Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change To List and Trade Shares of First Trust Inflation Managed Fund, 54700-54704 [2013-21533]

Download as PDF 54700 Federal Register / Vol. 78, No. 172 / Thursday, September 5, 2013 / Notices III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change is effective upon filing pursuant to Section 19(b)(3)(A) 14 of the Act and subparagraph (f)(2) of Rule 19b–4 15 thereunder, because it establishes a due, fee, or other charge imposed by NYSE MKT. At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) 16 of the Act to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: ehiers on DSK2VPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEMKT–2013–71 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–NYSEMKT–2013–71. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEMKT–2013–71 and should be submitted on or before September 26, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–21572 Filed 9–4–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70282; File No. SR– NYSEArca–2013–70] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of Proposed Rule Change To List and Trade Shares of First Trust Inflation Managed Fund August 29, 2013. I. Introduction On July 8, 2013, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of the First Trust Inflation Managed Fund (‘‘Fund’’) under NYSE Arca Equities Rule 8.600. The proposed rule change was published for comment in the Federal Register on July 25, 2013.3 The Commission received no comments on the proposed rule change. This order 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 70008 (July 19, 2013), 78 FR 45003 (‘‘Notice’’). 1 15 14 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(2). 16 15 U.S.C. 78s(b)(2)(B). 15 17 VerDate Mar<15>2010 14:10 Sep 04, 2013 Jkt 229001 PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 grants approval of the proposed rule change. II. Description of the Proposed Rule Change The Exchange proposes to list and trade Shares of the Fund pursuant to NYSE Arca Equities Rule 8.600, which governs the listing and trading of Managed Fund Shares on the Exchange. The Shares will be offered by First Trust Exchange-Traded Fund IV (‘‘Trust’’), which is organized as a Massachusetts business trust and is registered with the Commission as an open-end management investment company.4 The investment adviser to the Fund will be First Trust Advisors L.P. (‘‘Adviser’’ or ‘‘First Trust’’). First Trust Portfolios L.P. will be the principal underwriter and distributor of the Fund’s Shares. Bank of New York Mellon (‘‘BNY’’) will serve as the administrator, custodian, and transfer agent for the Fund. The Exchange states that the Adviser is not a broker-dealer but is affiliated with a broker-dealer and has implemented a fire wall with respect to its brokerdealer affiliate regarding access to information concerning the composition and/or changes to the Fund’s portfolio.5 The Fund’s primary investment objective will be to seek long-term capital appreciation, and its secondary investment objective will be to seek current income. The Fund will be an actively managed exchange-traded fund that will invest in: (1) Exchange-listed common stocks and other equity securities described below (including ‘‘Depositary Receipts,’’ as defined herein) of companies in the agriculture, energy, metals, and mining sectors; (2) exchange-traded products (‘‘Underlying ETPs’’) 6 that hold commodities, such as 4 The Trust is registered under the Investment Company Act of 1940 (‘‘1940 Act’’). On December 7, 2012, the Trust filed with the Commission an amendment to the Trust’s registration statement on Form N–1A under the Securities Act of 1933 (‘‘1933 Act’’) and under the 1940 Act relating to the Fund (File Nos. 333–174332 and 811–22559) (‘‘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. 28468 (October 27, 2008) (File No. 812–13477) (‘‘Exemptive Order’’). 5 See NYSE Arca Equities Rule 8.600, Commentary .06. In the event (a) the Adviser or any sub-adviser becomes newly affiliated with a brokerdealer, or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated with a broker-dealer, it will implement a fire wall with respect to its relevant personnel or its broker-dealer affiliate 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 nonpublic information regarding such portfolio. 6 The term ‘‘Underlying ETPs’’ includes Investment Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio Depositary E:\FR\FM\05SEN1.SGM 05SEN1 Federal Register / Vol. 78, No. 172 / Thursday, September 5, 2013 / Notices gold and silver, or futures on such commodities; (3) debt securities and Underlying ETPs that invest in such securities; and (4) real estate interests, including other exchange-traded funds that invest in such interests. The asset class allocation between equity securities, bonds, commodities, and real estate will be performed on a quarterly basis by First Trust. Changes to the asset allocation will be considered on a shorter time frame if market conditions warrant.7 After the initial asset class allocation, the securities for each asset type will be selected as described below. Equity Allocation The Fund may invest in equity securities, which include common stocks; preferred securities; warrants to purchase common stocks or preferred securities; securities convertible into common stocks or preferred securities; and other securities with equity characteristics. The Fund also may invest in U.S. dollar-denominated foreign equity securities.8 Under normal market conditions,9 the Fund will invest, in addition to common stocks, in U.S. dollardenominated sponsored depositary receipts, which will include American Depositary Receipts (‘‘ADRs’’), Global Depositary Receipts (‘‘GDRs’’), European Depositary Receipts (‘‘EDRs’’), and American Depositary Shares (‘‘ADSs’’) (collectively ‘‘Depositary Receipts’’),10 of agriculture, energy, metals, and mining companies. The Adviser anticipates that the equities portion of the portfolio initially will represent 60% of the net assets of the Fund, although this percentage may vary over time. An initial universe of inflation-related stocks will be created by selecting stocks of agricultural, energy, metals, and mining companies that trade on a U.S. stock exchange and have adequate liquidity for investment. The Fund’s portfolio will be selected by examining the historical financial results of the securities from the initial universe. Companies that do not produce positive cash flow or companies with credit quality issues will be eliminated. The securities will then be evaluated by fundamental factors such as sales, earnings, and cash flow growth; valuation factors such as price/earnings, price/cash flow, price/sales, and price/ book; and technical factors such as price momentum and earnings surprises. An estimated value will be calculated for each of the companies. The companies that currently trade at an attractive market price relative to their estimated value will be favored over companies that do not. The final portfolio will then be selected by the Adviser based on the security’s fundamentals, valuation and technical factors, the security’s relative valuation, and other qualitative factors such as competitive advantages, new products, and quality of management. ehiers on DSK2VPTVN1PROD with NOTICES Bond Allocation Receipts (as described in NYSE Arca Equities Rule 8.100); Trust Issued Receipts (as described in NYSE Arca Equities Rule 8.200); Commodity-Based Trust Shares (as described in NYSE Arca Equities Rule 8.201); Currency Trust Shares (as described in NYSE Arca Equities Rule 8.202); Commodity Index Trust Shares (as described in NYSE Arca Equities Rule 8.203); Trust Units (as described in NYSE Arca Equities Rule 8.500); Managed Fund Shares (as described in NYSE Arca Equities Rule 8.600); and closed-end funds. The Underlying ETPs all will be listed and traded in the U.S. on registered exchanges. 