank for International Settlements (``BIS'')
Triennial Central Bank Survey. As of the most recent BIS Triennial
Central Bank Survey, at least 52 separate currencies had minimum
average daily foreign exchange turnover of USD $1 billion. For a
list of eligible BIS currencies, see www.bis.org.
---------------------------------------------------------------------------
The Fund will comply with the regulatory requirements of the
Commission to maintain assets as ``cover,'' maintain segregated
accounts, and/or make margin payments when it takes positions in
derivative instruments involving obligations to third parties (i.e.,
instruments other than purchase options). If the applicable guidelines
prescribed under the 1940 Act so require, the Fund will earmark or set
aside cash, U.S. government securities, high grade liquid debt
securities, and/or other liquid assets permitted by the Commission in a
segregated custodial account in the amount prescribed.
Other Investments and Investment Restrictions
Under normal market conditions, the Fund will invest substantially
all of its assets to meet its investment objective and, as described
above, the Fund may invest in derivative instruments and foreign
currencies. In addition, the Fund may invest its remaining assets as
described below.
The Fund may invest up to 20% of its net assets in non-U.S.
corporate bonds that are not included within the meaning of the term
``Debt Instruments'' (referred to as ``Corporate Bonds''). The Fund
will invest only in Corporate Bonds that the Adviser and/or the Sub-
Adviser deems to be sufficiently liquid.\18\ Under normal market
conditions, a Corporate Bond must have $200 million (or the foreign
currency equivalent thereof) or more par amount outstanding and
significant par value traded to be considered as an eligible
investment. Economic and other conditions may, from time to time, lead
to a decrease in the average par amount outstanding of non-U.S.
corporate bond issuances. Therefore, although the Fund does not intend
to do so, the Fund may invest up to 5% of its net assets in Corporate
Bonds with less than $200 million (or the foreign currency equivalent
thereof) par amount outstanding if (i) the Adviser and/or the Sub-
Adviser deems such securities to be sufficiently liquid and (ii) such
investment is deemed by the Adviser and/or the Sub-Adviser to be in the
best interest of the Fund.
---------------------------------------------------------------------------
\18\ See supra note 12.
---------------------------------------------------------------------------
The Fund may invest up to 20% of its net assets in short-term debt
securities (as described in the following paragraph) that are not
included within the meaning of the term ``Debt Instruments,'' \19\
money market funds, and other cash equivalents, or it may hold cash.
For temporary defensive purposes, during the initial invest-up period,
and during periods of high cash inflows or outflows, the Fund may
depart from its principal investment
[[Page 57147]]
strategies and invest part or all of its assets in these securities or
it may hold cash. During such periods, the Fund may not be able to
achieve its investment objective. The Fund may adopt a defensive
strategy when the Adviser and/or Sub-Adviser believes that securities
in which the Fund normally invests have elevated risks due to political
or economic factors and in other extraordinary circumstances. The use
of temporary investments will not be a part of a principal investment
strategy of the Fund.
---------------------------------------------------------------------------
\19\ Short-term debt securities are securities from issuers
having a long-term debt rating of at least A by Standard & Poor's
Ratings Services (``S&P Ratings''), Moody's Investors Service, Inc.
(``Moody's''), or Fitch Ratings (``Fitch'') and having a maturity of
one year or less. For the sake of clarity, the foregoing parameters
do not apply to Debt Instruments.
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Short-term debt securities are the following: (1) Fixed rate and
floating rate U.S. government securities, including bills, notes, and
bonds differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities; (2) short-term securities issued or
guaranteed by non-U.S. governments or by their agencies or
instrumentalities; \20\ (3) certificates of deposit issued against
funds deposited in a bank or savings and loan association; (4) bankers'
acceptances, which are short-term credit instruments used to finance
commercial transactions; (5) repurchase agreements,\21\ which involve
purchases of debt securities; (6) bank time deposits, which are monies
kept on deposit with banks or savings and loan associations for a
stated period of time at a fixed rate of interest; (7) commercial
paper, which is short-term unsecured promissory notes; \22\ and (8)
other securities that are similar to the foregoing.
