Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Income ETF of First Trust Exchange-Traded Fund IV, 29247-29259 [2014-11740]

Download as PDF mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. If the Exchange becomes aware that the NAV is not being disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. If the IIV or the Index values are not being disseminated as required, the Corporation may halt trading during the day in which the interruption to the dissemination of the IIV or Index value occurs. If the interruption to the dissemination of the IIV or Index value persists past the trading day in which it occurred, the Corporation will halt trading. Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to NYSE Arca Equities Rule 7.34, which sets forth circumstances under which Shares of the Fund may be halted. In addition, investors will have ready access to information regarding the IIV, and quotation and last sale information for the Shares. 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 in that it will facilitate the listing and trading of an additional type of exchange-traded fund that holds municipal bonds and that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and 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. In addition, investors will have ready access to information regarding the IIV and quotation and last sale information for the Shares. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of another exchange-traded product that holds municipal securities and that will enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. 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 up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the 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– NYSEArca–2014–37 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2014–37. 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 PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 29247 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 Section, 100 F Street NE., Washington, DC 20549, on official business days between 10:00 a.m. and 3:00 p.m. Copies of the filing will also be available for inspection and copying at the principal office of NYSE. 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–NYSEArca–2014–37 and should be submitted on or before June 11, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.23 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–11705 Filed 5–20–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72169; File No. SR– NASDAQ–2014–050] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Income ETF of First Trust ExchangeTraded Fund IV May 15, 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 May 5, 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 in Items I, II, and III below, which Items have been prepared by Nasdaq. The Commission is publishing this notice to 23 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\21MYN1.SGM 21MYN1 29248 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices 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 Nasdaq proposes to list and trade the shares of the First Trust Strategic Income ETF (the ‘‘Fund’’) of First Trust Exchange-Traded Fund IV (the ‘‘Trust’’) under Nasdaq Rule 5735 (‘‘Managed Fund Shares’’).3 The shares of the Fund are collectively referred to herein as the ‘‘Shares.’’ 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. Nasdaq has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose The Exchange proposes to list and trade the Shares of the Fund under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares 4 on the Exchange. The Fund will 3 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). There are already multiple actively-managed funds listed on the Exchange; see, e.g., Securities Exchange Act Release Nos. 69464 (April 26, 2013), 78 FR 25774 (May 2, 2013) (SR– NASDAQ–2013–036) (order approving listing and trading of First Trust Senior Loan Fund); 68972 (February 22, 2013), 78 FR 13721 (February 28, 2013) (SR–NASDAQ–2012–147) (order approving listing and trading of First Trust High Yield Long/ Short ETF); 66489 (February 29, 2012), 77 FR 13379 (March 6, 2012) (SR–NASDAQ–2012–004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund). The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders. 4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1) (the ‘‘1940 Act’’) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Index VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 be an actively-managed exchange-traded fund (‘‘ETF’’). The Shares will be offered by the Trust, which was established as a Massachusetts business trust on September 15, 2010.5 The Trust is registered with the Commission as an investment company and has filed a registration statement on Form N–1A (‘‘Registration Statement’’) with the Commission.6 The Fund will be a series of the Trust. 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. First Trust Advisors L.P. will be the investment adviser (‘‘Adviser’’) to the Fund. The following will serve as investment sub-advisers (each a ‘‘SubAdviser’’) to the Fund: First Trust Global Portfolios Ltd (‘‘First Trust Global’’); Energy Income Partners, LLC (‘‘EIP’’); Stonebridge Advisors LLC (‘‘Stonebridge’’); and Richard Bernstein Advisors LLC (‘‘RBA’’). First Trust Portfolios L.P. (the ‘‘Distributor’’) will be the principal underwriter and distributor of the Fund’s Shares. The Bank of New York Mellon Corporation (‘‘BNY’’) will act as the administrator, accounting agent, custodian and transfer agent to the Fund. Paragraph (g) of Rule 5735 provides that if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a brokerdealer, such investment adviser shall erect a ‘‘fire wall’’ between the investment adviser and the brokerdealer with respect to access to information concerning the composition and/or changes to such investment company portfolio.7 In addition, Fund Shares, listed and traded on the Exchange under Nasdaq Rule 5705, seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. 5 The Commission has issued an order, upon which the Trust may rely, granting certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 30029 (April 10, 2012) (File No. 812–13795) (the ‘‘Exemptive Relief’’). In addition, the Commission has issued no-action relief, upon which the Trust may rely, pertaining to the Fund’s ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief. See Commission No-Action Letter (December 6, 2012). 6 See Post-Effective Amendment No. 67 to Registration Statement on Form N–1A for the Trust, dated May 2, 2014 (File Nos. 333–174332 and 811– 22559). The descriptions of the Fund and the Shares contained herein are based, in part, on information in the Registration Statement. 7 An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). As a result, the Adviser, the Sub-Advisers 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 PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 paragraph (g) further requires that personnel who make decisions on the open-end fund’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the open-end fund’s portfolio. Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with the establishment of a ‘‘fire wall’’ between the investment adviser and the broker-dealer reflects the applicable open-end fund’s portfolio, not an underlying benchmark index, as is the case with index-based funds. Neither the Adviser nor any SubAdviser is a broker-dealer, although the Adviser, First Trust Global, EIP and Stonebridge are each affiliated with a broker-dealer.8 The Adviser and the foregoing Sub-Advisers have each implemented a fire wall with respect to their respective broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio. In addition, personnel who make decisions on the Fund’s portfolio composition will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the Fund’s portfolio. In the event (a) the Adviser or a Sub-Adviser becomes, or becomes newly affiliated with, a broker-dealer, or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated with a broker-dealer, it will implement a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning the composition and/or changes to the portfolio and will be subject to procedures designed to prevent the use and dissemination of material nonadvisers 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. 8 RBA is currently not affiliated with a brokerdealer. E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices public information regarding such portfolio. First Trust Strategic Income ETF General Investment Approach and Parameters mstockstill on DSK4VPTVN1PROD with NOTICES The primary investment objective of the Fund will be to seek risk-adjusted income and its secondary objective will be capital appreciation. Under normal market conditions,9 the Fund will seek to achieve its investment objectives by following a strategic and tactical asset allocation process that will provide diversified exposure to incomeproducing asset classes. The Fund will be a multi-manager, multi-strategy actively-managed exchange-traded fund. The Adviser will determine the Fund’s strategic allocation among various general investment categories and allocate the Fund’s assets to portfolio management teams comprised of personnel of the Adviser and/or a Sub-Adviser (each a ‘‘Management Team’’) which will employ their respective investment strategies. The Fund’s investment categories will be: (i) High yield corporate bonds and first lien senior secured floating rate bank loans (referred to as ‘‘senior loans’’); (ii) mortgage-related investments; (iii) preferred securities; (iv) international sovereign bonds; (v) equity securities of Energy Infrastructure Companies (as defined herein); and (vi) dividend paying domestic equity securities and Depositary Receipts (as defined herein), together with a related option overlay strategy. (The foregoing investment categories and related investment strategies are described in more detail below under ‘‘Investment Categories and Related Investment Strategies.’’) In addition to the option overlay strategy referenced in investment category (vi), the Management Teams may utilize derivative instruments in implementing their respective investment strategies for the Fund. See ‘‘Derivative Instruments’’ below. The Fund may add or remove investment categories or Management Teams at the Adviser’s discretion. The Fund will seek to provide income and total return by having each Management Team focus on those securities within 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 securities 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. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 its respective investment category. The Fund may invest in securities directly or, alternatively, may invest in other ETFs that generally provide exposure to the various investment categories.10 The Adviser expects that the Fund may at times invest significantly (and, potentially, may invest up to 50% of its net assets) in other ETFs, including but not limited to, other ETFs that are advised by the Adviser; however, the Fund does not intend to operate principally as a ‘‘fund of funds.’’ Any other ETFs in which the Fund invests to gain exposure to an investment category may be subject to investment parameters that differ in certain respects from those that have been established for such investment category which are described below under ‘‘Investment Categories and Related Investment Strategies.’’ To enhance expected return, the Adviser’s investment committee will, on a generally periodic basis, tactically adjust investment category weights. Security selection will be performed for the Fund by the Adviser and/or a SubAdviser. With respect to each investment category, the liquidity of a security will be a substantial factor in the Fund’s security selection process. The Fund will not purchase any securities or other assets that, in the opinion of the applicable Management Team, are illiquid if, as a result, more than 15% of the value of the Fund’s net assets will be invested in illiquid assets (the ‘‘15% Limitation’’).11 Illiquid assets include 10 An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities. Many ETFs are designed to track the performance of a securities index, including industry, sector, country and region indexes. ETFs included in the Fund will be listed and traded in the U.S. on registered exchanges. 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, including ETFs, in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser 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. 11 In reaching liquidity decisions, the Adviser and/or Management Team 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 PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 29249 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.12 The Adviser will communicate with the various Management Teams regarding the Fund’s ongoing compliance with the 15% Limitation. Except as specifically provided below under ‘‘Investment Categories and Related Investment Strategies,’’ the fixed income and equity securities in which the Fund will invest may be issued by U.S. and non-U.S. issuers of all kinds and of any capitalization range and credit quality. The Fund represents that its portfolio will include a minimum of 13 non-affiliated issuers of fixed income securities. In addition, the fixed income securities in which the Fund will invest may have effective or final maturities of any length. At least 90% of the Fund’s net assets that are invested in exchange-traded equity securities of both domestic and foreign issuers, exchange-traded products and exchange-traded derivatives (in the aggregate) will be invested in investments that trade in markets that are members of the Intermarket Surveillance Group (‘‘ISG’’), which includes all U.S. national securities exchanges and certain foreign exchanges, or are parties to a comprehensive surveillance sharing agreement with the Exchange.13 The Fund may invest in the equity securities (including without limitation preferred securities) of foreign issuers, either directly or through investments that are in the form of American Depositary Receipts (‘‘ADRs’’) or Global Depositary Receipts (‘‘GDRs’’ and, together with ADRs, ‘‘Depositary needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). 12 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), footnote 34. See also Investment Company Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ‘‘Restricted Securities’’); Investment Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N–1A). A fund’s portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund. See Investment Company Act Release No. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a–7 under the 1940 Act); Investment Company Act Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the Securities Act of 1933). 13 For a list of the current members of ISG, see www.isgportal.org. E:\FR\FM\21MYN1.SGM 21MYN1 29250 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices Receipts’’).14 The Depositary Receipts in which the Fund invests will be exchange-traded and will not include unsponsored Depositary Receipts. The Fund’s exposure to any single country (outside of the U.S.) will generally be limited to 20% of the Fund’s net assets. The portion of the Fund’s net assets that may be denominated in currencies other than the U.S. dollar is not expected to exceed 30%. To the extent the Fund invests in such assets, the value of the assets of the Fund as measured in U.S. dollars will be affected by changes in exchange rates. The Fund may from time to time purchase securities on a ‘‘when-issued’’ or other delayed-delivery basis. To the extent required under applicable federal securities laws (including the 1940 Act), rules, and interpretations thereof, the Fund will ‘‘set aside’’ liquid assets or engage in other measures to ‘‘cover’’ open positions held in connection with the foregoing types of transactions.15 Investment Categories and Related Investment Strategies mstockstill on DSK4VPTVN1PROD with NOTICES The investment categories in which the Fund intends to invest and the investment strategies that the applicable Management Teams are expected to pursue are described below: • High Yield Corporate Bonds and Senior Loans. The Fund intends to invest between 0% and 30%, but may invest up to 50%, of its net assets in a combination of high yield corporate bonds and senior loans.16 Such bonds and loans in which the Fund invests directly will be issued by entities domiciled in the United States. Under normal market conditions, the Fund will seek to invest at least 75% of its net assets that are invested in such bonds and loans (in the aggregate) in bonds and loans that, at the time of original 14 ADRs are U.S. dollar denominated receipts typically issued by U.S. banks and trust companies that evidence ownership of underlying securities issued by a foreign issuer. GDRs are receipts issued throughout the world that evidence a similar arrangement. ADRs and GDRs may trade in currencies that differ from the currency in which the underlying security trades. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets. GDRs, in registered form, are traded both in the United States and in Europe and are designed for use throughout the world. 15 With respect to guidance under the 1940 Act, see 15 U.S.C. 80a–18; Investment Company Act Release No. 10666 (April 18, 1979), 44 FR 25128 (April 27, 1979); Dreyfus Strategic Investing, Commission No-Action Letter (June 22, 1987); Merrill Lynch Asset Management, L.P., Commission No-Action Letter (July 2, 1996). 16 For the avoidance of doubt, this investment category and these percentages will not include socalled baby bonds, which are included in ‘‘Preferred Securities’’ (described below). VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 issuance, have at least $100 million par amount outstanding. The high yield corporate bonds in which the Fund will invest will be rated below investment grade 17 at the time of purchase or unrated and deemed by the Adviser and/or the applicable Management Team to be of comparable quality,18 commonly referred to as ‘‘junk’’ bonds. For purposes of determining whether a security is below investment grade, the lowest available rating will be considered. High yield debt may be issued, for example, by companies without long track records of sales and earnings or by issuers that have questionable credit strength. Corporate bonds may carry fixed or floating rates of interest. The senior loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders. In many cases, senior loans are issued in connection with recapitalizations, acquisitions, leveraged buyouts, and refinancings. A significant portion of the senior loans in which the Fund will invest are expected to be rated below investment grade or unrated. A senior loan is considered senior to all other unsecured claims against the borrower, and senior to or pari passu with all other secured claims, meaning that in the event of a bankruptcy, the senior loan, together with all other first lien claims, is entitled to be the first to be repaid out of the proceeds of the assets securing the loans, before other existing unsecured claims or interests receive repayment. However, in bankruptcy proceedings, there may be other claims, such as taxes or additional advances, which take precedence. Senior loans have interest rates that reset periodically. The interest rates on senior loans are generally based on a 17 Securities rated below investment grade include securities that are rated Ba1/BB+/BB+ or below by Moody’s Investors Service, Inc. (‘‘Moody’s’’), Fitch Ratings (‘‘Fitch’’), or Standard & Poor’s Ratings Services, a division of The McGrawHill Companies, Inc. (‘‘S&P Ratings’’), respectively, or another nationally recognized statistical rating organization (‘‘NRSRO’’). 18 Comparable quality of unrated securities will be determined by the Adviser and/or the applicable Management Team based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities. On a best efforts basis, the Adviser and/or the applicable Management Team will attempt to make a rating determination based on publicly available data. In making a ‘‘comparable quality’’ determination, the Adviser and/or the applicable Management Team 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. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 percentage above the London Interbank Offered Rate (LIBOR), a U.S bank’s prime or base rate, the overnight federal funds rate, or another rate. Senior loans may be structured and administered by a financial institution that acts as the agent of the lenders participating in the senior loan. The Fund may acquire senior loans directly from a lender or through the agent, as an assignment from another lender who holds a senior loan, or as a participation interest in another lender’s senior loan or portion thereof. The Fund will generally invest in senior loans that the Adviser and/or the applicable Management Team deems to be liquid with readily available prices. The Management Team does not intend to purchase senior loans that are in default; however, the Fund may hold a senior loan that has defaulted subsequent to the purchase by the Fund. • Mortgage-Related Investments. The Fund intends to invest between 0% and 30%, but may invest up to 50%, of its net assets in the mortgage-related debt securities and other mortgage-related instruments described below (collectively, ‘‘Mortgage-Related Investments’’). The Mortgage-Related Investments in which the Fund invests will primarily consist of investment grade securities (i.e., securities with credit ratings within the four highest rating categories of an NRSRO at the time of purchase or securities that are unrated and deemed by the Adviser and/or the applicable Management Team to be of comparable quality 19 at the time of purchase). If a security is rated by multiple NRSROs and receives different ratings, the Fund will treat the security as being rated in the highest rating category received from an NRSRO. In addition, if a security experiences a decline in credit quality and falls below investment grade, the Fund may continue to hold the security. The types of Mortgage-Related Investments in which the Fund will invest are described in the following three paragraphs: The Fund will invest in mortgagebacked securities (such as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS)). Mortgage-backed securities represent an interest in a pool of mortgage loans made by banks and other financial institutions to finance purchases of homes, commercial buildings and other real estate. The individual mortgage loans are packaged or ‘‘pooled’’ together for sale to investors. As the underlying mortgage 19 See E:\FR\FM\21MYN1.SGM note 18. 21MYN1 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices loans are paid off, investors receive principal and interest payments.20 The mortgage-backed securities in which the Fund will invest may be, but are not required to be, issued or guaranteed by the U.S. government, its agencies or instrumentalities, such as Ginnie Mae and U.S. governmentsponsored entities, such as Fannie Mae and Freddie Mac (the U.S. government, its agencies and instrumentalities, and U.S. government-sponsored entities are referred to collectively as ‘‘Government Entities’’).21 The Fund, however, will limit its investments in mortgage-backed securities that are not issued or guaranteed by Government Entities to 20% of its net assets. Many mortgagebacked securities are pass-through securities, which means they provide investors with monthly payments consisting of a pro rata share of both regular interest and principal payments as well as unscheduled prepayments on the underlying mortgage loans. Because prepayment rates of individual mortgage pools vary widely, the average life of a particular pool cannot be predicted accurately. Adjustable rate mortgagebacked securities include ARMS and other mortgage-backed securities with interest rates that adjust periodically to reflect prevailing market rates. Additionally, the Fund may invest in mortgage dollar rolls.22 The Fund mstockstill on DSK4VPTVN1PROD with NOTICES 20 Mortgage-backed securities may be fixed rate or adjustable rate mortgage-backed securities (ARMS). Certain mortgage-backed securities (including RMBS and CMBS), where mortgage payments are divided up between paying the loan’s principal and paying the loan’s interest, are referred to as stripped mortgage-backed securities (SMBS). Further, mortgage-backed securities can also be categorized as collateralized mortgage obligations (CMOs) or real estate mortgage investment conduits (REMICs) where they are divided into multiple classes with each class being entitled to a different share of the principal and/or interest payments received from the pool of underlying assets. 21 Securities issued or guaranteed by Government Entities have different levels of credit support. For example, Ginnie Mae securities carry a guarantee as to the timely repayment of principal and interest that is backed by the full faith and credit of the U.S. government. However, the full faith and credit guarantee does not apply to the market prices and yields of the Ginnie Mae securities or to the net asset value, trading price or performance of the Fund, which will vary with changes in interest rates and other market conditions. Fannie Mae and Freddie Mac pass-through mortgage certificates are backed by the credit of the respective Government Entity and are not guaranteed by the U.S. government. Other securities issued by Government Entities (other than the U.S. government) may only be backed by the creditworthiness of the issuing institution, not the U.S. government, or the issuers may have the right to borrow from the U.S. Treasury to meet their obligations. 22 In a mortgage dollar roll, the Fund will sell (or buy) mortgage-backed securities for delivery on a specified date and simultaneously contract to repurchase (or sell) substantially similar (same type, coupon and maturity) securities on a future date. During the period between a sale and repurchase, VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 intends to enter into mortgage dollar rolls only with high quality securities dealers and banks, as determined by the Adviser. The Fund may also invest in to-be-announced transactions (‘‘TBA Transactions’’).23 Further, the Fund may enter into short sales as part of its overall portfolio management strategies or to offset a potential decline in the value of a security; however, the Fund does not expect, under normal market conditions, to engage in short sales with respect to more than 30% of the value of its net assets that are invested in Mortgage-Related Investments. To the extent required under applicable federal securities laws, rules, and interpretations thereof, the Fund will ‘‘set aside’’ liquid assets or engage in other measures to ‘‘cover’’ open positions and short positions held in connection with the foregoing types of transactions.24 • Preferred Securities. The Fund intends to invest between 0% and 30%, but may invest up to 50%, of its net assets in preferred securities issued by U.S. and non-U.S. issuers.25 Under the Fund will forgo principal and interest paid on the mortgage-backed securities. The Fund will earn or lose money on a mortgage dollar roll from any difference between the sale price and the future purchase price. In a sale and repurchase, the Fund will also earn money on the interest earned on the cash proceeds of the initial sale. 23 A TBA Transaction is a method of trading mortgage-backed securities. TBA Transactions generally are conducted in accordance with widelyaccepted guidelines which establish commonly observed terms and conditions for execution, settlement and delivery. In a TBA Transaction, the buyer and the seller agree on general trade parameters such as agency, settlement date, par amount and price. The actual pools delivered generally are determined two days prior to the settlement date. The mortgage TBA market is liquid and positions can be easily added, rolled or closed. According to the Financial Industry Regulatory Authority (‘‘FINRA’’) Trade Reporting and Compliance Engine (‘‘TRACE’’) data, TBA Transactions represented approximately 93% of total trading volume for agency mortgage-backed securities in the month of January 2014. 24 See note 15 regarding guidance under the 1940 Act. 25 For the avoidance of doubt, this investment category and these percentages will not include those investments in preferred securities that are included in ‘‘Equity Securities of Energy Infrastructure Companies’’ (described below). Certain of the preferred securities in which the Fund will invest will be traditional preferred stocks that issue dividends that qualify for the dividends received deduction under which ‘‘qualified’’ domestic corporations are able to exclude a percentage of the dividends received from their taxable income. Other preferred securities in which the Fund will invest will be preferred stocks that do not issue dividends that qualify for the dividends received deduction or generate qualified dividend income. Additionally, certain of the preferred securities in which the Fund will invest may be so-called baby bonds (i.e., small denomination, typically $25 par value, bonds that often have certain characteristics associated with fixed income securities sold to retail investors (for example, they typically pay a quarterly coupon and PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 29251 normal market conditions, the Fund will seek to invest at least 75% of its net assets that are invested in preferred securities in preferred securities that have a minimum initial issuance amount of at least $100 million. Initially, at least 50% of the Fund’s net assets that are invested in preferred securities will be invested in exchangelisted preferred securities, although this percentage may decrease in the future. Preferred securities held by the Fund will generally pay fixed or adjustable rate distributions to investors and will have preference over common stock in the payment of distributions and the liquidation of a company’s assets, which means that a company typically must pay dividends or interest on its preferred securities before paying any dividends on its common stock. Preferred securities are generally junior to all forms of the company’s debt, including both senior and subordinated debt. • International Sovereign Bonds. The Fund intends to invest between 0% and 30%, but may invest up to 50%, of its net assets in debt securities, including inflation-linked bonds,26 issued by foreign governments or their subdivisions, agencies and governmentsponsored enterprises (‘‘Sovereign Debt’’).27 At least 50% of the Fund’s net are typically investment grade)). Hybrid preferred securities, another type of preferred securities, are typically junior and fully subordinated liabilities of an issuer or the beneficiary of a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. 26 Inflation-linked bonds are fixed income securities that are structured to provide protection against inflation. The value of the inflation-linked bond’s principal or the interest income paid on the bond is adjusted to track changes in an official inflation measure. The value of inflation-linked bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in the value of inflation-linked bonds. 27 For the avoidance of doubt, Sovereign Debt includes debt obligations denominated in local currencies or U.S. dollars. Moreover, given that it includes debt issued by subdivisions, agencies and government-sponsored enterprises, Sovereign Debt may include debt commonly referred to as ‘‘quasisovereign debt.’’ Sovereign Debt may also include issues denominated in emerging market local currencies that are issued by ‘‘supranational issuers,’’ such as the International Bank for Reconstruction and Development and the International Finance Corporation, as well as development agencies supported by other national governments. According to the Adviser and the applicable Management Team, while there is no universally accepted definition of what constitutes an ‘‘emerging market,’’ in general, emerging market countries are characterized by developing commercial and financial infrastructure with significant potential for economic growth and increased capital market participation by foreign investors. E:\FR\FM\21MYN1.SGM 21MYN1 29252 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices assets that are invested in Sovereign Debt will be invested in securities of issuers rated investment grade (BBB¥/ Baa3 or higher) at the time of purchase by at least one NRSRO and unrated securities judged to be of comparable quality 28 by the Adviser and/or the applicable Management Team. Up to 50% of its net assets invested in Sovereign Debt may be invested in securities of issuers rated below investment grade at the time of purchase (i.e., ‘‘junk’’ bonds). If a security or issuer is rated by multiple NRSROs and receives different ratings, the Fund will treat the security or issuer (as applicable) as being rated in the highest rating category received from an NRSRO. In addition, if a security or issuer (as applicable) experiences a decline in credit quality and falls below investment grade, the Fund may continue to hold the security and it will not count toward the investment limit; however, the security will be taken into account for purposes of determining whether purchases of additional securities will cause the Fund to violate such limit. The Fund intends to invest in Sovereign Debt of issuers in both developed and emerging markets.29 In addition, the Fund expects that, under normal market conditions, at least 80% of the Sovereign Debt in which it invests will be issued by issuers with outstanding debt of at least $200 million (or the foreign currency equivalent thereof). • Equity Securities of Energy Infrastructure Companies. The Fund intends to invest between 0% and 50% of its net assets in exchange-traded equity securities of companies deemed by the applicable Management Team to be engaged in the energy infrastructure sector. These companies principally include publicly-traded master limited partnerships and limited liability companies taxed as partnerships (‘‘MLPs’’) (described below), MLP affiliates (described below), ‘‘Canadian Income Equities,’’ which are successor companies to Canadian income trusts,30 28 See note 18. Fund intends, initially, to invest in Sovereign Debt of the following issuers: Argentina; Brazil; Chile; Colombia; Costa Rica; Dubai (United Arab Emirates); Hungary; Indonesia; Malaysia; Mexico; Nigeria; Peru; Philippines; Poland; Qatar; Romania; Russia; South Africa; South Korea; Sri Lanka; Thailand; Turkey; Venezuela; and Vietnam, although this list may change based on market developments. The percentage of Fund assets invested in a specific region, country or issuer will change from time to time. 30 The term ‘‘Canadian income trusts’’ refers to qualified income trusts designated by the Canada Revenue Agency that derive income and gains from the exploration, development, mining or production, processing, refining, transportation mstockstill on DSK4VPTVN1PROD with NOTICES 29 The VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 pipeline companies, utilities, and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries (collectively, ‘‘Energy Infrastructure Companies’’). As indicated above, the Fund may invest in the equity securities of MLPs. MLPs are limited partnerships whose shares (or units) are listed and traded on a U.S. securities exchange. MLP units may be common or subordinated.31 In addition, the Fund may invest in I-Shares,32 which represent an ownership interest issued by an affiliated party of an MLP. The MLP affiliate uses the proceeds from the sale of I-Shares to purchase limited partnership interests in the MLP in the form of i-units. I-units have similar features as MLP common units in terms of voting rights, liquidation preference and distributions. However, rather than receiving cash, the MLP affiliate receives additional i-units in an amount equal to the cash distributions received by MLP common units. Similarly, holders of I-Shares will receive additional I-Shares, in the same proportion as the MLP affiliates’ receipt of i-units, rather than cash distributions. I-Shares themselves have limited voting rights which are similar to those applicable to MLP common units. I-Shares are listed and traded on a U.S. national securities exchange. • Dividend Paying Domestic Equity Securities and Depositary Receipts and Related Option Overlay Strategy. The Fund intends to invest between 0% and 30%, but may invest up to 50%, of its net assets in dividend paying U.S. exchange-traded equity securities (including common stock) of companies domiciled in the United States and Depositary Receipts.33 In connection (including pipelines transporting gas, oil or products thereof), or the marketing of any mineral or natural resources. 31 MLPs generally have two classes of owners, the general partner and limited partners. The general partner, which is generally a major energy company, investment fund or the management of the MLP, typically controls the MLP through a 2% general partner equity interest in the MLP plus common units and subordinated units. Limited partners own the remainder of the partnership, through ownership of common units, and have a limited role in the partnership’s operations and management. 32 As a matter of clarification, the ‘‘I-Shares’’ referred to herein are not ‘‘iShares’’ ETFs. 33 For the avoidance of doubt, this investment category and these percentages will not include investments in preferred securities (described above under ‘‘Preferred Securities’’), investments in those equity securities that are included in ‘‘Equity PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 with its investments in dividend paying domestic equity securities, the Fund may use an option overlay strategy (the ‘‘Option Overlay Strategy’’).34 To implement this strategy, the Fund will write (sell) covered U.S. exchangetraded call options in order to seek additional cash flow in the form of premiums on the options. The market value of the Option Overlay Strategy may be up to 30% of the Fund’s overall net asset value and the notional value of the calls written may be up to 30% of the overall Fund. The maturity of the options utilized will generally be between one week and three months. The options written may be in-themoney, at-the-money or out-of-themoney. Derivative Instruments As described below, the Fund may invest in derivative instruments.35 Not including the Option Overlay Strategy, no more than 20% of the value of the Fund’s net assets will be invested in derivative instruments (the ‘‘20% Limitation’’).36 In general, the Fund may invest in exchange-listed futures contracts, exchange-listed options, Securities of Energy Infrastructure Companies’’ (described above), or investments in ETFs that are intended to provide exposure to any of the other five investment categories (see ‘‘General Investment Approach and Parameters’’ above). 34 The Fund’s investments in options in connection with the Option Overlay Strategy will not be included for purposes of determining compliance with the 20% Limitation (defined below). 35 The Fund may invest in derivative instruments for various purposes, such as to seek to enhance return, to hedge some of the risks of its investments in securities, as a substitute for a position in the underlying asset, to reduce transaction costs, to maintain full market exposure (which means to adjust the characteristics of its investments to more closely approximate those of the markets in which it invests), to manage cash flows, to limit exposure to losses due to changes to non-U.S. currency exchange rates or to preserve capital. 36 Because the Option Overlay Strategy will be excluded from the 20% Limitation, the Fund’s total investments in derivative instruments may exceed 20% of the value of its net assets. 