7 Such market conditions could include periods of extreme volatility and force majeure events including, but not limited to, elements of nature or acts of God, earthquakes, strikes, riots, acts of war, terrorism, or other national emergencies. 8 See infra note 10. 9 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. 10 The equity securities, including Depositary Receipts, in which the Fund will invest will trade in markets that are members of the Intermarket Surveillance Group (‘‘ISG’’) or are parties to comprehensive surveillance sharing agreements with the Exchange. VerDate Mar<15>2010 14:10 Sep 04, 2013 Jkt 229001 The Fund will invest in the types of bonds described below primarily through investing in Underlying ETPs that concentrate in these types of holdings. Bonds with fixed coupons during periods of rising inflation expectations may likely experience price depreciation due to the impact of rising interest rates. The negative effects of inflation on bonds may be offset through Underlying ETPs that invest in inflation-linked bonds. Inflation-linked government bonds, commonly known in the U.S. as Treasury Inflation-Protected Securities (‘‘TIPS’’), are securities issued by governments that are designed to provide inflation protection to investors. The coupon payments and principal value on these securities are adjusted according to inflation over the life of the bonds. The Underlying ETPs chosen to represent the bond portion of the portfolio will be reviewed for capitalization, liquidity, expenses, tracking error, and taxation structure factors. First Trust anticipates that the bond portion of the portfolio will initially represent approximately 20% PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 54701 of the net assets of the Fund, although this percentage may vary over time. The Fund, through investments in Underlying ETPs, will invest primarily in investment grade debt securities with respect to the bond portion of its portfolio and may invest up to 15% of its net assets in high yield debt securities, including leveraged loans,11 that are rated below investment grade at the time of purchase, or unrated securities deemed by the Fund’s Adviser to be of comparable quality. ‘‘Below investment grade’’ is defined as those securities that have a long-term credit rating below ‘‘BBB-’’ by Standard & Poor’s Rating Group, a division of McGraw Hill Companies, Inc. (‘‘S&P’’), or below ‘‘Baa3’’ by Moody’s Investors Service, Inc. (‘‘Moody’s’’), or comparably rated by another nationally recognized statistical rating organization. The Fund, or the Underlying ETPs in which it may invest, may invest in a variety of debt securities, including corporate debt securities, U.S. government securities, and non-U.S. debt securities. 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. Commercial paper has the shortest term and is usually unsecured. Certain debt securities held by the Fund may include debt instruments that have economic characteristics that are similar to preferred securities. Such debt instruments are typically issued by corporations, generally in the form of interest bearing notes, or by an affiliated business trust of a corporation, generally in the form of (i) beneficial interests in subordinated debentures or similarly structured securities or (ii) more senior debt securities that pay income and trade in a manner similar to preferred securities. Such debt instruments that have economic characteristics similar to preferred securities include trust preferred securities, hybrid trust 11 Under normal market conditions, the Fund may invest up to 15% of its net asset value (‘‘NAV’’) in leveraged loans, including senior secured bank loans, unsecured and/or subordinated bank loans, loan participations, and unfunded contracts. The Fund may invest in such loans by purchasing assignments of all or a portion of loans or loan participations from third parties. These loans are made by or issued to corporations primarily to finance acquisitions, refinance existing debt, support organic growth, or pay out dividends, and are typically originated by large banks and are then syndicated out to institutional investors as well as to other banks. E:\FR\FM\05SEN1.SGM 05SEN1 54702 Federal Register / Vol. 78, No. 172 / Thursday, September 5, 2013 / Notices preferred securities, and senior notes/ baby bonds. The Fund will invest in Underlying ETPs that are designed to track government bond indexes, bank loan indexes, and floating rate security indexes. Commodities Allocation The Fund will invest in commodities through investing in Underlying ETPs that invest in commodities or futures on such commodities, such as gold, silver, and commodity indexes. In general, commodities have relatively high correlations with inflation, and the prices of real assets, such as gold, silver, oil, and copper, often rise along with increasing interest rates and inflation. Additionally, commodities normally move in the opposite direction of the U.S. dollar. First Trust anticipates that the commodities portion of the portfolio will represent 10% of the initial net assets of the Fund, although this percentage may vary over time. Real Estate Allocation The Fund will invest in U.S. exchange-listed securities of real estate investment trusts (‘‘REITS’’). In general, real estate prices have generated a correspondingly large increase in return and largely preserved the purchasing power of the original investment during periods of high inflation. The real estate portion of the portfolio will represent 10% of the initial net assets of the Fund, although this percentage may vary over time. The Fund also may invest in exchange-traded funds designed to track real estate indexes. Other Investments ehiers on DSK2VPTVN1PROD with NOTICES Normally, the Fund will invest substantially all of its assets in the securities allocations described above to meet its investment objectives. The Fund may invest the remainder of its 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 may 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.12 During 12 The Fund may, without limit as to percentage of assets, purchase U.S. government securities or short-term debt securities to keep cash on hand 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, Moody’s, or Fitch, Inc. (‘‘Fitch’’) and having a maturity of one year or less. The use of VerDate Mar<15>2010 14:10 Sep 04, 2013 Jkt 229001 such periods, the Fund may not be able to achieve its investment objectives. The Fund may adopt a defensive strategy when the portfolio manager 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 invest up to 15% of its net assets in U.S. exchange-listed futures, interest rate swaps, total return swaps, non-U.S. currency swaps, credit default