Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Global Tactical Commodity Strategy Fund of First Trust Exchange-Traded Fund VII, 62834-62838 [2013-24643]
Download as PDF
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
The Commission believes FINRA’s
proposed rule change, as amended,
raises questions as to whether it is
consistent with the requirements of
Section 15A(b)(6) and 15A(b)(9) of the
Exchange Act.
V. Request for Written Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the changes
to the proposed rule change as set forth
in Amendment No. 1, as well as any
others they may have identified with the
proposed rule change, as amended. In
particular, the Commission invites the
written views of interested persons
concerning whether the proposed rule
change, as modified by Amendment No.
1, is inconsistent with Section 15A(b)(6)
or any other provision of the Exchange
Act, or the rules and regulations
thereunder.
Although there do not appear to be
any issues relevant to approval or
disapproval which would be facilitated
by an oral presentation of views, data,
and arguments, the Commission will
consider, pursuant to Rule 19b–4, any
request for an opportunity to make an
oral presentation.22 Interested persons
are invited to submit written data,
views, and arguments by October 28,
2013 concerning Amendment No. 1 and
regarding whether the proposed rule
change, as modified by Amendment No.
1, should be approved or disapproved.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal by November 12, 2013.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2013–025 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–FINRA–2013–025. 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 such
filing also will be available for
inspection and copying at the principle
office of FINRA. 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
publicly available.
All submissions should refer to File
Number SR–FINRA–2013–025 and
should be submitted on or before
October 28, 2013. If comments are
received, any rebuttal comments should
be submitted by November 12, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–24568 Filed 10–21–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70638; File No. SR–
NASDAQ–2013–107]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule
Change Relating to the Listing and
Trading of the Shares of the First Trust
Global Tactical Commodity Strategy
Fund of First Trust Exchange-Traded
Fund VII
October 9, 2013.
I. Introduction
On August 16, 2013, The NASDAQ
Stock Market LLC (‘‘Exchange’’ or
‘‘Nasdaq’’) 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 Global Tactical Commodity
Strategy Fund (‘‘Fund’’) under Nasdaq
Rule 5735. The proposed rule change
was published for comment in the
Federal Register on August 30, 2013.3
The Commission received no comments
on this proposal. This order 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
Nasdaq Rule 5735, which governs the
listing and trading of Managed Fund
Shares on the Exchange. The Shares will
be offered by First Trust ExchangeTraded Fund VII (‘‘Trust’’), which is
organized as a Massachusetts business
trust and is registered with the
Commission as an open-end investment
company.4 First Trust Advisors L.P. will
be the investment adviser (‘‘Adviser’’) to
the Fund. First Trust Portfolios L.P. will
be the principal underwriter and
distributor of the Fund’s Shares. Brown
Brothers Harriman & Co. (‘‘BBH’’) will
act as the administrator, accounting
agent, custodian, and transfer agent to
the Fund. The Exchange states that the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70253
(August 26, 2013), 78 FR 53799 (‘‘Notice’’).
4 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). See
Registration Statement on Form N–1A for the Trust,
dated November 13, 2012 (File Nos. 333–184918
and 811–22767) (‘‘Registration Statement’’). The
Commission has issued an order granting certain
exemptive relief to the Trust under the 1940 Act
(‘‘Exemptive Order’’). See Investment Company Act
Release No. 30029 (April 10, 2012) (File No. 812–
13795).
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2 17
22 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Acts Amendments of
1975, Pub. L. 94–29, 89 Stat. 97 (1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Acts
Amendments of 1975, Report of the Senate
Committee on Banking, Housing and Urban Affairs
to Accompany S. 249, S. Rep. No. 75, 94th Cong.,
1st Sess. 30 (1975).
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23 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(57).
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
Adviser is not a broker-dealer but is
affiliated with a broker-dealer and that
the Adviser has implemented a fire wall
with respect to its broker-dealer affiliate
regarding access to information
concerning the composition of or
changes to the Fund’s portfolio.5
The Fund’s investment objective will
be to provide total return by providing
investors with commodity exposure
while seeking a relatively stable risk
profile. The Fund will pursue its
objective by seeking to invest through a
wholly-owned subsidiary in a broadly
diversified portfolio composed
principally of commodity futures
contracts.
Principal Investments
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Fund’s Investments
The Fund will be an actively managed
exchange-traded fund (‘‘ETF’’) that will
seek to achieve attractive risk adjusted
returns by investing in exchange-traded
commodity futures contracts and
exchange-traded commodity linked
instruments 6 (collectively,
‘‘Commodities’’) through a whollyowned subsidiary controlled by the
Fund and organized under the laws of
the Cayman Islands (‘‘First Trust
Subsidiary’’). The Fund will seek to gain
exposure to the futures markets through
investments in the First Trust
Subsidiary. The Fund’s investment in
the First Trust Subsidiary may not
exceed 25% of the Fund’s total assets.
The remainder of the Fund’s assets will
primarily be invested in: (1) Short-term
investment grade fixed income
securities that include U.S. government
and agency securities,7 sovereign debt
5 See Nasdaq Rule 5735(g). In the event (a) the
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, the Adviser, any new adviser, or
any new sub-adviser will implement a fire wall
with respect to its relevant personnel and the
broker-dealer affiliate, if applicable, regarding
access to information concerning the composition
of or changes to the portfolio, and will be subject
to procedures designed to prevent the use and
dissemination of material non-public information
regarding such portfolio.