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. E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES exchange-listed options on futures contracts, and exchange-listed stock index options.37 Primarily in connection with its investments in Sovereign Debt (but, to the extent applicable, in connection with other investments), the Fund may actively manage its foreign currency exposures, including through the use of forward currency contracts, nondeliverable forward currency contracts, exchange-listed currency futures and exchange-listed currency options; such derivatives use will be included for purposes of determining compliance with the 20% Limitation. The Fund may, for instance, enter into forward currency contracts in order to ‘‘lock in’’ the exchange rate between the currency it will deliver and the currency it will receive for the duration of the contract 38 and may buy or sell exchange-listed futures contracts on U.S. Treasury securities, non-U.S. government securities and major non-U.S. currencies. The Fund will comply with the regulatory requirements of the Commission to maintain assets as ‘‘cover,’’ maintain segregated accounts, and/or make margin payments when it takes positions in derivative instruments involving obligations to third parties (i.e., instruments other than purchase options). If the applicable guidelines prescribed under the 1940 37 Any exchange-traded derivatives in which the Fund invests will trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. The exchange-listed futures and options contracts in which the Fund may invest will be listed on exchanges in the U.S., Europe, London, Hong Kong, Singapore, Australia or Canada. The United Kingdom’s primary financial markets regulator (the Financial Conduct Authority), Hong Kong’s primary financial markets regulator (the Securities and Futures Commission), Singapore’s primary financial markets regulator (the Monetary Authority of Singapore), Australia’s primary financial markets regulator (the Australian Securities and Investments Commission), and certain Canadian financial markets regulators (including the Alberta Securities Commission, the British Columbia Securities Commission, the Ontario Securities Commission, and Autorite des marches financiers (Quebec)) are signatories to the International Organization of Securities Commissions (‘‘IOSCO’’) Multilateral Memorandum of Understanding (‘‘MMOU’’), which is a multi-party information sharing arrangement among financial regulators. Both the Commission and the Commodity Futures Trading Commission are signatories to the IOSCO MMOU. 38 The Fund will invest only in currencies, and instruments that provide exposure to such currencies, that have significant foreign exchange turnover and are included in the Bank for International Settlements, Triennial Central Bank Survey, Global Foreign Exchange Market Turnover in 2013 (‘‘BIS Survey’’). The Fund may invest in currencies, and instruments that provide exposure to such currencies, selected from the top 40 currencies (as measured by percentage share of average daily turnover for the applicable month and year) included in the BIS Survey. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 Act so require, the Fund will earmark or set aside cash, U.S. government securities, high grade liquid debt securities and/or other liquid assets permitted by the Commission in a segregated custodial account in the amount prescribed.39 The Fund will only enter into transactions in derivative instruments with counterparties that the Adviser and/or the applicable Management Team reasonably believes are capable of performing under the applicable contract.40 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. Other Investments Under normal market conditions, the Fund will invest substantially all of its assets to meet its investment objectives and, as described above, the Fund may invest in derivative instruments. In addition, the Fund may invest its remaining assets in other securities and financial instruments, as generally described below. The Fund may invest up to 20% 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. For temporary defensive purposes, during the initial invest-up period and during periods of high cash inflows or outflows, the Fund (as a whole or with respect to one or more investment categories) may depart from its principal investment strategies and invest part or all of its assets in these securities or it may hold cash. During such periods, the Fund may not be able to achieve its investment objectives. The Fund (as a whole or with respect to one or more investment categories) may adopt a defensive strategy when the Adviser and/or a Management Team believe securities in which the Fund 39 See note 15 regarding related guidance under the 1940 Act. 40 The Fund will seek, where possible, to use counterparties, as applicable, whose financial status is such that the risk of default is reduced; however, the risk of losses resulting from default is still possible. The Adviser and/or the applicable Management Team will evaluate the creditworthiness of counterparties on an ongoing basis. In addition to information provided by credit agencies, the Adviser’s and/or Management Team’s analysis will evaluate each approved counterparty using various methods of analysis and may consider the Adviser’s and/or Management Team’s past experience with the counterparty, its known disciplinary history and its share of market participation. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 29253 normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances. Short-term debt securities are securities from issuers having a longterm debt rating of at least A by S&P Ratings, Moody’s or 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 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) short-term securities issued or guaranteed by nonU.S. governments or by their agencies or instrumentalities; 41 (3) certificates of deposit issued against funds deposited in a bank or savings and loan association; (4) bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions; (5) repurchase agreements,42 which involve purchases of debt securities; (6) 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; (7) commercial paper, which is short-term unsecured promissory notes; and (8) other securities that are similar to the foregoing. 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. In addition, to manage foreign currency exposures, the Fund may invest directly in foreign currencies, including without limitation in the form of bank and financial institution deposits, certificates of deposit, and bankers’ acceptances denominated in a specified non-U.S. currency. The Fund may invest in the securities of money market funds. The Fund may also invest in the securities of other ETFs that invest primarily in short-term debt securities, in addition to any 41 The relevant non-U.S. government, agency or instrumentality must have a long-term debt rating of at least A by S&P Ratings, Moody’s or Fitch. 42 The Fund intends to enter into repurchase agreements only with financial institutions and dealers believed by the Adviser and/or the applicable Management Team to present minimal credit risks in accordance with criteria approved by the Board of Trustees of the Trust (‘‘Trust Board’’). The Adviser and/or the Management Team will review and monitor the creditworthiness of such institutions. The Adviser and/or the Management Team 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. E:\FR\FM\21MYN1.SGM 21MYN1 29254 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices investments in other ETFs described above under ‘‘General Investment Approach and Parameters.’’ 43 The Fund may invest up to 15% of its net assets in secured loans that are not first lien loans or loans that are unsecured (collectively referred to as ‘‘junior loans’’). Junior loans have the same characteristics as senior loans except that junior loans are not first in priority of repayment and/or may not be secured by collateral. Accordingly, the risks associated with junior loans are higher than the risks for loans with first priority over the collateral. Because junior loans are lower in priority and/ or unsecured, they are subject to the additional risk that the cash flow of the borrower may be insufficient to meet scheduled payments after giving effect to the secured obligations of the borrower or in the case of a default, recoveries may be lower for unsecured loans than for secured loans.44 In accordance with the 15% Limitation described above, 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 and/or the applicable Management Team.45 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. The Fund will not concentrate in any one industry.46 For the avoidance of any doubt, however, this will not limit the Fund’s investments in (a) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities or (b) securities of other investment companies. Creation and Redemption of Shares The Fund will issue and redeem Shares on a continuous basis at net asset 43 See note 10. loans generally have greater price volatility than senior loans and may be less liquid. There is also a possibility that originators will not be able to sell participations in junior loans, which would create greater credit risk exposure for the holders of such loans. Junior loans share the same risks as other below investment grade instruments. 45 See notes 11 and 12 and accompanying text. 46 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). mstockstill on DSK4VPTVN1PROD with NOTICES 44 Junior VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 value (‘‘NAV’’) 47 only in large blocks of Shares (‘‘Creation Units’’) in transactions with authorized participants, generally including brokerdealers and large institutional investors (‘‘Authorized Participants’’). Creation Units generally will consist of 50,000 Shares, although this may change from time to time. Creation Units, however, are not expected to consist of less than 50,000 Shares. As described in the Registration Statement and consistent with the Exemptive Relief, the Fund will issue and redeem Creation Units in exchange for an in-kind portfolio of instruments and/or cash in lieu of such instruments (the ‘‘Creation Basket’’). In addition, if there is a difference between the NAV attributable to a Creation Unit and the market value of the Creation Basket exchanged for the Creation Unit, the party conveying instruments with the lower value will pay to the other an amount in cash equal to the difference (referred to as the ‘‘Cash Component’’). Creations and redemptions must be made by an Authorized Participant or through a firm that is either a member of the National Securities Clearing Corporation (‘‘NSCC’’) or a Depository Trust Company participant that, in each case, must have executed an agreement that has been agreed to by the Distributor and BNY with respect to creations and redemptions of Creation Units. All standard orders to create Creation Units must be received by the transfer agent no later than the closing time of the regular trading session on the New York Stock Exchange (ordinarily 4:00 p.m., Eastern time) (the ‘‘Closing Time’’) in each case on the date such order is placed in order for the creation of Creation Units to be effected based on the NAV of Shares as next determined on such date after receipt of the order in proper form. Shares may be redeemed only in Creation Units at their NAV next determined after receipt not later than the Closing Time of a redemption request in proper form by the Fund through the transfer agent and only on a business day. The Fund’s custodian, through the NSCC, will make available on each business day, prior to the opening of business of the Exchange, the list of the names and quantities of the instruments comprising the Creation Basket, as well 47 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 (the ‘‘NAV Calculation Time’’). NAV per Share will be calculated by dividing the Fund’s net assets by the number of Fund Shares outstanding. For more information regarding the valuation of Fund investments in calculating the Fund’s NAV, see the Registration Statement. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 as the estimated Cash Component (if any), for that day. The published Creation Basket will apply until a new Creation Basket is announced on the following business day. Net Asset Value The Fund’s NAV will be determined as of the close of trading (normally 4:00 p.m., Eastern time) on each day the New York Stock Exchange is open for business. NAV will be calculated for the Fund by taking the market price of the Fund’s total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing such amount by the total number of Shares outstanding. The result, rounded to the nearest cent, will be the NAV per Share. All valuations will be subject to review by the Trust Board or its delegate. The Fund’s investments will be valued daily at market value or, in the absence of market value with respect to any investment, at fair value, in each case in accordance with valuation procedures (which may be revised from time to time) adopted by the Trust Board (the ‘‘Valuation Procedures’’) and in accordance with the 1940 Act. A market valuation generally means a valuation (i) obtained from an exchange, an independent pricing service (‘‘Pricing Service’’), or a major market maker (or dealer) or (ii) based on a price quotation or other equivalent indication of value supplied by an exchange, a Pricing Service, or a major market maker (or dealer). The information summarized below is based on the Valuation Procedures as currently in effect; however, as noted above, the Valuation Procedures are amended from time to time and, therefore, such information is subject to change. Common stocks and other equity securities listed on any exchange other than the Exchange and the London Stock Exchange Alternative Investment Market (‘‘AIM’’) will be valued at the last sale price on the exchange on which they are principally traded on the business day as of which such value is being determined. Equity securities listed on the Exchange or the AIM will be valued at the official closing price on the business day as of which such value is being determined. If there has been no sale on such day, or no official closing price in the case of securities traded on the Exchange or the AIM, the securities will be valued using fair value pricing, as described below. Equity securities traded on more than one securities exchange will be valued at the last sale price or official closing price, as applicable, on the business day as of which such value is being determined at E:\FR\FM\21MYN1.SGM 21MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices the close of the exchange representing the principal market for such securities. Shares of money market funds will be valued at their net asset values as reported by such funds to Pricing Services. Exchange-traded options and futures contracts will be valued at the closing price in the market where such contracts are principally traded. Forward currency contracts and nondeliverable forward currency contracts will be valued at the current day’s interpolated foreign exchange rate, as calculated using the current day’s spot rate, and the thirty, sixty, ninety, and one-hundred-eighty day forward rates provided by a Pricing Service or by certain independent dealers in such contracts. Certain securities in which the Fund may invest that are not listed on any securities exchange or board of trade will typically be bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an overthe-counter secondary market, although typically no formal market makers will exist. Certain securities, particularly debt securities, will have few or no trades, or trade infrequently, and information regarding a specific security may not be widely available or may be incomplete. Accordingly, determinations of the fair value of debt securities may be based on infrequent and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of debt securities than for other types of securities. Typically (other than as described below), corporate bonds, senior loans, Sovereign Debt, preferred securities that are treated as fixed income securities, and other debt securities in which the Fund may invest (as described under ‘‘Other Investments’’) will be valued using information provided by a Pricing Service. To the extent the foregoing securities have a remaining maturity of 60 days or less when purchased, they will be valued at cost adjusted for amortization of premiums and accretion of discounts. Overnight repurchase agreements will be valued at cost. Term repurchase agreements (i.e., those whose maturity exceeds seven days) will be valued at the average of the bid quotations obtained daily from at least two recognized dealers. In connection with valuation of the securities described in the preceding paragraph, the Fund’s accounting agent will obtain all pricing data from a Pricing Service, or, if no price is available from a Pricing Service, then the accounting agent will contact the Adviser’s pricing committee (‘‘Pricing VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 Committee’’), which will attempt to obtain one or more broker quotes from the selling dealer or financial institution for the security daily and will value the security accordingly. In addition, with respect to the valuation of senior loans, as part of its review, the Pricing Committee may, in certain limited circumstances, override a value provided by the Pricing Service. If the Pricing Service does not provide a valuation for a particular senior loan, or if the Pricing Committee overrides a value of the senior loan, the senior loan will be valued using fair value pricing, as described below. Preferred securities that are treated as equity securities but that are not traded on an exchange will be valued at the mean of the bid and the ask price, if available, and otherwise at their last bid price. Exchange-traded preferred securities will be valued as described in the third paragraph of this ‘‘Net Asset Value’’ section. Mortgage-Related Investments will generally be valued by using a Pricing Service. If a Pricing Service does not cover a particular Mortgage-Related Investment, or discontinues covering a particular Mortgage-Related Investment, the Mortgage-Related Investment will be priced using broker quotes generally provided by brokers that make or participate in markets in the MortgageRelated Investment. To derive values, Pricing Services and broker-dealers may use matrix pricing and valuation models, as well as recent market transactions for the same or similar assets. Occasionally, the Pricing Committee may determine that a Pricing Service price does not represent an accurate value of a Mortgage-Related Investment, based on broker quotes it receives, a recent trade in the MortgageRelated Investment by the Fund, information from a portfolio manager, or other market information. In the event that the Pricing Committee determines that the Pricing Service price is unreliable or inaccurate based on such other information, broker quotes may be used. Additionally, if the Pricing Committee determines that the price of a Mortgage-Related Investment obtained from a Pricing Service and available broker quotes are unreliable or inaccurate due to market conditions or other reasons, or if a Pricing Service price or broker quote is unavailable, the security will be valued using fair value pricing, as described below. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Trust Board or its delegate at fair value. The use of fair value pricing by the Fund will be governed by the PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 29255 Valuation Procedures and conducted in accordance with the provisions of the 1940 Act. Valuing the Fund’s securities using fair value pricing will result in using prices for those securities that may differ from current market valuations or official closing prices on the applicable exchange. Because foreign securities exchanges may be open on different days than the days during which an investor may purchase or sell Shares, the value of the Fund’s securities may change on days when investors are not able to purchase or sell Shares. Assets denominated in foreign currencies will be translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar as provided by a Pricing Service. The value of assets denominated in foreign currencies will be converted into U.S. dollars at the exchange rates in effect at the time of valuation. Availability of Information The Fund’s Web site (www.ftportfolios.com), which will be publicly available prior to the public offering of Shares, will include a form of the prospectus for the Fund that may be downloaded. The Web site will include the Shares’ ticker, Cusip and exchange information along with additional quantitative information updated on a daily basis, including, for the Fund: (1) Daily trading volume, the prior business day’s reported NAV and closing price, midpoint of the bid/ask spread at the time of calculation of such NAV (the ‘‘Bid/Ask Price’’),48 and a calculation of the premium and discount of the Bid/Ask Price against the NAV; and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters. On each business day, before commencement of trading in Shares in the Regular Market Session 49 on the Exchange, the Fund will disclose on its Web site the identities and quantities of the portfolio of securities and other assets (the ‘‘Disclosed Portfolio’’ as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form the basis for the 48 The Bid/Ask Price of the Fund will be determined using the midpoint of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fund’s NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. 