Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Proposed Rule Change Relating to Listing and Trading of Exchange-Traded Managed Fund Shares, 14092-14100 [2014-05320]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 48 (Wednesday, March 12, 2014)]
[Notices]
[Pages 14092-14100]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05320]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71657; File No. SR-NASDAQ-2014-020]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Proposed Rule Change Relating to Listing and Trading of 
Exchange-Traded Managed Fund Shares

March 6, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 26, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) of the Act,\3\ and 
Rule 19b-4 thereunder,\4\ Nasdaq is filing with the Commission a 
proposed rule change to list and trade under proposed Nasdaq Rule 5745 
the shares of a proposed new type of open-end management investment 
company registered under the Investment Company Act of 1940, as amended 
(``1940 Act''), called an Exchange-Traded Managed Fund (``ETMF''), and 
to amend related references under Nasdaq Rules 4120, 5615 (and IM-5615-
4) and 5940.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available at https://nasdaq.cchwallstreet.com/, at Nasdaq's principal office, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below, and is set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt Nasdaq Rule 5745 for the purpose of 
permitting the listing and trading of ETMF Shares. Similar to Managed 
Fund Shares as defined in Nasdaq Rule 5735,\5\ ETMF Shares would be 
issued in specified aggregate unit quantities in return for a deposit 
of a specified basket of securities and/or a cash amount with a value 
equal to the product of the ETMF's net asset value per Share (``NAV'') 
and the number of Shares issued. When aggregated in the same specified 
unit quantities, ETMF Shares could be redeemed in exchange for a 
specified basket of securities and/or cash with a value per Share equal 
to the ETMF's NAV. Unlike Managed Fund Shares, ETMF Shares would trade 
on Nasdaq using a new trading protocol called ``NAV-Based Trading.'' In 
NAV-Based Trading, all bids, offers and execution prices would be 
expressed as a premium/discount (which may be zero) to the ETMF's next-
determined NAV (e.g., NAV-$0.01; NAV+$0.01). An ETMF's NAV would be 
determined each business day, normally as of 4:00 p.m. Eastern Time. 
Trade executions using NAV-Based Trading would be binding at the time 
orders are matched on Nasdaq's facilities, with the transaction prices 
contingent upon the determination of the ETMF's NAV at the end of the 
business day.
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    \5\ The Commission approved Nasdaq Rule 5735 in Securities 
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 
20, 2008) (SR-NASDAQ-2008-039).
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Proposed Listing Rules for Exchange-Traded Managed Fund Shares
    Proposed Nasdaq Rule 5745(b)(1) provides that Nasdaq will file 
separate proposals under Section 19(b) of the Act before the listing of 
ETMF Shares. Proposed Nasdaq Rule 5745(b)(2) provides that transactions 
in ETMF Shares will occur during Nasdaq's Regular Market Session 
through 4:00 p.m.\6\ Proposed Nasdaq Rule 5745(b)(3) provides that ETMF 
Shares will trade on Nasdaq at market-determined premiums or discounts 
to the next-determined NAV, and that the minimum price variation for 
quoting and entry of orders in ETMF Shares will be $0.01. Proposed Rule 
Nasdaq 5745(b)(4) provides that Nasdaq will implement written

[[Page 14093]]