---------------------------------------------------------------------------
\20\ The relevant non-U.S. government, agency, or
instrumentality must have a long-term debt rating of at least A by
S&P Ratings, Moody's, or Fitch. For the sake of clarity, the
foregoing ratings requirement does not apply to Debt Instruments.
\21\ The Fund intends to enter into repurchase agreements only
with financial institutions and dealers believed by the Sub-Adviser
to present minimal credit risks in accordance with criteria approved
by the Board of Trustees of the Trust (``Trust Board''). The Sub-
Adviser will review and monitor the creditworthiness of such
institutions. The Sub-Adviser will monitor the value of the
collateral at the time the transaction is entered into and at all
times during the term of the repurchase agreement.
\22\ Except for commercial paper that is included within the
meaning of the term ``Debt Instruments,'' the Fund will only invest
in commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or
higher by Moody's, or F1 or higher by Fitch.
---------------------------------------------------------------------------
The Fund may invest up to 20% of its net assets in the securities
of money market funds (as noted above) and other exchange-traded funds
(``ETFs'') \23\ that invest primarily in short-term debt securities or
Debt Instruments. Except for these investments in other investment
companies, the Fund will not invest directly in equity securities.\24\
The ETFs in which the Fund will invest will be exchange-listed and
trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange.
---------------------------------------------------------------------------
\23\ An ETF is an investment company registered under the 1940
Act that holds a portfolio of securities. Many ETFs are designed to
track the performance of a securities index, including industry,
sector, country, and region indexes. ETFs included in the Fund will
be listed and traded in the U.S. on registered exchanges. The Fund
may invest in the securities of ETFs in excess of the limits imposed
under the 1940 Act pursuant to exemptive orders obtained by other
ETFs and their sponsors from the Commission. In addition, the Fund
may invest in the securities of certain other investment companies
(including without limitation ETFs) in excess of the limits imposed
under the 1940 Act pursuant to an exemptive order that the Trust has
obtained from the Commission. See Investment Company Act Release No.
30377 (February 5, 2013) (File No. 812-13895). The ETFs in which the
Fund may invest include Index Fund Shares (as described in Nasdaq
Rule 5705), Portfolio Depository Receipts (as described in Nasdaq
Rule 5705), and Managed Fund Shares (as described in Nasdaq Rule
5735). While the Fund may invest in inverse ETFs, the Fund will not
invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs.
\24\ It is possible, however, that an investment company in
which the Fund invests will invest a portion of its assets in
foreign and/or domestic equity securities.
---------------------------------------------------------------------------
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser and/or
the Sub-Adviser.\25\ The 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 the 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.
---------------------------------------------------------------------------
\25\ See supra note 12.
---------------------------------------------------------------------------
The Fund may not invest 25% or more of the value of its total
assets in securities of issuers in any one industry. This restriction
does not apply to (a) obligations issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, or (b) securities of
other investment companies.
The Fund may purchase securities on a when-issued or other delayed
delivery basis and may enter into reverse repurchase agreements.
Reverse repurchase agreements will not be used by the Fund to enhance
leverage.
The Fund will seek to qualify for treatment as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended.
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.\26\ 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,\27\ which requires, among other
things, that the Exchange's rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. The Commission notes that the Fund and the Shares must
comply with the requirements of Nasdaq Rule 5735 to be listed and
traded on the Exchange.
---------------------------------------------------------------------------
\26\ 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).
