Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Listing and Trading of the Shares of the First Trust Managed Municipal Fund of First Trust Exchange-Traded Fund III, 21333-21337 [2014-08416]

Download as PDF Federal Register / Vol. 79, No. 72 / Tuesday, April 15, 2014 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71913; File No. SR– NASDAQ–2014–019] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the Listing and Trading of the Shares of the First Trust Managed Municipal Fund of First Trust Exchange-Traded Fund III April 9, 2014. I. Introduction On February 7, 2014, 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’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade the shares of the First Trust Managed Municipal ETF (‘‘Fund’’) of First Trust Exchange-Traded Fund III (‘‘Trust’’). The proposed rule change was published for comment in the Federal Register on February 25, 2014.3 The Commission received no comments on the proposed rule change. On March 27, 2014, the Exchange filed Amendment No. 1 to the proposed rule change. This order approves the proposed rule change, as modified by Amendment No. 1 thereto, on an accelerated basis. II. Description of the Proposed Rule Change The Exchange proposes to list and trade Shares pursuant to Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares.4 The Exchange deems the Shares to be equity securities, rendering trading in the Shares subject to the Exchange’s 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 71572 (February 19, 2014), 79 FR 10584 (‘‘Notice’’). 4 Under Nasdaq’s Rules, a Managed Fund Share is a security that (a) represents an interest in a registered investment company (‘‘Investment Company’’) organized as an open-end management investment company or similar entity, that invests in a portfolio of securities selected by the Investment Company’s investment adviser consistent with the Investment Company’s investment objectives and policies; (b) is issued in a specified aggregate minimum number in return for a deposit of a specified portfolio of securities and/ or a cash amount with a value equal to the next determined net asset value; and (c) when aggregated in the same specified minimum number, may be redeemed at a holder’s request, which holder will be paid a specified portfolio of securities and/or cash with a value equal to the next determined net asset value. See Nasdaq Rule 5735(c)(1). mstockstill on DSK4VPTVN1PROD with NOTICES 2 17 VerDate Mar<15>2010 18:06 Apr 14, 2014 Jkt 232001 existing rules governing the trading of equity securities.5 The Shares will be offered by the First Trust Exchange Traded Fund III (‘‘Trust’’), which is organized as a Massachusetts business trust and is registered with the Commission as an investment company.6 First Trust Advisors L.P. is the investment adviser (‘‘Adviser’’) to the Fund. First Trust Portfolios L.P. is the principal underwriter and distributor of the Shares (‘‘Distributor’’). Brown Brothers Harriman & Co. will act as the administrator, accounting agent, custodian, and transfer agent to the Fund. The Adviser is affiliated with the Distributor, a broker-dealer. As required by Nasdaq Rule 5735(g),7 the Adviser has implemented a firewall with respect to its broker-dealer affiliate regarding access to information concerning the composition of or changes to the portfolio.8 First Trust Managed Municipal ETF Principal Investments The primary investment objective of the Fund will be to generate current income that is exempt from regular federal income taxes, and its secondary objective will be long-term capital appreciation. Under normal market conditions,9 the Fund will seek to 5 See Notice, supra note 3, 78 FR at 16017. Trust is registered under the Investment Company Act of 1940 (‘‘1940 Act’’). See PostEffective Amendment No. 2 to Registration Statement on Form N–1A for the Trust, dated December 20, 2013 (File Nos. 333–176976 and 811– 22245) (‘‘Registration Statement’’). In addition, the Exchange represents that the Trust has obtained certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 30029 (April 10, 2012) (File No. 812–13795) (‘‘Exemptive Order’’). 7 Nasdaq Rule 5735(g) also requires that Adviser personnel who make decisions regarding the Fund’s portfolio be subject to procedures designed to prevent the use and dissemination of material, nonpublic information regarding the Fund’s portfolio. 8 Additionally, the Exchange represents that, in the event (a) the Adviser becomes newly affiliated with a broker-dealer, or (b) any new adviser or subadviser becomes affiliated with a broker-dealer, it will implement a fire wall with respect to such broker-dealer regarding access to information concerning the composition of or changes to the portfolio, and it will be subject to procedures designed to prevent the use and dissemination of material, non-public information regarding such portfolio. 9 The term ‘‘under normal market conditions’’ as used herein includes, but is not limited to, the absence of adverse market, economic, political, or other conditions, including extreme volatility or trading halts in the fixed income markets or the financial markets generally; operational issues causing dissemination of inaccurate market information; or force majeure type events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance. For temporary defensive purposes, during the initial invest-up period and during periods of high 6 The PO 00000 Frm 00131 Fmt 4703 Sfmt 4703 21333 achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in municipal debt securities that pay interest that is exempt from regular federal income taxes (collectively, ‘‘Municipal Securities’’).10 Municipal Securities are generally issued by or on behalf of states, territories, or possessions of the U.S. (including the District of Columbia) and their political subdivisions, agencies, authorities, and other instrumentalities. The types of Municipal Securities in which the Fund may invest include municipal lease obligations (and certificates of participation in such obligations), municipal general obligation bonds, municipal revenue bonds, municipal notes, municipal cash equivalents, private activity bonds (including without limitation industrial development bonds), and prerefunded 11 and escrowed-to-maturity bonds. In addition, Municipal Securities include securities issued by entities whose underlying assets are municipal bonds (for example, tender option bond (TOB) trusts and custodial receipts cash inflows or outflows, the Fund may depart from its principal investment strategies and invest part or all of its assets in short-term debt securities, money market funds, and other cash equivalents, or it may hold cash. (See ‘‘Other Investments’’ below.) During such periods, the Fund may not be able to achieve its investment objectives. The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances. 