surveillance procedures for ETMF Shares. Proposed Nasdaq Rule 
5745(b)(5) provides that, for ETMF Shares based on an international or 
global portfolio, the statutory prospectus or the application for 
exemption from provisions of the 1940 Act for such series of ETMF 
Shares must state that such series must comply with the federal 
securities laws in accepting securities for deposit and satisfying 
redemptions with securities, including that the securities accepted for 
deposit and the securities used to satisfy redemption requests are sold 
in transactions that would be exempt from registration under the 
Securities Act of 1933 (``Securities Act'').
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    \6\ Nasdaq Rule 4120(b)(4) defines the Regular Market Session as 
the trading session from 9:30 a.m. to 4:00 p.m. or 4:15 p.m. ETMF 
Shares will trade until 4:00 p.m.
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    Proposed Definitions. Proposed Nasdaq Rule 5745(c)(1) defines the 
term ``ETMF Share'' as a security that: (1) Represents an interest in a 
registered investment company organized as an open-end management 
investment company that invests in a portfolio of securities and other 
assets selected and managed by the ETMF's investment adviser consistent 
with the ETMF's investment objectives and policies; (2) is issued in 
specified aggregate unit quantities in return for a deposit of a 
specified portfolio of securities and/or a cash amount with a value per 
Share equal to the ETMF's NAV; (3) when aggregated in the same 
specified unit quantities, may be redeemed in exchange for a specified 
portfolio of securities and/or cash with a value per Share equal to the 
ETMF's NAV; and (4) is traded on Nasdaq or another national securities 
exchange using NAV-Based Trading, including pursuant to UTP.
    In addition, proposed Nasdaq Rule 5745(c)(2) defines the term 
``Intraday Indicative Value'' (``IIV'') as the estimated indicative 
value of an ETMF Share based on current information regarding the value 
of the securities and other assets held by the ETMF. Proposed Nasdaq 
Rule 5745(c)(3) defines the term ``Composition File'' as the specified 
portfolio of securities and/or cash that an ETMF will accept as a 
deposit in issuing ETMF Shares and the specified portfolio of 
securities and/or cash that an ETMF will deliver in a redemption of 
ETMF Shares. The current Composition File will be disseminated through 
the National Securities Clearing Corporation (``NSCC'') once each 
business day before the open of trading in ETMF Shares on Nasdaq on 
such day. To maintain the confidentiality of current portfolio trading, 
an ETMF's Composition File generally will not be a pro rata reflection 
of the ETMF's securities positions. Each security included in the 
Composition File will be a current holding of the ETMF, but the 
Composition File generally will not include all of the securities in 
the ETMF's portfolio or match the weightings of the included securities 
in the portfolio. The Composition File also may consist entirely of 
cash, in which case it will not include any of the securities in the 
ETMF's portfolio.
    Proposed Nasdaq Rule 5745(c)(4) defines the term ``Reporting 
Authority'' as Nasdaq, an institution or a reporting service designated 
by Nasdaq as the official source for calculating and reporting 
information relating to such series of ETMF Shares, including, but not 
limited to, the IIV, the amount of any cash distribution to holders of 
ETMF Shares, NAV, the Composition File or other information relating to 
the issuance, redemption or trading of ETMF Shares. A series of ETMF 
Shares may have more than one Reporting Authority, each having 
different functions.
    Initial and Continued Listing. Proposed Nasdaq Rule 5745(d) sets 
forth the initial and continued listing criteria applicable to ETMF 
Shares.\7\ Proposed Nasdaq Rule 5745(d)(1)(A) provides that, for each 
series of ETMF Shares, Nasdaq will establish a minimum number of ETMF 
Shares required to be outstanding at the time of commencement of 
trading. In addition, under proposed Nasdaq Rule 5745(d)(1)(B), Nasdaq 
must obtain a representation from the issuer of each series of ETMF 
Shares that the NAV for such series will be calculated on each business 
day that the New York Stock Exchange is open for trading and that the 
NAV will be made available to all market participants at the same time. 
Under proposed Nasdaq Rule 5745(d)(1)(C), the Reporting Authority that 
provides the Composition File must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material non-public information regarding the ETMF's portfolio 
positions and changes in positions.
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    \7\ An investment adviser to an ETMF would be registered under 
the Investment Advisers Act of 1940 (the ``Advisers Act''). As a 
result, the investment adviser and any subadviser and their related 
personnel would be 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. The Exchange 
represents that, for initial and/or continued listing, an ETMF must 
be in compliance with Rule 10A-3 under the Act. 17 CFR 240.10A-3.
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    Proposed Nasdaq Rule 5745(d)(2)(A) provides that each series of 
ETMF Shares could continue to be listed and traded if the IIV for the 
ETMF Shares is widely disseminated by one or more major market data 
vendors at intervals of not more than 15 minutes during the Regular 
Market Session when the ETMF Shares trade on Nasdaq. Proposed Nasdaq 
Rule 5745(d)(2)(B) provides that Nasdaq will consider the suspension of 
trading in, or removal from listing of, a series of ETMF Shares under 
any of the following circumstances: (1) If, following the initial 
twelve-month period after commencement of trading on the Exchange of a 
series of ETMF Shares, there are fewer than 50 beneficial holders of 
the series of ETMF Shares for 30 or more consecutive trading days; (2) 
if the ETMF's IIV or NAV is no longer calculated or if its IIV, NAV or 
Composition File is no longer available to all market participants at 
the same time; (3) if the ETMF has failed to submit any filings 
required by the Commission or if Nasdaq is aware that the ETMF is not 
in compliance with the conditions of any exemptive order or no-action 
relief granted by the Commission with respect to the series of ETMF 
Shares; or (4) if such other event shall occur or condition exists 
which, in the opinion of Nasdaq, makes further dealings on Nasdaq 
inadvisable.
    Proposed Nasdaq Rule 5745(d)(2)(C) provides that, if the IIV of a 
series of ETMF Shares is not being disseminated as required, Nasdaq may 
halt trading during the day in which the interruption to the 
dissemination of the IIV occurs. If the interruption to the 
dissemination of the IIV persists past the trading day in which it 
first occurred, Nasdaq will halt trading no later than the beginning of 
the trading day following the interruption. In addition, if the 
Exchange becomes aware that the NAV with respect to a series of ETMF 
Shares is not calculated on each business day that the New York Stock 
Exchange is open for trading and disseminated to all market 
participants at the same time, it will halt trading in such series 
until such time as the NAV is available to all market participants. If 
Nasdaq becomes aware that the

[[Page 14094]]

