Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade First Trust Preferred Securities and Income ETF Under NYSE Arca Equities Rule 8.600, 76148-76155 [2012-30888]
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III. Discussion and Commission
Findings
The Commission has carefully
considered the proposed rule change
and finds that the proposed rule change
is consistent with the requirements of
the Act and the rules and regulations
thereunder applicable to the MSRB.20 In
particular, the proposed rule change is
consistent with Section 15B(b)(2)(C) of
the Act, which provides that the
MSRB’s rules shall 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 regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in municipal securities and municipal
financial products, to remove
impediments to and perfect the
mechanism of a free and open market in
municipal securities and municipal
financial products, and, in general, to
protect investors, municipal entities,
obligated persons, and the public
interest.21
The Commission believes that the
proposed rule change is designed to
remove impediments to and perfect the
mechanism of a free and open market in
municipal securities by reducing the
submission burden on underwriters and
improving data quality on EMMA and
in the municipal securities marketplace.
The proposed rule change revises Rule
G–32 to provide that an underwriter’s
obligations to submit data about a new
issue under Rule G–32 would be
fulfilled by submitting that data through
NIIDS as required pursuant to Rule G–
34, while data elements not included in
NIIDS and data for certain types of
offerings not required to use NIIDS
would continue to be subject to existing
Rule G–32 data submission
requirements. Allowing underwriters to
submit information to NIIDS in
satisfaction of certain EMMA
submission requirements should help to
streamline the submission process and
accelerate the availability of Form G–32
transactions be reported within 15 minutes of the
time of trade and remove language describing
auction rate securities as having a short ‘‘effective
maturity.’’ The technical amendments to MSRB
Rule G–32 include correcting a cross-reference to
Rule 15c2–12 under the Act and a misnumbered
paragraph containing the definition of the term
‘‘obligated person,’’ as well as removing certain
transitional provisions that were operational during
the period between the former pre-EMMA
submission process and the EMMA-based
submission process.
20 In approving the proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
21 15 U.S.C. 78o–4(b)(2)(C).
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data on EMMA. In addition, the
proposed rule change would require
underwriters to announce the Time of
Formal Award and the Time of First
Execution and to use NIIDS to
disseminate information about new
issues of notes maturing in less than
nine months, variable rate instruments,
and auction rate products, which will
provide market participants and the
general public with enhanced access to
primary market data for a broader scope
of new issues of municipal securities.
The proposed rule change would
permit underwriters of any issue that is
made ‘‘trade eligible’’ between 3:00 p.m.
and 5:00 p.m. Eastern Time to set a
Time of First Execution for as early as
9:00 a.m. Eastern Time on the next
RTRS Business Day without having to
wait for the two Business Hour period
to elapse. The Commission notes that
dealers would still have sixteen hours
between 5:00 p.m. Eastern Time and the
earliest possible Time of Execution to
integrate NIIDS data and prepare for the
underwriter’s announced Time of First
Execution. The proposed rule change
adds an exception from this requirement
for variable rate instruments with a
planned settlement cycle of one day or
less. According to the MSRB, the twohour advanced notification timeframe is
not as important for these types of
instruments as for other types of new
issues. The Commission notes, however,
that the requirement to announce the
Time of Formal Award and the Time of
First Execution and to use NIIDS to
disseminate information would apply to
these instruments.
IV. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
the MSRB and, in particular, Section
15B(b)(2)(C) 22 of the Act. The proposal
will become effective no later than May
6, 2013, or such earlier date to be
announced by the MSRB in a notice
published on the MSRB Web site with
at least a thirty day advance notification
prior to the effective date.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,23 that the
proposed rule change (SR–MSRB–2012–
08) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–31013 Filed 12–21–12; 4:15 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68458; File No. SR–
NYSEArca-2012–139]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change To List and Trade First
Trust Preferred Securities and Income
ETF Under NYSE Arca Equities Rule
8.600
December 18, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that,
on December 6, 2012, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade the following under NYSE Arca
Equities Rule 8.600 (‘‘Managed Fund
Shares’’): First Trust Preferred Securities
and Income ETF. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
24 17
22 15
U.S.C. 78o-4(b)(2)(C).
23 15 U.S.C. 78s(b)(2).
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CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
The Exchange proposes to list and
trade shares (‘‘Shares’’) of the First Trust
Preferred Securities and Income ETF
(‘‘Fund’’) under NYSE Arca Equities
Rule 8.600,3 which governs the listing
and trading of Managed Fund Shares.4
The Shares will be offered by First Trust
Exchange-Traded Fund III (‘‘Trust’’),
which is organized as a Massachusetts
business trust and is registered with the
Commission as an open-end
management investment company.5 The
investment adviser to the Fund is First
Trust Advisors L.P. (‘‘Adviser’’ or ‘‘First
Trust’’). Stonebridge Advisors LLC will
serve as investment sub-adviser to the
Fund (‘‘Sub-Adviser’’) and will provide
day-to-day portfolio management of the
Fund. First Trust Portfolios L.P.
(‘‘Distributor’’) will be the principal
3 The Commission previously approved listing
and trading on the Exchange of a number of actively
managed funds under Rule 8.600. See, e.g.,
Securities Exchange Act Release Nos. 57801 (May
8, 2008), 73 FR 27878 (May 14, 2008) (SR–
NYSEArca–2008–31) (order approving Exchange
listing and trading of twelve actively-managed
funds of the WisdomTree Trust); 60460 (August 7,
2009), 74 FR 41468 (August 17, 2009) (SR–
NYSEArca–2009–55) (order approving listing of
Dent Tactical ETF); 62502 (July 15, 2010), 75 FR
42471 (July 21, 2010) (SR–NYSEArca–2010–57)
(order approving listing of AdviserShares WCM/
BNY Mellon Focused Growth ADR ETF); and 63076
(October 12, 2010), 75 FR 63874 (October 18, 2010)
(SR–NYSEArca–2010–79) (order approving listing
of Cambria Global Tactical ETF).
4 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that
correspond generally to the price and yield
performance of a specific foreign or domestic stock
index, fixed income securities index, or
combination thereof.
5 The Trust is registered under the 1940 Act. On
September 23, 2011, the Trust filed with the
Commission a registration statement on Form N–1A
under the Securities Act of 1933 and under the
1940 Act relating to the Fund (File Nos. 333–
176976 and 811–22245) (‘‘Registration Statement’’).
The description of the operation of the Trust and
the Fund herein is based, in part, on the
Registration Statement. In addition, the
Commission has issued an order granting certain
exemptive relief to the Trust under the 1940 Act.
See Investment Company Act Release No. 30029
(April 10, 2012) (File No. 812–13795) (‘‘Exemptive
Order’’).
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underwriter and distributor of the
Fund’s Shares. Brown Brothers
Harriman & Co. (‘‘Administrator’’ or
‘‘Custodian’’) will serve as
administrator, custodian, and transfer
agent for the Fund.
Commentary .06 to Rule 8.600
provides that, if the investment adviser
to the investment company issuing
Managed Fund Shares is affiliated with
a broker-dealer, such investment adviser
shall erect a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio. In addition,
Commentary .06 further requires that
personnel who make decisions on the
open-end fund’s portfolio composition
must be subject to procedures designed
to prevent the use and dissemination of
material nonpublic information
regarding the open-end fund’s
portfolio.6 Commentary .06 to Rule
8.600 is similar to Commentary .03(a)(i)
and (iii) to NYSE Arca Equities Rule
5.2(j)(3); however, Commentary .06 in
connection with the establishment of a
‘‘fire wall’’ between the investment
adviser and the broker-dealer reflects
the applicable open-end fund’s
portfolio, not an underlying benchmark
index, as is the case with index-based
funds. The Adviser is affiliated with the
Distributor, a broker-dealer, and the
Sub-Adviser also is affiliated with a
broker-dealer. The Adviser and SubAdviser each has implemented a fire
wall with respect to its respective
broker-dealer affiliate regarding access
to information concerning the
composition and/or changes to the
portfolio. In the event (a) the Adviser or
6 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (‘‘Advisers Act’’). As a result,
the Adviser and 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.
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76149
the Sub-Adviser becomes newly
affiliated with a broker-dealer, or (b) any
new adviser or sub-adviser becomes
affiliated with a broker-dealer, it will
implement a fire wall with respect to
such broker-dealer regarding access to
information concerning the composition
and/or changes to the portfolio, and will
be subject to procedures designed to
prevent the use and dissemination of
material, non-public information
regarding such portfolio.
According to the Registration
Statement, the Fund’s objective will be
to provide current income and total
return. Under normal market
conditions,7 the Fund will invest at
least 80% of its net assets (including
investment borrowings) in preferred
securities (‘‘Preferred Securities’’) and
income-producing debt securities
(‘‘Income Securities’’).8 The Adviser
represents that initially at least 50% of
the Fund’s net assets invested in
Preferred Securities and 50% of the
Income Securities held by the Fund will
be exchange-listed.9 However, the Fund
reserves the right to reduce the
percentage of assets that are exchangelisted. Preferred Securities held by the
Fund generally pay fixed or adjustablerate distributions to investors and have
preference over common stock in the
payment of distributions and the
7 The term ‘‘under normal market conditions’’
includes, but is not limited to, the absence of
extreme volatility or trading halts in the equity
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 manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar
intervening circumstance.