\27\ 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,\28\ 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,\29\ as
defined in Nasdaq Rule
[[Page 57148]]
5735(c)(3), for the Fund will be available on the NASDAQ OMX
Information LLC proprietary index data service, and will be updated and
widely disseminated by one or more major market data vendors and
broadly displayed at least every 15 seconds during the Regular Market
Session.\30\ On each business day, before commencement of trading in
Shares in the Regular Market Session \31\ on the Exchange, the Fund
will disclose on its 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 the Fund that will form the
basis for the Fund's calculation of NAV at the end of the business
day.\32\ The Fund's 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 the estimated amount of cash
(if any), constituting the creation basket for the Fund for that day.
The NAV of the Fund will be determined as of the close of trading
(normally 4:00 p.m., Eastern Time) on each day the New York Stock
Exchange is open for business.\33\ Information regarding market price
and trading volume of the Shares will be continually available on a
real-time basis throughout the day on brokers' computer screens and
other electronic services. Information regarding the previous day's
closing price and trading volume information for the Shares will be
published daily in the financial section of newspapers. Quotation and
last sale information for ETFs will be available via the CTA high-speed
line, and will be available from the national securities exchange on
which they are listed. Pricing information for ETFs and exchange-traded
derivative instruments will be available from the exchanges on which
they trade and from major market data vendors. Pricing information for
Debt Instruments, forward currency contracts, non-deliverable forward
currency contracts, and other debt securities in which the Fund may
invest will be available from major broker-dealer firms, major market
data vendors and/or Pricing Services. Money market funds are typically
priced once each business day and their prices will be available
through the applicable fund's Web site or major market data vendors.
The Fund's Web site, which will be publicly available prior to the
public offering of Shares, will include a form of the prospectus for
the Fund and additional data relating to NAV and other applicable
quantitative information.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\29\ According to the Exchange, the Intraday Indicative Value
reflects an estimated intraday value of the Fund's Disclosed
Portfolio and will be based upon the current value for the
components of a Disclosed Portfolio. The Exchange states that the
Intraday Indicative Value will be based on quotes and closing prices
from the securities' local market and may not reflect events that
occur subsequent to the local market's close, that premiums and
discounts between the Intraday Indicative Value and the market price
may occur, and that the Intraday Indicative Value should not be
viewed as a ``real time'' update of the NAV per Share of the Fund,
which is calculated only once a day.
\30\ 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.
\31\ 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).
\32\ On a daily basis, the Fund will disclose on the Fund's Web
site the following information regarding each portfolio holding, as
applicable to the type of holding: ticker symbol, CUSIP number or
other identifier, if any; a description of the holding (including
the type of holding); the identity of the security or other asset or
instrument underlying the holding, if any; for options, the option
strike price; quantity held (as measured by, for example, par value,
notional value or number of shares, contracts or units); maturity
date, if any; coupon rate, if any; effective date, if any; market
value of the holding; and the percentage weighting of the holding in
the Fund's portfolio. The Fund's disclosure of derivative positions
in the Disclosed Portfolio will include information that market
participants can use to value these positions intraday. This Web
site information will be publicly available at no charge.