6 According to the Exchange, exchange-traded
commodity linked instruments include: (1) ETFs
that provide exposure to commodities as would be
listed under Nasdaq Rules 5705 and 5735; and (2)
pooled investment vehicles that invest primarily in
commodities and commodity-related instruments as
would be listed under Nasdaq Rules 5710 and 5711.
Such pooled investment vehicles are commonly
referred to as ‘‘exchange traded funds,’’ but they are
not registered as investment companies because of
the nature of their underlying investments.
7 Such securities will include securities that are
issued or guaranteed by the U.S. Treasury, by
various agencies of the U.S. government, or by
various instrumentalities that have been established
or sponsored by the U.S. government. According to
the Exchange, U.S. Treasury obligations are backed
by the ‘‘full faith and credit’’ of the U.S.
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obligations of non-U.S. countries, and
repurchase agreements; 8 (2) money
market instruments; 9 (3) ETFs and other
investment companies registered under
the 1940 Act; and (4) cash and other
cash equivalents.
The Fund will not invest directly in
Commodities. The Fund expects to gain
exposure to these investments
exclusively by investing in the First
Trust Subsidiary.
The Fund will use the fixed-income
securities as investments and to
collateralize the First Trust Subsidiary’s
commodity exposure on a day-to-day
basis. The Fund may also invest directly
in ETFs 10 and other investment
companies, including, to the extent
permitted under the 1940 Act,
exchange-traded closed-end funds that
provide exposure to commodities,
equity securities, and fixed income
securities.11
According to the Exchange, the
Fund’s investment in the First Trust
Subsidiary will be designed to help the
government. Securities issued or guaranteed by
federal agencies, and U.S. government-sponsored
instrumentalities may or may not be backed by the
full faith and credit of the U.S. government.
8 The Fund intends to enter into repurchase
agreements only with financial institutions and
dealers believed by the Adviser to present minimal
credit risks in accordance with criteria approved by
the Fund’s Board of Trustees (‘‘Board’’). The
Adviser will review and monitor the
creditworthiness of such institutions. The Adviser
will monitor the value of the collateral at the time
the transaction is entered into and at all times
during the term of the repurchase agreement.
9 For the Fund’s purposes, money market
instruments will include: Short-term, high-quality
securities issued or guaranteed by non-U.S.
governments, agencies, and instrumentalities; nonconvertible corporate debt securities with
remaining maturities of not more than 397 days that
satisfy ratings requirements under Rule 2a–7 of the
1940 Act; money market mutual funds; and
deposits and other obligations of U.S. and non-U.S.
banks and financial institutions. As a related
matter, the Fund may invest in shares of money
market mutual funds to the extent permitted by the
1940 Act.
10 An ETF is an investment company registered
under the 1940 Act that holds a portfolio of
securities. Many ETFs are designed to track the
performance of a securities index, including
industry, sector, country, and region indexes. ETFs
included in the Fund will be listed and traded in
the U.S. on registered exchanges. Pursuant to
exemptive orders obtained by other ETFs and their
sponsors from the Commission, the Fund may
invest in the securities of ETFs in excess of the
limits imposed under the 1940 Act. The ETFs in
which the Fund may invest include Index Fund
Shares (as described in Nasdaq Rule 5705), Portfolio
Depositary Receipts (as described in Nasdaq Rule
5705), and Managed Fund Shares (as described in
Nasdaq Rule 5735). While the Fund may invest in
inverse ETFs, the Fund will not invest in leveraged
or inverse leveraged (e.g., 2X or -3X) ETFs.
11 The equity securities (including shares of ETFs
and closed-end funds) in which the Fund may
invest will be limited to securities that trade in
markets that are members of the ISG, which
includes all U.S. national securities exchanges, or
are parties to a comprehensive surveillance sharing
agreement with the Exchange.
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62835
Fund achieve exposure to commodity
returns in a manner consistent with the
federal tax requirements applicable to
the Fund and other regulated
investment companies.
First Trust Subsidiary’s Investments
The First Trust Subsidiary will seek to
make investments generally in
Commodities while managing volatility,
as measured by annualized standard
deviation, to a more consistent range
than statistically weighted commodity
indices. The investment weightings of
the underlying Commodities held by the
First Trust Subsidiary will be
rebalanced in an attempt to stabilize risk
levels. According to the Exchange, the
dynamic weighting process will result
in a disciplined, systematic investment
process which will be keyed off of the
Adviser’s volatility forecasting process.
The First Trust Subsidiary will be
advised by the Adviser.12 The Fund’s
investment in the First Trust Subsidiary
is intended to provide the Fund with
exposure to commodity markets within
the limits of current federal income tax
laws applicable to investment
companies such as the Fund, which
limit the ability of investment
companies to invest directly in the
derivative instruments. The First Trust
Subsidiary will have the same
investment objective as the Fund, but
unlike the Fund, it may invest without
limitation in Commodities. The First
Trust Subsidiary’s investments will
provide the Fund with exposure to
domestic and international markets.
The First Trust Subsidiary may have
both long and short positions in
Commodities. However, for a given
Commodity, the First Trust Subsidiary
will have a net long exposure. The First
Trust Subsidiary will initially consider
investing in specific exchange-traded 13
12 The First Trust Subsidiary will not be
registered under the 1940 Act and will not be
directly subject to its investor protections, except as
noted in the Registration Statement. However, the
First Trust Subsidiary will be wholly-owned and
controlled by the Fund and will be advised by the
Adviser. Therefore, according to the Exchange, the
Fund’s ownership and control of the First Trust
Subsidiary will prevent the First Trust Subsidiary
from taking action contrary to the interests of the
Fund or its shareholders. The Exchange states that
the Board will have oversight responsibility for the
investment activities of the Fund, including its
expected investment in the First Trust Subsidiary,
and the Fund’s role as the sole shareholder of the
First Trust Subsidiary. The Adviser will receive no
additional compensation for managing the assets of
the First Trust Subsidiary. The First Trust
Subsidiary will also enter into separate contracts for
the provision of custody, transfer agency, and
accounting agent services with the same or with
affiliates of the same service providers that provide
those services to the Fund.