8 The risks and potential rewards of investing in
the Fund may at times be similar to the risks and
potential rewards of investing in both equity funds
and bond funds. Certain of the Preferred Securities
in which the Fund will invest will be traditional
preferred stocks which issue dividends that qualify
for the dividend received deduction under which
‘‘qualified’’ domestic corporations are able to
exclude a percentage of the dividends received from
their taxable income. Certain of the Preferred
Securities in which the Fund will invest will be
preferred stock that does not issue dividends that
qualify for the dividends received deduction for
eligible investors (‘‘non-DRD preferred stock’’) that
do not qualify for the dividends received deduction
or issue qualified dividend income. As described in
the Registration Statement, hybrid preferred
securities, another type of Preferred Securities, are
typically junior and fully subordinated liabilities of
an issuer or the beneficiary of a guarantee that is
junior and fully subordinated to the other liabilities
of the guarantor.
9 The foreign equity securities, including
preferred, hybrid-preferred, and contingent
convertible capital, securities in which the Fund
may invest will be limited to securities that trade
in markets that are members of the Intermarket
Surveillance Group (‘‘ISG’’), which includes all U.S.
national securities exchanges and certain foreign
exchanges, or are parties to a comprehensive
surveillance sharing agreement with the Exchange.
See note 25, infra.
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liquidation of a company’s assets, but
are generally junior to all forms of the
company’s debt, including both senior
and subordinated debt. For purposes of
the 80% test set forth above, Income
Securities consist of both foreign and
domestic debt instruments, including
corporate bonds, high yield bonds,
convertible securities, and contingent
convertible capital securities. In
addition, for purposes of the 80% test
set forth above, securities of other openend funds, closed-end funds, or
exchange-traded funds (‘‘ETFs’’)
registered under the 1940 Act 10 that
invest primarily in Preferred Securities
or Income Securities will be deemed to
be Preferred Securities or Income
Securities, respectively. The Adviser
represents that at least 80% of the
Preferred Securities and Income
Securities held by the Fund will have a
minimum original principal amount
outstanding of $100 million or more. In
addition, the Fund’s portfolio will be
comprised of a minimum of 13 nonaffiliated issuers.
As stated above, the Fund may invest
in a variety of debt securities, including
corporate debt securities.11 The broad
category of corporate debt securities
includes debt issued by U.S. and nonU.S. companies of all kinds, including
those with small-, mid-, and largecapitalizations.12 Corporate debt may
carry fixed or floating rates of interest.
Initially, the Fund will invest at least
80% of the Fund’s net assets in Income
Securities of an issuing firm when the
issuing firm (‘‘issuer’’) has a long-term
10 For purposes of this filing, ETFs, which will be
listed on a national securities exchange, include the
following: Investment Company Units (as described
in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio
Depositary Receipts (as described in NYSE Arca
Equities Rule 8.100); and Managed Fund Shares (as
described in NYSE Arca Equities Rule 8.600). 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 certain ETFs and
their sponsors from the Commission. The Fund will
not invest in leveraged, inverse, or leveraged
inverse ETFs.
11 As described in the Registration Statement,
corporate debt securities are fixed-income securities
issued by businesses to finance their operations.
Notes, bonds, debentures, and commercial paper
are the most common types of corporate debt
securities, with the primary difference being their
maturities and secured or unsecured status. Certain
debt securities held by the Fund may include debt
instruments that are similar in many respects to
preferred securities.
12 Under normal market conditions, at least 80%
of the Fund’s investments in U.S. corporate bonds
must have $100 million or more par amount
outstanding to be considered as an eligible
investment and a non-U.S. corporate bond must
have $200 million 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
bond issuances.
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issuer credit rating of investment grade
at the time of the investment. However,
the Fund reserves the right to reduce the
percentage of assets invested in
investment grade issuers. ‘‘Investment
grade’’ is defined as those issuers that
have a long-term credit rating of
‘‘BBB¥’’ or higher by Standard & Poor’s
Rating Group, a division of McGraw Hill
Companies, Inc. (‘‘S&P’’), or ‘‘Baa3’’ or
higher by Moody’s Investors Service,
Inc. (‘‘Moody’s’’), or comparably rated
by another nationally recognized
statistical rating organization
(‘‘NRSRO’’). The Fund may also invest
in securities that are unrated by an
NRSRO if such securities are of
comparable credit quality. Comparable
credit quality of securities that are
unrated by an NRSRO will be
determined by the Sub-Adviser based
on fundamental credit analysis of the
unrated issuer and comparable NRSRO
rated peer issuers of the same industry
sector. On a best efforts basis, the SubAdviser will attempt to make a rating
determination based on publicly
available data. Factors taken into
consideration in determining the
comparable credit quality of the unrated
issuer will be company leverage, capital
structure, liquidity, funding,
sustainability of cash flows, earnings
quality, market position, and asset
quality. In the event that a security is
rated by multiple NRSROs and receives
divergent ratings, the Fund will treat the
issuing firm as being rated in the highest
rating category received from an
NRSRO.
Initially, the Fund may invest up to
20% of the Fund’s net assets in Income
Securities issued by below-investment
grade issuers if that security has
acceptable credit quality and attractive
relative value. However, the Fund
reserves the right to increase the
percentage of assets invested in belowinvestment grade securities. ‘‘Below
investment grade’’ is defined as those
issuers that have a long-term credit
rating of ‘‘BBB¥’’ or lower by ‘‘S&P,’’ or
‘‘Baa3’’ or lower by Moody’s, or
comparably rated by another NRSRO.
The Fund may also invest in securities
that are unrated by an NRSRO if such
securities are of comparable credit
quality as determined by the SubAdviser.
The Fund intends to invest at least
25% of its assets in securities of
financial companies. Financial
companies include, but are not limited
to, companies involved in activities
such as banking, mortgage finance,
consumer finance, specialized finance,
investment banking and brokerage, asset
management and custody, corporate
lending, insurance and financial
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Fmt 4703
Sfmt 4703
investment, and real estate, including
but not limited to real estate investment
trusts (‘‘REITs’’).
Other Investments
While the Fund, under normal market
conditions, will invest at least 80% of
its net assets (including investment
borrowings) in Preferred Securities and
Income Securities, the Fund also may
invest the remainder of its assets in
other investments, as described below.
Normally, the Fund may invest up to
15% of its net assets in securities with
maturities of less than one year or cash
equivalents, or it may hold cash. The
percentage of the Fund invested in such
holdings will vary and depend on
several factors, including market
conditions. For temporary defensive
purposes and during periods of high
cash inflows or outflows, the Fund may
depart from its principal investment
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
Sub-Adviser or the Adviser believes
securities in which the Fund normally
invests have elevated risks due to
political or economic factors and in
other extraordinary circumstances.
The Fund may also invest in U.S.
government securities 13 or short-term
debt securities 14 to keep cash on hand
13 U.S. government securities include U.S.
Treasury obligations and securities issued or
guaranteed by various agencies of the U.S.
government, or by various instrumentalities which
have been established or sponsored by the U.S.
government. U.S. Treasury obligations are backed
by the ‘‘full faith and credit’’ of the U.S.
government. Securities issued or guaranteed by
federal agencies and U.S. government sponsored
instrumentalities may or may not be backed by the
full faith and credit of the U.S. government.
14 Short-term debt securities are defined to
include, without limitation, the following:
(1) 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) Certificates of deposit issued against funds
deposited in a bank or savings and loan association.
Such certificates are for a definite period of time,
earn a specified rate of return, and are normally
negotiable. If such certificates of deposit are nonnegotiable, they will be considered illiquid
securities and be subject to the Fund’s 15%
restriction on investments in illiquid securities.
(3) Bankers’ acceptances, which are short-term
credit instruments used to finance commercial
transactions.
(4) Repurchase agreements, which involve
purchases of debt securities. In such an action, at
the time the Fund purchases the security, it
simultaneously agrees to resell and redeliver the
security to the seller, who also simultaneously
agrees to buy back the security at a fixed price and
time.
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fully invested or for temporary
defensive purposes. Short-term debt
securities are securities from issuers
having a long-term debt rating of at least
A by S&P Ratings, Moody’s, or Fitch,
Inc. and having a maturity of one year
or less. The use of temporary
investments is not a part of the principal
investment strategy of the Fund.
The Fund may also invest in senior
loans, second lien loans, loan
participations, payment-in-kind
securities, zero coupon bonds, bank
certificates of deposit, fixed-time
deposits, bankers’ acceptances, U.S.
government securities, or fixed income
securities issued by non-U.S.
governments denominated in U.S.
dollars.
The Fund may invest in warrants.