swaps,13 U.S. exchange-listed options, forward contracts, and other derivative instruments in the aggregate to seek to enhance returns,14 to hedge some of the risks of its investments in securities,15 as a substitute for a position in the underlying asset, to reduce transaction costs, to maintain full market exposure in a given asset class, to manage cash flows, to limit exposure to losses due to changes to non-U.S. currency exchange rates, or to preserve capital.16 The Fund will only enter into transactions in derivative instruments with counterparties that First Trust reasonably believes are capable of performing under the contract 17 and these temporary investments will not be a part of a principal investment strategy of the Fund. Shortterm 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; (3) bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions; (4) repurchase agreements, which involve purchases of debt securities; (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; and (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. The Fund may only invest in commercial paper rated A–1 or higher by S&P, Prime-1 or higher by Moody’s, or F2 or higher by Fitch. 13 To the extent practicable, the Fund will invest in swaps cleared through the facilities of a centralized clearing house. 14 For example, the Fund may sell exchange-listed covered calls on equity positions in the portfolio in order to enhance its income. 15 The Fund may use derivative investments to hedge against interest rate and market risks. The Fund may engage in various interest rate and currency hedging transactions, including buying or selling U.S. exchange-listed options or entering into other transactions including forward contracts, fully collateralized swaps, and other derivatives transactions. 16 The Fund will not enter into futures and options transactions if the sum of the initial margin deposits and premiums paid for unexpired options or futures exceeds 5% of the Fund’s total assets. 17 The Fund will seek, where possible, to use counterparties, as applicable, whose financial status PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 will post as collateral at least $250,000 each day. The Fund may invest in shares of money market funds to the extent permitted by the 1940 Act. 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. 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 Rule 144A securities deemed illiquid by the Adviser 18 and master demand notes. 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. The Fund intends to qualify annually and to elect to be treated as a regulated investment company under the Internal Revenue Code.19 The Fund may invest up to 10% of its net assets in inverse Underlying ETPs, but it will not invest in leveraged or inverse leveraged Underlying ETPs. The Fund’s investments will be consistent with the Fund’s investment objectives and will not be used to enhance leverage. That is, while the Fund will be permitted to borrow as is such that the risk of default is reduced; however, the risk of losses resulting from default is still possible. The Adviser’s Execution Committee will evaluate the creditworthiness of counterparties on an ongoing basis. In addition to information provided by credit agencies, the Adviser’s analysts will evaluate each approved counterparty using various methods of analysis, including the counterparty’s liquidity in the event of default, the broker-dealer’s reputation, the Adviser’s past experience with the broker-dealer, the Financial Industry Regulatory Authority’s (‘‘FINRA’’) BrokerCheck and disciplinary history, and its share of market participation. 18 In reaching liquidity decisions, the Adviser may consider the following factors: the frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). 19 26 U.S.C. 851. E:\FR\FM\05SEN1.SGM 05SEN1 Federal Register / Vol. 78, No. 172 / Thursday, September 5, 2013 / Notices permitted under the 1940 Act, the Fund’s investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Fund’s broad-based securities market index (as defined in Form N–1A) (i.e., S&P 500). Additional information regarding the Trust and the Shares, including investment strategies, risks, creation and redemption procedures, fees, portfolio holdings disclosure policies, distributions, and taxes, among other things, is included in the Notice and Registration Statement, as applicable.20 ehiers on DSK2VPTVN1PROD with NOTICES III. Discussion and Commission’s Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act 21 and the rules and regulations thereunder applicable to a national securities exchange.22 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,23 which requires, among other things, that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission notes that the Fund and the Shares must comply with the requirements of NYSE Arca Equities Rule 8.600 for the Shares to be listed and traded on the Exchange. The Commission finds that the proposal to list and trade the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the Act,24 which sets forth Congress’s finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for, and transactions in, securities. Quotation and last-sale information for the Shares will be available via the Consolidated Tape Association (‘‘CTA’’) high-speed line. In addition, the Portfolio Indicative Value, as defined in NYSE Arca Equities 20 See Notice and Registration Statement, supra notes 3 and 4, respectively. 21 15 U.S.C. 78f. 22 In approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 23 15 U.S.C. 78f(b)(5). 24 15 U.S.C. 78k–1(a)(1)(C)(iii). VerDate Mar<15>2010 14:10 Sep 04, 2013 Jkt 229001 Rule 8.600(c)(3), will be widely disseminated every 15 seconds throughout the Exchange’s Core Trading Session by one or more major market data vendors.25 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.26 The Fund’s NAV will be determined as of the close of trading (normally 4:00 p.m. Eastern Time) on each day the New York Stock Exchange is open for business. A basket composition file, which will include 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 New York Stock Exchange via the National Securities Clearing Corporation. 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. The intra-day, closing, and settlement prices of the portfolio securities will also be readily available from the national securities exchanges trading such securities, automated quotation systems, published or other public sources, or on-line information services such as Bloomberg or Reuters. The Fund’s Web site will include a form of the prospectus for the 25 According to the Exchange, several major market data vendors widely disseminate Portfolio Indicative Values taken from the CTA or other data feeds. In addition, the Exchange represents that the price of a non-U.S. security that is primarily traded on a non-U.S. exchange will 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. Further, in calculating the Portfolio Indicative Value of the Fund’s Shares, exchange rates may be used throughout the Core Trading Session 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 Portfolio Indicative Value. 26 On a daily basis, the Fund 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, if applicable, and 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. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 54703 Fund and additional data relating to NAV and other applicable quantitative information. The Commission further believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately and to prevent trading when a reasonable degree of transparency cannot be assured. The Commission notes 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.27 In addition, 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. The Exchange may halt trading in the Shares if trading is not occurring in the securities and/or the financial instruments comprising the Disclosed Portfolio of the Fund, or if other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present.28 Further, the Commission notes that the Reporting Authority that provides the Disclosed Portfolio must implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material, non-public information regarding the actual components of the portfolio.29 The Commission notes that the Financial Industry Regulatory Authority (‘‘FINRA’’), on behalf of the Exchange,30 will communicate as needed regarding trading in the Shares, equity securities, futures contracts, and options contracts with other markets and other entities that are members of the ISG, and FINRA, on behalf of the Exchange, may obtain trading information regarding trading in the 27 See NYSE Arca Equities Rule 8.600(d)(1)(B). NYSE Arca Equities Rule 8.600(d)(2)(C) (providing additional considerations for the suspension of trading in or removal from listing of Managed Fund Shares on the Exchange). 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. 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. 29 See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii). In addition, the Adviser represents that the Trust, First Trust, and BNY will not disseminate nonpublic information concerning the Trust. 30 The Exchange states that, while FINRA surveils trading on the Exchange pursuant to a regulatory services agreement, the Exchange is responsible for FINRA’s performance under this regulatory services agreement. 28 See E:\FR\FM\05SEN1.SGM 05SEN1 54704 Federal Register / Vol. 78, No. 172 / Thursday, September 5, 2013 / Notices Shares, equity securities, futures contracts, and options contracts from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, equity securities, futures contracts, and options contracts from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. The Exchange states that it has a general policy prohibiting the distribution of material, non-public information by its employees. The Exchange also states that the Adviser is not a broker-dealer but is affiliated with a broker-dealer, and the Adviser has implemented a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio.31 The Exchange represents that the Shares are deemed to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. In support of this proposal, the Exchange has made representations, including: (1) The Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rule 8.600. (2) The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. (3) The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws and that these procedures are adequate to ehiers on DSK2VPTVN1PROD with NOTICES 31 See supra note 5. An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (‘‘Advisers Act’’). As a result, the Adviser and its related personnel are subject to the provisions of Rule 204A–1 under the Advisers Act relating to codes of ethics. This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A–1 under the Advisers Act. In addition, Rule 206(4)–7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. VerDate Mar<15>2010 14:10 Sep 04, 2013 Jkt 229001 properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. (4) Prior to the commencement of trading, the Exchange will inform its Equity Trading Permit (‘‘ETP’’) Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (a) the procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (b) 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; (c) the risks involved in trading the Shares during the Opening and Late Trading Sessions when an updated Portfolio Indicative Value will not be calculated or publicly disseminated; (d) how information regarding the Portfolio Indicative Value will be disseminated; (e) 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 (f) trading information. (5) For initial and/or continued listing, the Fund will be in compliance with Rule 10A–3 under the Exchange Act,32 as provided by NYSE Arca Equities Rule 5.3. (6) The equity securities in which the Fund will invest, including Underlying ETPs, Depositary Receipts, REITs, common stocks, preferred securities, warrants, convertible securities, and U.S. dollar-denominated foreign securities, as well as certain derivatives such as options and futures contracts, will trade in markets that are ISG members or are parties to a comprehensive surveillance sharing agreement with the Exchange. (7) 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 Rule 144A securities deemed illiquid by the Adviser and master demand notes. (8) A minimum of 100,000 Shares of the Fund will be outstanding at the commencement of trading on the Exchange. (9) The Fund’s investments will be consistent with the Fund’s investment objectives and will not be used to enhance leverage. The Fund may invest up to 10% of its net assets in inverse Underlying ETPs, but it will not invest 32 17 PO 00000 CFR 240.10A–3. Frm 00088 Fmt 4703 Sfmt 4703 in leveraged or inverse leveraged Underlying ETPs. (10) The Fund will only enter into transactions in derivative instruments with counterparties that First Trust reasonably believes are capable of performing under the contract 33 and will post as collateral at least $250,000 each day. In addition, to the extent practicable, the Fund will invest in swaps cleared through the facilities of a centralized clearing house. This approval order is based on all of the Exchange’s representations and description of the Fund, including those set forth above and in the Notice.34 For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 35 and the rules and regulations thereunder applicable to a national securities exchange. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,36 that the proposed rule change (SR–NYSEArca– 2013–70) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.37 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–21533 Filed 9–4–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70287; File No. SR–NYSE– 2013–60] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the New York Stock Exchange Price List To Provide for Fees for a 40 Gigabit Liquidity Center Network Connection in the Exchange Data Center August 29, 2013. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the 33 See supra note 17. Commission notes that it does not regulate the market for futures in which the Fund plans to take positions. Limits on the positions that any person may take in futures may be directly set by the Commodity Futures Trading Commission or by the markets on which the futures are traded. The Commission has no role in establishing position limits on futures even though such limits could impact an exchange-traded product that is under the jurisdiction of the Commission. 35 15 U.S.C. 78f(b)(5). 36 15 U.S.C. 78s(b)(2). 37 17 CFR 200.30–3(a)(12). 34 The E:\FR\FM\05SEN1.SGM 05SEN1