13 All of the exchanges are ISG members except
for the London Metal Exchange (‘‘LME’’). According
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
futures contracts set forth in a table in
the Notice.
As U.S. and London exchanges list
additional contracts, as currently listed
contracts on those exchanges gain
sufficient liquidity, or as other
exchanges list sufficiently liquid
contracts, the Adviser will include those
contracts in the list of possible
investments of the First Trust
Subsidiary. The list of commodities
futures and commodities markets
considered for investment can and will
change over time.
Commodities Regulation
According to the Exchange, the
Commodity Futures Trading
Commission (‘‘CFTC’’) has recently
adopted substantial amendments to
CFTC Rule 4.5 relating to the
permissible exemptions and conditions
for reliance on exemptions from
registration as a commodity pool
operator. As a result of the instruments
that will be indirectly held by the Fund,
the Adviser has registered as a
commodity pool operator 14 and is also
a member of the National Futures
Association (‘‘NFA’’). The Exchange
states that the Fund and the First Trust
Subsidiary are subject to regulation by
the CFTC and NFA and to the additional
disclosure, reporting, and recordkeeping
rules imposed upon commodity pools.
sroberts on DSK5SPTVN1PROD with FRONT MATTER
Other Investments
The Fund may invest in certificates of
deposit issued against funds deposited
in a bank or savings and loan
association. In addition, the Fund may
invest in bankers’ acceptances, which
are short-term credit instruments used
to finance commercial transactions.
The Fund may invest in 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. In addition,
the Fund may invest in commercial
paper, which are short-term unsecured
promissory notes, including master
demand notes 15 issued by corporations
to finance their current operations. The
Fund may invest in commercial paper
only if it has received the highest rating
from at least one nationally recognized
to the Exchange, the LME falls under the
jurisdiction of the United Kingdom Financial
Conduct Authority (‘‘FCA’’). The Exchange states
that the FCA is responsible for ensuring the
financial stability of the exchange members’
businesses, whereas the LME is largely responsible
for the oversight of day-to-day exchange activity,
including conducting the arbitration proceedings
under the LME arbitration regulations.
14 As defined in Section 1a(11) of the Commodity
Exchange Act.
15 Master demand notes are direct lending
arrangements between the Fund and a corporation.
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statistical rating organization or, if
unrated, has been judged by the Adviser
to be of comparable quality.
Investment Restrictions
The Fund may not invest more than
25% of the value of its total assets in
securities of issuers in any one industry
or group of industries. This restriction
will not apply to obligations issued or
guaranteed by the U.S. government or
its agencies or instrumentalities or to
securities of other investment
companies.
The First Trust Subsidiary’s shares
will be offered only to the Fund, and the
Fund will not sell shares of the First
Trust Subsidiary to other investors. The
Fund and the First Trust Subsidiary will
not invest in any non-U.S. equity
securities (other than shares of the First
Trust Subsidiary). The Fund will not
purchase securities of open-end or
closed-end investment companies
except in compliance with the 1940 Act.
Pursuant to the Exemptive Order, the
Fund will not invest directly in options
contracts, futures contracts, or swap
agreements; however, this restriction
will not apply to the First Trust
Subsidiary.
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.16
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 for and
to elect to be treated as a separate
regulated investment company under
Subchapter M of the Internal Revenue
Code.17
16 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).
17 26 U.S.C. 851.
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Under the 1940 Act, the Fund’s
investment in investment companies
will, subject to certain exceptions, be
limited to: (i) 3% of the total
outstanding voting stock of any one
investment company, (ii) 5% of the
Fund’s total assets with respect to any
one investment company, and (iii) 10%
of the Fund’s total assets with respect to
investment companies in the aggregate.
The Fund’s and the First Trust
Subsidiary’s investments will be
consistent with the Fund’s investment
objective and will not be used to
enhance leverage.
Additional information regarding the
Fund and the Shares, including
investment strategies, futures contracts
and futures exchange information, risks,
creation and redemption procedures,
fees, Fund holdings disclosure policies,
distributions, and taxes is included in
the Notice and Registration Statement,
as applicable.18
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 19 and the rules and
regulations thereunder applicable to a
national securities exchange.20 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,21 which
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in facilitating transactions in securities,
to remove impediments to and perfect
the mechanism of a free and open
market and a national market system,
and, in general, to protect investors and
the public interest. The Commission
notes that the Fund and the Shares must
comply with the requirements of
Nasdaq Rule 5735 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,22 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
18 See Notice and Registration Statement, supra
notes 3 and 4, respectively.
19 15 U.S.C. 78f.
20 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).
21 15 U.S.C. 78f(b)(5).
22 15 U.S.C. 78k–1(a)(1)(C)(iii).