Warrants acquired by the Fund entitle it
to buy common stock from the issuer at
a specified price and time. They do not
represent ownership of the securities
but only the right to buy them. Warrants
are subject to the same market risks as
stocks, but may be more volatile in
price. The Fund’s investment in
warrants will not entitle it to receive
dividends or exercise voting rights and
will become worthless if the warrants
cannot be profitably exercised before
their expiration date.
The Fund may invest in other pooled
investment vehicles and business
development companies that are
exchange listed and that invest
primarily in securities of the types in
which the Fund may invest directly.
Consistent with the Exemptive Order,
the Fund will not invest in options
contracts, futures contracts, or swap
agreements.
The Fund will not take short positions
in securities (‘‘short sales’’).
The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid securities (calculated at the time
(5) 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.
(6) Commercial paper, which are short-term
unsecured promissory notes, including variable rate
master demand notes issued by corporations to
finance their current operations. Master demand
notes are direct lending arrangements between the
Fund and a corporation. There is no secondary
market for the notes, and they will be considered
illiquid securities and be subject to the Fund’s 15%
restriction on investments in illiquid securities.
However, they are redeemable by the Fund at any
time. The Fund’s Sub-Adviser will consider the
financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity ratios) and
will continuously monitor the corporation’s ability
to meet all of its financial obligations, because the
Fund’s liquidity might be impaired if the
corporation were unable to pay principal and
interest on demand. The Fund may only invest in
commercial paper rated A–2 or higher by S&P
Ratings, Prime-2 or higher by Moody’s, or F2 or
higher by Fitch, Inc.
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of investment), including (1) nonnegotiable certificates of deposit and
master demand notes,15 (2) Rule 144A
securities, and (3) senior loans, second
lien loans, and loan participation
interests. 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 securities. Illiquid securities
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.16
The Fund will be classified as ‘‘nondiversified’’ under the 1940 Act and as
a result may invest a relatively high
percentage of its assets in a limited
number of issuers. The Fund will only
be limited as to the percentage of its
assets which may be invested in the
securities of any one issuer by the
diversification requirements imposed by
the Internal Revenue Code of 1986, as
amended (‘‘Code’’).17
Other than financial companies, the
Fund may not invest 25% or more of the
value of its total assets in securities of
issuers in any one industry or group of
industries. This restriction does not
apply to obligations issued or
guaranteed by the U.S. Government, its
agencies, or instrumentalities.18
The Fund intends to qualify annually
and to elect to be treated as a regulated
15 See
note 14, supra.
Commission has stated that long-standing
Commission guidelines have required open-end
funds to hold no more than 15% of their net assets
in illiquid securities and other illiquid assets. See
Investment Company Act Release No. 28193 (March
11, 2008), 73 FR 14618 (March 18, 2008), footnote
34. See also Investment Company Act Release No.
5847 (October 21, 1969), 35 FR 19989 (December
31, 1970) (Statement Regarding ‘‘Restricted
Securities’’); Investment Company Act Release No.
18612 (March 12, 1992), 57 FR 9828 (March 20,
1992) (Revisions of Guidelines to Form N–1A). A
fund’s portfolio security is illiquid if it cannot be
disposed of in the ordinary course of business
within seven days at approximately the value
ascribed to it by the fund. See Investment Company
Act Release No. 14983 (March 12, 1986), 51 FR
9773 (March 21, 1986) (adopting amendments to
Rule 2a-7 under the 1940 Act); and Investment
Company Act Release No. 17452 (April 23, 1990),
55 FR 17933 (April 30, 1990) (adopting Rule 144A
under the Securities Act of 1933).
17 See 26 U.S.C. 851.
18 See Form N–1A, Item 9. The Commission has
taken the position that a fund is concentrated if it
invests more than 25% of the value of its total
assets in any one industry. See, e.g., Investment
Company Act Release No. 9011 (October 30, 1975),
40 FR 54241 (November 21, 1975).
16 The
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76151
investment company (‘‘RIC’’) under the
Code.19
The Fund’s investments will be
consistent with the Fund’s investment
objective and will not be used to
enhance leverage.
The Shares will conform to the initial
and continued listing criteria under
NYSE Arca Equities Rule 8.600. The
Exchange represents that, for initial
and/or continued listing, the Fund will
be in compliance with Rule 10A–3
under the Exchange Act,20 as provided
by NYSE Arca Equities Rule 5.3. A
minimum of 100,000 Shares will be
outstanding at the commencement of
trading on the Exchange. The Exchange
will obtain a representation from the
issuer of the Shares that the net asset
value (‘‘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.
Creation and Redemption of Shares
The Fund will issue and redeem
Shares on a continuous basis, at NAV,
only in large specified blocks each
consisting of 50,000 Shares (each such
block of Shares, a ‘‘Creation Unit’’). The
consideration for purchase of Creation
Unit aggregations of the Fund may
consist of (i) cash in lieu of all or a
portion of the Deposit Securities, as
defined below, and/or (ii) a designated
portfolio of securities determined by
First Trust (‘‘Deposit Securities’’) per
Creation Unit aggregation generally
conforming to holdings of the Fund
(‘‘Fund Securities’’) and generally an
amount of cash (‘‘Cash Component’’).
Together, the Deposit Securities and the
Cash Component (including the cash in
lieu amount) constitute the ‘‘Fund
Deposit,’’ which represents the
minimum initial and subsequent
investment amount for a Creation Unit
aggregation of the Fund.
The Custodian, through the National
Securities Clearing Corporation
(‘‘NSCC’’), will make available on each
business day, prior to the opening of
business of the New York Stock
Exchange (‘‘NYSE’’) (currently 9:30
a.m., Eastern Time (‘‘E.T.’’)), the list of
the names and the required number of
shares of each Deposit Security to be
included in the current Fund Deposit
(based on information at the end of the
previous business day) for the Fund.
Such Fund Deposit will be applicable,
subject to any adjustments as described
below, in order to effect creations of
Creation Unit aggregations of the Fund
until such time as the next-announced
19 26
20 17
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CFR 240.10A–3.
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tkelley on DSK3SPTVN1PROD with
composition of the Deposit Securities is
made available.
In order to be eligible to place orders
with the Distributor and to create or
redeem a Creation Unit aggregation of
the Fund, an entity must be an
authorized participant, and must have
executed an agreement with the
Distributor and transfer agent, with
respect to creations and redemptions of
Creation Unit aggregations, and have
international operational capabilities.
Fund Shares may be redeemed only in
Creation Unit aggregations at their NAV
next determined after receipt of a
redemption request in proper form by
the Fund through the transfer agent and
only on a business day. The Fund will
not redeem Shares in amounts less than
Creation Unit aggregations.
The Custodian, through the NSCC,
will make available prior to the opening
of business on the NYSE (currently 9:30
a.m., E.T.) on each business day, the
identity of the Fund Securities that will
be applicable (subject to possible
amendment or correction) to
redemption requests received in proper
form on that day. Fund Securities
received on redemption may not be
identical to Deposit Securities that are
applicable to creations of Creation Unit
aggregations.
All orders to create or redeem
Creation Unit aggregations must be
received by the transfer agent no later
than the closing time of the regular
trading session on the NYSE (ordinarily
4:00 p.m., E.T.), in each case on the date
such order is placed in order for
creation or redemption of Creation Unit
aggregations to be effected based on the
NAV of Shares of the Fund as next
determined on such date after receipt of
the order in proper form.
The Fund’s NAV will be determined
as of the close of trading (normally 4:00
p.m., E.T.) on each day the NYSE is
open for business. NAV 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,
and dividing such amount by the total
number of Shares outstanding. The
result, rounded to the nearest cent, will
be the NAV per Share.
The Fund’s investments will be
valued at market value or, in the
absence of market value with respect to
any portfolio securities, at fair value in
accordance with valuation procedures
adopted by the Trust’s Board of Trustees
and in accordance with the 1940 Act.
Availability of Information
The Fund’s Web site
(www.ftportfolios.com), which will be
publicly available prior to the public
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Jkt 229001
offering of Shares, will include a form
of the prospectus for the Fund that may
be downloaded. The Fund’s Web site
will include additional quantitative
information updated on a daily basis,
including, for the Fund, (1) daily trading
volume, the prior business day’s
reported closing price, NAV and midpoint of the bid/ask spread at the time
of calculation of such NAV (the ‘‘Bid/
Ask Price’’),21 and a calculation of the
premium and discount of the Bid/Ask
Price against the NAV, and (2) data in
chart format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters. On each business day, before
commencement of trading in Shares in
the Core Trading Session on the
Exchange, the Fund will disclose on its
Web site the Disclosed Portfolio as
defined in NYSE Arca Equities Rule
8.600(c)(2) that will form the basis for
the Fund’s calculation of NAV at the
end of the business day.22
On a daily basis, the Adviser will
disclose for each portfolio security and
other financial instrument of the Fund
the following information on the Fund’s
Web site: Ticker symbol (if applicable),
name of security and financial
instrument, number of shares or dollar
value of securities and financial
instruments held in the portfolio, and
percentage weighting of the security and
financial instrument in the portfolio.
The Web site information will be
publicly available at no charge.