Agencies

[Federal Register Volume 78, Number 172 (Thursday, September 5, 2013)]
[Notices]
[Pages 54700-54704]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-21533]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70282; File No. SR-NYSEArca-2013-70]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change To List and Trade Shares of First 
Trust Inflation Managed Fund

August 29, 2013.

I. Introduction

    On July 8, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the First 
Trust Inflation Managed Fund (``Fund'') under NYSE Arca Equities Rule 
8.600. The proposed rule change was published for comment in the 
Federal Register on July 25, 2013.\3\ The Commission received no 
comments on the proposed rule change. This order grants approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70008 (July 19, 
2013), 78 FR 45003 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund pursuant 
to NYSE Arca Equities Rule 8.600, which governs the listing and trading 
of Managed Fund Shares on the Exchange. The Shares will be offered by 
First Trust Exchange-Traded Fund IV (``Trust''), which is organized as 
a Massachusetts business trust and is registered with the Commission as 
an open-end management investment company.\4\ The investment adviser to 
the Fund will be First Trust Advisors L.P. (``Adviser'' or ``First 
Trust''). First Trust Portfolios L.P. will be the principal underwriter 
and distributor of the Fund's Shares. Bank of New York Mellon (``BNY'') 
will serve as the administrator, custodian, and transfer agent for the 
Fund. The Exchange states that the Adviser is not a broker-dealer but 
is affiliated with a broker-dealer and has implemented a fire wall with 
respect to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the Fund's portfolio.\5\
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    \4\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). On December 7, 2012, the Trust filed with the 
Commission an amendment to the Trust's registration statement on 
Form N-1A under the Securities Act of 1933 (``1933 Act'') and under 
the 1940 Act relating to the Fund (File Nos. 333-174332 and 811-
22559) (``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. 28468 (October 
27, 2008) (File No. 812-13477) (``Exemptive Order'').
    \5\ See NYSE Arca Equities Rule 8.600, Commentary .06. In the 
event (a) the Adviser or any sub-adviser becomes newly affiliated 
with a broker-dealer, or (b) any new adviser or sub-adviser is a 
registered broker-dealer or becomes affiliated with a broker-dealer, 
it will implement a fire wall with respect to its relevant personnel 
or its broker-dealer affiliate 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.
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    The Fund's primary investment objective will be to seek long-term 
capital appreciation, and its secondary investment objective will be to 
seek current income. The Fund will be an actively managed exchange-
traded fund that will invest in: (1) Exchange-listed common stocks and 
other equity securities described below (including ``Depositary 
Receipts,'' as defined herein) of companies in the agriculture, energy, 
metals, and mining sectors; (2) exchange-traded products (``Underlying 
ETPs'') \6\ that hold commodities, such as

[[Page 54701]]

gold and silver, or futures on such commodities; (3) debt securities 
and Underlying ETPs that invest in such securities; and (4) real estate 
interests, including other exchange-traded funds that invest in such 
interests.
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    \6\ The term ``Underlying ETPs'' includes 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); 
Trust Issued Receipts (as described in NYSE Arca Equities Rule 
8.200); Commodity-Based Trust Shares (as described in NYSE Arca 
Equities Rule 8.201); Currency Trust Shares (as described in NYSE 
Arca Equities Rule 8.202); Commodity Index Trust Shares (as 
described in NYSE Arca Equities Rule 8.203); Trust Units (as 
described in NYSE Arca Equities Rule 8.500); Managed Fund Shares (as 
described in NYSE Arca Equities Rule 8.600); and closed-end funds. 
The Underlying ETPs all will be listed and traded in the U.S. on 
registered exchanges.
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    The asset class allocation between equity securities, bonds, 
commodities, and real estate will be performed on a quarterly basis by 
First Trust. Changes to the asset allocation will be considered on a 
shorter time frame if market conditions warrant.\7\ After the initial 
asset class allocation, the securities for each asset type will be 
selected as described below.
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    \7\ Such market conditions could include periods of extreme 
volatility and force majeure events including, but not limited to, 
elements of nature or acts of God, earthquakes, strikes, riots, acts 
of war, terrorism, or other national emergencies.
---------------------------------------------------------------------------

Equity Allocation
    The Fund may invest in equity securities, which include common 
stocks; preferred securities; warrants to purchase common stocks or 
preferred securities; securities convertible into common stocks or 
preferred securities; and other securities with equity characteristics. 
The Fund also may invest in U.S. dollar-denominated foreign equity 
securities.\8\
---------------------------------------------------------------------------

    \8\ See infra note 10.
---------------------------------------------------------------------------