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for, and
transactions in, securities. According to
the Exchange, quotation and last-sale
information for the Shares will be
available via Nasdaq proprietary quote
and trade services, as well as in
accordance with the Unlisted Trading
Privileges and the Consolidated Tape
Association plans for the Shares and
any underlying exchange-traded
products. In addition, the Intraday
Indicative Value, available on the
NASDAQ OMX Information LLC
proprietary index data service, will be
based upon the current value for the
components of the Disclosed Portfolio
and will be updated and widely
disseminated by one or more major
market data vendors and broadly
displayed at least every 15 seconds
during the Regular Market Session. On
each business day, before
commencement of trading in Shares in
the Regular Market Session on the
Exchange, the Fund will disclose on its
Web site the Disclosed Portfolio, as
defined in Nasdaq Rule 5735(c)(2), held
by the Fund and the First Trust
Subsidiary, which will form the basis
for the Fund’s calculation of net asset
value (‘‘NAV’’) at the end of the
business day.23 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. Information
regarding market price and volume of
the Shares will be continually available
on a real-time basis throughout the day
on brokers’ computer screens and other
electronic services. The previous day’s
closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers. Intra-day, executable
price quotations on the securities,
Commodities, and other assets held by
the Fund and the First Trust Subsidiary
will be available from major brokerdealer firms or on the exchange on
which they are traded, as applicable.
Intra-day price information will also be
available through subscription services,
such as Bloomberg, Markit, and
Thomson Reuters, which can be
accessed by authorized participants and
other investors. The Fund’s Web site
will include a form of the prospectus for
the Fund and additional data relating to
23 The Disclosed Portfolio will include, as
applicable, the names, quantity, percentage
weighting, and market value of securities,
Commodities, and other assets held by the Fund
and the First Trust Subsidiary and the
characteristics of such assets. The Web site and
information will be publicly available at no charge.
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21:08 Oct 21, 2013
Jkt 232001
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.24 In
addition, trading in the Shares will be
subject to Nasdaq Rule 5735(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, Commodities, and
other assets constituting the Disclosed
Portfolio of the Fund and the First Trust
Subsidiary or if other unusual
conditions or circumstances detrimental
to the maintenance of a fair and orderly
market are present.25 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.26 The Commission notes that
the Financial Industry Regulatory
Authority (‘‘FINRA’’), on behalf of the
Exchange,27 will communicate as
needed regarding trading in the Shares,
Commodities, and other exchangetraded securities and instruments held
by the Fund and the First Trust
Subsidiary with other markets and other
entities that are members of the
Intermarket Surveillance Group (‘‘ISG’’),
and FINRA may obtain trading
information regarding trading in the
24 See
Nasdaq Rule 5735(d)(1)(B).
Nasdaq Rule 5735(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. Nasdaq
will halt trading in the Shares under the conditions
specified in Nasdaq Rules 4120 and 4121, including
the trading pauses under Nasdaq Rules 4120(a)(11)
and (12). 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.
26 See Nasdaq Rule 5735(d)(2)(B)(ii).
27 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.
25 See
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Sfmt 4703
62837
Shares, Commodities, and other
exchange-traded securities and
instruments held by the Fund and the
First Trust Subsidiary from such
markets and other entities. In addition,
the Exchange may obtain information
regarding trading in the Shares,
Commodities, and other exchangetraded securities and instruments held
by the Fund and the First Trust
Subsidiary from markets and other
entities that are members of ISG, which
includes securities and futures
exchanges,28 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 that the Adviser has implemented
a fire wall with respect to its brokerdealer affiliate regarding access to
information concerning the composition
of or changes to the portfolio.29
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 be subject to
Nasdaq Rule 5735, which sets forth the
28 With respect to the futures contracts held
indirectly through the First Trust Subsidiary, not
more than 10% of the weight of such futures
contracts in the aggregate will consist of
instruments whose principal trading market is not
a member of ISG or is a market with which the
Exchange does not have a comprehensive
surveillance sharing agreement.
29 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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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
initial and continued listing criteria
applicable to Managed Fund Shares.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) The Exchange represents that
trading in the Shares will be subject to
the existing trading surveillances,
administered by both Nasdaq and
FINRA on behalf of the Exchange,
which are designed to detect violations
of Exchange rules and applicable federal
securities laws and that these
procedures are adequate to properly
monitor Exchange trading of the Shares
in all trading sessions and to deter and
detect violations of Exchange rules and
applicable federal securities laws.
(4) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (b) Nasdaq Rule 2111A,
which imposes suitability obligations on
Nasdaq members with respect to
recommending transactions in the
Shares to customers; (c) how
information regarding the Intraday
Indicative Value is disseminated; (d) the
risks involved in trading the Shares
during the Pre-Market and Post-Market
Sessions when an updated Intraday
Indicative Value will not be calculated
or publicly disseminated; (e) the
requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (f) trading information.
(5) For initial and continued listing,
the Fund and the First Trust Subsidiary
must be in compliance with Rule 10A–
3 under the Exchange Act.30
(6) A minimum of 100,000 Shares will
be outstanding at the commencement of
trading on 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) The equity securities (including
shares of ETFs and closed-end funds) in
which the Fund may invest will be
limited to securities that trade in
markets that are members of the ISG,
which includes all U.S. national
securities exchanges, or are parties to a
comprehensive surveillance sharing
agreement with the Exchange. The Fund
30 17
CFR 240.10A–3.
VerDate Mar<15>2010
21:08 Oct 21, 2013
Jkt 232001
and the First Trust Subsidiary will not
invest in any non-U.S. equity securities
(other than shares of the First Trust
Subsidiary).
(9) The Fund will not invest directly
in Commodities. The Fund expects to
gain exposure to these investments
exclusively by investing in the First
Trust Subsidiary.
(10) The Fund’s investment in the
First Trust Subsidiary may not exceed
25% of the Fund’s total assets.