Composition File with respect to a series of ETMF Shares is not 
disseminated to all market participants at the same time, it will halt 
trading in such series until such time as the Composition File is 
available to all market participants.
    In addition, proposed Nasdaq Rule 5745(d)(2)(D) provides that, upon 
termination of an ETMF, the ETMF Shares issued in connection with such 
entity must be removed from listing on Nasdaq. Proposed Nasdaq Rule 
5745(d)(2)(E) provides that voting rights must be as set forth in the 
applicable ETMF prospectus.
    Additional Provisions. Proposed Nasdaq Rule 5745(e) provides that 
neither Nasdaq, the Reporting Authority nor any agent of Nasdaq shall 
have any liability for damages, claims, losses or expenses caused by 
any errors, omissions or delays in calculating or disseminating any of 
the following: the current portfolio value; the current value of the 
securities and other assets required to be deposited in connection with 
issuance of ETMF Shares; the amount of any dividend-equivalent payment 
or cash distribution to holders of ETMF Shares; NAV; the Composition 
File; or other information relating to the purchase, redemption or 
trading of ETMF Shares, resulting from any negligent act or omission by 
Nasdaq, the Reporting Authority or any agent of Nasdaq, or any act, 
condition or cause beyond the reasonable control of Nasdaq, its agent 
or the Reporting Authority, including, but not limited to, an act of 
God, fire, flood, extraordinary weather conditions, war, insurrection, 
riot, strike, accident, action of government, communications or power 
failure, equipment or software malfunction, or any error, omission or 
delay in the reports of transactions in one or more underlying 
securities.
    Proposed Nasdaq Rule 5745(f) applies only to series of ETMF Shares 
that are the subject of an order by the Commission exempting such 
series from certain prospectus delivery requirements under Section 
24(d) of the 1940 Act and are not otherwise subject to prospectus 
delivery requirements under the Securities Act. Nasdaq will inform its 
members regarding application of Proposed Nasdaq Rule 5745(f) to a 
particular series of ETMF Shares by means of an information circular 
prior to commencement of trading in such series. Under the proposed 
rule, Nasdaq requires that members provide to all purchasers of a 
series of ETMF Shares a written description of the terms and 
characteristics of those securities, in a form prepared by the open-end 
management investment company issuing such securities, not later than 
the time a confirmation of the first transaction in such series is 
delivered to such purchaser. In addition, members shall include such a 
written description with any sales material relating to a series of 
ETMF Shares that is provided to customers or the public. Any other 
written materials provided by a member to customers or the public 
making specific reference to a series of ETMF Shares as an investment 
vehicle must include a statement in substantially the following form: 
``A circular describing the terms and characteristics of (the series of 
ETMF Shares) has been prepared by the (open-end management investment 
company name) and is available from your broker. It is recommended that 
you obtain and review such circular before purchasing (the series of 
ETMF Shares).'' A member carrying an omnibus account for a non-member 
broker-dealer is required to inform such non-member that execution of 
an order to purchase a series of ETMF Shares for such omnibus account 
will be deemed to constitute agreement by the non-member to make such a 
written description available to its customers on the same terms as are 
directly applicable to members under this rule. Upon request of a 
customer, a member shall also provide a prospectus for the particular 
series of ETMF Shares.
    Proposed Nasdaq Rule 5745(g) provides that, if the investment 
adviser to an ETMF issuing Shares is a registered broker-dealer or 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the investment adviser and the broker-dealer 
personnel or broker-dealer affiliate, as applicable, with respect to 
access to information concerning the composition and/or changes to such 
ETMF's portfolio holdings. Personnel who make decisions on the ETMF's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material nonpublic information regarding 
the applicable ETMF portfolio.
Other Proposed Rule Changes
    The Exchange also proposes to amend: (1) Nasdaq Rule 4120(a)(9) and 
(10) to add provisions applicable to ETMF Shares with respect to 
trading halts; (2) Nasdaq Rule 4120(b)(4)(A) and (E) to modify certain 
defined terms to include references to ETMF Shares; (3) Nasdaq Rule 
5615(a)(5) and IM-5615-4 to add references to ETMFs for purposes of 
certain corporate governance requirements; and (4) Nasdaq Rule 5940(a) 
and (b) to add references to ETMF Shares to those securities already 
covered under the rule relating to both entry fees and annual fees.\8\
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    \8\ The Exchange also proposes to make certain other minor 
technical changes to these rules unrelated to ETMFs. Specifically, 
the Exchange proposes to amend Rule 4120(a)(9), (b)(4)(A), and 
(b)(4)(E) to include appropriate references to various derivative 
securities defined in Rule 5711, and to make certain other 
typographical corrections and clarifications.
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Key Features of ETMF Shares
    Open-End Registered Investment Company. An ETMF Share means a 
security that represents an interest in an open-end investment company 
registered under the 1940 Act that invests in a portfolio of securities 
and other assets selected and managed by its investment adviser 
consistent with its investment objectives and policies and which is 
traded on a national securities exchange using NAV-Based Trading.
    1940 Act Exemptive Relief. The 1940 Act contemplates management 
investment companies that either (1) issue redeemable securities (i.e., 
open-end investment companies) or (2) do not issue redeemable 
securities (i.e., closed-end investment companies). ETMF Shares are 
redeemable, but only in large blocks of shares, not individually. 
Because exchange-traded funds (``ETFs'') issuing Managed Fund Shares 
(``Active ETFs'') do not fit neatly into either the open-end category 
or the closed-end category, Active ETFs have had to seek exemptive 
relief from the Commission to permit registration as an open-end 
investment company. ETMFs share some key structural features with 
Active ETFs, including creations and redemptions only in large blocks 
of shares, and require exemptive relief from the Commission from 
substantially the same provisions of the 1940 Act.
    Creations and Redemptions. As with Managed Fund Shares, ETMF Shares 
will be issued and redeemed on a daily basis at NAV \9\ in specified 
blocks of Shares called ``Creation Units.'' Creation Units may be 
purchased and redeemed by or through ``Authorized Participants.'' \10\ 
Purchases and sales of

[[Page 14095]]