10 Assuming compliance with the investment requirements and limitations described herein (including the 10% limitation on distressed Municipal Securities described below), the Fund may invest up to 100% of its net assets in Municipal Securities that pay interest that generates income subject to the federal alternative minimum tax. 11 A pre-refunded municipal bond is a municipal bond that has been refunded to a call date on or before the final maturity of principal and that remains outstanding in the municipal market. The payment of principal and interest of the prerefunded municipal bonds held by the Fund will be funded from securities in a designated escrow account that holds U.S. Treasury securities or other obligations of the U.S. government (including its agencies and instrumentalities). As the payment of principal and interest is generated from securities held in a designated escrow account, the pledge of the municipality has been fulfilled and the original pledge of revenue by the municipality is no longer in place. The escrow account securities pledged to pay the principal and interest of the pre-refunded municipal bond do not guarantee the price movement of the bond before maturity. Investment in pre-refunded municipal bonds held by the Fund may subject the Fund to interest rate risk, market risk, and credit risk. In addition, while a secondary market exists for pre-refunded municipal bonds, if the Fund sells pre-refunded municipal bonds prior to maturity, the price received may be more or less than the original cost, depending on market conditions at the time of sale. E:\FR\FM\15APN1.SGM 15APN1 21334 Federal Register / Vol. 79, No. 72 / Tuesday, April 15, 2014 / Notices trusts). The Fund may invest in Municipal Securities of any maturity. The Fund will invest at least 65% of its net assets in investment grade securities, which are securities that are rated at the time of investment in one of the four highest credit quality categories by at least one nationally recognized statistical rating organization or that, if unrated, are determined by the Adviser to be of comparable quality.12 The Fund will consider pre-refunded or escrowed to maturity bonds, regardless of rating, to be investment grade securities. The Fund may invest up to 35% of its net assets in securities that are, at the time of investment, rated below investment grade (or securities that are unrated and determined by the Adviser to be of comparable quality), commonly referred to as ‘‘high yield’’ or ‘‘junk’’ bonds. If, subsequent to purchase by the Fund, a security held by the Fund experiences a decline in credit quality and falls below investment grade, the Fund may continue to hold the security, and it will not cause the Fund to violate the 35% investment limitation; however, the security will be taken into account for purposes of determining whether purchases of additional securities will cause the Fund to violate such limitation. mstockstill on DSK4VPTVN1PROD with NOTICES Investments in Derivatives To pursue its investment objectives, the Fund may invest in exchange-listed options on U.S. Treasury securities, exchange-listed options on U.S. Treasury futures contracts and exchange-listed U.S. Treasury futures contracts. The use of these derivative transactions may allow the Fund to obtain net long or short exposures to selected interest rates. These derivatives may also be used to hedge risks, including interest rate risks and credit risks, associated with the Fund’s portfolio investments. The Fund expects that no more than 20% of the value of the Fund’s net assets will be invested in derivative instruments.13 The Fund’s investments 12 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable rated securities. On a best efforts basis, the Adviser will attempt to make a rating determination based on publicly available data. In making a ‘‘comparable quality’’ determination, the Adviser may consider, for example, whether the issuer of the security has issued other rated securities, the nature and provisions of the relevant security, whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any), relevant cash flows, macroeconomic analysis, and/or sector or industry analysis. 13 The Fund will limit its direct investments in futures and options on futures to the extent VerDate Mar<15>2010 18:06 Apr 14, 2014 Jkt 232001 in derivative instruments will be consistent with the Fund’s investment objectives and the 1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an index. Other Investments Under normal market conditions, the Fund will invest substantially all of its assets to meet its investment objectives as described above. In addition, the Fund may invest its assets as generally described below. The Fund may invest up to 10% of its net assets in taxable municipal securities. In addition, the Fund may invest up to 10% of its net assets in distressed Municipal Securities.14 The Fund may also invest up to 10% of its net assets in short-term debt securities, money market funds and other cash equivalents, or it may hold cash. The percentage of the Fund invested in such holdings will vary and will depend on several factors, including market conditions. Short-term debt securities, which do not include Municipal Securities, are securities from issuers having a longterm debt rating of at least A by Standard & Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc. (‘‘S&P Ratings’’); Moody’s Investors Service, Inc. (‘‘Moody’s’’); or Fitch Ratings (‘‘Fitch’’) and having a maturity of one year or less. The use of temporary investments will not be a part of a principal investment strategy of the Fund. Short-term debt securities are defined to include, without limitation, the following: (1) Fixed-rate and floatingrate U.S. government securities, necessary for the Adviser to claim the exclusion from regulation as a ‘‘commodity pool operator’’ with respect to the Fund under Rule 4.5 promulgated by the Commodity Futures Trading Commission (‘‘CFTC’’), as such rule may be amended from time to time. Under Rule 4.5 as currently in effect, the Fund will limit its trading activity in futures and options on futures (excluding activity for ‘‘bona fide hedging purposes,’’ as defined by the CFTC) such that it will meet one of the following tests: (i) Aggregate initial margin and premiums required to establish its futures and options on futures positions will not exceed 5% of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and losses on such positions; or (ii) aggregate net notional value of its futures and options on futures positions will not exceed 100% of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and losses on such positions. 14 Distressed Municipal Securities are Municipal Securities that are currently in default and not expected to pay the current coupon. If, subsequent to purchase by the Fund, a Municipal Security held by the Fund becomes distressed, the Fund may continue to hold the Municipal Security and it will not cause the Fund to violate the 10% limitation; however, the Municipal Security will be taken into account for purposes of determining whether purchases of additional Municipal Securities will cause the Fund to violate such limitation. PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 including bills, notes, and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities; (2) certificates of deposit issued against funds deposited in a bank or savings and loan association; (3) bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions; (4) repurchase agreements,15 which involve purchases of debt securities; (5) bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest; and (6) commercial paper, which is short-term unsecured promissory notes. The Fund may only invest in commercial paper rated A–1 or higher by S&P Ratings, Prime–1 or higher by Moody’s, or F1 or higher by Fitch. The Fund may invest up to 20% of its net assets in the securities of other investment companies, including money market funds, closed-end funds, open-end funds, and other ETFs.16 The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser, in accordance with Commission guidance.17 The Fund will 15 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 Board of Trustees of the Trust (‘‘Trust 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. 