(11) The Fund’s and the First Trust
Subsidiary’s investments will be
consistent with the Fund’s investment
objective and will not be used to
enhance leverage. The Fund may invest
in inverse ETFs, but it will not invest in
leveraged or inverse leveraged ETFs.
(12) Pursuant to the Exemptive Order,
the Fund will not invest directly in
options contracts, futures contracts, or
swap agreements. However, this
restriction will not apply to the First
Trust Subsidiary. With respect to the
futures contracts held indirectly through
the First Trust Subsidiary, not more
than 10% of the weight of such futures
contracts in the aggregate shall consist
of instruments whose principal trading
market is not a member of ISG or is a
market with which the Exchange does
not have a comprehensive surveillance
sharing agreement.
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.31
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 32 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,33 that the
proposed rule change (SR–NASDAQ–
2013–107) be, and it hereby is,
approved.
31 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 CFTC 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.
32 15 U.S.C. 78f(b)(5).
33 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–24643 Filed 10–21–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70636; File No. SR–Topaz–
2013–05]
Self-Regulatory Organizations; Topaz
Exchange, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Related to PIM and Penny
Pilot Periods
October 9, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 27, 2013, the Topaz
Exchange, LLC (d/b/a ISE Gemini) (the
‘‘Exchange’’ or ‘‘Topaz’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
Topaz is proposing to amend its rules
to correct date references related to two
pilot programs being conducted on the
Exchange: the PIM Pilot and Penny
Pilot, each as defined below. The
Exchange is also proposing to revise a
provision describing how the Exchange
notifies Members about which option
classes are eligible to trade in the Penny
Pilot. The text of the proposed rule
change is available on the Exchange’s
Internet Web site at https://www.ise.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
34 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Agencies
[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62834-62838]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24643]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70638; File No. SR-NASDAQ-2013-107]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule Change Relating to the Listing and
Trading of the Shares of the First Trust Global Tactical Commodity
Strategy Fund of First Trust Exchange-Traded Fund VII
October 9, 2013.
I. Introduction
On August 16, 2013, The NASDAQ Stock Market LLC (``Exchange'' or
``Nasdaq'') 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 Global Tactical Commodity Strategy Fund
(``Fund'') under Nasdaq Rule 5735. The proposed rule change was
published for comment in the Federal Register on August 30, 2013.\3\
The Commission received no comments on this proposal. This order grants
approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70253 (August 26,
2013), 78 FR 53799 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant
to Nasdaq Rule 5735, which governs the listing and trading of Managed
Fund Shares on the Exchange. The Shares will be offered by First Trust
Exchange-Traded Fund VII (``Trust''), which is organized as a
Massachusetts business trust and is registered with the Commission as
an open-end investment company.\4\ First Trust Advisors L.P. will be
the investment adviser (``Adviser'') to the Fund. First Trust
Portfolios L.P. will be the principal underwriter and distributor of
the Fund's Shares. Brown Brothers Harriman & Co. (``BBH'') will act as
the administrator, accounting agent, custodian, and transfer agent to
the Fund. The Exchange states that the
[[Page 62835]]
Adviser is not a broker-dealer but is affiliated with a broker-dealer
and that the Adviser has implemented a fire wall with respect to its
broker-dealer affiliate regarding access to information concerning the
composition of or changes to the Fund's portfolio.\5\
---------------------------------------------------------------------------
\4\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). See Registration Statement on Form N-1A for the
Trust, dated November 13, 2012 (File Nos. 333-184918 and 811-22767)
(``Registration Statement''). The Commission has issued an order
granting certain exemptive relief to the Trust under the 1940 Act
(``Exemptive Order''). See Investment Company Act Release No. 30029
(April 10, 2012) (File No. 812-13795).
\5\ See Nasdaq Rule 5735(g). In the event (a) the 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, the Adviser, any new adviser, or
any new sub-adviser will implement a fire wall with respect to its
relevant personnel and the broker-dealer affiliate, if applicable,
regarding access to information concerning the composition of or
changes to the portfolio, and will be subject to procedures designed
to prevent the use and dissemination of material non-public
information regarding such portfolio.
---------------------------------------------------------------------------
The Fund's investment objective will be to provide total return by
providing investors with commodity exposure while seeking a relatively
stable risk profile. The Fund will pursue its objective by seeking to
invest through a wholly-owned subsidiary in a broadly diversified
portfolio composed principally of commodity futures contracts.
Principal Investments
Fund's Investments
The Fund will be an actively managed exchange-traded fund (``ETF'')
that will seek to achieve attractive risk adjusted returns by investing
in exchange-traded commodity futures contracts and exchange-traded
commodity linked instruments \6\ (collectively, ``Commodities'')
through a wholly-owned subsidiary controlled by the Fund and organized
under the laws of the Cayman Islands (``First Trust Subsidiary''). The
Fund will seek to gain exposure to the futures markets through
investments in the First Trust Subsidiary. The Fund's investment in the
First Trust Subsidiary may not exceed 25% of the Fund's total assets.
The remainder of the Fund's assets will primarily be invested in: (1)
Short-term investment grade fixed income securities that include U.S.
government and agency securities,\7\ sovereign debt obligations of non-
U.S. countries, and repurchase agreements; \8\ (2) money market
instruments; \9\ (3) ETFs and other investment companies registered
under the 1940 Act; and (4) cash and other cash equivalents.