49 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange: (1) PreMarket Session from 4 a.m. to 9:30 a.m., Eastern time; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 4:15 p.m., Eastern time; and (3) PostMarket Session from 4 p.m. or 4:15 p.m. to 8 p.m., Eastern time). E:\FR\FM\21MYN1.SGM 21MYN1 29256 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Fund’s calculation of NAV at the end of the business day.50 The Disclosed Portfolio will include, as applicable, the names, quantities, percentage weightings and market values of the portfolio securities, financial instruments, and other assets held by the Fund. The Web site information will be publicly available at no charge. In addition, for the Fund, an estimated value, defined in Rule 5735(c)(3) as the ‘‘Intraday Indicative Value,’’ that reflects an estimated intraday value of the Fund’s Disclosed Portfolio, will be disseminated. Moreover, the Intraday Indicative Value, available on the NASDAQ OMX Information LLC proprietary index data service,51 will be based upon the current value for the components of the Disclosed Portfolio and will be updated and widely disseminated by one or more major market data vendors and broadly displayed at least every 15 seconds during the Regular Market Session. The Intraday Indicative Value will be based on quotes and closing prices from the securities’ local market and may not reflect events that occur subsequent to the local market’s close. Premiums and discounts between the Intraday Indicative Value and the market price may occur. This should not be viewed as a ‘‘real time’’ update of the NAV per Share of the Fund, which is calculated only once a day. The dissemination of the Intraday Indicative Value, together with the Disclosed Portfolio, will allow investors to determine the value of the underlying portfolio of the Fund on a daily basis and will provide a close estimate of that value throughout the trading day. Investors will also be able to obtain the Fund’s Statement of Additional Information (‘‘SAI’’), the Fund’s annual and semi-annual reports (together, ‘‘Shareholder Reports’’), and its Form N–CSR and Form N–SAR, filed twice a year. The Fund’s SAI and Shareholder Reports will be available free upon request from the Fund, and those documents and the Form N–CSR and Form N–SAR may be viewed on-screen 50 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. 51 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. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 or downloaded from the Commission’s Web site at www.sec.gov. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. 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 (‘‘CTA’’) plans for the Shares. Quotation and last sale information for U.S. exchange-listed equity securities will be available via the CTA high-speed line, and will be available from the national securities exchange on which they are listed. Pricing information for exchange-traded equity securities (including ETFs, exchange-traded preferred securities, and the exchange-traded equity securities described under ‘‘Dividend Paying Domestic Equity Securities and Depositary Receipts and Related Option Overlay Strategy’’ and ‘‘Equity Securities of Energy Infrastructure Companies’’), exchange-traded derivative instruments and Depositary Receipts will be available from the exchanges on which they trade and from major market data vendors. Pricing information for corporate bonds, senior loans, non-exchange traded preferred securities, Sovereign Debt, MortgageRelated Investments, forward currency contracts, non-deliverable forward currency contracts, and debt securities in which the Fund may invest that are described under ‘‘Other Investments’’ will be available from major brokerdealer firms and/or major market data vendors and/or Pricing Services. An additional source of price information for certain fixed income securities is FINRA’s TRACE. Information relating to U.S. exchange-listed options will be available via the Options Price Reporting Authority. Additional information regarding the Fund and the Shares, including investment strategies, risks, creation and redemption procedures, fees, Fund holdings disclosure policies, distributions and taxes will be included in the Registration Statement. All terms relating to the Fund that are referred to, but not defined in, this proposed rule change will be defined in the Registration Statement. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 Initial and Continued Listing The Shares will be subject to Rule 5735, which sets forth the initial and continued listing criteria applicable to Managed Fund Shares. The Exchange represents that, for initial and/or continued listing, the Fund must be in compliance with Rule 10A–3 52 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. 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. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Nasdaq will halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121, including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). Trading 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 and/or the other assets 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. Trading Rules Nasdaq deems the Shares to be equity securities, thus rendering trading in the Shares subject to Nasdaq’s existing rules governing the trading of equity securities. Nasdaq will allow trading in the Shares from 4:00 a.m. until 8:00 p.m., Eastern time. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum price variation for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $0.01. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both Nasdaq and also 52 See E:\FR\FM\21MYN1.SGM 17 CFR 240.10A–3. 21MYN1 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES FINRA, on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.53 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. 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 regarding trading in the Shares and the exchangetraded securities and instruments held by the Fund with other markets and other entities that are members of ISG 54 and FINRA may obtain trading information regarding trading in the Shares and the exchange-traded securities and instruments held by the Fund from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares and the exchange-traded securities and instruments held by the Fund 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. Moreover, FINRA, on behalf of the Exchange, will be able to access, as needed, trade information for certain fixed income securities held by the Fund reported to FINRA’s TRACE. At least 90% of the Fund’s net assets that are invested in exchange-traded equity securities of both domestic and foreign issuers, exchange-traded products and exchange-traded derivatives (in the aggregate) will be invested in investments that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. 53 FINRA surveils trading on the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. 54 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. VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 Information Circular 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: (1) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq members with respect to recommending transactions in the Shares to customers; (3) how information regarding the Intraday Indicative Value is disseminated; (4) 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; (5) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. Additionally, the Information Circular will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Circular will also disclose the trading hours of the Shares of the Fund and the applicable NAV Calculation Time for the Shares. The Information Circular will disclose that information about the Shares of the Fund will be publicly available on the Fund’s Web site. 2. Statutory Basis Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in general and Section 6(b)(5) of the Act 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, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule 5735. The PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 29257 Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both Nasdaq and also FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws. Neither the Adviser nor any SubAdviser is a broker-dealer, although the Adviser, First Trust Global, EIP and Stonebridge are each affiliated with a broker-dealer and each is required to implement a ‘‘fire wall’’ with respect to such broker-dealer affiliate regarding access to information concerning the composition and/or changes to the Fund’s portfolio. RBA is not currently affiliated with a broker-dealer. In addition, paragraph (g) of Nasdaq Rule 5735 further requires that personnel who make decisions on the open-end fund’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the open-end fund’s portfolio. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchangetraded securities and instruments held by the Fund with other markets and other entities that are members of ISG and FINRA may obtain trading information regarding trading in the Shares and the exchange-traded securities and instruments held by the Fund from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares and the exchange-traded securities and instruments held by the Fund 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. Moreover, FINRA, on behalf of the Exchange, will be able to access, as needed, trade information for certain fixed income securities held by the Fund reported to FINRA’s TRACE. At least 90% of the Fund’s net assets that are invested in exchange-traded equity securities of both domestic and foreign issuers, exchange-traded products and exchange-traded derivatives (in the aggregate) will be invested in investments that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. The primary investment objective of the Fund will be to seek risk-adjusted income and its secondary objective will be capital appreciation. Under normal market conditions, the Fund will seek to achieve its objectives by following a strategic and tactical asset allocation process that will provide diversified E:\FR\FM\21MYN1.SGM 21MYN1 mstockstill on DSK4VPTVN1PROD with NOTICES 29258 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices exposure to income-producing asset classes. The Adviser will determine the Fund’s strategic allocation among various general investment categories and allocate the Fund’s assets to Management Teams which will employ their respective management strategies. In general, except as applicable to any specific investment category, the fixed income and equity securities in which the Fund will invest may be issued by U.S. and non-U.S. issuers of all kinds and of any capitalization range and credit quality. The Fund’s exposure to any single country (outside of the U.S.) will generally be limited to 20% of the Fund’s net assets and the portion of the Fund’s net assets that may be denominated in currencies other than the U.S. dollar is not expected to exceed 30%. In connection with its investments in high yield corporate bonds and senior loans, under normal market conditions, the Fund will seek to invest at least 75% of its net assets that are invested in such bonds and loans (in the aggregate) in bonds and loans that, at the time of original issuance, have at least $100 million par amount outstanding. The Fund will limit its investments in mortgage-backed securities that are not issued or guaranteed by Government Entities to 20% of its net assets. The Mortgage-Related Investments in which the Fund invests will primarily consist of investment grade securities (i.e., securities with credit ratings within the four highest rating categories of an NRSRO at the time of purchase or securities that are unrated and deemed by the Adviser and/or the applicable Management Team to be of comparable quality at the time of purchase). Under normal market conditions, the Fund will seek to invest at least 75% of its net assets that are invested in preferred securities in preferred securities that have a minimum initial issuance amount of at least $100 million. In addition, initially, at least 50% of the Fund’s net assets that are invested in preferred securities will be invested in exchange-listed preferred securities, although this percentage may decrease in the future. At least 50% of the Fund’s net assets that are invested in Sovereign Debt will be invested in securities of issuers rated investment grade at the time of purchase by at least one NRSRO and unrated securities judged to be of comparable quality by the Adviser and/ or the applicable Management Team. In addition, the Fund expects that, under normal market conditions, at least 80% of the Sovereign Debt in which it invests will be issued by issuers with outstanding debt of at least $200 million (or the foreign currency equivalent VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 thereof). The Fund may invest in derivative instruments. Not including the Option Overlay Strategy, no more than 20% of the value of the Fund’s net assets will be invested in derivative instruments. Because the Option Overlay Strategy will be excluded from the foregoing 20% limitation, the Fund’s total investments in derivative instruments may exceed 20% of the value of its net assets. The Fund will comply with the regulatory requirements of the Commission to maintain assets as ‘‘cover,’’ maintain segregated accounts, and/or make margin payments when it takes positions in derivative instruments involving obligations to third parties (i.e., instruments other than purchase options). 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. Also, 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 and/or the applicable Management Team. 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. 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 proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in 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, a large amount of information will be publicly available regarding the Fund and the Shares, thereby promoting market transparency. Moreover, the Intraday Indicative Value, available on the NASDAQ OMX Information LLC proprietary index data service, will be widely disseminated by one or more major market data vendors and broadly displayed at least every 15 seconds PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 during the Regular Market Session. On each business day, before commencement of trading in Shares in the Regular Market Session on the Exchange, the Fund will disclose on its Web site the Disclosed Portfolio that will form the basis for the Fund’s calculation of NAV at the end of the business day. 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 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 CTA plans for the Shares. Quotation and last sale information for U.S. exchange-listed equity securities will be available via the CTA high-speed line, and will be available from the national securities exchange on which they are listed. Pricing information for exchange-traded equity securities (including ETFs, exchange-traded preferred securities, and the exchange-traded equity securities described under ‘‘Dividend Paying Domestic Equity Securities and Depositary Receipts and Related Option Overlay Strategy’’ and ‘‘Equity Securities of Energy Infrastructure Companies’’), exchange-traded derivative instruments and Depositary Receipts will be available from the exchanges on which they trade and from major market data vendors. Pricing information for corporate bonds, senior loans, non-exchange traded preferred securities, Sovereign Debt, MortgageRelated Investments, forward currency contracts, non-deliverable forward currency contracts, and debt securities in which the Fund may invest that are described under ‘‘Other Investments’’ will be available from major brokerdealer firms and/or major market data vendors and/or Pricing Services. An additional source of price information for certain fixed income securities is FINRA’s TRACE. Information relating to U.S. exchange-listed options will be available via the Options Price Reporting Authority. 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. Trading in Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120 and 4121 or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to Nasdaq E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 79, No. 98 / Wednesday, May 21, 2014 / Notices Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. The Fund’s investments will be valued daily at market value or, in the absence of market value with respect to any investment, at fair value, in each case in accordance with the Valuation Procedures and the 1940 Act. 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 in that it will facilitate the listing and trading of an additional type of activelymanaged exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchangetraded securities and instruments held by the Fund with other markets and other entities that are members of ISG and FINRA may obtain trading information regarding trading in the Shares and the exchange-traded securities and instruments held by the Fund from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares and in the exchange-traded securities and instruments held by the Fund 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. Furthermore, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. For the above reasons, Nasdaq believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. mstockstill on DSK4VPTVN1PROD with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that the proposed rule change will facilitate the listing and trading of an additional type of activelymanaged exchange-traded fund that will enhance competition among market VerDate Mar<15>2010 17:42 May 20, 2014 Jkt 232001 participants, to the benefit of investors and the marketplace. 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) 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–2014–050 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2014–050. 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 PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 29259 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–2014–050 and should be submitted on or before June 11, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.55 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–11740 Filed 5–20–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [File No. 500–1] Andalusian Resorts and Spas, Inc.; Order of Suspension of Trading May 19, 2014. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Andalusian Resorts and Spas, Inc. (‘‘Andalusian’’) because of questions concerning the adequacy and accuracy of assertions by Andalusian, and by others, in press releases and other public statements to investors concerning, among other things, the company’s business combinations. Andalusian is a Nevada corporation based in Las Vegas. Its stock is quoted on OTC Link, operated by OTC Markets Group Inc., under the ticker symbol ‘‘ARSP.’’ The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above-listed company. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the securities of the above-listed company is suspended for the period from 9:30 a.m. EDT, on May 19, 2014, through 11:59 p.m. EDT, on June 2, 2014. 55 17 E:\FR\FM\21MYN1.SGM CFR 200.30–3(a)(12). 21MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 98 (Wednesday, May 21, 2014)]
[Notices]
[Pages 29247-29259]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-11740]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72169; File No. SR-NASDAQ-2014-050]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change Relating to the Listing and 
Trading of the Shares of the First Trust Strategic Income ETF of First 
Trust Exchange-Traded Fund IV