16 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. The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission. In addition, the Fund may invest in the securities of certain other investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order that the Trust has obtained from the Commission. See Investment Company Act Release No. 30377 (February 5, 2013) (File No. 812– 13895). The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705), Portfolio Depository 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. 17 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 E:\FR\FM\15APN1.SGM 15APN1 Federal Register / Vol. 79, No. 72 / Tuesday, April 15, 2014 / Notices 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 the Fund 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 assets. Illiquid assets 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 may not invest 25% or more of the value of its total assets in securities of issuers in any one industry. This restriction does not apply to (a) Municipal Securities issued by governments or political subdivisions of governments, (b) obligations issued or guaranteed by the U.S. government or by its agencies or instrumentalities, or (c) securities of other investment companies.18 The Fund intends to qualify each year as a regulated investment company (‘‘RIC’’) under Subchapter M of the Internal Revenue Code of 1986, as amended. Additional information regarding the Shares and the Fund, including, among other things, investment strategies, risks, creation and redemption procedures, fees, portfolio holdings disclosure policies, availability of Fund values and other information, and distributions and taxes, can be found in the Notice or Registration Statement, as applicable.19 mstockstill on DSK4VPTVN1PROD with NOTICES III. Discussion and Commission’s Findings The Commission has carefully reviewed the proposed rule change and finds that it is consistent with the requirements of Section 6 of the Act 20 and the rules and regulations thereunder applicable to a national securities exchange.21 In particular, the 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 in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). 18 See Form N–1A, Item 9. The Commission has taken the position that a fund is concentrated if it invests more than 25% of the value of its total assets in any one industry. See, e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 (November 21, 1975). 19 See supra notes 3 and 6 and respective accompanying text. 20 15 U.S.C. 78f. 21 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). VerDate Mar<15>2010 18:06 Apr 14, 2014 Jkt 232001 Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,22 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 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,23 which sets forth Congress’ finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for, and transactions in, securities. Quotation and last sale information for the Shares will be available via 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. One source of price information for Municipal Securities is the Electronic Municipal Market Access (‘‘EMMA’’) of the Municipal Securities Rulemaking Board (‘‘MSRB’’).24 Additionally, the MSRB offers trade data subscription services that permit subscribers to obtain information about municipal securities transactions. Quotation information from brokers and dealers or Pricing Services will also be available for fixed income securities generally. On each business day, before commencement of trading in Shares in the Regular Market Session 25 on the Exchange, the Fund will disclose on its Web site the identities and quantities of the portfolio of securities and other assets (‘‘Disclosed Portfolio’’) held by the Fund that will form the basis for the Fund’s calculation of net asset value 22 15 U.S.C. 78f(b)(5). U.S.C. 78k–1(a)(1)(C)(iii). 24 A source of price information for other types of fixed income securities is the Trade Reporting and Compliance Engine (‘‘TRACE’’) of the Financial Industry Regulatory Authority (‘‘FINRA’’). 25 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange: (1) PreMarket Session from 7:00 a.m. to 9:30 a.m.; (2) Regular Market Session from 9:30 a.m. to 4:00 p.m. or 4:15 p.m.; and (3) Post-Market Session from 4:00 p.m. or 4:15 p.m. to 8:00 p.m.). 23 15 PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 21335 (‘‘NAV’’) at the end of the business day.26 The NAV of the Fund’s Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange, generally 4:00 p.m., Eastern time.27 Moreover, the Intraday Indicative Value, available on the NASDAQ OMX Information LLC proprietary index data service,28 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 will be broadly displayed at least every 15 seconds during the Regular Market Session. In addition, information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services, and the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Intraday executable price information for fixed income securities, equity securities, and derivatives will be available from major broker-dealer firms and major market data vendors. For exchange-traded assets, intraday price information will also be available directly from the applicable listing exchanges. Intraday price information will also generally 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. 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 26 The Disclosed Portfolio will include, as applicable, the names, quantity, percentage weighting, and market value of fixed-income securities and other assets held by the Fund and the characteristics of such assets. The Web site and information will be publicly available at no charge. 27 Under accounting procedures to be followed by the Fund, trades made on the prior business day (‘‘T’’) will be booked and reflected in NAV on the current business day (‘‘T+1’’). Accordingly, the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day. 28 Currently, the NASDAQ OMX Global Index Data Service (‘‘GIDS’’) is the NASDAQ OMX global index data feed service, offering real-time updates, daily summary messages, and access to widely followed indexes and Intraday Indicative Values for ETFs. GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes, listed ETFs, or third-party partner indexes and ETFs. E:\FR\FM\15APN1.SGM 15APN1 21336 Federal Register / Vol. 79, No. 72 / Tuesday, April 15, 2014 / Notices 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. In addition, the Exchange will halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities or the financial instruments constituting the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. The Exchange will consider the suspension of trading in or removal from listing of the Shares if the Intraday Indicative Value is no longer calculated or available or the Disclosed Portfolio is not made available to all market participants at the same time.29 The Exchange states that the Adviser is affiliated with the Distributor, a broker-dealer. The Exchange represents that the Adviser has implemented a fire wall with respect to its broker-dealer affiliate.30 29 See Nasdaq Rule 5735(d)(2)(C)(ii). Nasdaq Rule 5735(g), supra note 6 and accompanying text. The Commission notes that 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 Sub-Adviser and their 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 mstockstill on DSK4VPTVN1PROD with NOTICES 30 See VerDate Mar<15>2010 18:06 Apr 14, 2014 Jkt 232001 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.31 The Exchange states that trading of the Shares through Nasdaq will be subject to FINRA’s surveillance procedures for derivative products, including Managed Fund Shares.32 FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares with other markets and other entities that are members of the Intermarket Surveillance Group (‘‘ISG’’),33 and FINRA may obtain trading information regarding trading in the Shares from such markets and other entities. Further, the Exchange states that it prohibits the distribution of material, non-public information by its employees. 