---------------------------------------------------------------------------
\6\ According to the Exchange, exchange-traded commodity linked
instruments include: (1) ETFs that provide exposure to commodities
as would be listed under Nasdaq Rules 5705 and 5735; and (2) pooled
investment vehicles that invest primarily in commodities and
commodity-related instruments as would be listed under Nasdaq Rules
5710 and 5711. Such pooled investment vehicles are commonly referred
to as ``exchange traded funds,'' but they are not registered as
investment companies because of the nature of their underlying
investments.
\7\ Such securities will include securities that are issued or
guaranteed by the U.S. Treasury, by various agencies of the U.S.
government, or by various instrumentalities that have been
established or sponsored by the U.S. government. According to the
Exchange, U.S. Treasury obligations are backed by the ``full faith
and credit'' of the U.S. government. Securities issued or guaranteed
by federal agencies, and U.S. government-sponsored instrumentalities
may or may not be backed by the full faith and credit of the U.S.
government.
\8\ The Fund intends to enter into repurchase agreements only
with financial institutions and dealers believed by the Adviser to
present minimal credit risks in accordance with criteria approved by
the Fund's Board of Trustees (``Board''). The Adviser will review
and monitor the creditworthiness of such institutions. The Adviser
will monitor the value of the collateral at the time the transaction
is entered into and at all times during the term of the repurchase
agreement.
\9\ For the Fund's purposes, money market instruments will
include: Short-term, high-quality securities issued or guaranteed by
non-U.S. governments, agencies, and instrumentalities; non-
convertible corporate debt securities with remaining maturities of
not more than 397 days that satisfy ratings requirements under Rule
2a-7 of the 1940 Act; money market mutual funds; and deposits and
other obligations of U.S. and non-U.S. banks and financial
institutions. As a related matter, the Fund may invest in shares of
money market mutual funds to the extent permitted by the 1940 Act.
---------------------------------------------------------------------------
The Fund will not invest directly in Commodities. The Fund expects
to gain exposure to these investments exclusively by investing in the
First Trust Subsidiary.
The Fund will use the fixed-income securities as investments and to
collateralize the First Trust Subsidiary's commodity exposure on a day-
to-day basis. The Fund may also invest directly in ETFs \10\ and other
investment companies, including, to the extent permitted under the 1940
Act, exchange-traded closed-end funds that provide exposure to
commodities, equity securities, and fixed income securities.\11\
---------------------------------------------------------------------------
\10\ An ETF is an investment company registered under the 1940
Act that holds a portfolio of securities. Many ETFs are designed to
track the performance of a securities index, including industry,
sector, country, and region indexes. ETFs included in the Fund will
be listed and traded in the U.S. on registered exchanges. Pursuant
to exemptive orders obtained by other ETFs and their sponsors from
the Commission, the Fund may invest in the securities of ETFs in
excess of the limits imposed under the 1940 Act. The ETFs in which
the Fund may invest include Index Fund Shares (as described in
Nasdaq Rule 5705), Portfolio Depositary Receipts (as described in
Nasdaq Rule 5705), and Managed Fund Shares (as described in Nasdaq
Rule 5735). While the Fund may invest in inverse ETFs, the Fund will
not invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs.
\11\ The equity securities (including shares of ETFs and closed-
end funds) in which the Fund may invest will be limited to
securities that trade in markets that are members of the ISG, which
includes all U.S. national securities exchanges, or are parties to a
comprehensive surveillance sharing agreement with the Exchange.
---------------------------------------------------------------------------
According to the Exchange, the Fund's investment in the First Trust
Subsidiary will be designed to help the Fund achieve exposure to
commodity returns in a manner consistent with the federal tax
requirements applicable to the Fund and other regulated investment
companies.
First Trust Subsidiary's Investments
The First Trust Subsidiary will seek to make investments generally
in Commodities while managing volatility, as measured by annualized
standard deviation, to a more consistent range than statistically
weighted commodity indices. The investment weightings of the underlying
Commodities held by the First Trust Subsidiary will be rebalanced in an
attempt to stabilize risk levels. According to the Exchange, the
dynamic weighting process will result in a disciplined, systematic
investment process which will be keyed off of the Adviser's volatility
forecasting process.
The First Trust Subsidiary will be advised by the Adviser.\12\ The
Fund's investment in the First Trust Subsidiary is intended to provide
the Fund with exposure to commodity markets within the limits of
current federal income tax laws applicable to investment companies such
as the Fund, which limit the ability of investment companies to invest
directly in the derivative instruments. The First Trust Subsidiary will
have the same investment objective as the Fund, but unlike the Fund, it
may invest without limitation in Commodities. The First Trust
Subsidiary's investments will provide the Fund with exposure to
domestic and international markets.
---------------------------------------------------------------------------
\12\ The First Trust Subsidiary will not be registered under the
1940 Act and will not be directly subject to its investor
protections, except as noted in the Registration Statement. However,
the First Trust Subsidiary will be wholly-owned and controlled by
the Fund and will be advised by the Adviser. Therefore, according to
the Exchange, the Fund's ownership and control of the First Trust
Subsidiary will prevent the First Trust Subsidiary from taking
action contrary to the interests of the Fund or its shareholders.
The Exchange states that the Board will have oversight
responsibility for the investment activities of the Fund, including
its expected investment in the First Trust Subsidiary, and the
Fund's role as the sole shareholder of the First Trust Subsidiary.
The Adviser will receive no additional compensation for managing the
assets of the First Trust Subsidiary. The First Trust Subsidiary
will also enter into separate contracts for the provision of
custody, transfer agency, and accounting agent services with the
same or with affiliates of the same service providers that provide
those services to the Fund.