    Under normal market conditions,\9\ the Fund will invest, in 
addition to common stocks, in U.S. dollar-denominated sponsored 
depositary receipts, which will include American Depositary Receipts 
(``ADRs''), Global Depositary Receipts (``GDRs''), European Depositary 
Receipts (``EDRs''), and American Depositary Shares (``ADSs'') 
(collectively ``Depositary Receipts''),\10\ of agriculture, energy, 
metals, and mining companies.
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    \9\ 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.
    \10\ The equity securities, including Depositary Receipts, in 
which the Fund will invest will trade in markets that are members of 
the Intermarket Surveillance Group (``ISG'') or are parties to 
comprehensive surveillance sharing agreements with the Exchange.
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    The Adviser anticipates that the equities portion of the portfolio 
initially will represent 60% of the net assets of the Fund, although 
this percentage may vary over time.
    An initial universe of inflation-related stocks will be created by 
selecting stocks of agricultural, energy, metals, and mining companies 
that trade on a U.S. stock exchange and have adequate liquidity for 
investment. The Fund's portfolio will be selected by examining the 
historical financial results of the securities from the initial 
universe. Companies that do not produce positive cash flow or companies 
with credit quality issues will be eliminated. The securities will then 
be evaluated by fundamental factors such as sales, earnings, and cash 
flow growth; valuation factors such as price/earnings, price/cash flow, 
price/sales, and price/book; and technical factors such as price 
momentum and earnings surprises. An estimated value will be calculated 
for each of the companies. The companies that currently trade at an 
attractive market price relative to their estimated value will be 
favored over companies that do not. The final portfolio will then be 
selected by the Adviser based on the security's fundamentals, valuation 
and technical factors, the security's relative valuation, and other 
qualitative factors such as competitive advantages, new products, and 
quality of management.
Bond Allocation
    The Fund will invest in the types of bonds described below 
primarily through investing in Underlying ETPs that concentrate in 
these types of holdings. Bonds with fixed coupons during periods of 
rising inflation expectations may likely experience price depreciation 
due to the impact of rising interest rates. The negative effects of 
inflation on bonds may be offset through Underlying ETPs that invest in 
inflation-linked bonds. Inflation-linked government bonds, commonly 
known in the U.S. as Treasury Inflation-Protected Securities 
(``TIPS''), are securities issued by governments that are designed to 
provide inflation protection to investors. The coupon payments and 
principal value on these securities are adjusted according to inflation 
over the life of the bonds. The Underlying ETPs chosen to represent the 
bond portion of the portfolio will be reviewed for capitalization, 
liquidity, expenses, tracking error, and taxation structure factors. 
First Trust anticipates that the bond portion of the portfolio will 
initially represent approximately 20% of the net assets of the Fund, 
although this percentage may vary over time.
    The Fund, through investments in Underlying ETPs, will invest 
primarily in investment grade debt securities with respect to the bond 
portion of its portfolio and may invest up to 15% of its net assets in 
high yield debt securities, including leveraged loans,\11\ that are 
rated below investment grade at the time of purchase, or unrated 
securities deemed by the Fund's Adviser to be of comparable quality. 
``Below investment grade'' is defined as those securities that have a 
long-term credit rating below ``BBB-'' by Standard & Poor's Rating 
Group, a division of McGraw Hill Companies, Inc. (``S&P''), or below 
``Baa3'' by Moody's Investors Service, Inc. (``Moody's''), or 
comparably rated by another nationally recognized statistical rating 
organization.
---------------------------------------------------------------------------

    \11\ Under normal market conditions, the Fund may invest up to 
15% of its net asset value (``NAV'') in leveraged loans, including 
senior secured bank loans, unsecured and/or subordinated bank loans, 
loan participations, and unfunded contracts. The Fund may invest in 
such loans by purchasing assignments of all or a portion of loans or 
loan participations from third parties. These loans are made by or 
issued to corporations primarily to finance acquisitions, refinance 
existing debt, support organic growth, or pay out dividends, and are 
typically originated by large banks and are then syndicated out to 
institutional investors as well as to other banks.
---------------------------------------------------------------------------

    The Fund, or the Underlying ETPs in which it may invest, may invest 
in a variety of debt securities, including corporate debt securities, 
U.S. government securities, and non-U.S. debt securities. 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. Commercial paper has the shortest term and is usually 
unsecured. Certain debt securities held by the Fund may include debt 
instruments that have economic characteristics that are similar to 
preferred securities. Such debt instruments are typically issued by 
corporations, generally in the form of interest bearing notes, or by an 
affiliated business trust of a corporation, generally in the form of 
(i) beneficial interests in subordinated debentures or similarly 
structured securities or (ii) more senior debt securities that pay 
income and trade in a manner similar to preferred securities. Such debt 
instruments that have economic characteristics similar to preferred 
securities include trust preferred securities, hybrid trust

[[Page 54702]]

preferred securities, and senior notes/baby bonds.
    The Fund will invest in Underlying ETPs that are designed to track 
government bond indexes, bank loan indexes, and floating rate security 
indexes.
Commodities Allocation
    The Fund will invest in commodities through investing in Underlying 
ETPs that invest in commodities or futures on such commodities, such as 
gold, silver, and commodity indexes. In general, commodities have 
relatively high correlations with inflation, and the prices of real 
assets, such as gold, silver, oil, and copper, often rise along with 
increasing interest rates and inflation. Additionally, commodities 
normally move in the opposite direction of the U.S. dollar. First Trust 
anticipates that the commodities portion of the portfolio will 
represent 10% of the initial net assets of the Fund, although this 
percentage may vary over time.
Real Estate Allocation
    The Fund will invest in U.S. exchange-listed securities of real 
estate investment trusts (``REITS''). In general, real estate prices 
have generated a correspondingly large increase in return and largely 
preserved the purchasing power of the original investment during 
periods of high inflation. The real estate portion of the portfolio 
will represent 10% of the initial net assets of the Fund, although this 
percentage may vary over time. The Fund also may invest in exchange-
traded funds designed to track real estate indexes.
Other Investments
    Normally, the Fund will invest substantially all of its assets in 
the securities allocations described above to meet its investment 
objectives. The Fund may invest the remainder of its 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 may 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.\12\ During such periods, the Fund may 
not be able to achieve its investment objectives. The Fund may adopt a 
defensive strategy when the portfolio manager believes securities in 
which the Fund normally invests have elevated risks due to political or 
economic factors and in other extraordinary circumstances.
---------------------------------------------------------------------------