Shares in amounts smaller than the number of Shares required for a 
Creation Unit may be effected only in the secondary market through NAV-
based transactions, as described below, and not directly with the ETMF.
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    \9\ As with other registered open-end investment companies, the 
NAV of ETMF Shares generally would be calculated daily Monday 
through Friday as of the close of regular trading on the New York 
Stock Exchange, normally 4:00 p.m. Eastern Time. NAV would be 
calculated by dividing the ETMF's net asset value by the number of 
ETMF Shares outstanding. Information regarding the valuation of 
investments in calculating the ETMF's NAV would be contained in the 
registration statement for the ETMF Shares.
    \10\ ``Authorized Participants'' would be either: (1) 
``Participating parties,'' i.e., brokers or other participants in 
the Continuous Net Settlement System of the NSCC, a clearing agency 
registered with Commission and affiliated with the Depository Trust 
Company (``DTC''), or (2) DTC participants, which in either case 
have executed participant agreements with the ETMF's distributor and 
transfer agent regarding the creation and redemption of Creation 
Units. Investors would not have to be Authorized Participants in 
order to transact in Creation Units, but must place an order through 
and make appropriate arrangements with an Authorized Participant for 
such transactions.
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    As with Active ETFs, the creation and redemption process for ETMFs 
may be effected ``in kind,'' in cash, or in a combination of securities 
and cash. Creation ``in kind'' means that the Authorized Participant--
usually a brokerage house or large institutional investor--purchases 
the Creation Unit with a basket of securities equal in value to the 
aggregate NAV of the Shares in the Creation Unit. When an Authorized 
Participant redeems a Creation Unit in kind, it receives a basket of 
securities equal in value to the aggregate NAV of the Shares in the 
Creation Unit.
    Composition File. As defined in proposed Nasdaq Rule 5475(c)(3), 
the Composition File is the specified portfolio of securities and/or 
cash that an ETMF will accept as a deposit in issuing a Creation Unit 
of ETMF Shares, and the specified portfolio of securities and/or cash 
that an ETMF will deliver in a redemption of a Creation Unit of ETMF 
Shares. The Composition File will be disseminated through the NSCC once 
each business day before the open of trading in ETMF Shares on such 
day. Because ETMFs seek to preserve the confidentiality of their 
current portfolio trading program, the Composition File generally will 
not be a pro rata reflection of the ETMF's securities positions. Each 
security included in the Composition File will be a current holding of 
the ETMF, but the Composition File generally will not include all of 
the securities in the ETMF's portfolio or match the weightings of the 
included securities in the portfolio. Securities that the investment 
adviser to the ETMF is in the process of acquiring for the ETMF 
generally would not be represented in the Composition File until their 
purchase has been completed. Similarly, securities that are held in the 
ETMF's portfolio but in the process of being sold may not be removed 
from the Composition File until the sale program is substantially 
completed. ETMFs creating and redeeming Shares in kind would use cash 
amounts to supplement the in-kind transactions to the extent necessary 
to ensure that Creation Units are purchased and redeemed at NAV. The 
Composition File also may consist entirely of cash, in which case it 
will not include any of the securities in the ETMF's portfolio.\11\
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    \11\ In determining whether an ETMF will issue or redeem 
Creation Units entirely on a cash basis, the key consideration will 
be the benefit that would accrue to the ETMF and its investors. For 
instance, in bond transactions, the investment adviser to the ETMF 
may be able to obtain better execution than Authorized Participants 
because of the investment adviser's size, experience and potentially 
stronger relationships in the fixed-income markets.
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    NAV-Based Trading. Because ETMF Shares will be listed and traded on 
the Exchange, ETMF Shares will be available for purchase and sale on an 
intraday basis, like shares of conventional ETFs and other listed 
securities. Different from conventional ETF share trading, however, 
ETMF Shares would be purchased and sold in the secondary market at 
prices based on the next-determined NAV. All bids, offers and execution 
prices would be expressed as a premium/discount (which may be zero) to 
the ETMF's next-determined NAV (e.g., NAV - $0.01, NAV + $0.01). An 
ETMF's NAV would be determined each business day, normally as of 4:00 
p.m. Eastern Time. Trade executions would be binding at the time orders 
are matched on Nasdaq's facilities, with the transaction prices 
contingent upon the determination of NAV.
     Trading Premiums and Discounts. ETMF Share prices would be 
quoted throughout the day relative to NAV. The premium or discount to 
NAV at which ETMF Share prices are quoted and transactions are executed 
would vary depending on market factors, including the balance of supply 
and demand for ETMF Shares among investors, transaction fees and other 
costs in connection with creating and redeeming Creation Units of ETMF 
Shares, competition among market makers and other arbitrageurs, the 
ETMF Share inventory positions and inventory strategies of market 
makers and other arbitrageurs, and the volume of ETMF Share trading. 
Reflecting these and other market factors, prices for ETMF Shares in 
the secondary market may be above, at or below NAV.
     Transmitting and Processing Orders. Member firms would 
utilize existing order types and interfaces to transmit ETMF Share bids 
and offers to Nasdaq, which would process ETMF Share trades like trades 
in shares of conventional ETFs and other listed securities. In the 
systems used to transmit and process transactions in ETMF Shares, 
Nasdaq expects an ETMF's next-determined NAV to be represented by a 
proxy price (e.g., 100.00) and a premium/discount of a stated amount to 
the next-determined NAV to be represented by the same increment/
decrement from the proxy price used to denote NAV (e.g., NAV - $0.01 
would be represented as 99.99; NAV + $0.01 as 100.01).\12\
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    \12\ Order transmission and processing systems currently in 
common use by exchanges and member firms are generally not designed 
to accommodate pricing arrangements, such as NAV-Based Trading, in 
which bids, offers and execution prices are determined by reference 
to a price or value that is unknown at the time of trade execution. 
Compared to the alternative of building and maintaining (and 
requiring member firms to build and maintain) a dedicated NAV-Based 
Trading order transmission and processing system, the Exchange 
believes that the proposed approach (using, for processing purposes, 
a proxy price to represent next-determined NAV) offers major 
advantages in terms of cost, efficiency and time to implement. To 
convert proxy prices used to represent intraday bids, offers and 
execution prices into prices expressed in relation to the next-
determined NAV, member firms would subtract from the reported proxy 
price (e.g., 99.99) the proxy for NAV (e.g., 100.00) and inserting 
``NAV'' in front of the calculated number expressed in dollars 
(e.g., 99.99-100.00 = -0.01, expressed as ``NAV - $0.01'').
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    To avoid potential investor confusion, Nasdaq would work with 
member firms and providers of market data services to seek to ensure 
that representations of intraday bids, offers and execution prices for 
ETMFs that are made available to the investing public follow the ``NAV 
- $0.01/NAV + $0.01'' (or similar) display format, rather than 
displaying proxy prices. Nasdaq expects all ETMFs listed on the 
Exchange to have a unique identifier associated with their ticker 
symbols, which would indicate that their Shares are traded using NAV-
Based Trading. Nasdaq makes available to member firms and market data 
services certain proprietary data feeds (``Nasdaq Data Feeds'') that 
are designed to supplement the market information disseminated through 
the consolidated tape (``Consolidated Tape''). The Exchange would use a 
Nasdaq Data Feed to disseminate intraday price and quote data for ETMFs 
in real time in the ``NAV - $0.01/NAV + $0.01'' (or similar) display 
format. Member firms could use the Nasdaq Data Feed to source intraday 
ETMF prices for presentation to the investing public in the ``NAV - 
$0.01/NAV + $0.01'' (or similar) display format. Alternatively, member 
firms could source intraday ETMF prices in proxy price format from the 
Consolidated Tape and use a simple algorithm to convert prices into the 
``NAV - $0.01/NAV + $0.01'' (or similar) display format.
     Intraday Reporting of Quotes and Trades. All ETMF bids, 
offers and trade executions would be reported intraday in real time by 
the Exchange to the

[[Page 14096]]