---------------------------------------------------------------------------
The First Trust Subsidiary may have both long and short positions
in Commodities. However, for a given Commodity, the First Trust
Subsidiary will have a net long exposure. The First Trust Subsidiary
will initially consider investing in specific exchange-traded \13\
[[Page 62836]]
futures contracts set forth in a table in the Notice.
---------------------------------------------------------------------------
\13\ All of the exchanges are ISG members except for the London
Metal Exchange (``LME''). According to the Exchange, the LME falls
under the jurisdiction of the United Kingdom Financial Conduct
Authority (``FCA''). The Exchange states that the FCA is responsible
for ensuring the financial stability of the exchange members'
businesses, whereas the LME is largely responsible for the oversight
of day-to-day exchange activity, including conducting the
arbitration proceedings under the LME arbitration regulations.
---------------------------------------------------------------------------
As U.S. and London exchanges list additional contracts, as
currently listed contracts on those exchanges gain sufficient
liquidity, or as other exchanges list sufficiently liquid contracts,
the Adviser will include those contracts in the list of possible
investments of the First Trust Subsidiary. The list of commodities
futures and commodities markets considered for investment can and will
change over time.
Commodities Regulation
According to the Exchange, the Commodity Futures Trading Commission
(``CFTC'') has recently adopted substantial amendments to CFTC Rule 4.5
relating to the permissible exemptions and conditions for reliance on
exemptions from registration as a commodity pool operator. As a result
of the instruments that will be indirectly held by the Fund, the
Adviser has registered as a commodity pool operator \14\ and is also a
member of the National Futures Association (``NFA''). The Exchange
states that the Fund and the First Trust Subsidiary are subject to
regulation by the CFTC and NFA and to the additional disclosure,
reporting, and recordkeeping rules imposed upon commodity pools.
---------------------------------------------------------------------------
\14\ As defined in Section 1a(11) of the Commodity Exchange Act.
---------------------------------------------------------------------------
Other Investments
The Fund may invest in certificates of deposit issued against funds
deposited in a bank or savings and loan association. In addition, the
Fund may invest in bankers' acceptances, which are short-term credit
instruments used to finance commercial transactions.
The Fund may invest in 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. In addition, the Fund may invest
in commercial paper, which are short-term unsecured promissory notes,
including master demand notes \15\ issued by corporations to finance
their current operations. The Fund may invest in commercial paper only
if it has received the highest rating from at least one nationally
recognized statistical rating organization or, if unrated, has been
judged by the Adviser to be of comparable quality.
---------------------------------------------------------------------------
\15\ Master demand notes are direct lending arrangements between
the Fund and a corporation.
---------------------------------------------------------------------------
Investment Restrictions
The Fund may not invest more than 25% of the value of its total
assets in securities of issuers in any one industry or group of
industries. This restriction will not apply to obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities
or to securities of other investment companies.
The First Trust Subsidiary's shares will be offered only to the
Fund, and the Fund will not sell shares of the First Trust Subsidiary
to other investors. The Fund and the First Trust Subsidiary will not
invest in any non-U.S. equity securities (other than shares of the
First Trust Subsidiary). The Fund will not purchase securities of open-
end or closed-end investment companies except in compliance with the
1940 Act.
Pursuant to the Exemptive Order, the Fund will not invest directly
in options contracts, futures contracts, or swap agreements; however,
this restriction will not apply to the First Trust Subsidiary.
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.\16\ The Fund will monitor its portfolio liquidity
on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained and
will consider taking appropriate steps in order to maintain adequate
liquidity if, through a change in values, net assets, or other
circumstances, more than 15% of the Fund's net assets are held in
illiquid securities. Illiquid securities include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
---------------------------------------------------------------------------
\16\ 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 for and to elect to be treated as a
separate regulated investment company under Subchapter M of the
Internal Revenue Code.\17\
---------------------------------------------------------------------------
\17\ 26 U.S.C. 851.
---------------------------------------------------------------------------
Under the 1940 Act, the Fund's investment in investment companies
will, subject to certain exceptions, be limited to: (i) 3% of the total
outstanding voting stock of any one investment company, (ii) 5% of the
Fund's total assets with respect to any one investment company, and
(iii) 10% of the Fund's total assets with respect to investment
companies in the aggregate.
The Fund's and the First Trust Subsidiary's investments will be
consistent with the Fund's investment objective and will not be used to
enhance leverage.
Additional information regarding the Fund and the Shares, including
investment strategies, futures contracts and futures exchange
information, risks, creation and redemption procedures, fees, Fund
holdings disclosure policies, distributions, and taxes is included in
the Notice and Registration Statement, as applicable.\18\
---------------------------------------------------------------------------
\18\ 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 \19\
and the rules and regulations thereunder applicable to a national
securities exchange.\20\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The Commission notes that
the Fund and the Shares must comply with the requirements of Nasdaq
Rule 5735 for the Shares to be listed and traded on the Exchange.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f.
\20\ 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).