In addition, a basket composition file,
which includes the security names and
share quantities required to be delivered
in exchange for the Fund’s Shares,
together with estimates and actual cash
components, will be publicly
disseminated daily prior to the opening
of the NYSE via the NSCC. The basket
represents one Creation Unit of the
Fund.
Information regarding the intra-day
value of the Shares of the Fund (the
‘‘indicative optimized portfolio value’’
or ‘‘IOPV’’), which is the Portfolio
Indicative Value (‘‘PIV’’) as defined in
NYSE Arca Equities Rule 8.600 (c)(3),
will be widely disseminated by one or
21 The Bid/Ask Price of the Fund will be
determined using the mid-point of the highest bid
and the lowest offer on the Exchange as of the time
of calculation of the Fund’s NAV. The records
relating to Bid/Ask Prices will be retained by the
Fund and its service providers.
22 Under accounting procedures followed by the
Fund, trades made on the prior business day (‘‘T’’)
will be booked and reflected in NAV on the current
business day (‘‘T+1’’). Accordingly, the Fund will
be able to disclose at the beginning of the business
day the portfolio that will form the basis for the
NAV calculation at the end of the business day.
PO 00000
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Fmt 4703
Sfmt 4703
more major market data vendors at least
every 15 seconds during the Core
Trading Session.23 The dissemination of
the IOPV, together with the Disclosed
Portfolio, will allow investors to
determine the value of the underlying
portfolio of the Fund on a daily basis
and to provide a close estimate of that
value throughout the trading day. The
IOPV should not be viewed as a ‘‘realtime’’ update of the NAV per Share of
the Fund because the IOPV may not be
calculated in the same manner as the
NAV, which is computed once a day,
generally at the end of the business day.
The price of a non-U.S. security that is
primarily traded on a non-U.S. exchange
shall be updated, using the last sale
price, every 15 seconds throughout the
trading day, provided, that upon the
closing of such non-U.S. exchange, the
closing price of the security, after being
converted to U.S. dollars, will be used.
Furthermore, in calculating the IOPV of
the Fund’s Shares, exchange rates may
be used throughout the day (9:00 a.m. to
4:15 p.m., E.T.) that may differ from
those used to calculate the NAV per
Share of the Fund and consequently
may result in differences between the
NAV and the IOPV.
The Adviser represents that the Trust,
First Trust, and BNY will not
disseminate non-public information
concerning the Trust and the Fund.
Investors can also obtain the Trust’s
Statement of Additional Information
(‘‘SAI’’), the Fund’s Shareholder
Reports, and the Trust’s Form N–CSR
and Form N–SAR, filed twice a year.
The Trust’s SAI and Shareholder
Reports are available free upon request
from the Trust, and those documents
and the Form N–CSR and Form N–SAR
may be viewed on-screen or
downloaded from the Commission’s
Web site at www.sec.gov. 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 the Shares will be
available via the CTA high-speed line.
The intra-day, closing, and settlement
prices of the portfolio securities and
other instruments will be also readily
available from the national securities
exchanges trading such securities,
23 Currently, it is the Exchange’s understanding
that several major market data vendors display and/
or make widely available IOPVs taken from the
Consolidated Tape Association (‘‘CTA’’) or other
data feeds.
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automated quotation systems, published
or other public sources, or on-line
information services such as Bloomberg
or Reuters.
Additional information regarding the
Trust and the Shares, including
investment strategies, risks, creation and
redemption procedures, fees, portfolio
holdings disclosure policies,
distributions, and taxes is included in
the Registration Statement. All terms
relating to the Fund that are referred to,
but not defined in, this proposed rule
change are defined in the Registration
Statement.
Trading Halts
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.24 Trading in Shares of the
Fund will be halted if the circuit breaker
parameters in NYSE Arca Equities Rule
7.12 have been reached. Trading also
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. These may
include: (1) The extent to which trading
is not occurring in the securities and/or
the financial instruments comprising
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. Trading in the
Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets
forth circumstances under which Shares
of the Fund may be halted.
tkelley on DSK3SPTVN1PROD with
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00
a.m. to 8:00 p.m., E.T. in accordance
with NYSE Arca Equities Rule 7.34
(Opening, Core, and Late Trading
Sessions). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Equities Rule 7.6, Commentary .03,
the minimum price variation (‘‘MPV’’)
for quoting and entry of orders in equity
securities traded on the NYSE Arca
Marketplace is $0.01, with the exception
of securities that are priced less than
$1.00 for which the MPV for order entry
is $0.0001.
24 See NYSE Arca Equities Rule 7.12,
Commentary .04.
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Jkt 229001
Surveillance
The Exchange intends to utilize its
existing surveillance procedures
applicable to derivative products (which
include Managed Fund Shares) to
monitor trading in the Shares. The
Exchange represents that these
procedures are adequate to properly
monitor Exchange trading of the Shares
in all trading sessions and to deter and
detect violations of Exchange rules and
applicable federal securities laws.
The Exchange’s current trading
surveillance focuses on detecting
securities trading outside their normal
patterns. When such situations are
detected, surveillance analysis follows
and investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations.
The Exchange may obtain information
via the ISG from other exchanges that
are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.25
Initially, at least 50% of the Fund’s net
assets invested in Preferred Securities
and Income Securities will be exchangelisted and such exchanges will be
members of ISG or parties to a
comprehensive surveillance sharing
agreement with the Exchange.
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
Information Bulletin
Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit (‘‘ETP’’) Holders
in an Information Bulletin (‘‘Bulletin’’)
of the special characteristics and risks
associated with trading the Shares.
Specifically, the Bulletin will discuss
the following: (1) The procedures for
purchases and redemptions of Shares in
Creation Unit aggregations (and that
Shares are not individually redeemable);
(2) NYSE Arca Equities Rule 9.2(a),
which imposes a duty of due diligence
on its ETP Holders to learn the essential
facts relating to every customer prior to
trading the Shares; (3) the risks involved
in trading the Shares during the
Opening and Late Trading Sessions
when an updated PIV will not be
calculated or publicly disseminated; (4)
how information regarding the PIV is
disseminated; (5) the requirement that
ETP Holders deliver a prospectus to
25 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed Portfolio for the Fund
may trade on markets that are members of ISG or
with which the Exchange has in place a
comprehensive surveillance sharing agreement. See
note 9, supra.
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Fmt 4703
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76153
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will
reference that the Fund is subject to
various fees and expenses described in
the Registration Statement. The Bulletin
will discuss any exemptive, no-action,
and interpretive relief granted by the
Commission from any rules under the
Exchange Act. The Bulletin will also
disclose that the NAV for the Shares
will be calculated after 4:00 p.m., E.T.
each trading day.
2. Statutory Basis
The basis under the Exchange Act for
this proposed rule change is the
requirement under Section 6(b)(5) 26
that an exchange have rules that are
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to, and
perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Equities
Rule 8.600. The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws. The Exchange may obtain
information via ISG from other
exchanges that are members of ISG or
with which the Exchange has entered
into a comprehensive surveillance
sharing agreement. Under normal
market conditions, the Fund will invest
at least 80% of its net assets (including
investment borrowings) in Preferred
Securities and Income Securities. The
Adviser represents that initially at least
50% of the Fund’s net assets invested in
Preferred Securities and 50% of the
Income Securities held by the Fund will
be exchange-listed. The foreign equity
securities, including preferred, hybridpreferred, and contingent convertible
capital, securities in which the Fund
may invest will be limited to securities
that trade in markets that are members
of the ISG. Initially, the Fund will invest
at least 80% of the Fund’s net assets in
Income Securities of an issuing firm
when the issuer has a long-term issuer
credit rating of investment grade at the
time of the investment. Under normal
26 15
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26DEN1
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Federal Register / Vol. 77, No. 247 / Wednesday, December 26, 2012 / Notices
market conditions, at least 80% of the
Fund’s investments in US corporate
bonds must have $100 million or more
par amount outstanding to be
considered as an eligible investment
and a non-U.S. corporate bond must
have $200 million or more par amount
outstanding and significant par value
traded to be considered as an eligible
investment. The intra-day, closing, and
settlement prices of the portfolio
securities and other instruments will be
also readily available from the national
securities exchanges trading such
securities, automated quotation systems,
published or other public sources, or
on-line information services. The Fund
may hold, in the aggregate, up to 15%
of its net assets in: (1) Illiquid securities,
including non-negotiable certificates of
deposit and master demand notes,27 (2)
Rule 144A securities, and (3) senior
loans, second lien loans, and loan
participation interests. Consistent with
the Exemptive Order, the Fund will not
invest in options contracts, futures
contracts, or swap agreements. The
Fund’s investments will be consistent
with the Fund’s investment objective
and will not be used to enhance
leverage. The PIV will be widely
disseminated by one or more major
market data vendors at least every 15
seconds during the Core Trading
Session.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the 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. In
addition, a large amount of information
is publicly available regarding the Fund
and the Shares, thereby promoting
market transparency. Moreover, the PIV
will be widely disseminated by one or
more major market data vendors at least
every 15 seconds during the Exchange’s
Core Trading Session. On each business
day, before commencement of trading in
Shares in the Core Trading Session on
the Exchange, the Fund will disclose on
its Web site the Disclosed Portfolio that
will form the basis for the Fund’s
calculation of NAV at the end of the
business day. 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, and quotation and
last-sale information will be available
via the CTA high-speed line. The Web
27 See
note 14, supra.