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 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’s surveillance procedures are adequate to properly monitor the trading of the Shares on Nasdaq during all trading sessions and to deter and detect violations of Exchange rules and the 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 administering the policies and procedures adopted under subparagraph (i) above. 31 See Nasdaq Rule 5735(d)(2)(B)(ii). 32 The Exchange states that FINRA surveils trading on Nasdaq pursuant to a regulatory services agreement and that it is responsible for FINRA’s performance under this regulatory services agreement. 33 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 redeemable); (b) Nasdaq Rule 2310, 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/or continued listing, the Fund must be in compliance with Rule 10A–3 under the Act.34 (6) The Fund will invest at least 80% of its net assets in Municipal Securities, and at least 65% of its net assets in investment grade securities. (7) The Fund will invest 85% or more of the portfolio in assets that the Adviser deems to be sufficiently liquid at the time of investment. The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Advisor, in accordance with Commission guidance. 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 assets. (8) The Fund will not invest more than 10% of the portfolio in distressed Municipal Securities, as described herein, as determined at the time of the investment. (9) The Fund may invest in the following derivative instruments: exchange-listed options on U.S. Treasury securities, exchange-listed options on U.S. Treasury futures contracts, and exchange-listed U.S. Treasury futures contracts. The Fund expects that no more than 20% of its net assets will be invested in these derivatives. The Fund’s investments in derivatives will be consistent with the Fund’s investment objectives and will not be used to seek to achieve a multiple or inverse multiple of the performance of an index. (10) At least 90% of the Fund’s net assets that are invested in exchange34 See E:\FR\FM\15APN1.SGM 17 CFR 240.10A–3. 15APN1 Federal Register / Vol. 79, No. 72 / Tuesday, April 15, 2014 / Notices traded futures and exchange-traded options (in the aggregate) will be invested in instruments that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. (11) A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. This approval order is based on all of the Exchange’s representations, including those set forth above and in the Notice, and the Exchange’s description of the Fund. For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act35 and the rules and regulations thereunder applicable to a national securities exchange. IV. Solicitation of Comments on Amendment No. 1 Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods: mstockstill on DSK4VPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2014–019 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, Station Place, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2014–019. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site http://www.sec.gov/ rules/sro.shtml. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and 35 15 U.S.C. 78f(b)(5). VerDate Mar<15>2010 18:06 Apr 14, 2014 Jkt 232001 printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of Nasdaq. 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–2014–019 and should be submitted on or before May 6, 2014. V. Accelerated Approval of Amendment No. 1 The Commission finds good cause to approve the proposed rule change, as modified by Amendment No. 1, prior to the thirtieth day after the date of publication of notice in the Federal Register. The proposed Amendment supplements the proposed rule change by limiting the type and amount of derivatives in which the Fund may invest and makes modifications related thereto, adds greater clarity regarding the intended investment limitations regarding non-investment grade securities and distressed municipal securities, and provides how Net Asset Value will be calculated with respect to repurchase agreements. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act,36 to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. VI. Conclusion For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act37 and the rules and regulations thereunder applicable to a national securities exchange. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,38 that the proposed rule change (SR–NASDAQ– 2014–019), as modified by Amendment No. 1 thereto, be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.39 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–08416 Filed 4–14–14; 8:45 am] BILLING CODE 8011–01–P U.S.C. 78s(b)(2). U.S.C. 78f(b)(5). 38 15 U.S.C. 78s(b)(2). 39 CFR 200.30–3(a)(12). 37 15 PO 00000 Frm 00135 Fmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71909; File No. SR– NYSEARCA–2014–28] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change, as Modified by Amendment No. 1, Amending Rule To Change the Time By Which Purchase Orders and Redemption Orders Must Be Placed With Respect to the Market Vectors Low Volatility Commodity ETF and Market Vectors Long/Short Commodity ETF April 9, 2014. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on March 28, 2014, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change, which filing was amended by Amendment No. 1 thereto on April 2, 2014,4 as described in Items I and II below, which Items have been prepared by the Exchange. 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 Substance of the Proposed Rule Change The Exchange is submitting a proposed rule change to change the time by which purchase orders and redemption orders must be placed with respect to the Market Vectors Low Volatility Commodity ETF and Market Vectors Long/Short Commodity ETF (the ‘‘Funds’’). The Commission has approved listing and trading of shares of the Funds on the Exchange under NYSE Arca Equities Rule 8.200. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.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 Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 4 In Amendment No. 1, the Exchange corrected erroneous references to the term ‘‘Adviser’’ in the Filing and replaced such references with the term ‘‘Managing Owner.’’ 2 15 36 15 Sfmt 4703 21337 E:\FR\FM\15APN1.SGM 15APN1