Consolidated Tape \13\ and separately disseminated to member firms and 
market data services through a Nasdaq Data Feed. The Exchange would 
also provide the member firms participating in each ETMF Share trade 
with a contemporaneous notice of trade execution, indicating the number 
of ETMF Shares bought or sold and the executed premium/discount to 
NAV.\14\
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    \13\ Due to systems limitations, the Consolidated Tape would 
report intraday execution prices and quotes for ETMFs using a proxy 
price format. As noted, Nasdaq would separately report real-time 
execution prices and quotes to member firms and providers of market 
data services in the ``NAV - $0.01/NAV + $0.01'' (or similar) 
display format, and otherwise seek to ensure that representations of 
intraday bids, offers and execution prices for ETMFs that are made 
available to the investing public follow the same display format.
    \14\ All orders to buy or sell an ETMF Share that are not 
executed on the day the order is submitted will be automatically 
cancelled as of the close of trading on such day.
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     Final Trade Pricing, Reporting and Settlement. All 
executed ETMF Share trades would be recorded and stored intraday by 
Nasdaq to await the calculation of the ETMF's end-of-day NAV and the 
determination of final trade pricing. After the Reporting Authority 
calculates an ETMF's NAV and provides this information to the Exchange, 
Nasdaq would price each ETMF Share trade entered into during the day at 
the ETMF's NAV plus/minus the trade's executed premium/discount. Using 
the final trade price, each executed ETMF Share trade would then be 
disseminated to member firms and market data services through the 
Nasdaq Data Feed used to report ETMF Share trades, and confirmed to the 
member firms participating in the trade to supplement the previously 
provided information to include final pricing. After the pricing is 
finalized, Nasdaq would deliver the ETMF Share trading data to NSCC for 
clearance and settlement, following the same processes used for the 
clearance and settlement of trades in conventional ETFs and other 
exchange-traded securities.
    Portfolio Disclosure and ETMF Share Trading Efficiency. As required 
for traditional open-end investment companies, ETMFs would disclose 
their full portfolio positions at least quarterly, with a delay (not to 
exceed 60 days) to limit opportunities for other market participants to 
engage in predatory trading practices that might harm fund 
shareholders.\15\
---------------------------------------------------------------------------

    \15\ See 17 CFR 249.332; 17 CFR 274.130. In adopting the 
requirement for quarterly portfolio disclosure with not more than a 
60 day delay, the Commission noted that it took seriously concerns 
that more frequent portfolio disclosure and/or a shorter delay for 
release of this information might expand the opportunities for other 
market participants to engage in predatory trading practices that 
harm fund shareholders. Shareholder Reports and Quarterly Portfolio 
Disclosure of Registered Management Investment Companies, Securities 
Exchange Act Release No. 49333 (Feb. 27, 2004). As with traditional 
mutual funds, an ETMF could elect to provide more frequent 
disclosure of portfolio positions, if appropriate.
---------------------------------------------------------------------------

    Rule 5735 requires Active ETFs to disclose publicly their full 
portfolio positions at least once daily. The purpose of this 
requirement is to provide Active ETF market makers with the portfolio 
information needed to hedge the intraday market risk they assume as 
they take inventory positions in connection with their market making 
activities. In conventional ETF trading, a condition to maintaining a 
tight relationship between market trading prices and contemporaneous 
underlying portfolio values is that market makers have sufficient 
information regarding portfolio positions to enable them to earn 
reliable arbitrage profits by entering into long (or short) positions 
in ETF shares and offsetting short (or long) positions in the 
underlying holdings (or a suitable proxy).
    In ETMF trading, by contrast, a market maker assumes no intraday 
market risk in connection with its inventory positions because all ETMF 
Share transaction prices are based on the next-determined NAV. Whether 
an ETMF's underlying value goes up or down over the course of a trading 
day will not affect how much profit a market maker earns by selling (or 
buying) ETMF Shares in the market at a net premium (discount) to NAV, 
and then purchasing (redeeming) an offsetting number of ETMF Shares at 
the end of the day in transactions with the ETMF. No intraday market 
risk means no requirement for intraday hedging, and therefore no 
associated requirement for portfolio disclosure to maintain a tight 
relationship between ETMF Share trading prices and NAV.
    The arbitrage that connects ETMF trading prices to NAV is effected 
at the end of each trading day when a market maker or other arbitrageur 
purchases (or redeems) Creation Units of ETMF Shares through an 
Authorized Participant to offset the net amount of ETMF Shares it has 
sold (bought) over the course of the trading day, and buys (sells) the 
quantity of Composition File instruments corresponding to the number of 
Creation Units purchased (redeemed). An ETMF market maker that 
purchases (or redeems) a Creation Unit at the end of a trading day to 
offset its net intraday sales (purchases) of a Creation Unit quantity 
of ETMF Shares will earn arbitrage profits to the extent that it either 
sells (buys) Shares at an aggregate premium (discount) to NAV or buys 
(sells) a Creation Unit-equivalent quantity of Composition File 
instruments at an aggregate discount (premium) to their end-of-day 
values, and the net amount of ETMF premium (discount) plus Composition 
File instruments discount (premium) exceeds the transaction fee that 
applies to a purchase (redemption) of a Creation Unit of ETMF 
Shares.\16\
---------------------------------------------------------------------------

    \16\ The arbitrage mechanism is simplified for cash creations 
and redemptions. An ETMF market maker that purchases (or redeems) a 
Creation Unit in cash to offset its net intraday sales (purchases) 
of a Creation Unit quantity of ETMF Shares will earn arbitrage 
profits to the extent that it sells (buys) ETMF Shares in the 
secondary market at an aggregate premium (discount) to NAV that 
exceeds the transaction fee that applies to a cash creation 
(redemption) of a Creation Unit of ETMF Shares.
---------------------------------------------------------------------------

    Different from ETFs trading in conventional intraday markets, ETMFs 
offer market makers an arbitrage profit opportunity that does not 
depend on either corresponding intraday adjustments in fund share and 
underlying portfolio positions or the use of a hedge portfolio to 
manage intraday market risk. A ``perfect arbitrage'' in an ETMF 
requires only that market makers holding short (or long) positions in 
ETMF Shares accumulated intraday transact with the ETMF to purchase 
(redeem) a corresponding number of Creation Units of ETMF Shares, buy 
(sell) the equivalent quantities of Composition File instruments at 
market-closing or better prices, and offload any remaining sub-Creation 
Unit ETMF Share inventory through secondary market transactions by the 
market close.\17\
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    \17\ Market makers are expected generally to seek to minimize 
their exposure to price risk in ETMF Shares by holding little or no 
overnight inventory. Establishing Creation Unit sizes for ETMFs that 
are somewhat smaller (i.e., in a range of 5,000 to 50,000 Shares) 
than is customary for ETFs should support efficient arbitrage 
between an ETMF's trading prices and NAV by facilitating tighter 
market maker inventory management. To the extent that market makers 
hold small positions in ETMF Shares overnight, they are expected to 
aggregate such holdings with other risk positions and transact at or 
near the market close to buy or sell offsetting positions in 
appropriate, broad-based hedging instruments. Such hedging of 
overnight inventory risk on a macro basis does not require 
disclosure of non-Composition File portfolio positions.
---------------------------------------------------------------------------