    \12\ The Fund may, without limit as to percentage of assets, 
purchase U.S. government securities or short-term debt securities to 
keep cash on hand 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, Moody's, or 
Fitch, Inc. (``Fitch'') and having a maturity of one year or less. 
The use of these temporary investments will not be a part of a 
principal investment strategy of the Fund. 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; (3) bankers' acceptances, which are short-term credit 
instruments used to finance commercial transactions; (4) repurchase 
agreements, which involve purchases of debt securities; (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; and (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. The Fund may only invest in commercial paper 
rated A-1 or higher by S&P, Prime-1 or higher by Moody's, or F2 or 
higher by Fitch.
---------------------------------------------------------------------------

    The Fund may invest up to 15% of its net assets in U.S. exchange-
listed futures, interest rate swaps, total return swaps, non-U.S. 
currency swaps, credit default swaps,\13\ U.S. exchange-listed options, 
forward contracts, and other derivative instruments in the aggregate to 
seek to enhance returns,\14\ to hedge some of the risks of its 
investments in securities,\15\ as a substitute for a position in the 
underlying asset, to reduce transaction costs, to maintain full market 
exposure in a given asset class, to manage cash flows, to limit 
exposure to losses due to changes to non-U.S. currency exchange rates, 
or to preserve capital.\16\
---------------------------------------------------------------------------

    \13\ To the extent practicable, the Fund will invest in swaps 
cleared through the facilities of a centralized clearing house.
    \14\ For example, the Fund may sell exchange-listed covered 
calls on equity positions in the portfolio in order to enhance its 
income.
    \15\ The Fund may use derivative investments to hedge against 
interest rate and market risks. The Fund may engage in various 
interest rate and currency hedging transactions, including buying or 
selling U.S. exchange-listed options or entering into other 
transactions including forward contracts, fully collateralized 
swaps, and other derivatives transactions.
    \16\ The Fund will not enter into futures and options 
transactions if the sum of the initial margin deposits and premiums 
paid for unexpired options or futures exceeds 5% of the Fund's total 
assets.
---------------------------------------------------------------------------

    The Fund will only enter into transactions in derivative 
instruments with counterparties that First Trust reasonably believes 
are capable of performing under the contract \17\ and will post as 
collateral at least $250,000 each day.
---------------------------------------------------------------------------

    \17\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser's Execution Committee will 
evaluate the creditworthiness of counterparties on an ongoing basis. 
In addition to information provided by credit agencies, the 
Adviser's analysts will evaluate each approved counterparty using 
various methods of analysis, including the counterparty's liquidity 
in the event of default, the broker-dealer's reputation, the 
Adviser's past experience with the broker-dealer, the Financial 
Industry Regulatory Authority's (``FINRA'') BrokerCheck and 
disciplinary history, and its share of market participation.
---------------------------------------------------------------------------

    The Fund may invest in shares of money market funds to the extent 
permitted by the 1940 Act.
    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.
    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 Rule 144A securities deemed illiquid by the Adviser \18\ and 
master demand notes. 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.
---------------------------------------------------------------------------

    \18\ In reaching liquidity decisions, the Adviser may consider 
the following factors: the frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer).
---------------------------------------------------------------------------

    The Fund intends to qualify annually and to elect to be treated as 
a regulated investment company under the Internal Revenue Code.\19\
---------------------------------------------------------------------------

    \19\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Fund may invest up to 10% of its net assets in inverse 
Underlying ETPs, but it will not invest in leveraged or inverse 
leveraged Underlying ETPs.
    The Fund's investments will be consistent with the Fund's 
investment objectives and will not be used to enhance leverage. That 
is, while the Fund will be permitted to borrow as

[[Page 54703]]

permitted under the 1940 Act, the Fund's investments will not be used 
to seek performance that is the multiple or inverse multiple (i.e., 2Xs 
and 3Xs) of the Fund's broad-based securities market index (as defined 
in Form N-1A) (i.e., S&P 500).
    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
distributions, and taxes, among other things, is included in the Notice 
and Registration Statement, as applicable.\20\
---------------------------------------------------------------------------