Agencies

[Federal Register Volume 79, Number 72 (Tuesday, April 15, 2014)]
[Notices]
[Pages 21333-21337]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-08416]



[[Page 21333]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71913; File No. SR-NASDAQ-2014-019]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, Relating to the Listing and Trading of the Shares of the First 
Trust Managed Municipal Fund of First Trust Exchange-Traded Fund III

April 9, 2014.

I. Introduction

    On February 7, 2014, 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'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade the shares of the First Trust 
Managed Municipal ETF (``Fund'') of First Trust Exchange-Traded Fund 
III (``Trust''). The proposed rule change was published for comment in 
the Federal Register on February 25, 2014.\3\ The Commission received 
no comments on the proposed rule change. On March 27, 2014, the 
Exchange filed Amendment No. 1 to the proposed rule change. This order 
approves the proposed rule change, as modified by Amendment No. 1 
thereto, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71572 (February 19, 
2014), 79 FR 10584 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares pursuant to Nasdaq 
Rule 5735, which governs the listing and trading of Managed Fund 
Shares.\4\ The Exchange deems the Shares to be equity securities, 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.\5\
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    \4\ Under Nasdaq's Rules, a Managed Fund Share is a security 
that (a) represents an interest in a registered investment company 
(``Investment Company'') organized as an open-end management 
investment company or similar entity, that invests in a portfolio of 
securities selected by the Investment Company's investment adviser 
consistent with the Investment Company's investment objectives and 
policies; (b) is issued in a specified aggregate minimum number in 
return for a deposit of a specified portfolio of securities and/or a 
cash amount with a value equal to the next determined net asset 
value; and (c) when aggregated in the same specified minimum number, 
may be redeemed at a holder's request, which holder will be paid a 
specified portfolio of securities and/or cash with a value equal to 
the next determined net asset value. See Nasdaq Rule 5735(c)(1).
    \5\ See Notice, supra note 3, 78 FR at 16017.
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    The Shares will be offered by the First Trust Exchange Traded Fund 
III (``Trust''), which is organized as a Massachusetts business trust 
and is registered with the Commission as an investment company.\6\ 
First Trust Advisors L.P. is the investment adviser (``Adviser'') to 
the Fund. First Trust Portfolios L.P. is the principal underwriter and 
distributor of the Shares (``Distributor''). Brown Brothers Harriman & 
Co. will act as the administrator, accounting agent, custodian, and 
transfer agent to the Fund. The Adviser is affiliated with the 
Distributor, a broker-dealer. As required by Nasdaq Rule 5735(g),\7\ 
the Adviser has implemented a firewall with respect to its broker-
dealer affiliate regarding access to information concerning the 
composition of or changes to the portfolio.\8\
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    \6\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). See Post-Effective Amendment No. 2 to 
Registration Statement on Form N-1A for the Trust, dated December 
20, 2013 (File Nos. 333-176976 and 811-22245) (``Registration 
Statement''). In addition, the Exchange represents that the Trust 
has obtained certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 30029 (April 10, 2012) (File No. 
812-13795) (``Exemptive Order'').
    \7\ Nasdaq Rule 5735(g) also requires that Adviser personnel who 
make decisions regarding the Fund's portfolio be subject to 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Fund's portfolio.
    \8\ Additionally, the Exchange represents that, in the event (a) 
the Adviser becomes newly affiliated with a broker-dealer, or (b) 
any new adviser or sub-adviser becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to such broker-
dealer regarding access to information concerning the composition of 
or changes to the portfolio, and it will be subject to procedures 
designed to prevent the use and dissemination of material, non-
public information regarding such portfolio.
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First Trust Managed Municipal ETF
Principal Investments
    The primary investment objective of the Fund will be to generate 
current income that is exempt from regular federal income taxes, and 
its secondary objective will be long-term capital appreciation. Under 
normal market conditions,\9\ the Fund will seek to achieve its 
investment objectives by investing at least 80% of its net assets 
(including investment borrowings) in municipal debt securities that pay 
interest that is exempt from regular federal income taxes 
(collectively, ``Municipal Securities'').\10\ Municipal Securities are 
generally issued by or on behalf of states, territories, or possessions 
of the U.S. (including the District of Columbia) and their political 
subdivisions, agencies, authorities, and other instrumentalities. The 
types of Municipal Securities in which the Fund may invest include 
municipal lease obligations (and certificates of participation in such 
obligations), municipal general obligation bonds, municipal revenue 
bonds, municipal notes, municipal cash equivalents, private activity 
bonds (including without limitation industrial development bonds), and 
pre-refunded \11\ and escrowed-to-maturity bonds. In addition, 
Municipal Securities include securities issued by entities whose 
underlying assets are municipal bonds (for example, tender option bond 
(TOB) trusts and custodial receipts