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06:31 Dec 22, 2012
Jkt 229001
site for the Fund will include a form of
the prospectus for the Fund and
additional data relating to NAV and
other applicable quantitative
information. Moreover, prior to the
commencement of trading, the Exchange
will inform its ETP Holders in an
Information Bulletin of the special
characteristics and risks associated with
trading the Shares. Trading in Shares of
the Fund will be halted if the circuit
breaker parameters in NYSE Arca
Equities Rule 7.12 have been reached or
because of market conditions or for
reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable, and trading in the Shares
will be subject to NYSE Arca Equities
Rule 8.600(d)(2)(D), which sets forth
circumstances under which Shares of
the Fund may be halted. In addition, as
noted above, investors will have ready
access to information regarding the
Fund’s holdings, the PIV, the Disclosed
Portfolio, and quotation and last-sale
information for the Shares.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of activelymanaged exchange-traded product that
will enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
the Exchange has in place surveillance
procedures relating to trading in the
Shares and may obtain information via
ISG from other exchanges that are
members of ISG or with which the
Exchange has entered into a
comprehensive surveillance sharing
agreement. In addition, as noted above,
investors will have ready access to
information regarding the Fund’s
holdings, the PIV, the Disclosed
Portfolio, and quotation and last-sale
information for the Shares.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
PO 00000
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Fmt 4703
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSEArca–2012–139 on
the subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEArca-2012–139. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml.) Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
E:\FR\FM\26DEN1.SGM
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Federal Register / Vol. 77, No. 247 / Wednesday, December 26, 2012 / Notices
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2012–139 and should be
submitted on or before January 14, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–30888 Filed 12–21–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68461; File No. SR–
NYSEArca–2012–94]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change To Amend
Commentary .06 to NYSE Arca Options
Rule 6.4 To Permit the Exchange To
List Additional Strike Prices Until the
Close of Trading on the Second
Business Day Prior to Monthly
Expiration
December 18, 2012.
I. Introduction
On September 6, 2012, NYSE Arca,
Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend Commentary .06 to
NYSE Arca Options Rule 6.4 to permit
the Exchange to list additional strike
prices until the close of trading on the
second business day prior to monthly
expiration in unusual market
conditions. The proposed rule change
was published for comment in the
Federal Register on September 20,
2012.3 On November 1, 2012, the
Commission designated a longer period
to act on the proposed rule change, until
December 19, 2012.4 The Commission
tkelley on DSK3SPTVN1PROD with
28 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 67863
(September 14, 2012), 77 FR 58433 (‘‘Notice’’).
4 Securities Exchange Act Release No. 68136, 77
FR 66896 (November 7, 2012).
1 15
VerDate Mar<15>2010
06:31 Dec 22, 2012
Jkt 229001
received no comment letters on the
proposal. This order approves the
proposed rule change.
II. Description of the Proposal
The Exchange proposes to amend
Commentary .06 to NYSE Arca Options
Rule 6.4 to permit the Exchange to add
additional strikes until the close of
trading on the second business day prior
to the expiration of a monthly, or
standard, option in the event of unusual
market conditions. NYSE Arca Options
Rule 6.4 currently permits the Exchange
to open additional series of individual
stock options until the first calendar day
of the month in which the option
expires or until the fifth business day
prior to expiration if unusual market
conditions exist.5 The Exchange claims
that, under its current rules, if unusual
market conditions occur anytime from
five to two days prior to expiration, then
market participants are unable to obtain
a contract tailored to manage their risk.6
According to the Exchange, options
market participants generally prefer to
focus their trading in strike prices that
immediately surround the price of the
underlying security.7 If, however, the
price of the underlying stock moves
significantly, the Exchange argues that
there may be a market need for
additional strike prices to adequately
account for market participants’ risk
management in a stock.8 Accordingly,
the Exchange proposes to permit the
listing of additional strikes until the
close of trading on the second business
day prior to expiration of a monthly
option in unusual market conditions.
The Exchange represents that the
proposal does not raise any capacity
concerns on the Exchange because the
proposed change presents no material
difference in impact from the current
rules.9 The Exchange notes that the
proposed change allows for new strikes
that it would otherwise be permitted to
add under existing rules either on the
fifth day prior to or immediately after
expiration. The Exchange further
represents that it discussed the
proposed change with the Options
Clearing Corporation (‘‘OCC’’).10
According to the Exchange, the OCC
5 The Exchange may make the determination to
open additional series for trading when the
Exchange deems it necessary to maintain an orderly
market, to meet customer demand, or when certain
price movements take place in the underlying
market. See Notice, supra note 3 at 58434.
6 See Notice, supra note 3 at 58434.
7 See id. at 58433.
8 See id. at 58434.
9 See id. The Exchange also stated that any new
strikes added under this proposal would be added
in a manner consistent with the range limitations
described in NYSE Arca Options Rule 6.4A.
10 See id.
PO 00000
Frm 00188
Fmt 4703
Sfmt 4703
76155
represented that it is able to
accommodate the proposal and will
have no operational concerns with
adding new series on any day, except
the last day of trading an expiring
series.11 The Exchange states that, since
the implementation of the fifth business
day restriction on listing additional
strikes, improved communications and
the adoption of the Streamline Options
Series Adds by OCC allows notification
of new strikes in real time throughout
the industry.12
III. Discussion and Commission
Findings
After careful review of the proposed
rule change, the Commission finds that
the proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.13 Specifically, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,14 which requires, among other
things, that the rules of a national
securities exchange be designed to
promote just and equitable principles of
trade, to prevent fraudulent and
manipulative acts, 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 proposed change extends the
timeframe during which the Exchange
may list additional series of individual
stock options in unusual market
conditions. The Commission believes
that the proposed change will provide
the investing public and other market
participants with additional
opportunities to tailor their investment
and hedging decisions, thus allowing
investors to better manage their risk
exposure with additional series.15
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,16 that the
11 See
id.
id. at 58433 n. 4.
13 In approving this proposed rule change, the
Commission considered the proposed rule’s impact
on efficiency, competition, and capital formation.
See 15 U.S.C. 78c(f).
14 15 U.S.C. 78f(b)(5).
15 In approving this proposal, the Commission
notes that the Exchange has stated that, although
the four additional days to list additional strike
prices in the event of unusual market circumstances
may generate additional quote traffic, the Exchange
believes that any increased traffic will not become
unmanageable since the proposal remains limited to
the narrow situations when an unusual market
event occurs. See Notice, supra note 3 at 58434.
16 15 U.S.C. 78s(b)(2).
12 See
E:\FR\FM\26DEN1.SGM
26DEN1
]]>Agencies
[Federal Register Volume 77, Number 247 (Wednesday, December 26, 2012)]
[Notices]
[Pages 76148-76155]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30888]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68458; File No. SR-NYSEArca-2012-139]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade First Trust Preferred
Securities and Income ETF Under NYSE Arca Equities Rule 8.600
December 18, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that, on December 6, 2012, NYSE Arca, Inc.
(``Exchange'' or ``NYSE Arca'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade the following under NYSE
Arca Equities Rule 8.600 (``Managed Fund Shares''): First Trust
Preferred Securities and Income ETF. The text of the proposed rule
change is available on the Exchange's Web site at www.nyse.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries,
[[Page 76149]]
set forth in sections A, B, and C below, of the most significant parts
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
First Trust Preferred Securities and Income ETF (``Fund'') under NYSE
Arca Equities Rule 8.600,\3\ which governs the listing and trading of
Managed Fund Shares.\4\ The Shares will be offered by First Trust
Exchange-Traded Fund III (``Trust''), which is organized as a
Massachusetts business trust and is registered with the Commission as
an open-end management investment company.\5\ The investment adviser to
the Fund is First Trust Advisors L.P. (``Adviser'' or ``First Trust'').
Stonebridge Advisors LLC will serve as investment sub-adviser to the
Fund (``Sub-Adviser'') and will provide day-to-day portfolio management
of the Fund. First Trust Portfolios L.P. (``Distributor'') will be the
principal underwriter and distributor of the Fund's Shares. Brown
Brothers Harriman & Co. (``Administrator'' or ``Custodian'') will serve
as administrator, custodian, and transfer agent for the Fund.
---------------------------------------------------------------------------
\3\ The Commission previously approved listing and trading on
the Exchange of a number of actively managed funds under Rule 8.600.
See, e.g., Securities Exchange Act Release Nos. 57801 (May 8, 2008),
73 FR 27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order approving
Exchange listing and trading of twelve actively-managed funds of the
WisdomTree Trust); 60460 (August 7, 2009), 74 FR 41468 (August 17,
2009) (SR-NYSEArca-2009-55) (order approving listing of Dent
Tactical ETF); 62502 (July 15, 2010), 75 FR 42471 (July 21, 2010)
(SR-NYSEArca-2010-57) (order approving listing of AdviserShares WCM/
BNY Mellon Focused Growth ADR ETF); and 63076 (October 12, 2010), 75
FR 63874 (October 18, 2010) (SR-NYSEArca-2010-79) (order approving
listing of Cambria Global Tactical ETF).
