Order Granting Limited Exemptions From Exchange Act Rule 10b-17 and Rules 101 and 102 of Regulation M to First Trust Dorsey Wright Focus Five ETF Pursuant to Exchange Act Rule 10b-17(b)(2) and Rules 101(d) and 102(e) of Regulation M, 13691-13693 [2014-05177]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 47 (Tuesday, March 11, 2014)]
[Notices]
[Pages 13691-13693]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05177]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71652; File No. TP 14-05]


Order Granting Limited Exemptions From Exchange Act Rule 10b-17 
and Rules 101 and 102 of Regulation M to First Trust Dorsey Wright 
Focus Five ETF Pursuant to Exchange Act Rule 10b-17(b)(2) and Rules 
101(d) and 102(e) of Regulation M

March 5, 2014.
    By letter dated March 5, 2014 (the ``Letter''), as supplemented by 
conversations with the staff of the Division of Trading and Markets, 
counsel for First Trust Exchange-Traded Fund VI (the ``Trust'') on 
behalf of the Trust, First Trust Dorsey Wright Focus Five ETF (the 
``Fund''), any national securities exchange on or through which shares 
issued by the Fund (``Shares'') may subsequently trade, First Trust 
Portfolios L.P., and persons or entities engaging in transactions in 
Shares (collectively, the ``Requestors'') requested exemptions, or 
interpretive or no-action relief, from Rule 10b-17 of the Securities 
Exchange Act of 1934, as amended (``Exchange Act'') and Rules 101 and 
102 of Regulation M in connection with secondary market transactions in 
Shares and the creation or redemption of aggregations of Shares of at 
least 50,000 shares (``Creation Units'').
    The Trust is registered with the Commission under the Investment 
Company Act of 1940, as amended (``1940 Act''), as an open-end 
management investment company. The Fund seeks to track the performance 
of an underlying index developed by Dorsey, Wright & Associates called 
the Dorsey Wright Focus Five Index (``Index''). The Index is designed 
to provide targeted exposure to the five First Trust sector-based 
exchange traded funds (``ETFs'') (i.e., sector-based ETFs also advised 
by the investment advisor to the Fund) that the index provider believes 
offer the greatest potential to outperform other First Trust sector-
based ETFs. The Index will take into account the performance of each of 
these sector or industry ETFs relative to one another. The Fund intends 
to operate as an ``ETF of ETFs'' by seeking to track the performance of 
its underlying Index through investing at least 90% of its net assets 
(plus the amount of any borrowings for investment purposes) in the ETFs 
which comprise the Index. Except for the fact that the Fund will 
operate as an ETF of ETFs, the Fund will operate in a manner identical 
to the ETFs that are included in the Index.
    The Requestors represent, among other things, the following:
     Shares of the Fund will be issued by the Trust, an open-
end management investment company that is registered with the 
Commission;
     The Trust will continuously redeem Creation Units at net 
asset value (``NAV'') and the secondary market price of the Shares 
should not vary substantially from the NAV of such Shares;
     Shares of the Fund will be listed and traded on the Nasdaq 
Stock Market LLC or other exchange in accordance with exchange listing 
standards that are, or will become, effective pursuant to

[[Page 13692]]