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\22\ 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
[[Page 62837]]
to assure the availability to brokers, dealers, and investors of
information with respect to quotations for, and transactions in,
securities. According to the Exchange, quotation and last-sale
information for the Shares will be available via Nasdaq proprietary
quote and trade services, as well as in accordance with the Unlisted
Trading Privileges and the Consolidated Tape Association plans for the
Shares and any underlying exchange-traded products. In addition, the
Intraday Indicative Value, available on the NASDAQ OMX Information LLC
proprietary index data service, will be based upon the current value
for the components of the Disclosed Portfolio and will be updated and
widely disseminated by one or more major market data vendors and
broadly displayed at least every 15 seconds during the Regular Market
Session. On each business day, before commencement of trading in Shares
in the Regular Market Session on the Exchange, the Fund will disclose
on its Web site the Disclosed Portfolio, as defined in Nasdaq Rule
5735(c)(2), held by the Fund and the First Trust Subsidiary, which will
form the basis for the Fund's calculation of net asset value (``NAV'')
at the end of the business day.\23\ 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. Information
regarding market price and volume of the Shares will be continually
available on a real-time basis throughout the day on brokers' computer
screens and other electronic services. The previous day's closing price
and trading volume information for the Shares will be published daily
in the financial section of newspapers. Intra-day, executable price
quotations on the securities, Commodities, and other assets held by the
Fund and the First Trust Subsidiary will be available from major
broker-dealer firms or on the exchange on which they are traded, as
applicable. Intra-day price information will also be available through
subscription services, such as Bloomberg, Markit, and Thomson Reuters,
which can be accessed by authorized participants and other investors.
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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\22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\23\ The Disclosed Portfolio will include, as applicable, the
names, quantity, percentage weighting, and market value of
securities, Commodities, and other assets held by the Fund and the
First Trust Subsidiary and the characteristics of such assets. The
Web site and 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.\24\
In addition, trading in the Shares will be subject to Nasdaq Rule
5735(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, Commodities, and other
assets constituting the Disclosed Portfolio of the Fund and the First
Trust Subsidiary or if other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present.\25\ 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.\26\ The Commission notes that the Financial Industry
Regulatory Authority (``FINRA''), on behalf of the Exchange,\27\ will
communicate as needed regarding trading in the Shares, Commodities, and
other exchange-traded securities and instruments held by the Fund and
the First Trust Subsidiary with other markets and other entities that
are members of the Intermarket Surveillance Group (``ISG''), and FINRA
may obtain trading information regarding trading in the Shares,
Commodities, and other exchange-traded securities and instruments held
by the Fund and the First Trust Subsidiary from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares, Commodities, and other exchange-traded
securities and instruments held by the Fund and the First Trust
Subsidiary from markets and other entities that are members of ISG,
which includes securities and futures exchanges,\28\ 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 that the Adviser has implemented a
fire wall with respect to its broker-dealer affiliate regarding access
to information concerning the composition of or changes to the
portfolio.\29\
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\24\ See Nasdaq Rule 5735(d)(1)(B).
\25\ See Nasdaq Rule 5735(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. Nasdaq will halt trading in the Shares under the
conditions specified in Nasdaq Rules 4120 and 4121, including the
trading pauses under Nasdaq Rules 4120(a)(11) and (12). 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.
\26\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\27\ 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\ With respect to the futures contracts held indirectly
through the First Trust Subsidiary, not more than 10% of the weight
of such futures contracts in the aggregate will consist of
instruments whose principal trading market is not a member of ISG or
is a market with which the Exchange does not have a comprehensive
surveillance sharing agreement.
\29\ 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 be subject to Nasdaq Rule 5735, which sets
forth the
[[Page 62838]]
initial and continued listing criteria applicable to Managed Fund
Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange represents that trading in the Shares will be
subject to the existing trading surveillances, administered by both
Nasdaq and FINRA on behalf of the Exchange, which are designed to
detect violations of Exchange rules and applicable federal securities
laws and that these procedures are adequate to properly monitor
Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities
laws.
(4) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes
suitability obligations on Nasdaq members with respect to recommending
transactions in the Shares to customers; (c) how information regarding
the Intraday Indicative Value is disseminated; (d) the risks involved
in trading the Shares during the Pre-Market and Post-Market Sessions
when an updated Intraday Indicative Value will not be calculated or
publicly disseminated; (e) the requirement that members deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (f) trading
information.
(5) For initial and continued listing, the Fund and the First Trust
Subsidiary must be in compliance with Rule 10A-3 under the Exchange
Act.\30\
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\30\ 17 CFR 240.10A-3.
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(6) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on 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) The equity securities (including shares of ETFs and closed-end
funds) in which the Fund may invest will be limited to securities that
trade in markets that are members of the ISG, which includes all U.S.
national securities exchanges, or are parties to a comprehensive
surveillance sharing agreement with the Exchange. The Fund and the
First Trust Subsidiary will not invest in any non-U.S. equity
securities (other than shares of the First Trust Subsidiary).
(9) The Fund will not invest directly in Commodities. The Fund
expects to gain exposure to these investments exclusively by investing
in the First Trust Subsidiary.
(10) The Fund's investment in the First Trust Subsidiary may not
exceed 25% of the Fund's total assets.
(11) The Fund's and the First Trust Subsidiary's investments will
be consistent with the Fund's investment objective and will not be used
to enhance leverage. The Fund may invest in inverse ETFs, but it will
not invest in leveraged or inverse leveraged ETFs.
(12) Pursuant to the Exemptive Order, the Fund will not invest
directly in options contracts, futures contracts, or swap agreements.
However, this restriction will not apply to the First Trust Subsidiary.
With respect to the futures contracts held indirectly through the First
Trust Subsidiary, not more than 10% of the weight of such futures
contracts in the aggregate shall consist of instruments whose principal
trading market is not a member of ISG or is a market with which the
Exchange does not have a comprehensive surveillance sharing agreement.
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.\31\
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\31\ 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 CFTC 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 \32\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\32\ 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,\33\ that the proposed rule change (SR-NASDAQ-2013-107) be, and it
hereby is, approved.
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\33\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24643 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P