\4\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Equities Rule
5.2(j)(3), seeks to provide investment results that correspond
generally to the price and yield performance of a specific foreign
or domestic stock index, fixed income securities index, or
combination thereof.
\5\ The Trust is registered under the 1940 Act. On September 23,
2011, the Trust filed with the Commission a registration statement
on Form N-1A under the Securities Act of 1933 and under the 1940 Act
relating to the Fund (File Nos. 333-176976 and 811-22245)
(``Registration Statement''). The description of the operation of
the Trust and the Fund herein is based, in part, on the Registration
Statement. In addition, the Commission has issued an order granting
certain exemptive relief to the Trust under the 1940 Act. See
Investment Company Act Release No. 30029 (April 10, 2012) (File No.
812-13795) (``Exemptive Order'').
---------------------------------------------------------------------------
Commentary .06 to Rule 8.600 provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition and/or
changes to such investment company portfolio. In addition, Commentary
.06 further requires that personnel who make decisions on the open-end
fund's portfolio composition must be subject to procedures designed to
prevent the use and dissemination of material nonpublic information
regarding the open-end fund's portfolio.\6\ Commentary .06 to Rule
8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca
Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the
establishment of a ``fire wall'' between the investment adviser and the
broker-dealer reflects the applicable open-end fund's portfolio, not an
underlying benchmark index, as is the case with index-based funds. The
Adviser is affiliated with the Distributor, a broker-dealer, and the
Sub-Adviser also is affiliated with a broker-dealer. The Adviser and
Sub-Adviser each has implemented a fire wall with respect to its
respective broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio. In the
event (a) the Adviser or the Sub-Adviser becomes newly affiliated with
a broker-dealer, or (b) any new adviser or sub-adviser becomes
affiliated with a broker-dealer, it will implement a fire wall with
respect to such broker-dealer regarding access to information
concerning the composition and/or changes to the portfolio, and will be
subject to procedures designed to prevent the use and dissemination of
material, non-public information regarding such portfolio.
---------------------------------------------------------------------------
\6\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (``Advisers
Act''). As a result, the Adviser and 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.
---------------------------------------------------------------------------
According to the Registration Statement, the Fund's objective will
be to provide current income and total return. Under normal market
conditions,\7\ the Fund will invest at least 80% of its net assets
(including investment borrowings) in preferred securities (``Preferred
Securities'') and income-producing debt securities (``Income
Securities'').\8\ The Adviser represents that initially at least 50% of
the Fund's net assets invested in Preferred Securities and 50% of the
Income Securities held by the Fund will be exchange-listed.\9\ However,
the Fund reserves the right to reduce the percentage of assets that are
exchange-listed. Preferred Securities held by the Fund generally pay
fixed or adjustable-rate distributions to investors and have preference
over common stock in the payment of distributions and the
[[Page 76150]]
liquidation of a company's assets, but are generally junior to all
forms of the company's debt, including both senior and subordinated
debt. For purposes of the 80% test set forth above, Income Securities
consist of both foreign and domestic debt instruments, including
corporate bonds, high yield bonds, convertible securities, and
contingent convertible capital securities. In addition, for purposes of
the 80% test set forth above, securities of other open-end funds,
closed-end funds, or exchange-traded funds (``ETFs'') registered under
the 1940 Act \10\ that invest primarily in Preferred Securities or
Income Securities will be deemed to be Preferred Securities or Income
Securities, respectively. The Adviser represents that at least 80% of
the Preferred Securities and Income Securities held by the Fund will
have a minimum original principal amount outstanding of $100 million or
more. In addition, the Fund's portfolio will be comprised of a minimum
of 13 non-affiliated issuers.
---------------------------------------------------------------------------
\7\ The term ``under normal market conditions'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the equity 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.
\8\ The risks and potential rewards of investing in the Fund may
at times be similar to the risks and potential rewards of investing
in both equity funds and bond funds. Certain of the Preferred
Securities in which the Fund will invest will be traditional
preferred stocks which issue dividends that qualify for the dividend
received deduction under which ``qualified'' domestic corporations
are able to exclude a percentage of the dividends received from
their taxable income. Certain of the Preferred Securities in which
the Fund will invest will be preferred stock that does not issue
dividends that qualify for the dividends received deduction for
eligible investors (``non-DRD preferred stock'') that do not qualify
for the dividends received deduction or issue qualified dividend
income. As described in the Registration Statement, hybrid preferred
securities, another type of Preferred Securities, are typically
junior and fully subordinated liabilities of an issuer or the
beneficiary of a guarantee that is junior and fully subordinated to
the other liabilities of the guarantor.
\9\ The foreign equity securities, including preferred, hybrid-
preferred, and contingent convertible capital, securities in which
the Fund may invest will be limited to securities that trade in
markets that are members of the Intermarket Surveillance Group
(``ISG''), which includes all U.S. national securities exchanges and
certain foreign exchanges, or are parties to a comprehensive
surveillance sharing agreement with the Exchange. See note 25,
infra.
\10\ For purposes of this filing, ETFs, which will be listed on
a national securities exchange, include the following: Investment
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3));
Portfolio Depositary Receipts (as described in NYSE Arca Equities
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca
Equities Rule 8.600). 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 certain ETFs and their sponsors from
the Commission. The Fund will not invest in leveraged, inverse, or
leveraged inverse ETFs.
---------------------------------------------------------------------------
As stated above, the Fund may invest in a variety of debt
securities, including corporate debt securities.\11\ The broad category
of corporate debt securities includes debt issued by U.S. and non-U.S.
companies of all kinds, including those with small-, mid-, and large-
capitalizations.\12\ Corporate debt may carry fixed or floating rates
of interest.
---------------------------------------------------------------------------
\11\ As described in the Registration Statement, corporate debt
securities are fixed-income securities issued by businesses to
finance their operations. Notes, bonds, debentures, and commercial
paper are the most common types of corporate debt securities, with
the primary difference being their maturities and secured or
unsecured status. Certain debt securities held by the Fund may
include debt instruments that are similar in many respects to
preferred securities.
\12\ Under normal market conditions, at least 80% of the Fund's
investments in U.S. corporate bonds must have $100 million or more
par amount outstanding to be considered as an eligible investment
and a non-U.S. corporate bond must have $200 million 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 bond issuances.
---------------------------------------------------------------------------
Initially, the Fund will invest at least 80% of the Fund's net
assets in Income Securities of an issuing firm when the issuing firm
(``issuer'') has a long-term issuer credit rating of investment grade
at the time of the investment. However, the Fund reserves the right to
reduce the percentage of assets invested in investment grade issuers.
``Investment grade'' is defined as those issuers that have a long-term
credit rating of ``BBB-'' or higher by Standard & Poor's Rating Group,
a division of McGraw Hill Companies, Inc. (``S&P''), or ``Baa3'' or
higher by Moody's Investors Service, Inc. (``Moody's''), or comparably
rated by another nationally recognized statistical rating organization
(``NRSRO''). The Fund may also invest in securities that are unrated by
an NRSRO if such securities are of comparable credit quality.
Comparable credit quality of securities that are unrated by an NRSRO
will be determined by the Sub-Adviser based on fundamental credit
analysis of the unrated issuer and comparable NRSRO rated peer issuers
of the same industry sector. On a best efforts basis, the Sub-Adviser
will attempt to make a rating determination based on publicly available
data. Factors taken into consideration in determining the comparable
credit quality of the unrated issuer will be company leverage, capital
structure, liquidity, funding, sustainability of cash flows, earnings
quality, market position, and asset quality. In the event that a
security is rated by multiple NRSROs and receives divergent ratings,
the Fund will treat the issuing firm as being rated in the highest
rating category received from an NRSRO.
Initially, the Fund may invest up to 20% of the Fund's net assets
in Income Securities issued by below-investment grade issuers if that
security has acceptable credit quality and attractive relative value.
However, the Fund reserves the right to increase the percentage of
assets invested in below-investment grade securities. ``Below
investment grade'' is defined as those issuers that have a long-term
credit rating of ``BBB-'' or lower by ``S&P,'' or ``Baa3'' or lower by
Moody's, or comparably rated by another NRSRO. The Fund may also invest
in securities that are unrated by an NRSRO if such securities are of
comparable credit quality as determined by the Sub-Adviser.
The Fund intends to invest at least 25% of its assets in securities
of financial companies. Financial companies include, but are not
limited to, companies involved in activities such as banking, mortgage
finance, consumer finance, specialized finance, investment banking and
brokerage, asset management and custody, corporate lending, insurance
and financial investment, and real estate, including but not limited to
real estate investment trusts (``REITs'').
Other Investments
While the Fund, under normal market conditions, will invest at
least 80% of its net assets (including investment borrowings) in
Preferred Securities and Income Securities, the Fund also may invest
the remainder of its assets in other investments, as described below.