\33\ NAV per Share will be calculated for the Fund by taking the
market price of the Fund's total assets, including interest or
dividends accrued but not yet collected, less all liabilities,
dividing such amount by the total number of Shares outstanding, and
rounding to the nearest cent. The Fund's investments will be valued
daily at market value or, in the absence of market value with
respect to any investment, at fair value, in each case in accordance
with valuation procedures, which may be revised from time to time,
adopted by the Trust Board (``Valuation Procedures'') and in
accordance with the 1940 Act. A market valuation generally means a
valuation (i) obtained from an exchange, an independent pricing
service (``Pricing Service''), or a major market maker or dealer, or
(ii) based on a price quotation or other equivalent indication of
value supplied by an exchange, a Pricing Service, or a major market
maker or dealer. Certain securities, including Debt Instruments, in
which the Fund will invest will not be listed on any securities
exchange or board of trade. Such securities will typically be bought
and sold by institutional investors in individually negotiated
private transactions that function in many respects like an over-
the-counter secondary market, although typically no formal market
makers will exist. Certain securities, particularly debt securities,
will have few or no trades, or trade infrequently, and information
regarding a specific security may not be widely available or may be
incomplete. Accordingly, determinations of the fair value of debt
securities may be based on infrequent and dated information. Because
there is less reliable, objective data available, elements of
judgment may play a greater role in valuation of debt securities
than for other types of securities. Typically, Debt Instruments and
other debt securities in which the Fund may invest will be valued
using information provided by a Pricing Service. To the extent debt
securities have a remaining maturity of 60 days or less when
purchased, they will be valued at cost adjusted for amortization of
premiums and accretion of discounts. Overnight repurchase agreements
will be valued at cost. Term repurchase agreements (i.e., those
whose maturity exceeds seven days) will be valued at the average of
the bid quotations obtained daily from at least two recognized
dealers. ETFs listed on any exchange other than the Exchange will be
valued at the last sale price on the exchange on which they are
principally traded on the business day as of which such value is
being determined. ETFs listed on the Exchange will be valued at the
official closing price on the business day as of which such value is
being determined. If there has been no sale on such day, or no
official closing price in the case of ETFs traded on the Exchange,
the ETFs will be valued using fair value pricing. ETFs traded on
more than one securities exchange will be valued at the last sale
price or official closing price, as applicable, on the business day
as of which such value is being determined at the close of the
exchange representing the principal market for such ETFs. Shares of
money market funds will be valued at their net asset values as
reported by such funds to Pricing Services. Exchange-traded options
and futures contracts will be valued at the closing price in the
market where such contracts are principally traded. Forward currency
contracts and non-deliverable forward currency contracts will be
valued at the current day's interpolated foreign exchange rate, as
calculated using the current day's spot rate, and the thirty, sixty,
ninety, and one-hundred-eighty day forward rates provided by a
Pricing Service or by certain independent dealers in such contracts.
Certain securities may not be able to be priced by pre-established
pricing methods. Such securities may be valued by the Trust Board or
its delegate at fair value. The use of fair value pricing by the
Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act. Valuing the Fund's
securities using fair value pricing will result in using prices for
those securities that may differ from current market valuations or
official closing prices on the applicable exchange. Because foreign
securities exchanges may be open on different days than the days
during which an investor may purchase or sell Shares, the value of
the Fund's securities may change on days when investors are not able
to purchase or sell Shares. Assets denominated in foreign currencies
will be translated into U.S. dollars at the exchange rate of such
currencies against the U.S. dollar as provided by a Pricing Service.
The value of assets denominated in foreign currencies will be
converted into U.S. dollars at the exchange rates in effect at the
time of valuation.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The 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 Fund 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
[[Page 57149]]
Exchange, make trading in the Shares inadvisable,\34\ 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 Fund 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.\35\ In addition, the Exchange states that, while neither the
Adviser nor the Sub-Adviser is registered as a broker-dealer, each of
the Adviser and the Sub-Adviser is affiliated with a broker-dealer and
has implemented a fire wall with respect to that broker-dealer
regarding access to information concerning the composition of, or
changes to, the portfolio, and that personnel who make decisions on the
Fund's portfolio composition will be subject to procedures designed to
prevent the use and dissemination of material non-public information
regarding the Fund's portfolio.\36\ 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.\37\ 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.
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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\34\ These reasons may include: (1) the extent to which trading
is not occurring in the securities or other assets constituting the
Disclosed Portfolio of the Fund; 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 Fund.
\35\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\36\ See supra note 6. 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, the Sub-Adviser and their 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.
\37\ 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.
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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 the following
representations:
(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 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. FINRA, on behalf of the
Exchange, will communicate as needed regarding trading in the Shares
and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG, and
FINRA may obtain trading information regarding trading in the Shares
and the 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 the exchange-
traded securities and instruments held by the Fund from markets and
other entities that are members of ISG, which includes securities and
futures exchanges, or with which the Exchange has in place 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 the Fund
reported to FINRA's Trade Reporting and Compliance Engine.