Section 19(b) of the Exchange Act (the ``Exchange''); \1\
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    \1\ Further, the Letter states that should the Shares also trade 
on a market pursuant to unlisted trading privileges, such trading 
will be conducted pursuant to self-regulatory organization rules 
that have become effective pursuant to Section 19(b) of the Exchange 
Act
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     All ETFs in which the Fund is invested will meet all 
conditions set forth in a relevant class relief letter,\2\ or will have 
received individual relief from the Commission;
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    \2\ Letter from Catherine McGuire, Esq., Chief Counsel, Division 
of Market Regulation, to the Securities Industry Association 
Derivative Products Committee (November 21, 2005); Letter from 
Racquel L. Russell, Branch Chief, Division of Market Regulation, to 
George T. Simon, Esq., Foley & Lardner LLP (June 21, 2006); Letter 
from James A. Brigagliano, Acting Associate Director, Division of 
Market Regulation, to Stuart M. Strauss, Esq., Clifford Chance US 
LLP (October 24, 2006); Letter from James A. Brigagliano, Associate 
Director, Division of Market Regulation, to Benjamin Haskin, Esq., 
Willkie Farr & Gallagher LLP (April 9, 2007); or Letter from 
Josephine Tao, Assistant Director, Division of Trading and Markets, 
to Domenick Pugliese, Esq., Paul, Hastings, Janofsky and Walker LLP 
(June 27, 2007).
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     At least 70% of the Fund is comprised of component 
securities that meet the minimum public float and minimum average daily 
trading volume thresholds under the ``actively-traded securities'' 
definition found in Regulation M for excepted securities during each of 
the previous two months of trading prior to formation of the Fund; 
provided, however, that if the Fund has 200 or more component 
securities, then 50% of the component securities must meet the 
actively-traded securities thresholds;
     All the components of the Index will have publicly 
available last sale trade information;
     The intra-day proxy value of the Fund per share and the 
value of the Index will be publicly disseminated by a major market data 
vendor throughout the trading day;
     On each business day before the opening of business on the 
Exchange, the Fund's custodian, through the National Securities 
Clearing Corporation, will make available the list of the names and the 
numbers of securities and other assets of the Fund's portfolio that 
will be applicable that day to creation and redemption requests;
     The Exchange or other market information provider will 
disseminate (i) continuously every 15 seconds throughout the trading 
day, through the facilities of the consolidated tape, the market value 
of a Share and (ii) every 15 seconds throughout the trading day, a 
calculation of the intraday indicative value of a Share;
     The arbitrage mechanism will be facilitated by the 
transparency of the Fund's portfolio and the availability of the intra-
day indicative value, the liquidity of securities and other assets held 
by the Fund, ability to acquire such securities, as well as the 
arbitrageurs' ability to create workable hedges;
     The Fund will invest solely in liquid securities;
     The Fund will invest in securities that will facilitate an 
effective and efficient arbitrage mechanism and the ability to create 
workable hedges;
     The Requestors believe that arbitrageurs are expected to 
take advantage of price variations between the Fund's market price and 
its NAV; and
     A close alignment between the market price of Shares and 
the Fund's NAV is expected.

Regulation M

    While redeemable securities issued by an open-end management 
investment company are excepted from the provisions of Rule 101 and 102 
of Regulation M, the Requestors may not rely upon that exception for 
the Shares.\3\ However, we find that it is appropriate in the public 
interest and is consistent with the protection of investors to grant a 
conditional exemption from Rules 101 and 102 to persons who may be 
deemed to be participating in a distribution of Shares of the Fund as 
described in more detail below.
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    \3\ While ETFs operate under exemptions from the definitions of 
``open-end company'' under Section 5(a)(1) of the 1940 Act and 
``redeemable security'' under Section 2(a)(32) of the 1940 Act, the 
Fund and its securities do not meet those definitions.
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Rule 101 of Regulation M

    Generally, Rule 101 of Regulation M is an anti-manipulation rule 
that, subject to certain exceptions, prohibits any ``distribution 
participant'' and its ``affiliated purchasers'' from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase 
any security which is the subject of a distribution until after the 
applicable restricted period, except as specifically permitted in the 
rule. Rule 100 of Regulation M defines ``distribution'' to mean any 
offering of securities that is distinguished from ordinary trading 
transactions by the magnitude of the offering and the presence of 
special selling efforts and selling methods. The provisions of Rule 101 
of Regulation M apply to underwriters, prospective underwriters, 
brokers, dealers, or other persons who have agreed to participate or 
are participating in a distribution of securities. The Shares are in a 
continuous distribution and, as such, the restricted period in which 
distribution participants and their affiliated purchasers are 
prohibited from bidding for, purchasing, or attempting to induce others 
to bid for or purchase extends indefinitely.
    Based on the representations and facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company that will continuously redeem at the NAV Creation 
Unit size aggregations of the Shares of the Fund and that a close 
alignment between the market price of Shares and the Fund's NAV is 
expected, the Commission finds that it is appropriate in the public 
interest and consistent with the protection of investors to grant the 
Trust an exemption under paragraph (d) of Rule 101 of Regulation M with 
respect to the Fund, thus permitting persons participating in a 
distribution of Shares of the Fund to bid for or purchase such Shares 
during their participation in such distribution.\4\
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    \4\ Additionally, we confirm the interpretation that a 
redemption of Creation Unit size aggregations of Shares of the Fund 
and the receipt of securities in exchange by a participant in a 
distribution of Shares of the Fund would not constitute an ``attempt 
to induce any person to bid for or purchase, a covered security 
during the applicable restricted period'' within the meaning of Rule 
101 of Regulation M and therefore would not violate that rule.
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Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security 
holders, and any affiliated purchaser of such person from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase a 
covered security during the applicable restricted period in connection 
with a distribution of securities effected by or on behalf of an issuer 
or selling security holder.
    Based on the representations and facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company that will redeem at the NAV Creation Units of Shares 
of the Fund and that a close alignment between the market price of 
Shares and the Fund's NAV is expected, the Commission finds that it is 
appropriate in the public interest and consistent with the protection 
of investors to grant the Trust an exemption under paragraph (e) of 
Rule 102 of Regulation M with respect to the Fund, thus permitting the 
Fund to redeem Shares of the Fund during the continuous offering of 
such Shares.