Normally, the Fund may invest up to 15% of its net assets in
securities with maturities of less than one year or cash equivalents,
or it may hold cash. The percentage of the Fund invested in such
holdings will vary and depend on several factors, including market
conditions. For temporary defensive purposes and during periods of high
cash inflows or outflows, the Fund may depart from its principal
investment 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 Sub-Adviser or the Adviser believes
securities in which the Fund normally invests have elevated risks due
to political or economic factors and in other extraordinary
circumstances.
The Fund may also invest in U.S. government securities \13\ or
short-term debt securities \14\ to keep cash on hand
[[Page 76151]]
fully invested or for temporary defensive purposes. Short-term debt
securities are securities from issuers having a long-term debt rating
of at least A by S&P Ratings, Moody's, or Fitch, Inc. and having a
maturity of one year or less. The use of temporary investments is not a
part of the principal investment strategy of the Fund.
---------------------------------------------------------------------------
\13\ U.S. government securities include U.S. Treasury
obligations and securities issued or guaranteed by various agencies
of the U.S. government, or by various instrumentalities which have
been established or sponsored by the U.S. government. U.S. Treasury
obligations are backed by the ``full faith and credit'' of the U.S.
government. Securities issued or guaranteed by federal agencies and
U.S. government sponsored instrumentalities may or may not be backed
by the full faith and credit of the U.S. government.
\14\ Short-term debt securities are defined to include, without
limitation, the following:
(1) 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) Certificates of deposit issued against funds deposited in a
bank or savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. If such certificates of deposit are non-
negotiable, they will be considered illiquid securities and be
subject to the Fund's 15% restriction on investments in illiquid
securities.
(3) Bankers' acceptances, which are short-term credit
instruments used to finance commercial transactions.
(4) Repurchase agreements, which involve purchases of debt
securities. In such an action, at the time the Fund purchases the
security, it simultaneously agrees to resell and redeliver the
security to the seller, who also simultaneously agrees to buy back
the security at a fixed price and time.
(5) 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.
(6) Commercial paper, which are short-term unsecured promissory
notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand
notes are direct lending arrangements between the Fund and a
corporation. There is no secondary market for the notes, and they
will be considered illiquid securities and be subject to the Fund's
15% restriction on investments in illiquid securities. However, they
are redeemable by the Fund at any time. The Fund's Sub-Adviser will
consider the financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity ratios) and will continuously
monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand. The
Fund may only invest in commercial paper rated A-2 or higher by S&P
Ratings, Prime-2 or higher by Moody's, or F2 or higher by Fitch,
Inc.
---------------------------------------------------------------------------
The Fund may also invest in senior loans, second lien loans, loan
participations, payment-in-kind securities, zero coupon bonds, bank
certificates of deposit, fixed-time deposits, bankers' acceptances,
U.S. government securities, or fixed income securities issued by non-
U.S. governments denominated in U.S. dollars.
The Fund may invest in warrants. Warrants acquired by the Fund
entitle it to buy common stock from the issuer at a specified price and
time. They do not represent ownership of the securities but only the
right to buy them. Warrants are subject to the same market risks as
stocks, but may be more volatile in price. The Fund's investment in
warrants will not entitle it to receive dividends or exercise voting
rights and will become worthless if the warrants cannot be profitably
exercised before their expiration date.
The Fund may invest in other pooled investment vehicles and
business development companies that are exchange listed and that invest
primarily in securities of the types in which the Fund may invest
directly.
Consistent with the Exemptive Order, the Fund will not invest in
options contracts, futures contracts, or swap agreements.
The Fund will not take short positions in securities (``short
sales'').
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including (1) non-negotiable certificates of deposit and master demand
notes,\15\ (2) Rule 144A securities, and (3) senior loans, second lien
loans, and loan participation interests. 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 securities. Illiquid securities 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.\16\
---------------------------------------------------------------------------
\15\ See note 14, supra.
\16\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also Investment Company Act
Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970)
(Statement Regarding ``Restricted Securities''); Investment Company
Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992)
(Revisions of Guidelines to Form N-1A). A fund's portfolio security
is illiquid if it cannot be disposed of in the ordinary course of
business within seven days at approximately the value ascribed to it
by the fund. See Investment Company Act Release No. 14983 (March 12,
1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7
under the 1940 Act); and Investment Company Act Release No. 17452
(April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A
under the Securities Act of 1933).
---------------------------------------------------------------------------
The Fund will be classified as ``non-diversified'' under the 1940
Act and as a result may invest a relatively high percentage of its
assets in a limited number of issuers. The Fund will only be limited as
to the percentage of its assets which may be invested in the securities
of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (``Code'').\17\
---------------------------------------------------------------------------
\17\ See 26 U.S.C. 851.
---------------------------------------------------------------------------
Other than financial companies, the Fund may not invest 25% or more
of the value of its total assets in securities of issuers in any one
industry or group of industries. This restriction does not apply to
obligations issued or guaranteed by the U.S. Government, its agencies,
or instrumentalities.\18\
---------------------------------------------------------------------------
\18\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests more than 25% of
the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
---------------------------------------------------------------------------
The Fund intends to qualify annually and to elect to be treated as
a regulated investment company (``RIC'') under the Code.\19\
---------------------------------------------------------------------------
\19\ 26 U.S.C. 851.
---------------------------------------------------------------------------
The Fund's investments will be consistent with the Fund's
investment objective and will not be used to enhance leverage.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600. The Exchange represents
that, for initial and/or continued listing, the Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\20\ as provided by
NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be
outstanding at the commencement of trading on the Exchange. The
Exchange will obtain a representation from the issuer of the Shares
that the net asset value (``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.
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\20\ 17 CFR 240.10A-3.
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Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis, at
NAV, only in large specified blocks each consisting of 50,000 Shares
(each such block of Shares, a ``Creation Unit''). The consideration for
purchase of Creation Unit aggregations of the Fund may consist of (i)
cash in lieu of all or a portion of the Deposit Securities, as defined
below, and/or (ii) a designated portfolio of securities determined by
First Trust (``Deposit Securities'') per Creation Unit aggregation
generally conforming to holdings of the Fund (``Fund Securities'') and
generally an amount of cash (``Cash Component''). Together, the Deposit
Securities and the Cash Component (including the cash in lieu amount)
constitute the ``Fund Deposit,'' which represents the minimum initial
and subsequent investment amount for a Creation Unit aggregation of the
Fund.
The Custodian, through the National Securities Clearing Corporation
(``NSCC''), will make available on each business day, prior to the
opening of business of the New York Stock Exchange (``NYSE'')
(currently 9:30 a.m., Eastern Time (``E.T.'')), the list of the names
and the required number of shares of each Deposit Security to be
included in the current Fund Deposit (based on information at the end
of the previous business day) for the Fund.
Such Fund Deposit will be applicable, subject to any adjustments as
described below, in order to effect creations of Creation Unit
aggregations of the Fund until such time as the next-announced
[[Page 76152]]
composition of the Deposit Securities is made available.
In order to be eligible to place orders with the Distributor and to
create or redeem a Creation Unit aggregation of the Fund, an entity
must be an authorized participant, and must have executed an agreement
with the Distributor and transfer agent, with respect to creations and
redemptions of Creation Unit aggregations, and have international
operational capabilities.
Fund Shares may be redeemed only in Creation Unit aggregations at
their NAV next determined after receipt of a redemption request in
proper form by the Fund through the transfer agent and only on a
business day. The Fund will not redeem Shares in amounts less than
Creation Unit aggregations.
The Custodian, through the NSCC, will make available prior to the
opening of business on the NYSE (currently 9:30 a.m., E.T.) on each
business day, the identity of the Fund Securities that will be
applicable (subject to possible amendment or correction) to redemption
requests received in proper form on that day. Fund Securities received
on redemption may not be identical to Deposit Securities that are
applicable to creations of Creation Unit aggregations.
All orders to create or redeem Creation Unit aggregations must be
received by the transfer agent no later than the closing time of the
regular trading session on the NYSE (ordinarily 4:00 p.m., E.T.), in
each case on the date such order is placed in order for creation or
redemption of Creation Unit aggregations to be effected based on the
NAV of Shares of the Fund as next determined on such date after receipt
of the order in proper form.
The Fund's NAV will be determined as of the close of trading
(normally 4:00 p.m., E.T.) on each day the NYSE is open for business.
NAV 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, and dividing such amount by the
total number of Shares outstanding. The result, rounded to the nearest
cent, will be the NAV per Share.
The Fund's investments will be valued at market value or, in the
absence of market value with respect to any portfolio securities, at
fair value in accordance with valuation procedures adopted by the
Trust's Board of Trustees and in accordance with the 1940 Act.