(4) 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 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.
(5) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Act.\38\
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\38\ See 17 CFR 240.10A-3.
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(6) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser and/or
the Sub-Adviser. The 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 the Fund's net assets are held in illiquid assets.
(7) Under normal market conditions, the Fund will invest at least
80% of its net assets (including investment borrowings) in Debt
Instruments. The Fund will invest in Debt Instruments issued by at
least 13 non-affiliated issuers. The Fund's exposure to any single
country generally will be limited to 20% of the Fund's net assets
(although this percentage may change from time to time in response to
economic events). The Fund will invest
[[Page 57150]]
only in Debt Instruments that, at the time of purchase, are performing.
(8) Under normal market conditions, at least 80% of the Fund's net
assets that are invested in Debt Instruments will be invested in Debt
Instruments that are issued by issuers with outstanding debt of at
least $200 million (or the foreign currency equivalent thereof).
(9) Under normal market conditions, no more than 20% of the value
of the Fund's net assets will be invested in derivative instruments.
The Fund's investments in derivative instruments will be made in
accordance with the 1940 Act and consistent with the Fund's investment
objective and policies. The Fund's investments in derivative
instruments will not be used to seek to achieve a multiple or inverse
multiple of an index.
(10) At least 90% of the Fund's net assets that are invested in
exchange-traded derivative instruments will be invested in instruments
that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange.
(11) The Fund will seek, where possible, to use counterparties
whose financial status is such that the risk of default is reduced. The
Adviser and/or the Sub-Adviser will evaluate the creditworthiness of
counterparties on an ongoing basis.
(12) At least 90% of the Fund's net assets that are invested in
foreign currencies will be invested in currencies with a minimum
average daily foreign exchange turnover of USD $1 billion as determined
by the BIS Triennial Central Bank Survey.
(13) The Fund will comply with the regulatory requirements of the
Commission to maintain assets as ``cover,'' maintain segregated
accounts, and/or make margin payments when it takes positions in
derivative instruments involving obligations to third parties (i.e.,
instruments other than purchase options). If the applicable guidelines
prescribed under the 1940 Act so require, the Fund will earmark or set
aside cash, U.S. government securities, high grade liquid debt
securities, and/or other liquid assets permitted by the Commission in a
segregated custodial account in the amount prescribed.
(14) The Fund may invest up to 20% of its net assets in Corporate
Bonds. Under normal market conditions, a Corporate Bond must have $200
million (or the foreign currency equivalent thereof) or more par amount
outstanding and significant par value traded to be considered as an
eligible investment. Although the Fund does not intend to do so, the
Fund may invest up to 5% of its net assets in Corporate Bonds with less
than $200 million (or the foreign currency equivalent thereof) par
amount outstanding if (i) the Adviser and/or the Sub-Adviser deems such
securities to be sufficiently liquid and (ii) such investment is deemed
by the Adviser and/or the Sub-Adviser to be in the best interest of the
Fund.
(15) The Fund intends to enter into repurchase agreements only with
financial institutions and dealers believed by the Sub-Adviser to
present minimal credit risks in accordance with criteria approved by
the Trust Board. The Sub-Adviser will review and monitor the
creditworthiness of such institutions. The Sub-Adviser will monitor the
value of the collateral at the time the transaction is entered into and
at all times during the term of the repurchase agreement.
(16) The ETFs in which the Fund will invest will be exchange-listed
and trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange.
(17) Reverse repurchase agreements will not be used by the Fund to
enhance leverage.
(18) A minimum of 100,000 Shares 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 \39\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\39\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\40\ that the proposed rule change (SR-NASDAQ-2014-073), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\40\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-22670 Filed 9-23-14; 8:45 am]
BILLING CODE 8011-01-P