[[Page 21334]]

trusts). The Fund may invest in Municipal Securities of any maturity.
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    \9\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political, or other conditions, including extreme 
volatility or trading halts in the fixed income markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption, or any similar intervening circumstance. For temporary 
defensive purposes, during the initial invest-up period and during 
periods of high cash inflows or outflows, the Fund may depart from 
its principal investment strategies and invest part or all of its 
assets in short-term debt securities, money market funds, and other 
cash equivalents, or it may hold cash. (See ``Other Investments'' 
below.) During such periods, the Fund may not be able to achieve its 
investment objectives. The Fund may adopt a defensive strategy when 
the Adviser believes securities in which the Fund normally invests 
have elevated risks due to political or economic factors and in 
other extraordinary circumstances.
    \10\ Assuming compliance with the investment requirements and 
limitations described herein (including the 10% limitation on 
distressed Municipal Securities described below), the Fund may 
invest up to 100% of its net assets in Municipal Securities that pay 
interest that generates income subject to the federal alternative 
minimum tax.
    \11\ A pre-refunded municipal bond is a municipal bond that has 
been refunded to a call date on or before the final maturity of 
principal and that remains outstanding in the municipal market. The 
payment of principal and interest of the pre-refunded municipal 
bonds held by the Fund will be funded from securities in a 
designated escrow account that holds U.S. Treasury securities or 
other obligations of the U.S. government (including its agencies and 
instrumentalities). As the payment of principal and interest is 
generated from securities held in a designated escrow account, the 
pledge of the municipality has been fulfilled and the original 
pledge of revenue by the municipality is no longer in place. The 
escrow account securities pledged to pay the principal and interest 
of the pre-refunded municipal bond do not guarantee the price 
movement of the bond before maturity. Investment in pre-refunded 
municipal bonds held by the Fund may subject the Fund to interest 
rate risk, market risk, and credit risk. In addition, while a 
secondary market exists for pre-refunded municipal bonds, if the 
Fund sells pre-refunded municipal bonds prior to maturity, the price 
received may be more or less than the original cost, depending on 
market conditions at the time of sale.
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    The Fund will invest at least 65% of its net assets in investment 
grade securities, which are securities that are rated at the time of 
investment in one of the four highest credit quality categories by at 
least one nationally recognized statistical rating organization or 
that, if unrated, are determined by the Adviser to be of comparable 
quality.\12\ The Fund will consider pre-refunded or escrowed to 
maturity bonds, regardless of rating, to be investment grade 
securities. The Fund may invest up to 35% of its net assets in 
securities that are, at the time of investment, rated below investment 
grade (or securities that are unrated and determined by the Adviser to 
be of comparable quality), commonly referred to as ``high yield'' or 
``junk'' bonds. If, subsequent to purchase by the Fund, a security held 
by the Fund experiences a decline in credit quality and falls below 
investment grade, the Fund may continue to hold the security, and it 
will not cause the Fund to violate the 35% investment limitation; 
however, the security will be taken into account for purposes of 
determining whether purchases of additional securities will cause the 
Fund to violate such limitation.
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    \12\ Comparable quality of unrated securities will be determined 
by the Adviser based on fundamental credit analysis of the unrated 
security and comparable rated securities. On a best efforts basis, 
the Adviser will attempt to make a rating determination based on 
publicly available data. In making a ``comparable quality'' 
determination, the Adviser may consider, for example, whether the 
issuer of the security has issued other rated securities, the nature 
and provisions of the relevant security, whether the obligations 
under the relevant security are guaranteed by another entity and the 
rating of such guarantor (if any), relevant cash flows, 
macroeconomic analysis, and/or sector or industry analysis.
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Investments in Derivatives
    To pursue its investment objectives, the Fund may invest in 
exchange-listed options on U.S. Treasury securities, exchange-listed 
options on U.S. Treasury futures contracts and exchange-listed U.S. 
Treasury futures contracts. The use of these derivative transactions 
may allow the Fund to obtain net long or short exposures to selected 
interest rates. These derivatives may also be used to hedge risks, 
including interest rate risks and credit risks, associated with the 
Fund's portfolio investments.
    The Fund expects that no more than 20% of the value of the Fund's 
net assets will be invested in derivative instruments.\13\ The Fund's 
investments in derivative instruments will be consistent with the 
Fund's investment objectives and the 1940 Act and will not be used to 
seek to achieve a multiple or inverse multiple of an index.
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    \13\ The Fund will limit its direct investments in futures and 
options on futures to the extent necessary for the Adviser to claim 
the exclusion from regulation as a ``commodity pool operator'' with 
respect to the Fund under Rule 4.5 promulgated by the Commodity 
Futures Trading Commission (``CFTC''), as such rule may be amended 
from time to time. Under Rule 4.5 as currently in effect, the Fund 
will limit its trading activity in futures and options on futures 
(excluding activity for ``bona fide hedging purposes,'' as defined 
by the CFTC) such that it will meet one of the following tests: (i) 
Aggregate initial margin and premiums required to establish its 
futures and options on futures positions will not exceed 5% of the 
liquidation value of the Fund's portfolio, after taking into account 
unrealized profits and losses on such positions; or (ii) aggregate 
net notional value of its futures and options on futures positions 
will not exceed 100% of the liquidation value of the Fund's 
portfolio, after taking into account unrealized profits and losses 
on such positions.
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Other Investments
    Under normal market conditions, the Fund will invest substantially 
all of its assets to meet its investment objectives as described above. 
In addition, the Fund may invest its assets as generally described 
below.
    The Fund may invest up to 10% of its net assets in taxable 
municipal securities. In addition, the Fund may invest up to 10% of its 
net assets in distressed Municipal Securities.\14\ The Fund may also 
invest up to 10% of its net assets in short-term debt securities, money 
market funds and other cash equivalents, or it may hold cash. The 
percentage of the Fund invested in such holdings will vary and will 
depend on several factors, including market conditions.
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    \14\ Distressed Municipal Securities are Municipal Securities 
that are currently in default and not expected to pay the current 
coupon. If, subsequent to purchase by the Fund, a Municipal Security 
held by the Fund becomes distressed, the Fund may continue to hold 
the Municipal Security and it will not cause the Fund to violate the 
10% limitation; however, the Municipal Security will be taken into 
account for purposes of determining whether purchases of additional 
Municipal Securities will cause the Fund to violate such limitation.
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    Short-term debt securities, which do not include Municipal 
Securities, are securities from issuers having a long-term debt rating 
of at least A by Standard & Poor's Ratings Services, a Division of The 
McGraw-Hill Companies, Inc. (``S&P Ratings''); Moody's Investors 
Service, Inc. (``Moody's''); or Fitch Ratings (``Fitch'') and having a 
maturity of one year or less. The use of temporary investments will not 
be a part of a principal investment strategy of the Fund.
    Short-term debt securities are defined to include, without 
limitation, the following: (1) Fixed-rate and floating-rate U.S. 
government securities, including bills, notes, and bonds differing as 
to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. government agencies or 
instrumentalities; (2) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (3) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (4) repurchase agreements,\15\ which involve 
purchases of debt securities; (5) bank time deposits, which are monies 
kept on deposit with banks or savings and loan associations for a 
stated period of time at a fixed rate of interest; and (6) commercial 
paper, which is short-term unsecured promissory notes. The Fund may 
only invest in commercial paper rated A-1 or higher by S&P Ratings, 
Prime-1 or higher by Moody's, or F1 or higher by Fitch.
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    \15\ 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 Board of Trustees of the Trust (``Trust 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.
---------------------------------------------------------------------------