May 15, 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 May 5, 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 in Items I, 
II, and III below, which Items have been prepared by Nasdaq. The 
Commission is publishing this notice to

[[Page 29248]]

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

    Nasdaq proposes to list and trade the shares of the First Trust 
Strategic Income ETF (the ``Fund'') of First Trust Exchange-Traded Fund 
IV (the ``Trust'') under Nasdaq Rule 5735 (``Managed Fund Shares'').\3\ 
The shares of the Fund are collectively referred to herein as the 
``Shares.''
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    \3\ 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). There are already multiple actively-
managed funds listed on the Exchange; see, e.g., Securities Exchange 
Act Release Nos. 69464 (April 26, 2013), 78 FR 25774 (May 2, 2013) 
(SR-NASDAQ-2013-036) (order approving listing and trading of First 
Trust Senior Loan Fund); 68972 (February 22, 2013), 78 FR 13721 
(February 28, 2013) (SR-NASDAQ-2012-147) (order approving listing 
and trading of First Trust High Yield Long/Short ETF); 66489 
(February 29, 2012), 77 FR 13379 (March 6, 2012) (SR-NASDAQ-2012-
004) (order approving listing and trading of WisdomTree Emerging 
Markets Corporate Bond Fund). The Exchange believes the proposed 
rule change raises no significant issues not previously addressed in 
those prior Commission orders.
---------------------------------------------------------------------------

    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. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares \4\ on the Exchange. The Fund will be an actively-
managed exchange-traded fund (``ETF''). The Shares will be offered by 
the Trust, which was established as a Massachusetts business trust on 
September 15, 2010.\5\ The Trust is registered with the Commission as 
an investment company and has filed a registration statement on Form N-
1A (``Registration Statement'') with the Commission.\6\ The Fund will 
be a series of the Trust. 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.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') organized 
as an open-end investment company or similar entity that invests in 
a portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Index Fund Shares, listed 
and traded on the Exchange under Nasdaq Rule 5705, seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specific foreign or domestic stock index, fixed 
income securities index or combination thereof.
    \5\ The Commission has issued an order, upon which the Trust may 
rely, granting certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 30029 (April 10, 2012) (File No. 
812-13795) (the ``Exemptive Relief''). In addition, the Commission 
has issued no-action relief, upon which the Trust may rely, 
pertaining to the Fund's ability to invest in derivatives 
notwithstanding certain representations in the application for the 
Exemptive Relief. See Commission No-Action Letter (December 6, 
2012).
    \6\ See Post-Effective Amendment No. 67 to Registration 
Statement on Form N-1A for the Trust, dated May 2, 2014 (File Nos. 
333-174332 and 811-22559). The descriptions of the Fund and the 
Shares contained herein are based, in part, on information in the 
Registration Statement.
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    First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund. The following will serve as investment sub-
advisers (each a ``Sub-Adviser'') to the Fund: First Trust Global 
Portfolios Ltd (``First Trust Global''); Energy Income Partners, LLC 
(``EIP''); Stonebridge Advisors LLC (``Stonebridge''); and Richard 
Bernstein Advisors LLC (``RBA''). First Trust Portfolios L.P. (the 
``Distributor'') will be the principal underwriter and distributor of 
the Fund's Shares. The Bank of New York Mellon Corporation (``BNY'') 
will act as the administrator, accounting agent, custodian and transfer 
agent to the Fund.
    Paragraph (g) of Rule 5735 provides that if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect a ``fire 
wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio.\7\ In addition, paragraph 
(g) further requires that personnel who make decisions on the open-end 
fund's portfolio composition must be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the open-end fund's portfolio. Rule 5735(g) is similar to 
Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with 
the establishment of a ``fire wall'' between the investment adviser and 
the broker-dealer reflects the applicable open-end fund's portfolio, 
not an underlying benchmark index, as is the case with index-based 
funds. Neither the Adviser nor any Sub-Adviser is a broker-dealer, 
although the Adviser, First Trust Global, EIP and Stonebridge are each 
affiliated with a broker-dealer.\8\ The Adviser and the foregoing Sub-
Advisers have each implemented a fire wall with respect to their 
respective broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio. In 
addition, personnel who make decisions on the Fund's portfolio 
composition will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
Fund's portfolio. In the event (a) the Adviser or a Sub-Adviser 
becomes, or becomes newly affiliated with, a broker-dealer, or (b) any 
new adviser or sub-adviser is a registered broker-dealer or becomes 
affiliated with a broker-dealer, it will implement a fire wall with 
respect to its relevant personnel and/or such broker-dealer affiliate, 
as applicable, regarding access to information concerning the 
composition and/or changes to the portfolio and will be subject to 
procedures designed to prevent the use and dissemination of material 
non-

[[Page 29249]]

public information regarding such portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser, the Sub-Advisers 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.
    \8\ RBA is currently not affiliated with a broker-dealer.
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First Trust Strategic Income ETF
General Investment Approach and Parameters
    The primary investment objective of the Fund will be to seek risk-
adjusted income and its secondary objective will be capital 
appreciation. Under normal market conditions,\9\ the Fund will seek to 
achieve its investment objectives by following a strategic and tactical 
asset allocation process that will provide diversified exposure to 
income-producing asset classes.
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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 securities 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.
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    The Fund will be a multi-manager, multi-strategy actively-managed 
exchange-traded fund. The Adviser will determine the Fund's strategic 
allocation among various general investment categories and allocate the 
Fund's assets to portfolio management teams comprised of personnel of 
the Adviser and/or a Sub-Adviser (each a ``Management Team'') which 
will employ their respective investment strategies. The Fund's 
investment categories will be: (i) High yield corporate bonds and first 
lien senior secured floating rate bank loans (referred to as ``senior 
loans''); (ii) mortgage-related investments; (iii) preferred 
securities; (iv) international sovereign bonds; (v) equity securities 
of Energy Infrastructure Companies (as defined herein); and (vi) 
dividend paying domestic equity securities and Depositary Receipts (as 
defined herein), together with a related option overlay strategy. (The 
foregoing investment categories and related investment strategies are 
described in more detail below under ``Investment Categories and 
Related Investment Strategies.'') In addition to the option overlay 
strategy referenced in investment category (vi), the Management Teams 
may utilize derivative instruments in implementing their respective 
investment strategies for the Fund. See ``Derivative Instruments'' 
below.
    The Fund may add or remove investment categories or Management 
Teams at the Adviser's discretion. The Fund will seek to provide income 
and total return by having each Management Team focus on those 
securities within its respective investment category. The Fund may 
invest in securities directly or, alternatively, may invest in other 
ETFs that generally provide exposure to the various investment 
categories.\10\ The Adviser expects that the Fund may at times invest 
significantly (and, potentially, may invest up to 50% of its net 
assets) in other ETFs, including but not limited to, other ETFs that 
are advised by the Adviser; however, the Fund does not intend to 
operate principally as a ``fund of funds.'' Any other ETFs in which the 
Fund invests to gain exposure to an investment category may be subject 
to investment parameters that differ in certain respects from those 
that have been established for such investment category which are 
described below under ``Investment Categories and Related Investment 
Strategies.''
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    \10\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. Many ETFs are designed to 
track the performance of a securities index, including industry, 
sector, country and region indexes. ETFs included in the Fund will 
be listed and traded in the U.S. on registered exchanges. 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, 
including ETFs, in excess of the limits imposed under the 1940 Act 
pursuant to an exemptive order obtained by the Trust and the Adviser 
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.
---------------------------------------------------------------------------