Availability of Information
The Fund's Web site (www.ftportfolios.com), which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund that may be downloaded. The Fund's Web
site will include additional quantitative information updated on a
daily basis, including, for the Fund, (1) daily trading volume, the
prior business day's reported closing price, NAV and mid-point of the
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask
Price''),\21\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the
frequency distribution of discounts and premiums of the daily Bid/Ask
Price against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. On each business day, before commencement
of trading in Shares in the Core Trading Session on the Exchange, the
Fund will disclose on its Web site the Disclosed Portfolio as defined
in NYSE Arca Equities Rule 8.600(c)(2) that will form the basis for the
Fund's calculation of NAV at the end of the business day.\22\
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\21\ The Bid/Ask Price of the Fund will be determined using the
mid-point of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Fund's NAV. The records relating
to Bid/Ask Prices will be retained by the Fund and its service
providers.
\22\ Under accounting procedures followed by the Fund, trades
made on the prior business day (``T'') will be booked and reflected
in NAV on the current business day (``T+1''). Accordingly, the Fund
will be able to disclose at the beginning of the business day the
portfolio that will form the basis for the NAV calculation at the
end of the business day.
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On a daily basis, the Adviser will disclose for each portfolio
security and other financial instrument of the Fund the following
information on the Fund's Web site: Ticker symbol (if applicable), name
of security and financial instrument, number of shares or dollar value
of securities and financial instruments held in the portfolio, and
percentage weighting of the security and financial instrument in the
portfolio. The Web site information will be publicly available at no
charge.
In addition, a basket composition file, which includes the security
names and share quantities required to be delivered in exchange for the
Fund's Shares, together with estimates and actual cash components, will
be publicly disseminated daily prior to the opening of the NYSE via the
NSCC. The basket represents one Creation Unit of the Fund.
Information regarding the intra-day value of the Shares of the Fund
(the ``indicative optimized portfolio value'' or ``IOPV''), which is
the Portfolio Indicative Value (``PIV'') as defined in NYSE Arca
Equities Rule 8.600 (c)(3), will be widely disseminated by one or more
major market data vendors at least every 15 seconds during the Core
Trading Session.\23\ The dissemination of the IOPV, together with the
Disclosed Portfolio, will allow investors to determine the value of the
underlying portfolio of the Fund on a daily basis and to provide a
close estimate of that value throughout the trading day. The IOPV
should not be viewed as a ``real-time'' update of the NAV per Share of
the Fund because the IOPV may not be calculated in the same manner as
the NAV, which is computed once a day, generally at the end of the
business day. The price of a non-U.S. security that is primarily traded
on a non-U.S. exchange shall be updated, using the last sale price,
every 15 seconds throughout the trading day, provided, that upon the
closing of such non-U.S. exchange, the closing price of the security,
after being converted to U.S. dollars, will be used. Furthermore, in
calculating the IOPV of the Fund's Shares, exchange rates may be used
throughout the day (9:00 a.m. to 4:15 p.m., E.T.) that may differ from
those used to calculate the NAV per Share of the Fund and consequently
may result in differences between the NAV and the IOPV.
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\23\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available IOPVs
taken from the Consolidated Tape Association (``CTA'') or other data
feeds.
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The Adviser represents that the Trust, First Trust, and BNY will
not disseminate non-public information concerning the Trust and the
Fund.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's
Form N-CSR and Form N-SAR, filed twice a year. The Trust's SAI and
Shareholder Reports are available free upon request from the Trust, and
those documents and the Form N-CSR and Form N-SAR may be viewed on-
screen or downloaded from the Commission's Web site at www.sec.gov.
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 the
Shares will be available via the CTA high-speed line. The intra-day,
closing, and settlement prices of the portfolio securities and other
instruments will be also readily available from the national securities
exchanges trading such securities,
[[Page 76153]]
automated quotation systems, published or other public sources, or on-
line information services such as Bloomberg or Reuters.
Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies,
distributions, and taxes is included in the Registration Statement. All
terms relating to the Fund that are referred to, but not defined in,
this proposed rule change are defined in the Registration Statement.
Trading Halts
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.\24\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Equities
Rule 7.12 have been reached. Trading also may be halted because of
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities and/or the
financial instruments comprising 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. Trading in
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D),
which sets forth circumstances under which Shares of the Fund may be
halted.
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\24\ See NYSE Arca Equities Rule 7.12, Commentary .04.
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Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late
Trading Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price
variation (``MPV'') for quoting and entry of orders in equity
securities traded on the NYSE Arca Marketplace is $0.01, with the
exception of securities that are priced less than $1.00 for which the
MPV for order entry is $0.0001.
Surveillance
The Exchange intends to utilize its existing surveillance
procedures applicable to derivative products (which include Managed
Fund Shares) to monitor trading in the Shares. The Exchange represents
that these procedures are adequate to properly monitor Exchange trading
of the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws.
The Exchange's current trading surveillance focuses on detecting
securities trading outside their normal patterns. When such situations
are detected, surveillance analysis follows and investigations are
opened, where appropriate, to review the behavior of all relevant
parties for all relevant trading violations.
The Exchange may obtain information via the ISG from other
exchanges that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.\25\ Initially, at
least 50% of the Fund's net assets invested in Preferred Securities and
Income Securities will be exchange-listed and such exchanges will be
members of ISG or parties to a comprehensive surveillance sharing
agreement with the Exchange.
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\25\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. See note 9, supra.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit (``ETP'') Holders in an Information Bulletin
(``Bulletin'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Bulletin will discuss the
following: (1) The procedures for purchases and redemptions of Shares
in Creation Unit aggregations (and that Shares are not individually
redeemable); (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty
of due diligence on its ETP Holders to learn the essential facts
relating to every customer prior to trading the Shares; (3) the risks
involved in trading the Shares during the Opening and Late Trading
Sessions when an updated PIV will not be calculated or publicly
disseminated; (4) how information regarding the PIV is disseminated;
(5) the requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Exchange Act.
The Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
The basis under the Exchange Act for this proposed rule change is
the requirement under Section 6(b)(5) \26\ that an exchange have rules
that are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\26\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.600. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares in all trading
sessions and to deter and detect violations of Exchange rules and
applicable federal securities laws. The Exchange may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a comprehensive surveillance sharing
agreement. Under normal market conditions, the Fund will invest at
least 80% of its net assets (including investment borrowings) in
Preferred Securities and Income Securities. The Adviser represents that
initially at least 50% of the Fund's net assets invested in Preferred
Securities and 50% of the Income Securities held by the Fund will be
exchange-listed. The foreign equity securities, including preferred,
hybrid-preferred, and contingent convertible capital, securities in
which the Fund may invest will be limited to securities that trade in
markets that are members of the ISG. Initially, the Fund will invest at
least 80% of the Fund's net assets in Income Securities of an issuing
firm when the issuer has a long-term issuer credit rating of investment
grade at the time of the investment. Under normal
[[Page 76154]]
market conditions, at least 80% of the Fund's investments in US
corporate bonds must have $100 million or more par amount outstanding
to be considered as an eligible investment and a non-U.S. corporate
bond must have $200 million or more par amount outstanding and
significant par value traded to be considered as an eligible
investment. The intra-day, closing, and settlement prices of the
portfolio securities and other instruments will be also readily
available from the national securities exchanges trading such
securities, automated quotation systems, published or other public
sources, or on-line information services. The Fund may hold, in the
aggregate, up to 15% of its net assets in: (1) Illiquid securities,
including non-negotiable certificates of deposit and master demand
notes,\27\ (2) Rule 144A securities, and (3) senior loans, second lien
loans, and loan participation interests. Consistent with the Exemptive
Order, the Fund will not invest in options contracts, futures
contracts, or swap agreements. The Fund's investments will be
consistent with the Fund's investment objective and will not be used to
enhance leverage. The PIV will be widely disseminated by one or more
major market data vendors at least every 15 seconds during the Core
Trading Session.
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\27\ See note 14, supra.
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The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the 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. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. Moreover, the PIV will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Exchange's Core Trading Session. On each business
day, before commencement of trading in Shares in the Core Trading
Session on the Exchange, the Fund will disclose on its Web site the
Disclosed Portfolio that will form the basis for the Fund's calculation
of NAV at the end of the business day. 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, and quotation and last-sale information will
be available via the CTA high-speed line. The Web site for the Fund
will include a form of the prospectus for the Fund and additional data
relating to NAV and other applicable quantitative information.
Moreover, prior to the commencement of trading, the Exchange will
inform its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares. Trading
in Shares of the Fund will be halted if the circuit breaker parameters
in NYSE Arca Equities Rule 7.12 have been reached or because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable, and trading in the Shares will be
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth
circumstances under which Shares of the Fund may be halted. In
addition, as noted above, investors will have ready access to
information regarding the Fund's holdings, the PIV, the Disclosed
Portfolio, and quotation and last-sale information for the Shares.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, as noted above, investors
will have ready access to information regarding the Fund's holdings,
the PIV, the Disclosed Portfolio, and quotation and last-sale
information for the Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2012-139 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2012-139.
This file number should be included on the subject line if email is
used. To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml.) Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE., Washington, DC 20549, on official
[[Page 76155]]
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEArca-2012-139 and should be submitted on or before
January 14, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30888 Filed 12-21-12; 8:45 am]
BILLING CODE 8011-01-P