Rule 10b-17

    Rule 10b-17, with certain exceptions, requires an issuer of a class 
of publicly traded securities to give notice of certain specified 
actions (for example, a dividend distribution) relating to such class 
of securities in accordance with

[[Page 13693]]

Rule 10b-17(b). Based on the representations and facts in the Letter, 
and subject to the conditions below, we find that it is appropriate in 
the public interest, and consistent with the protection of investors to 
grant the Trust a conditional exemption from Rule 10b-17 because market 
participants will receive timely notification of the existence and 
timing of a pending distribution, and thus the concerns that the 
Commission raised in adopting Rule 10b-17 will not be implicated.\5\
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    \5\ We also note that timely compliance with Rule 10b-
17(b)(1)(v)(a) and (b) would be impractical in light of the nature 
of the Fund. This is because it is not possible for the Fund to 
accurately project ten days in advance what dividend, if any, would 
be paid on a particular record date.
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Conclusion

    It is hereby ordered, pursuant to Rule 101(d) of Regulation M, that 
the Trust, based on the representations and facts presented in the 
Letter, is exempt from the requirements of Rule 101 with respect to the 
Fund, thus permitting persons who may be deemed to be participating in 
a distribution of Shares of the Fund to bid for or purchase such Shares 
during their participation in such distribution.
    It is further ordered, pursuant to Rule 102(e) of Regulation M, 
that the Trust, based on the representations and the facts presented in 
the Letter, is exempt from the requirements of Rule 102 with respect to 
the Fund, thus permitting the Fund to redeem Shares of the Fund during 
the continuous offering of such Shares.
    It is further ordered, pursuant to Rule 10b-17(b)(2), that the 
Trust, based on the representations and the facts presented in the 
Letter and subject to the conditions below, is exempt from the 
requirements of Rule 10b-17 with respect to transactions in the shares 
of the Fund.
    This exemptive relief is subject to the following conditions:
     The Trust will comply with Rule 10b-17 except for Rule 
10b-17(b)(1)(v)(a) and (b); and
     The Trust will provide the information required by Rule 
10b-17(b)(1)(v)(a) and (b) to the Exchange as soon as practicable 
before trading begins on the ex-dividend date, but in no event later 
than the time when the Exchange last accepts information relating to 
distributions on the day before the ex-dividend date.
    This exemptive relief is subject to modification or revocation at 
any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act. Persons 
relying upon this exemption shall discontinue transactions involving 
the Shares of the Fund under the circumstances described above and in 
the Letter, pending presentation of the facts for the Commission's 
consideration, in the event that any material change occurs with 
respect to any of the facts or representations made by the Requestors. 
In addition, persons relying on this exemption are directed to the 
anti-fraud and anti-manipulation provisions of the Exchange Act, 
particularly Sections 9(a), 10(b), and Rule 10b-5 thereunder. 
Responsibility for compliance with these and any other applicable 
provisions of the federal securities laws must rest with the persons 
relying on this exemption. This order should not be considered a view 
with respect to any other question that the proposed transactions may 
raise, including, but not limited to the adequacy of the disclosure 
concerning, and the applicability of other federal or state laws to, 
the proposed transactions.
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    \6\ 17 CFR 200.30-3(a)(6) and (9).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05177 Filed 3-10-14; 8:45 am]
BILLING CODE 8011-01-P