    Because the arbitrage mechanism that underlies ETMF trading is 
simpler, more reliable and exposes market makers to less risk than ETF 
arbitrage, market makers should require less profit inducement to 
establish and maintain markets in ETMF Shares than in similarly 
constituted ETFs, thereby enabling ETMFs to routinely trade at smaller 
premiums/discounts and narrower bid-ask spreads. Further, because the 
arbitrage mechanism that underlies efficient trading of ETMFs

[[Page 14097]]

does not involve portfolio positions that are not included in the 
Composition File, the need for full portfolio transparency to achieve 
tight markets in ETMF Shares is eliminated.
    Recognizing the potential harm to shareholders of disclosing 
portfolio trading information on a current basis (and the absence of a 
need for such information to maintain tight trading markets using NAV-
Based Trading), proposed Nasdaq Rule 5745 would not require daily 
portfolio disclosure or specify a minimum level of correspondence 
between an ETMF's portfolio positions and its Composition File.
    Intraday Indicative Value. For each series of ETMF Shares, an 
estimated value of an individual ETMF Share, defined in proposed Nasdaq 
Rule 5745(c)(2) as the ``Intraday Indicative Value,'' would be widely 
disseminated by one or more major market data vendors at intervals of 
not more than 15 minutes throughout the Regular Market Session when 
ETMF Shares trade on the Exchange. The IIV would be based on current 
information regarding the value of the securities and other assets held 
by an ETMF.\18\ Unlike Nasdaq Rule 5735, which requires dissemination 
of IIVs every 15 seconds for Managed Fund Shares, proposed Nasdaq Rule 
5745 would not require the dissemination of an IIV on such a frequent 
basis. Dissemination of IIVs plays a different, and lesser, role in 
NAV-Based Trading of ETMF Shares than in conventional ETF trading. For 
Managed Fund Shares (and ETFs generally), the primary purpose of IIVs 
is to provide retail investors with a measure of the contemporaneous 
underlying value of a fund's positions, allowing them to assess the 
reasonableness of trading prices in relation to underlying value. For 
ETMF Shares, NAV-Based Trading provides investors with a direct measure 
of the relationship between trading prices and NAV (e.g., NAV - $0.01, 
NAV + $0.02) and, using limit orders, a means for controlling the 
premium or discount to NAV at which they trade shares. The purpose of 
IIVs in NAV-Based Trading is to enable investors to estimate the next-
determined NAV so they can determine the number of ETMF Shares to buy 
or sell if they want to transact in an approximate dollar amount (e.g., 
if an investor wants to acquire approximately $5,000 of an ETMF, how 
many Shares should the investor buy?).\19\ For this purpose, 
dissemination of IIVs at intervals of not more than 15 minutes should 
generally be sufficient. More frequent dissemination of IIVs may 
increase fund costs without apparent benefit and could focus 
unwarranted investor attention on these disclosures. Moreover, for 
certain strategies, more frequent IIV disclosure could provide 
unintended information about current portfolio trading activity to 
market participants who possess the requisite analytical capabilities, 
computation power and motivation to reverse engineer the ETMF's 
portfolio positions. As proposed, an ETMF would be permitted to 
disseminate IIVs at intervals of less than 15 minutes, but would not be 
required to do so to maintain trading on the Exchange.
---------------------------------------------------------------------------

    \18\ IIVs disseminated throughout each trading day would be 
based on the same portfolio as used to calculate that day's NAV. 
Like Managed Fund Shares, ETMFs will reflect purchases and sales of 
portfolio positions in their NAV the next business day after trades 
are executed.
    \19\ Because, in NAV-Based Trading, prices of executed trades 
are not determined until the reference NAV is calculated, buyers and 
sellers of ETMF Shares during the trading day will not know the 
final value of their purchases and sales until the end of the 
trading day. An ETMF's registration statement, Web site and any 
advertising or marketing materials will include prominent disclosure 
of this fact. Although IIVs may provide useful estimates of the 
value of intraday trades, they cannot be used to calculate with 
precision the dollar value of the ETMF Shares to be bought or sold. 
An IIV of an ETMF will generally differ from NAV to the extent that 
the value of the ETMF's portfolio holdings change intraday between 
the time the IIV is calculated and the end of the trading day. The 
fact that an investor placing an order to purchase or sell ETMF 
Shares would not know the trade price at the time the order is 
entered is similar to certain existing order types in conventional 
share trading. For standard market orders, trading prices are not 
known until the order executes. For market-on-close orders, trading 
prices are not established until the end of the trading day. In 
addition, for purchases and sales of share quantities of mutual 
funds, an investor does not know the transaction value until NAV is 
calculated at the end of the day. Member firms may have different 
systems for communicating these trade characteristics to their 
customers and for ensuring that customers have sufficient resources 
to engage in these trades. Member firms may require that a cash 
buffer be maintained in a customer's account relative to the current 
value of the security to be purchased. Alternatively, customers may 
have margin accounts or arrangements with their broker-dealer to 
provide for payment subsequent to trade execution, but prior to 
trade settlement.
---------------------------------------------------------------------------

    Availability of Information. Prior to the commencement of market 
trading in ETMF Shares, each ETMF will be required to establish and 
maintain a public Web site through which its current prospectus may be 
downloaded. The Web site will include additional ETMF information 
updated on a daily basis, including most recent NAV. The Composition 
File will be disseminated through the NSCC before the open of trading 
in ETMF Shares on Nasdaq on each business day. Consistent with the 
disclosure requirements that apply to traditional open-end investment 
companies, a complete list of current ETMF portfolio positions will be 
made available at least once each calendar quarter, with a reporting 
lag of not more than 60 days. ETMFs may provide more frequent 
disclosures of portfolio positions at their discretion.
    Reports of ETMF Share transactions will be disseminated to the 
market and delivered to the member firms participating in the trade 
contemporaneous with execution. Once an ETMF's daily NAV has been 
calculated, Nasdaq would price each ETMF Share trade entered into 
during the day at the ETMF's NAV plus/minus the trade's executed 
premium/discount. Using the final trade price, each executed ETMF Share 
trade would then be disseminated to member firms and market data 
services through the Nasdaq Data Feed used to report ETMF Share trades, 
and confirmed to the member firms participating in the trade to 
supplement the previously provided information to include final 
pricing.
    Information regarding NAV-based trading prices and volumes of ETMF 
Shares will be continually available on a real-time basis throughout 
each trading day on brokers' computer screens and other electronic 
services. The previous trading day's closing price and volume 
information for the ETMF Shares will be published daily.
    Exchange Listing. Nasdaq intends to enter into a license agreement 
to allow for the listing and trading of ETMF Shares on the 
Exchange.\20\ ETMF Shares listed on the Exchange may trade pursuant to 
UTP on other national securities exchanges that have obtained 
appropriate licenses, adopted applicable exchange rules and developed 
systems to support NAV-Based Trading. Fees collected by the Exchange in 
connection with the listing and trading of ETMF Shares will comply with 
the statutory requirements set forth in the Act.
---------------------------------------------------------------------------

