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]
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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 (https://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 (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
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
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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
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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.
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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%
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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.
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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
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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
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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.
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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).
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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
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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
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]]>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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
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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.
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\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.
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\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).
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The Fund intends to qualify annually and to elect to be treated as
a regulated investment company under the Internal Revenue Code.\19\
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\19\ 26 U.S.C. 851.
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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\
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\20\ See Notice and Registration Statement, supra notes 3 and 4,
respectively.
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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.
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\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.
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\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.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The 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