    The Fund may invest up to 20% of its net assets in the securities 
of other investment companies, including money market funds, closed-end 
funds, open-end funds, and other ETFs.\16\
---------------------------------------------------------------------------

    \16\ 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. The Fund 
may invest in the securities of ETFs in excess of the limits imposed 
under the 1940 Act pursuant to exemptive orders obtained by other 
ETFs and their sponsors from the Commission. In addition, the Fund 
may invest in the securities of certain other investment companies 
in excess of the limits imposed under the 1940 Act pursuant to an 
exemptive order that the Trust has obtained from the Commission. See 
Investment Company Act Release No. 30377 (February 5, 2013) (File 
No. 812-13895). The ETFs in which the Fund may invest include Index 
Fund Shares (as described in Nasdaq Rule 5705), Portfolio Depository 
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.
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser, in 
accordance with Commission guidance.\17\ The Fund will

[[Page 21335]]

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 the Fund 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 assets. Illiquid assets 
include securities subject to contractual or other restrictions on 
resale and other instruments that lack readily available markets as 
determined in accordance with Commission staff guidance.
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    \17\ 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 in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers, and the mechanics of transfer).
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    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to (a) Municipal Securities issued by governments or 
political subdivisions of governments, (b) obligations issued or 
guaranteed by the U.S. government or by its agencies or 
instrumentalities, or (c) securities of other investment companies.\18\
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    \18\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
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    The Fund intends to qualify each year as a regulated investment 
company (``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended.
    Additional information regarding the Shares and the Fund, 
including, among other things, investment strategies, risks, creation 
and redemption procedures, fees, portfolio holdings disclosure 
policies, availability of Fund values and other information, and 
distributions and taxes, can be found in the Notice or Registration 
Statement, as applicable.\19\
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    \19\ See supra notes 3 and 6 and respective accompanying text.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \20\ and the rules and regulations thereunder applicable to a 
national securities exchange.\21\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\22\ 
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 to be listed and traded on the Exchange.
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    \20\ 15 U.S.C. 78f.
    \21\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\23\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last 
sale information for the Shares will be available via 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. One source of price information for Municipal 
Securities is the Electronic Municipal Market Access (``EMMA'') of the 
Municipal Securities Rulemaking Board (``MSRB'').\24\ Additionally, the 
MSRB offers trade data subscription services that permit subscribers to 
obtain information about municipal securities transactions. Quotation 
information from brokers and dealers or Pricing Services will also be 
available for fixed income securities generally. On each business day, 
before commencement of trading in Shares in the Regular Market Session 
\25\ on the Exchange, the Fund will disclose on its Web site the 
identities and quantities of the portfolio of securities and other 
assets (``Disclosed Portfolio'') held by the Fund that will form the 
basis for the Fund's calculation of net asset value (``NAV'') at the 
end of the business day.\26\ The NAV of the Fund's Shares generally 
will be calculated once daily Monday through Friday as of the close of 
regular trading on the New York Stock Exchange, generally 4:00 p.m., 
Eastern time.\27\ Moreover, the Intraday Indicative Value, available on 
the NASDAQ OMX Information LLC proprietary index data service,\28\ 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 will be broadly displayed at least every 
15 seconds during the Regular Market Session.
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    \23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \24\ A source of price information for other types of fixed 
income securities is the Trade Reporting and Compliance Engine 
(``TRACE'') of the Financial Industry Regulatory Authority 
(``FINRA'').
    \25\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 7:00 a.m. to 
9:30 a.m.; (2) Regular Market Session from 9:30 a.m. to 4:00 p.m. or 
4:15 p.m.; and (3) Post-Market Session from 4:00 p.m. or 4:15 p.m. 
to 8:00 p.m.).
    \26\ The Disclosed Portfolio will include, as applicable, the 
names, quantity, percentage weighting, and market value of fixed-
income securities and other assets held by the Fund and the 
characteristics of such assets. The Web site and information will be 
publicly available at no charge.
    \27\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.
    \28\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the NASDAQ OMX global index data feed service, 
offering real-time updates, daily summary messages, and access to 
widely followed indexes and Intraday Indicative Values for ETFs. 
GIDS provides investment professionals with the daily information 
needed to track or trade NASDAQ OMX indexes, listed ETFs, or third-
party partner indexes and ETFs.
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    In addition, information regarding market price and trading volume 
of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services, and the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Intraday executable price information for fixed 
income securities, equity securities, and derivatives will be available 
from major broker-dealer firms and major market data vendors. For 
exchange-traded assets, intraday price information will also be 
available directly from the applicable listing exchanges. Intraday 
price information will also generally 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.
    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