    To enhance expected return, the Adviser's investment committee 
will, on a generally periodic basis, tactically adjust investment 
category weights. Security selection will be performed for the Fund by 
the Adviser and/or a Sub-Adviser.
    With respect to each investment category, the liquidity of a 
security will be a substantial factor in the Fund's security selection 
process. The Fund will not purchase any securities or other assets 
that, in the opinion of the applicable Management Team, are illiquid 
if, as a result, more than 15% of the value of the Fund's net assets 
will be invested in illiquid assets (the ``15% Limitation'').\11\ 
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.\12\ The Adviser will communicate with the various Management 
Teams regarding the Fund's ongoing compliance with the 15% Limitation.
---------------------------------------------------------------------------

    \11\ In reaching liquidity decisions, the Adviser and/or 
Management Team 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).
    \12\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also Investment Company Act 
Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) 
(Statement Regarding ``Restricted Securities''); Investment Company 
Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) 
(Revisions of Guidelines to Form N-1A). A fund's portfolio security 
is illiquid if it cannot be disposed of in the ordinary course of 
business within seven days at approximately the value ascribed to it 
by the fund. See Investment Company Act Release No. 14983 (March 12, 
1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 
under the 1940 Act); Investment Company Act Release No. 17452 (April 
23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under 
the Securities Act of 1933).
---------------------------------------------------------------------------

    Except as specifically provided below under ``Investment Categories 
and Related Investment Strategies,'' the fixed income and equity 
securities in which the Fund will invest may be issued by U.S. and non-
U.S. issuers of all kinds and of any capitalization range and credit 
quality. The Fund represents that its portfolio will include a minimum 
of 13 non-affiliated issuers of fixed income securities. In addition, 
the fixed income securities in which the Fund will invest may have 
effective or final maturities of any length. At least 90% of the Fund's 
net assets that are invested in exchange-traded equity securities of 
both domestic and foreign issuers, exchange-traded products and 
exchange-traded derivatives (in the aggregate) will be invested in 
investments that trade in markets that are members of the Intermarket 
Surveillance Group (``ISG''), which includes all U.S. national 
securities exchanges and certain foreign exchanges, or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.\13\
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    \13\ For a list of the current members of ISG, see 
www.isgportal.org.
---------------------------------------------------------------------------

    The Fund may invest in the equity securities (including without 
limitation preferred securities) of foreign issuers, either directly or 
through investments that are in the form of American Depositary 
Receipts (``ADRs'') or Global Depositary Receipts (``GDRs'' and, 
together with ADRs, ``Depositary

[[Page 29250]]

Receipts'').\14\ The Depositary Receipts in which the Fund invests will 
be exchange-traded and will not include unsponsored Depositary 
Receipts.
---------------------------------------------------------------------------

    \14\ ADRs are U.S. dollar denominated receipts typically issued 
by U.S. banks and trust companies that evidence ownership of 
underlying securities issued by a foreign issuer. GDRs are receipts 
issued throughout the world that evidence a similar arrangement. 
ADRs and GDRs may trade in currencies that differ from the currency 
in which the underlying security trades. Generally, ADRs, in 
registered form, are designed for use in the U.S. securities 
markets. GDRs, in registered form, are traded both in the United 
States and in Europe and are designed for use throughout the world.
---------------------------------------------------------------------------

    The Fund's exposure to any single country (outside of the U.S.) 
will generally be limited to 20% of the Fund's net assets. The portion 
of the Fund's net assets that may be denominated in currencies other 
than the U.S. dollar is not expected to exceed 30%. To the extent the 
Fund invests in such assets, the value of the assets of the Fund as 
measured in U.S. dollars will be affected by changes in exchange rates.
    The Fund may from time to time purchase securities on a ``when-
issued'' or other delayed-delivery basis. To the extent required under 
applicable federal securities laws (including the 1940 Act), rules, and 
interpretations thereof, the Fund will ``set aside'' liquid assets or 
engage in other measures to ``cover'' open positions held in connection 
with the foregoing types of transactions.\15\
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    \15\ With respect to guidance under the 1940 Act, see 15 U.S.C. 
80a-18; Investment Company Act Release No. 10666 (April 18, 1979), 
44 FR 25128 (April 27, 1979); Dreyfus Strategic Investing, 
Commission No-Action Letter (June 22, 1987); Merrill Lynch Asset 
Management, L.P., Commission No-Action Letter (July 2, 1996).
---------------------------------------------------------------------------

Investment Categories and Related Investment Strategies
    The investment categories in which the Fund intends to invest and 
the investment strategies that the applicable Management Teams are 
expected to pursue are described below:
     High Yield Corporate Bonds and Senior Loans. The Fund 
intends to invest between 0% and 30%, but may invest up to 50%, of its 
net assets in a combination of high yield corporate bonds and senior 
loans.\16\ Such bonds and loans in which the Fund invests directly will 
be issued by entities domiciled in the United States. Under normal 
market conditions, the Fund will seek to invest at least 75% of its net 
assets that are invested in such bonds and loans (in the aggregate) in 
bonds and loans that, at the time of original issuance, have at least 
$100 million par amount outstanding.
---------------------------------------------------------------------------

    \16\ For the avoidance of doubt, this investment category and 
these percentages will not include so-called baby bonds, which are 
included in ``Preferred Securities'' (described below).
---------------------------------------------------------------------------

    The high yield corporate bonds in which the Fund will invest will 
be rated below investment grade \17\ at the time of purchase or unrated 
and deemed by the Adviser and/or the applicable Management Team to be 
of comparable quality,\18\ commonly referred to as ``junk'' bonds. For 
purposes of determining whether a security is below investment grade, 
the lowest available rating will be considered. High yield debt may be 
issued, for example, by companies without long track records of sales 
and earnings or by issuers that have questionable credit strength. 
Corporate bonds may carry fixed or floating rates of interest.
---------------------------------------------------------------------------

    \17\ Securities rated below investment grade include securities 
that are rated Ba1/BB+/BB+ or below by Moody's Investors Service, 
Inc. (``Moody's''), Fitch Ratings (``Fitch''), or Standard & Poor's 
Ratings Services, a division of The McGraw-Hill Companies, Inc. 
(``S&P Ratings''), respectively, or another nationally recognized 
statistical rating organization (``NRSRO'').
    \18\ Comparable quality of unrated securities will be determined 
by the Adviser and/or the applicable Management Team based on 
fundamental credit analysis of the unrated security and comparable 
NRSRO-rated securities. On a best efforts basis, the Adviser and/or 
the applicable Management Team will attempt to make a rating 
determination based on publicly available data. In making a 
``comparable quality'' determination, the Adviser and/or the 
applicable Management Team 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.
---------------------------------------------------------------------------

    The senior loans in which the Fund will invest will represent 
amounts borrowed by companies or other entities from banks and other 
lenders. In many cases, senior loans are issued in connection with 
recapitalizations, acquisitions, leveraged buyouts, and refinancings. A 
significant portion of the senior loans in which the Fund will invest 
are expected to be rated below investment grade or unrated.
    A senior loan is considered senior to all other unsecured claims 
against the borrower, and senior to or pari passu with all other 
secured claims, meaning that in the event of a bankruptcy, the senior 
loan, together with all other first lien claims, is entitled to be the 
first to be repaid out of the proceeds of the assets securing the 
loans, before other existing unsecured claims or interests receive 
repayment. However, in bankruptcy proceedings, there may be other 
claims, such as taxes or additional advances, which take precedence.
    Senior loans have interest rates that reset periodically. The 
interest rates on senior loans are generally based on a percentage 
above the London Interbank Offered Rate (LIBOR), a U.S bank's prime or 
base rate, the overnight federal funds rate, or another rate. Senior 
loans may be structured and administered by a financial institution 
that acts as the agent of the lenders participating in the senior loan. 
The Fund may acquire senior loans directly from a lender or through the 
agent, as an assignment from another lender who holds a senior loan, or 
as a participation interest in another lender's senior loan or portion 
thereof.
    The Fund will generally invest in senior loans that the Adviser 
and/or the applicable Management Team deems to be liquid with readily 
available prices.
    The Management Team does not intend to purchase senior loans that 
are in default; however, the Fund may hold a senior loan that has 
defaulted subsequent to the purchase by the Fund.
     Mortgage-Related Investments. The Fund intends to invest 
between 0% and 30%, but may invest up to 50%, of its net assets in the 
mortgage-related debt securities and other mortgage-related instruments 
described below (collectively, ``Mortgage-Related Investments'').
    The Mortgage-Related Investments in which the Fund invests will 
primarily consist of investment grade securities (i.e., securities with 
credit ratings within the four highest rating categories of an NRSRO at 
the time of purchase or securities that are unrated and deemed by the 
Adviser and/or the applicable Management Team to be of comparable 
quality \19\ at the time of purchase). If a security is rated by 
multiple NRSROs and receives different ratings, the Fund will treat the 
security as being rated in the highest rating category received from an 
NRSRO. In addition, if a security experiences a decline in credit 
quality and falls below investment grade, the Fund may continue to hold 
the security.
---------------------------------------------------------------------------

    \19\ See note 18.
---------------------------------------------------------------------------

    The types of Mortgage-Related Investments in which the Fund will 
invest are described in the following three paragraphs:
    The Fund will invest in mortgage-backed securities (such as 
residential mortgage-backed securities (RMBS) and commercial mortgage-
backed securities (CMBS)). Mortgage-backed securities represent an 
interest in a pool of mortgage loans made by banks and other financial 
institutions to finance purchases of homes, commercial buildings and 
other real estate. The individual mortgage loans are packaged or 
``pooled'' together for sale to investors. As the underlying mortgage

[[Page 29251]]

loans are paid off, investors receive principal and interest 
payments.\20\
---------------------------------------------------------------------------

    \20\ Mortgage-backed securities may be fixed rate or adjustable 
rate mortgage-backed securities (ARMS). Certain mortgage-backed 
securities (including RMBS and CMBS), where mortgage payments are 
divided up between paying the loan's principal and paying the loan's 
interest, are referred to as stripped mortgage-backed securities 
(SMBS). Further, mortgage-backed securities can also be categorized 
as collateralized mortgage obligations (CMOs) or real estate 
mortgage investment conduits (REMICs) where they are divided into 
multiple classes with each class being entitled to a different share 
of the principal and/or interest payments received from the pool of 
underlying assets.
---------------------------------------------------------------------------

    The mortgage-backed securities in which the Fund will invest may 
be, but are not required to be, issued or guaranteed by the U.S. 
government, its agencies or instrumentalities, such as Ginnie Mae and 
U.S. government-sponsored entities, such as Fannie Mae and Freddie Mac 
(the U.S. government, its agencies and instrumentalities, and U.S. 
government-sponsored entities are referred to collectively as 
``Government Entities'').\21\ The Fund, however, will limit its 
investments in mortgage-backed securities that are not issued or 
guaranteed by Government Entities to 20% of its net assets. Many 
mortgage-backed securities are pass-through securities, which means 
they provide investors with monthly payments consisting of a pro rata 
share of both regular interest and principal payments as well as 
unscheduled prepayments on the underlying mortgage loans. Because 
prepayment rates of individual mortgage pools vary widely, the average 
life of a particular pool cannot be predicted accurately. Adjustable 
rate mortgage-backed securities include ARMS and other mortgage-backed 
securities with interest rates that adjust periodically to reflect 
prevailing market rates.
---------------------------------------------------------------------------

    \21\ Securities issued or guaranteed by Government Entities have 
different levels of credit support. For example, Ginnie Mae 
securities carry a guarantee as to the timely repayment of principal 
and interest that is backed by the full faith and credit of the U.S. 
government. However, the full faith and credit guarantee does not 
apply to the market prices and yields of the Ginnie Mae securities 
or to the net asset value, trading price or performance of the Fund, 
which will vary with changes in interest rates and other market 
conditions. Fannie Mae and Freddie Mac pass-through mortgage 
certificates are backed by the credit of the respective Government 
Entity and are not guaranteed by the U.S. government. Other 
securities issued by Government Entities (other than the U.S. 
government) may only be backed by the creditworthiness of the 
issuing institution, not the U.S. government, or the issuers may 
have the right to borrow from the U.S. Treasury to meet their 
obligations.
---------------------------------------------------------------------------