    \20\ Aspects of ETMFs and NAV-Based Trading are protected 
intellectual property subject to issued and pending U.S. patents 
held by Navigate Fund Solutions LLC (``Navigate''), a wholly owned 
subsidiary of Eaton Vance Corp. Nasdaq would enter into a license 
agreement with Navigate to allow for NAV-Based Trading on the 
Exchange of ETMFs that have themselves entered into license 
agreements with Navigate.
---------------------------------------------------------------------------

Trading Halts
    The Exchange may consider all relevant factors in exercising its 
discretion to halt or suspend trading in ETMF Shares. Nasdaq will halt 
trading in ETMF Shares under the conditions specified in Nasdaq Rules 
4120, as proposed to be amended, and in proposed Nasdaq Rule 
5745(d)(2)(C), as discussed above. Additionally, Nasdaq may cease 
trading ETMF Shares if other

[[Page 14098]]

unusual conditions or circumstances exist which, in the opinion of 
Nasdaq, make further dealings on Nasdaq detrimental to the maintenance 
of a fair and orderly market. To manage the risk of a non-regulatory 
ETMF Share trading halt, Nasdaq has in place back-up processes and 
procedures to ensure orderly trading. Because, in NAV-Based Trading, 
all trade execution prices are linked to end-of-day NAV, buyers and 
sellers of ETMF Shares should be less exposed to risk of loss due to 
intraday trading halts than buyers and sellers of conventional ETFs and 
other exchange-traded securities.
Trading Rules
    Nasdaq deems ETMF Shares to be equity securities, thus rendering 
trading in ETMF Shares to be subject to Nasdaq's existing rules 
governing the trading of equity securities. Nasdaq will allow trading 
in ETMF Shares from 9:30 a.m. until 4:00 p.m. Eastern Time.\21\ As 
provided in proposed Nasdaq Rule 5745(b)(3), the minimum price 
variation for quoting and entry of orders in ETMF Shares traded on the 
Exchange will be $0.01.
---------------------------------------------------------------------------

    \21\ See, supra note 6.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in ETMF Shares will be subject 
to the existing trading surveillances, administered by both Nasdaq and 
the Financial Industry Regulatory Authority, Inc. (``FINRA'') on behalf 
of the Exchange, which are designed to detect violations of Exchange 
rules and applicable federal securities laws.\22\ The Exchange 
represents that these procedures are adequate to properly monitor 
trading of ETMF Shares on the Exchange and to deter and detect 
violations of Exchange rules and applicable federal securities laws.
---------------------------------------------------------------------------

    \22\ FINRA provides surveillance of trading on the Exchange 
pursuant to a regulatory services agreement. The Exchange is 
responsible for FINRA's performance under this regulatory services 
agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed with 
other markets and other entities that are members of the Intermarket 
Surveillance Group (``ISG'') \23\ regarding trading in ETMF Shares, and 
in exchange-traded securities and instruments held by ETMFs (to the 
extent such exchange-traded securities and instruments are known 
through the publication of the Composition File and periodic public 
disclosures of an ETMF's portfolio), and FINRA may obtain trading 
information regarding such trading from other markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in ETMF Shares, and in exchange-traded securities and 
instruments held by ETMFs (to the extent such exchange-traded 
securities and instruments are known through the publication of the 
Composition File and periodic public disclosures of an ETMF's 
portfolio), from markets and other entities that are members of ISG, 
which includes securities and futures exchanges, or with which the 
Exchange has in place a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    \23\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of an 
ETMF's portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material non-public information by its employees.
Information Circular
    Prior to the commencement of trading in an ETMF, the Exchange will 
inform its members in an Information Circular of the special 
characteristics and risks associated with trading the ETMF Shares. 
Specifically, the Information Circular will discuss the following: (1) 
The procedures for purchases and redemptions of ETMF Shares in Creation 
Units (and noting that ETMF Shares are not individually redeemable); 
(2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq 
members with respect to recommending transactions in ETMF Shares to 
customers; (3) how information regarding the IIV is disseminated; (4) 
the requirement that members deliver a prospectus to investors 
purchasing ETMF Shares prior to or concurrently with the confirmation 
of a transaction; and (5) information regarding NAV-Based Trading 
protocols.
    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the ETMF. Members purchasing ETMF Shares from the ETMF 
for resale to investors will deliver a summary prospectus to such 
investors. The Information Circular will also discuss any exemptive, 
no-action and interpretive relief granted by the Commission from any 
rules under the Act.
    The Information Circular also will reference that the ETMF is 
subject to various fees and expenses described in its registration 
statement. The Information Circular will also disclose the trading 
hours of the ETMF Shares and the applicable NAV calculation time for 
the ETMF Shares. The Information Circular will disclose that 
information about the ETMF Shares will be publicly available on the 
ETMF's Web site.
    Information regarding ETMF trading protocols will be disseminated 
to Nasdaq members in accordance with current processes for newly listed 
products. Nasdaq intends to provide its members with a detailed 
explanation of NAV-Based Trading through a Trading Alert issued prior 
to the commencement of trading in ETMF Shares on the Exchange.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act \24\ in general, and Section 6(b)(5) of the Act \25\ in 
particular, in that it is 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, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. Nasdaq also believes that 
imposition of an initial entry fee and an annual fee in connection with 
the listing of ETMF Shares under proposed Nasdaq Rule 5940 is 
consistent with Section 6(b)(4) of the Act \26\ in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using any facility or 
system that the Exchange operates or controls.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that ETMF 
Shares would be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in proposed Nasdaq Rule 5745. 
The Exchange believes that its surveillance procedures are adequate to 
properly monitor the trading of ETMF Shares on Nasdaq and to deter and 
detect violations of