    \20\ See Notice and Registration Statement, supra notes 3 and 4, 
respectively.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \21\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\22\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\23\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. The Commission notes that 
the Fund and the Shares must comply with the requirements of NYSE Arca 
Equities Rule 8.600 for the Shares to be listed and traded on the 
Exchange.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f.
    \22\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\24\ which sets forth Congress's finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. In addition, the Portfolio 
Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), 
will be widely disseminated every 15 seconds throughout the Exchange's 
Core Trading Session by one or more major market data vendors.\25\ 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.\26\ The Fund's NAV will be determined 
as of the close of trading (normally 4:00 p.m. Eastern Time) on each 
day the New York Stock Exchange is open for business. A basket 
composition file, which will include 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 New York Stock Exchange 
via the National Securities Clearing Corporation. 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. 
The intra-day, closing, and settlement prices of the portfolio 
securities will also be readily available from the national securities 
exchanges trading such securities, automated quotation systems, 
published or other public sources, or on-line information services such 
as Bloomberg or Reuters. The Fund's Web site will include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \25\ According to the Exchange, several major market data 
vendors widely disseminate Portfolio Indicative Values taken from 
the CTA or other data feeds. In addition, the Exchange represents 
that the price of a non-U.S. security that is primarily traded on a 
non-U.S. exchange will 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. 
Further, in calculating the Portfolio Indicative Value of the Fund's 
Shares, exchange rates may be used throughout the Core Trading 
Session 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 Portfolio Indicative Value.
    \26\ On a daily basis, the Fund 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, if 
applicable, and 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.
---------------------------------------------------------------------------

    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes 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.\27\ 
In addition, 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. The Exchange may halt trading 
in the Shares if trading is not occurring in the securities and/or the 
financial instruments comprising the Disclosed Portfolio of the Fund, 
or if other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.\28\ Further, the 
Commission notes that the Reporting Authority that provides the 
Disclosed Portfolio must implement and maintain, or be subject to, 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the actual components of the 
portfolio.\29\ The Commission notes that the Financial Industry 
Regulatory Authority (``FINRA''), on behalf of the Exchange,\30\ will 
communicate as needed regarding trading in the Shares, equity 
securities, futures contracts, and options contracts with other markets 
and other entities that are members of the ISG, and FINRA, on behalf of 
the Exchange, may obtain trading information regarding trading in the

[[Page 54704]]

Shares, equity securities, futures contracts, and options contracts 
from such markets and other entities. In addition, the Exchange may 
obtain information regarding trading in the Shares, equity securities, 
futures contracts, and options contracts from markets and other 
entities that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement. The Exchange 
states that it has a general policy prohibiting the distribution of 
material, non-public information by its employees. The Exchange also 
states that the Adviser is not a broker-dealer but is affiliated with a 
broker-dealer, and the Adviser has implemented a fire wall with respect 
to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio.\31\
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    \27\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
    \28\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing 
additional considerations for the suspension of trading in or 
removal from listing of Managed Fund Shares on the Exchange). 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. 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.
    \29\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii). In 
addition, the Adviser represents that the Trust, First Trust, and 
BNY will not disseminate non-public information concerning the 
Trust.
    \30\ The Exchange states that, while FINRA surveils trading on 
the Exchange pursuant to a regulatory services agreement, the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
    \31\ See supra note 5. An investment adviser to an open-end fund 
is required to be registered under the Investment Advisers Act of 
1940 (``Advisers Act''). As a result, the Adviser and its related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by FINRA on 
behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws and that these 
procedures are adequate to properly monitor Exchange trading of the 
Shares in all trading sessions and to deter and detect violations of 
Exchange rules and applicable federal securities laws.
    (4) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
of the special characteristics and risks associated with trading the 
Shares. Specifically, the Information Bulletin will discuss the 
following: (a) the procedures for purchases and redemptions of Shares 
in Creation Units (and that Shares are not individually redeemable); 
(b) 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; (c) the risks involved in 
trading the Shares during the Opening and Late Trading Sessions when an 
updated Portfolio Indicative Value will not be calculated or publicly 
disseminated; (d) how information regarding the Portfolio Indicative 
Value will be disseminated; (e) 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 (f) 
trading information.
    (5) For initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Exchange Act,\32\ as provided by 
NYSE Arca Equities Rule 5.3.
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    \32\ 17 CFR 240.10A-3.
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    (6) The equity securities in which the Fund will invest, including 
Underlying ETPs, Depositary Receipts, REITs, common stocks, preferred 
securities, warrants, convertible securities, and U.S. dollar-
denominated foreign securities, as well as certain derivatives such as 
options and futures contracts, will trade in markets that are ISG 
members or are parties to a comprehensive surveillance sharing 
agreement with the Exchange.
    (7) 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 Rule 144A securities deemed illiquid by the Adviser and 
master demand notes.
    (8) A minimum of 100,000 Shares of the Fund will be outstanding at 
the commencement of trading on the Exchange.
    (9) The Fund's investments will be consistent with the Fund's 
investment objectives and will not be used to enhance leverage. The 
Fund may invest up to 10% of its net assets in inverse Underlying ETPs, 
but it will not invest in leveraged or inverse leveraged Underlying 
ETPs.
    (10) The Fund will only enter into transactions in derivative 
instruments with counterparties that First Trust reasonably believes 
are capable of performing under the contract \33\ and will post as 
collateral at least $250,000 each day. In addition, to the extent 
practicable, the Fund will invest in swaps cleared through the 
facilities of a centralized clearing house.
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    \33\ See supra note 17.

This approval order is based on all of the Exchange's representations 
and description of the Fund, including those set forth above and in the 
Notice.\34\
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    \34\ The Commission notes that it does not regulate the market 
for futures in which the Fund plans to take positions. Limits on the 
positions that any person may take in futures may be directly set by 
the Commodity Futures Trading Commission or by the markets on which 
the futures are traded. The Commission has no role in establishing 
position limits on futures even though such limits could impact an 
exchange-traded product that is under the jurisdiction of the 
Commission.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \35\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \35\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (SR-NYSEArca-2013-70) be, and it 
hereby is, approved.
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    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-21533 Filed 9-4-13; 8:45 am]
BILLING CODE 8011-01-P