    Additionally, the Fund may invest in mortgage dollar rolls.\22\ The 
Fund intends to enter into mortgage dollar rolls only with high quality 
securities dealers and banks, as determined by the Adviser. The Fund 
may also invest in to-be-announced transactions (``TBA 
Transactions'').\23\ Further, the Fund may enter into short sales as 
part of its overall portfolio management strategies or to offset a 
potential decline in the value of a security; however, the Fund does 
not expect, under normal market conditions, to engage in short sales 
with respect to more than 30% of the value of its net assets that are 
invested in Mortgage-Related Investments. To the extent required under 
applicable federal securities laws, rules, and interpretations thereof, 
the Fund will ``set aside'' liquid assets or engage in other measures 
to ``cover'' open positions and short positions held in connection with 
the foregoing types of transactions.\24\
---------------------------------------------------------------------------

    \22\ In a mortgage dollar roll, the Fund will sell (or buy) 
mortgage-backed securities for delivery on a specified date and 
simultaneously contract to repurchase (or sell) substantially 
similar (same type, coupon and maturity) securities on a future 
date. During the period between a sale and repurchase, the Fund will 
forgo principal and interest paid on the mortgage-backed securities. 
The Fund will earn or lose money on a mortgage dollar roll from any 
difference between the sale price and the future purchase price. In 
a sale and repurchase, the Fund will also earn money on the interest 
earned on the cash proceeds of the initial sale.
    \23\ A TBA Transaction is a method of trading mortgage-backed 
securities. TBA Transactions generally are conducted in accordance 
with widely-accepted guidelines which establish commonly observed 
terms and conditions for execution, settlement and delivery. In a 
TBA Transaction, the buyer and the seller agree on general trade 
parameters such as agency, settlement date, par amount and price. 
The actual pools delivered generally are determined two days prior 
to the settlement date. The mortgage TBA market is liquid and 
positions can be easily added, rolled or closed. According to the 
Financial Industry Regulatory Authority (``FINRA'') Trade Reporting 
and Compliance Engine (``TRACE'') data, TBA Transactions represented 
approximately 93% of total trading volume for agency mortgage-backed 
securities in the month of January 2014.
    \24\ See note 15 regarding guidance under the 1940 Act.
---------------------------------------------------------------------------

     Preferred Securities. The Fund intends to invest between 
0% and 30%, but may invest up to 50%, of its net assets in preferred 
securities issued by U.S. and non-U.S. issuers.\25\ Under normal market 
conditions, the Fund will seek to invest at least 75% of its net assets 
that are invested in preferred securities in preferred securities that 
have a minimum initial issuance amount of at least $100 million. 
Initially, at least 50% of the Fund's net assets that are invested in 
preferred securities will be invested in exchange-listed preferred 
securities, although this percentage may decrease in the future. 
Preferred securities held by the Fund will generally pay fixed or 
adjustable rate distributions to investors and will have preference 
over common stock in the payment of distributions and the liquidation 
of a company's assets, which means that a company typically must pay 
dividends or interest on its preferred securities before paying any 
dividends on its common stock. Preferred securities are generally 
junior to all forms of the company's debt, including both senior and 
subordinated debt.
---------------------------------------------------------------------------

    \25\ For the avoidance of doubt, this investment category and 
these percentages will not include those investments in preferred 
securities that are included in ``Equity Securities of Energy 
Infrastructure Companies'' (described below). Certain of the 
preferred securities in which the Fund will invest will be 
traditional preferred stocks that issue dividends that qualify for 
the dividends received deduction under which ``qualified'' domestic 
corporations are able to exclude a percentage of the dividends 
received from their taxable income. Other preferred securities in 
which the Fund will invest will be preferred stocks that do not 
issue dividends that qualify for the dividends received deduction or 
generate qualified dividend income. Additionally, certain of the 
preferred securities in which the Fund will invest may be so-called 
baby bonds (i.e., small denomination, typically $25 par value, bonds 
that often have certain characteristics associated with fixed income 
securities sold to retail investors (for example, they typically pay 
a quarterly coupon and are typically investment grade)). Hybrid 
preferred securities, another type of preferred securities, are 
typically junior and fully subordinated liabilities of an issuer or 
the beneficiary of a guarantee that is junior and fully subordinated 
to the other liabilities of the guarantor.
---------------------------------------------------------------------------

     International Sovereign Bonds. The Fund intends to invest 
between 0% and 30%, but may invest up to 50%, of its net assets in debt 
securities, including inflation-linked bonds,\26\ issued by foreign 
governments or their subdivisions, agencies and government-sponsored 
enterprises (``Sovereign Debt'').\27\ At least 50% of the Fund's net

[[Page 29252]]

assets that are invested in Sovereign Debt will be invested in 
securities of issuers rated investment grade (BBB-/Baa3 or higher) at 
the time of purchase by at least one NRSRO and unrated securities 
judged to be of comparable quality \28\ by the Adviser and/or the 
applicable Management Team. Up to 50% of its net assets invested in 
Sovereign Debt may be invested in securities of issuers rated below 
investment grade at the time of purchase (i.e., ``junk'' bonds). If a 
security or issuer is rated by multiple NRSROs and receives different 
ratings, the Fund will treat the security or issuer (as applicable) as 
being rated in the highest rating category received from an NRSRO. In 
addition, if a security or issuer (as applicable) experiences a decline 
in credit quality and falls below investment grade, the Fund may 
continue to hold the security and it will not count toward the 
investment limit; however, the security will be taken into account for 
purposes of determining whether purchases of additional securities will 
cause the Fund to violate such limit.
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    \26\ Inflation-linked bonds are fixed income securities that are 
structured to provide protection against inflation. The value of the 
inflation-linked bond's principal or the interest income paid on the 
bond is adjusted to track changes in an official inflation measure. 
The value of inflation-linked bonds is expected to change in 
response to changes in real interest rates. Real interest rates are 
tied to the relationship between nominal interest rates and the rate 
of inflation. If nominal interest rates increase at a faster rate 
than inflation, real interest rates may rise, leading to a decrease 
in the value of inflation-linked bonds.
    \27\ For the avoidance of doubt, Sovereign Debt includes debt 
obligations denominated in local currencies or U.S. dollars. 
Moreover, given that it includes debt issued by subdivisions, 
agencies and government-sponsored enterprises, Sovereign Debt may 
include debt commonly referred to as ``quasi-sovereign debt.'' 
Sovereign Debt may also include issues denominated in emerging 
market local currencies that are issued by ``supranational 
issuers,'' such as the International Bank for Reconstruction and 
Development and the International Finance Corporation, as well as 
development agencies supported by other national governments. 
According to the Adviser and the applicable Management Team, while 
there is no universally accepted definition of what constitutes an 
``emerging market,'' in general, emerging market countries are 
characterized by developing commercial and financial infrastructure 
with significant potential for economic growth and increased capital 
market participation by foreign investors.
    \28\ See note 18.
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    The Fund intends to invest in Sovereign Debt of issuers in both 
developed and emerging markets.\29\ In addition, the Fund expects that, 
under normal market conditions, at least 80% of the Sovereign Debt in 
which it invests will be issued by issuers with outstanding debt of at 
least $200 million (or the foreign currency equivalent thereof).
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    \29\ The Fund intends, initially, to invest in Sovereign Debt of 
the following issuers: Argentina; Brazil; Chile; Colombia; Costa 
Rica; Dubai (United Arab Emirates); Hungary; Indonesia; Malaysia; 
Mexico; Nigeria; Peru; Philippines; Poland; Qatar; Romania; Russia; 
South Africa; South Korea; Sri Lanka; Thailand; Turkey; Venezuela; 
and Vietnam, although this list may change based on market 
developments. The percentage of Fund assets invested in a specific 
region, country or issuer will change from time to time.
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     Equity Securities of Energy Infrastructure Companies. The 
Fund intends to invest between 0% and 50% of its net assets in 
exchange-traded equity securities of companies deemed by the applicable 
Management Team to be engaged in the energy infrastructure sector. 
These companies principally include publicly-traded master limited 
partnerships and limited liability companies taxed as partnerships 
(``MLPs'') (described below), MLP affiliates (described below), 
``Canadian Income Equities,'' which are successor companies to Canadian 
income trusts,\30\ pipeline companies, utilities, and other companies 
that derive at least 50% of their revenues from operating or providing 
services in support of infrastructure assets such as pipelines, power 
transmission and petroleum and natural gas storage in the petroleum, 
natural gas and power generation industries (collectively, ``Energy 
Infrastructure Companies'').
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    \30\ The term ``Canadian income trusts'' refers to qualified 
income trusts designated by the Canada Revenue Agency that derive 
income and gains from the exploration, development, mining or 
production, processing, refining, transportation (including 
pipelines transporting gas, oil or products thereof), or the 
marketing of any mineral or natural resources.
---------------------------------------------------------------------------

    As indicated above, the Fund may invest in the equity securities of 
MLPs. MLPs are limited partnerships whose shares (or units) are listed 
and traded on a U.S. securities exchange. MLP units may be common or 
subordinated.\31\ In addition, the Fund may invest in I-Shares,\32\ 
which represent an ownership interest issued by an affiliated party of 
an MLP. The MLP affiliate uses the proceeds from the sale of I-Shares 
to purchase limited partnership interests in the MLP in the form of i-
units. I-units have similar features as MLP common units in terms of 
voting rights, liquidation preference and distributions. However, 
rather than receiving cash, the MLP affiliate receives additional i-
units in an amount equal to the cash distributions received by MLP 
common units. Similarly, holders of I-Shares will receive additional I-
Shares, in the same proportion as the MLP affiliates' receipt of i-
units, rather than cash distributions. I-Shares themselves have limited 
voting rights which are similar to those applicable to MLP common 
units. I-Shares are listed and traded on a U.S. national securities 
exchange.
---------------------------------------------------------------------------

    \31\ MLPs generally have two classes of owners, the general 
partner and limited partners. The general partner, which is 
generally a major energy company, investment fund or the management 
of the MLP, typically controls the MLP through a 2% general partner 
equity interest in the MLP plus common units and subordinated units. 
Limited partners own the remainder of the partnership, through 
ownership of common units, and have a limited role in the 
partnership's operations and management.
    \32\ As a matter of clarification, the ``I-Shares'' referred to 
herein are not ``iShares'' ETFs.
---------------------------------------------------------------------------

     Dividend Paying Domestic Equity Securities and Depositary 
Receipts and Related Option Overlay Strategy. The Fund intends to 
invest between 0% and 30%, but may invest up to 50%, of its net assets 
in dividend paying U.S. exchange-traded equity securities (including 
common stock) of companies domiciled in the United States and 
Depositary Receipts.\33\ In connection with its investments in dividend 
paying domestic equity securities, the Fund may use an option overlay 
strategy (the ``Option Overlay Strategy'').\34\ To implement this 
strategy, the Fund will write (sell) covered U.S. exchange-traded call 
options in order to seek additional cash flow in the form of premiums 
on the options. The market value of the Option Overlay Strategy may be 
up to 30% of the Fund's overall net asset value and the notional value 
of the calls written may be up to 30% of the overall Fund. The maturity 
of the options utilized will generally be between one week and three 
months. The options written may be in-the-money, at-the-money or out-
of-the-money.
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    \33\ For the avoidance of doubt, this investment category and 
these percentages will not include investments in preferred 
securities (described above under ``Preferred Securities''), 
investments in those equity securities that are included in ``Equity 
Securities of Energy Infrastructure Companies'' (described above), 
or investments in ETFs that are intended to provide exposure to any 
of the other five investment categories (see ``General Investment 
Approach and Parameters'' above).
    \34\ The Fund's investments in options in connection with the 
Option Overlay Strategy will not be included for purposes of 
determining compliance with the 20% Limitation (defined below).
---------------------------------------------------------------------------

Derivative Instruments

    As described below, the Fund may invest in derivative 
instruments.\35\ Not including the Option Overlay Strategy, no more 
than 20% of the value of the Fund's net assets will be invested in 
derivative instruments (the ``20% Limitation'').\36\ In general, the 
Fund may invest in exchange-listed futures contracts, exchange-listed 
options,