[[Page 14099]]

Exchange rules and the applicable federal securities laws. If the 
investment adviser to an ETMF is a registered broker-dealer or 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the investment adviser and the broker-dealer 
personnel or broker-dealer affiliate, as applicable, with respect to 
access to information concerning the composition and/or changes to the 
ETMF's portfolio holdings. The Exchange may obtain information via ISG 
from other exchanges that are members of ISG or with which the Exchange 
has entered into a comprehensive surveillance sharing agreement, to the 
extent necessary.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest. 
The Exchange will obtain a representation from each issuer of ETMF 
Shares that the NAV per ETMF Share will be calculated on each business 
day that the New York Stock Exchange is open for trading and that the 
NAV will be made available to all market participants at the same time. 
In addition, a large amount of information would be publicly available 
regarding ETMFs and ETMF Shares, thereby promoting market transparency. 
An IIV will be disseminated by one or more major market data vendors at 
intervals of not more than 15 minutes during trading on the Exchange. 
Prior to the commencement of market trading in ETMF Shares, each ETMF 
will be required to establish and maintain a public Web site through 
which its current prospectus may be downloaded. The Web site will 
include additional ETMF information updated on a daily basis, including 
the most recent NAV. The Composition File will be disseminated through 
the NSCC before the open of trading in ETMF Shares on each business 
day. A complete list of current ETMF portfolio positions will be made 
available at least once each calendar quarter, with a reporting lag of 
not more than 60 days. ETMFs may provide more frequent disclosures of 
portfolio positions at their discretion.
    Transactions in ETMF Shares will be reported to the Consolidated 
Tape, disseminated to member firms and market data services through the 
Nasdaq Data Feed used to report ETMF Share trades, and reported to the 
member firms participating in the trade contemporaneous with execution. 
Once an ETMF's daily NAV has been calculated and the final price of its 
intraday Share trades has been determined, Nasdaq disseminate final 
pricing information through the Nasdaq Data Feed used to report ETMF 
Share trades and deliver a confirmation with final pricing to the 
transacting parties. Information regarding NAV-based trading prices and 
volumes of ETMF Shares traded will be continually available on a real-
time basis throughout each trading day on brokers' computer screens and 
other electronic services. The previous trading day's closing price and 
volume information for the ETMF Shares will be published daily. Because 
ETMF Shares will trade at prices based on the next-determined NAV, 
investors will be able to buy and sell individual Shares at a known 
premium or discount to NAV that they can limit by transacting using 
limit orders. NAV-Based Trading provides a level of trading cost 
transparency and control that is normally not achievable in 
conventional ETF trading. Trading in ETMF Shares would be subject to 
proposed Nasdaq Rules 5745(d)(2)(B) and (C), which provide for the 
suspension of trading or trading halts under certain circumstances, 
including if, in the view of the Exchange, trading in ETMF Shares 
becomes inadvisable.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest. Proposed Nasdaq Rule 5745 will permit the listing and 
trading of a new type of exchange-traded product that can provide 
investors with access to a broad range of active strategies in a 
structure that provides the cost and tax efficiencies and shareholder 
protections of ETFs, while removing the requirement for portfolio 
transparency to ensure a tight relationship between market trading 
prices and NAV. Because proposed Nasdaq Rule 5745 would not require 
ETMFs to publish portfolio positions daily, ETMFs are expected to have 
broad appeal among active managers who seek to make their strategies 
available in an exchange-traded structure, but have not embraced Active 
ETFs due to concerns about the adverse effects of publicly disclosing 
portfolio trading information on a daily basis.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.
    With respect to the imposition of initial entry fees and annual 
fees for the listing of ETMF Shares under proposed Nasdaq Rule 5940, 
Nasdaq believes that the proposed fees are reasonable and equitably 
allocated. Nasdaq notes that the proposed fees would be in the same 
amount as the entry fees and annual fees that apply to Portfolio 
Depository Receipts, Index Fund Shares and Managed Fund Shares, which, 
like ETMF Shares, are exchange-listed shares of investment companies 
registered under the 1940 Act.
    Accordingly, Nasdaq believes the proposed rule change is consistent 
with the requirements of Section 6(b)(4) of the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. In fact, the 
Exchange believes that the introduction of ETMFs would promote 
competition. ETMFs would permit investment managers that have been 
unwilling to sponsor Active ETFs to introduce actively managed 
exchange-traded investment companies with features that could be 
attractive to investors. The Exchange believes that the NAV-Based 
Trading of ETMF Shares would provide investors with an ability to 
control trading costs in a way that is not normally available in 
conventional ETF trading. These developments could significantly 
enhance competition to the benefit of the markets and investors.
    Nasdaq intends to enter into a license agreement to allow for the 
listing and trading of ETMF Shares.\27\ ETMF Shares listed on the 
Exchange may trade pursuant to UTP on other national securities 
exchanges that have obtained appropriate licenses, adopted applicable 
exchange rules and developed systems to support NAV-Based Trading. Fees 
collected by the Exchange in connection with the listing and trading of 
ETMF Shares will comply with the statutory requirements set forth in 
the Act. Nasdaq believes that this proposal would enable a unique 
investment product to begin trading in a regulated exchange environment 
and thereby provide additional trading choices to the benefit of 
investors, including retail investors.
---------------------------------------------------------------------------

    \27\ As noted above, aspects of ETMFs and NAV-Based Trading are 
protected intellectual property subject to issued and pending U.S. 
patents.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i)

[[Page 14100]]

as the Commission may designate up to 90 days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the Exchange consents, the Commission 
shall:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-020 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-NASDAQ-2014-020. 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 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-NASDAQ-2014-020 and should 
be submitted on or before April 2, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05320 Filed 3-11-14; 8:45 am]
BILLING CODE 8011-01-P