[[Page 21336]]

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. In addition, the Exchange will halt 
trading in the Shares under the conditions specified in Nasdaq Rules 
4120 and 4121. Trading may be halted because of market conditions or 
for reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable. These may include: (1) The extent to which trading 
is not occurring in the securities or the financial instruments 
constituting the Disclosed Portfolio of the Fund; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present. Trading in the Shares also will be 
subject to Rule 5735(d)(2)(D), which sets forth circumstances under 
which Shares of the Fund may be halted. The Exchange will consider the 
suspension of trading in or removal from listing of the Shares if the 
Intraday Indicative Value is no longer calculated or available or the 
Disclosed Portfolio is not made available to all market participants at 
the same time.\29\ The Exchange states that the Adviser is affiliated 
with the Distributor, a broker-dealer. The Exchange represents that the 
Adviser has implemented a fire wall with respect to its broker-dealer 
affiliate.\30\ 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.\31\ The Exchange states that trading of the Shares through 
Nasdaq will be subject to FINRA's surveillance procedures for 
derivative products, including Managed Fund Shares.\32\ FINRA, on 
behalf of the Exchange, will communicate as needed regarding trading in 
the Shares with other markets and other entities that are members of 
the Intermarket Surveillance Group (``ISG''),\33\ and FINRA may obtain 
trading information regarding trading in the Shares from such markets 
and other entities. Further, the Exchange states that it prohibits the 
distribution of material, non-public information by its employees.
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    \29\ See Nasdaq Rule 5735(d)(2)(C)(ii).
    \30\ See Nasdaq Rule 5735(g), supra note 6 and accompanying 
text. The Commission notes that 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 Sub-Adviser 
and their 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.
    \31\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \32\ The Exchange states that FINRA surveils trading on Nasdaq 
pursuant to a regulatory services agreement and that it is 
responsible for FINRA's performance under this regulatory services 
agreement.
    \33\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
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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 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's surveillance procedures are adequate to properly 
monitor the trading of the Shares on Nasdaq during all trading sessions 
and to deter and detect violations of Exchange rules and the 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 2310, 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/or continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\34\
---------------------------------------------------------------------------

    \34\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (6) The Fund will invest at least 80% of its net assets in 
Municipal Securities, and at least 65% of its net assets in investment 
grade securities.
    (7) The Fund will invest 85% or more of the portfolio in assets 
that the Adviser deems to be sufficiently liquid at the time of 
investment. The Fund may hold up to an aggregate amount of 15% of its 
net assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Advisor, in 
accordance with Commission guidance. 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 assets.
    (8) The Fund will not invest more than 10% of the portfolio in 
distressed Municipal Securities, as described herein, as determined at 
the time of the investment.
    (9) The Fund may invest in the following derivative instruments: 
exchange-listed options on U.S. Treasury securities, exchange-listed 
options on U.S. Treasury futures contracts, and exchange-listed U.S. 
Treasury futures contracts. The Fund expects that no more than 20% of 
its net assets will be invested in these derivatives. The Fund's 
investments in derivatives will be consistent with the Fund's 
investment objectives and will not be used to seek to achieve a 
multiple or inverse multiple of the performance of an index.
    (10) At least 90% of the Fund's net assets that are invested in 
exchange-

[[Page 21337]]

traded futures and exchange-traded options (in the aggregate) will be 
invested in instruments that trade in markets that are members of ISG 
or are parties to a comprehensive surveillance sharing agreement with 
the Exchange.
    (11) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act\35\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
is consistent with the Act.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-019 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street NE., Washington, 
DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-019. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site http://www.sec.gov/rules/sro.shtml.
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of Nasdaq. 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-2014-019 and 
should be submitted on or before May 6, 2014.

V. Accelerated Approval of Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice in the Federal Register. The 
proposed Amendment supplements the proposed rule change by limiting the 
type and amount of derivatives in which the Fund may invest and makes 
modifications related thereto, adds greater clarity regarding the 
intended investment limitations regarding non-investment grade 
securities and distressed municipal securities, and provides how Net 
Asset Value will be calculated with respect to repurchase agreements. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\36\ to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \36\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act\37\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule change (SR-NASDAQ-2014-019), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved on 
an accelerated basis.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
Kevin M. O'Neill,
Deputy Secretary.
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    \39\ CFR 200.30-3(a)(12).
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[FR Doc. 2014-08416 Filed 4-14-14; 8:45 am]
BILLING CODE 8011-01-P