[[Page 29253]]

exchange-listed options on futures contracts, and exchange-listed stock 
index options.\37\
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    \35\ The Fund may invest in derivative instruments for various 
purposes, such as to seek to enhance return, to hedge some of the 
risks of its investments in securities, as a substitute for a 
position in the underlying asset, to reduce transaction costs, to 
maintain full market exposure (which means to adjust the 
characteristics of its investments to more closely approximate those 
of the markets in which it invests), to manage cash flows, to limit 
exposure to losses due to changes to non-U.S. currency exchange 
rates or to preserve capital.
    \36\ Because the Option Overlay Strategy will be excluded from 
the 20% Limitation, the Fund's total investments in derivative 
instruments may exceed 20% of the value of its net assets. 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.
    \37\ Any exchange-traded derivatives in which the Fund invests 
will trade in markets that are members of ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange. The 
exchange-listed futures and options contracts in which the Fund may 
invest will be listed on exchanges in the U.S., Europe, London, Hong 
Kong, Singapore, Australia or Canada. The United Kingdom's primary 
financial markets regulator (the Financial Conduct Authority), Hong 
Kong's primary financial markets regulator (the Securities and 
Futures Commission), Singapore's primary financial markets regulator 
(the Monetary Authority of Singapore), Australia's primary financial 
markets regulator (the Australian Securities and Investments 
Commission), and certain Canadian financial markets regulators 
(including the Alberta Securities Commission, the British Columbia 
Securities Commission, the Ontario Securities Commission, and 
Autorite des marches financiers (Quebec)) are signatories to the 
International Organization of Securities Commissions (``IOSCO'') 
Multilateral Memorandum of Understanding (``MMOU''), which is a 
multi-party information sharing arrangement among financial 
regulators. Both the Commission and the Commodity Futures Trading 
Commission are signatories to the IOSCO MMOU.
---------------------------------------------------------------------------

    Primarily in connection with its investments in Sovereign Debt 
(but, to the extent applicable, in connection with other investments), 
the Fund may actively manage its foreign currency exposures, including 
through the use of forward currency contracts, non-deliverable forward 
currency contracts, exchange-listed currency futures and exchange-
listed currency options; such derivatives use will be included for 
purposes of determining compliance with the 20% Limitation. The Fund 
may, for instance, enter into forward currency contracts in order to 
``lock in'' the exchange rate between the currency it will deliver and 
the currency it will receive for the duration of the contract \38\ and 
may buy or sell exchange-listed futures contracts on U.S. Treasury 
securities, non-U.S. government securities and major non-U.S. 
currencies.
---------------------------------------------------------------------------

    \38\ The Fund will invest only in currencies, and instruments 
that provide exposure to such currencies, that have significant 
foreign exchange turnover and are included in the Bank for 
International Settlements, Triennial Central Bank Survey, Global 
Foreign Exchange Market Turnover in 2013 (``BIS Survey''). The Fund 
may invest in currencies, and instruments that provide exposure to 
such currencies, selected from the top 40 currencies (as measured by 
percentage share of average daily turnover for the applicable month 
and year) included in the BIS Survey.
---------------------------------------------------------------------------

    The Fund will comply with the regulatory requirements of the 
Commission to maintain assets as ``cover,'' maintain segregated 
accounts, and/or make margin payments when it takes positions in 
derivative instruments involving obligations to third parties (i.e., 
instruments other than purchase options). If the applicable guidelines 
prescribed under the 1940 Act so require, the Fund will earmark or set 
aside cash, U.S. government securities, high grade liquid debt 
securities and/or other liquid assets permitted by the Commission in a 
segregated custodial account in the amount prescribed.\39\
---------------------------------------------------------------------------

    \39\ See note 15 regarding related guidance under the 1940 Act.
---------------------------------------------------------------------------

    The Fund will only enter into transactions in derivative 
instruments with counterparties that the Adviser and/or the applicable 
Management Team reasonably believes are capable of performing under the 
applicable contract.\40\
---------------------------------------------------------------------------

    \40\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser and/or the applicable 
Management Team will evaluate the creditworthiness of counterparties 
on an ongoing basis. In addition to information provided by credit 
agencies, the Adviser's and/or Management Team's analysis will 
evaluate each approved counterparty using various methods of 
analysis and may consider the Adviser's and/or Management Team's 
past experience with the counterparty, its known disciplinary 
history and its share of market participation.
---------------------------------------------------------------------------

    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.

Other Investments

    Under normal market conditions, the Fund will invest substantially 
all of its assets to meet its investment objectives and, as described 
above, the Fund may invest in derivative instruments. In addition, the 
Fund may invest its remaining assets in other securities and financial 
instruments, as generally described below.
    The Fund may invest up to 20% 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. 
For temporary defensive purposes, during the initial invest-up period 
and during periods of high cash inflows or outflows, the Fund (as a 
whole or with respect to one or more investment categories) may depart 
from its principal investment strategies and invest part or all of its 
assets in these securities or it may hold cash. During such periods, 
the Fund may not be able to achieve its investment objectives. The Fund 
(as a whole or with respect to one or more investment categories) may 
adopt a defensive strategy when the Adviser and/or a Management Team 
believe securities in which the Fund normally invests have elevated 
risks due to political or economic factors and in other extraordinary 
circumstances.
    Short-term debt securities are securities from issuers having a 
long-term debt rating of at least A by S&P Ratings, Moody's or 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 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) short-term securities issued or 
guaranteed by non-U.S. governments or by their agencies or 
instrumentalities; \41\ (3) certificates of deposit issued against 
funds deposited in a bank or savings and loan association; (4) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (5) repurchase agreements,\42\ which involve 
purchases of debt securities; (6) 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; (7) commercial 
paper, which is short-term unsecured promissory notes; and (8) other 
securities that are similar to the foregoing. 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.
---------------------------------------------------------------------------

    \41\ The relevant non-U.S. government, agency or instrumentality 
must have a long-term debt rating of at least A by S&P Ratings, 
Moody's or Fitch.
    \42\ The Fund intends to enter into repurchase agreements only 
with financial institutions and dealers believed by the Adviser and/
or the applicable Management Team to present minimal credit risks in 
accordance with criteria approved by the Board of Trustees of the 
Trust (``Trust Board''). The Adviser and/or the Management Team will 
review and monitor the creditworthiness of such institutions. The 
Adviser and/or the Management Team 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.
---------------------------------------------------------------------------

    In addition, to manage foreign currency exposures, the Fund may 
invest directly in foreign currencies, including without limitation in 
the form of bank and financial institution deposits, certificates of 
deposit, and bankers' acceptances denominated in a specified non-U.S. 
currency.
    The Fund may invest in the securities of money market funds. The 
Fund may also invest in the securities of other ETFs that invest 
primarily in short-term debt securities, in addition to any

[[Page 29254]]

investments in other ETFs described above under ``General Investment 
Approach and Parameters.'' \43\
---------------------------------------------------------------------------

    \43\ See note 10.
---------------------------------------------------------------------------

    The Fund may invest up to 15% of its net assets in secured loans 
that are not first lien loans or loans that are unsecured (collectively 
referred to as ``junior loans''). Junior loans have the same 
characteristics as senior loans except that junior loans are not first 
in priority of repayment and/or may not be secured by collateral. 
Accordingly, the risks associated with junior loans are higher than the 
risks for loans with first priority over the collateral. Because junior 
loans are lower in priority and/or unsecured, they are subject to the 
additional risk that the cash flow of the borrower may be insufficient 
to meet scheduled payments after giving effect to the secured 
obligations of the borrower or in the case of a default, recoveries may 
be lower for unsecured loans than for secured loans.\44\
---------------------------------------------------------------------------

    \44\ Junior loans generally have greater price volatility than 
senior loans and may be less liquid. There is also a possibility 
that originators will not be able to sell participations in junior 
loans, which would create greater credit risk exposure for the 
holders of such loans. Junior loans share the same risks as other 
below investment grade instruments.
---------------------------------------------------------------------------

    In accordance with the 15% Limitation described above, 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 and/or the applicable 
Management Team.\45\ 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.
---------------------------------------------------------------------------

    \45\ See notes 11 and 12 and accompanying text.
---------------------------------------------------------------------------

    The Fund will not concentrate in any one industry.\46\ For the 
avoidance of any doubt, however, this will not limit the Fund's 
investments in (a) obligations issued or guaranteed by the U.S. 
government, its agencies or instrumentalities or (b) securities of 
other investment companies.
---------------------------------------------------------------------------

    \46\ 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).
---------------------------------------------------------------------------

Creation and Redemption of Shares

    The Fund will issue and redeem Shares on a continuous basis at net 
asset value (``NAV'') \47\ only in large blocks of Shares (``Creation 
Units'') in transactions with authorized participants, generally 
including broker-dealers and large institutional investors 
(``Authorized Participants''). Creation Units generally will consist of 
50,000 Shares, although this may change from time to time. Creation 
Units, however, are not expected to consist of less than 50,000 Shares. 
As described in the Registration Statement and consistent with the 
Exemptive Relief, the Fund will issue and redeem Creation Units in 
exchange for an in-kind portfolio of instruments and/or cash in lieu of 
such instruments (the ``Creation Basket''). In addition, if there is a 
difference between the NAV attributable to a Creation Unit and the 
market value of the Creation Basket exchanged for the Creation Unit, 
the party conveying instruments with the lower value will pay to the 
other an amount in cash equal to the difference (referred to as the 
``Cash Component'').
---------------------------------------------------------------------------

    \47\ 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 
(the ``NAV Calculation Time''). NAV per Share will be calculated by 
dividing the Fund's net assets by the number of Fund Shares 
outstanding. For more information regarding the valuation of Fund 
investments in calculating the Fund's NAV, see the Registration 
Statement.
---------------------------------------------------------------------------

    Creations and redemptions must be made by an Authorized Participant 
or through a firm that is either a member of the National Securities 
Clearing Corporation (``NSCC'') or a Depository Trust Company 
participant that, in each case, must have executed an agreement that 
has been agreed to by the Distributor and BNY with respect to creations 
and redemptions of Creation Units. All standard orders to create 
Creation Units must be received by the transfer agent no later than the 
closing time of the regular trading session on the New York Stock 
Exchange (ordinarily 4:00 p.m., Eastern time) (the ``Closing Time'') in 
each case on the date such order is placed in order for the creation of 
Creation Units to be effected based on the NAV of Shares as next 
determined on such date after receipt of the order in proper form. 
Shares may be redeemed only in Creation Units at their NAV next 
determined after receipt not later than the Closing Time of a 
redemption request in proper form by the Fund through the transfer 
agent and only on a business day.
    The Fund's custodian, through the NSCC, will make available on each 
business day, prior to the opening of business of the Exchange, the 
list of the names and quantities of the instruments comprising the 
Creation Basket, as well as the estimated Cash Component (if any), for 
that day. The published Creation Basket will apply until a new Creation 
Basket is announced on the following business day.

Net Asset Value

    The Fund's NAV will be determined as of the close of trading 
(normally 4:00 p.m., Eastern time) on each day the New York Stock 
Exchange is open for business. NAV will be calculated for the Fund by 
taking the market price of the Fund's total assets, including interest 
or dividends accrued but not yet collected, less all liabilities, and 
dividing such amount by the total number of Shares outstanding. The 
result, rounded to the nearest cent, will be the NAV per Share. All 
valuations will be subject to review by the Trust Board or its 
delegate.
    The Fund's investments will be valued daily at market value or, in 
the absence of market value with respect to any investment, at fair 
value, in each case in accordance with valuation procedures (which may 
be revised from time to time) adopted by the Trust Board (the 
``Valuation Procedures'') and in accordance with the 1940 Act. A market 
valuation generally means a valuation (i) obtained from an exchange, an 
independent pricing service (``Pricing Service''), or a major market 
maker (or dealer) or (ii) based on a price quotation or other 
equivalent indication of value supplied by an exchange, a Pricing 
Service, or a major market maker (or dealer). The information 
summarized below is based on the Valuation Procedures as currently in 
effect; however, as noted above, the Valuation Procedures are amended 
from time to time and, therefore, such information is subject to 
change.
    Common stocks and other equity securities listed on any exchange 
other than the Exchange and the London Stock Exchange Alternative 
Investment Market (``AIM'') will be valued at the last sale price on 
the exchange on which they are principally traded on the business day 
as of which such value is being determined. Equity securities listed on 
the Exchange or the AIM will be valued at the official closing price on 
the business day as of which such value is being determined. If there 
has been no sale on such day, or no official closing price in the case 
of securities traded on the Exchange or the AIM, the securities will be 
valued using fair value pricing, as described below. Equity securities 
traded on more than one securities exchange will be valued at the last 
sale price or official closing price, as applicable, on the business 
day as of which such value is being determined at

[[Page 29255]]

the close of the exchange representing the principal market for such 
securities.
    Shares of money market funds will be valued at their net asset 
values as reported by such funds to Pricing Services. Exchange-traded 
options and futures contracts will be valued at the closing price in 
the market where such contracts are principally traded. Forward 
currency contracts and non-deliverable forward currency contracts will 
be valued at the current day's interpolated foreign exchange rate, as 
calculated using the current day's spot rate, and the thirty, sixty, 
ninety, and one-hundred-eighty day forward rates provided by a Pricing 
Service or by certain independent dealers in such contracts.
    Certain securities in which the Fund may invest that are not listed 
on any securities exchange or board of trade will typically be bought 
and sold by institutional investors in individually negotiated private 
transactions that function in many respects like an over-the-counter 
secondary market, although typically no formal market makers will 
exist. Certain securities, particularly debt securities, will have few 
or no trades, or trade infrequently, and information regarding a 
specific security may not be widely available or may be incomplete. 
Accordingly, determinations of the fair value of debt securities may be 
based on infrequent and dated information. Because there is less 
reliable, objective data available, elements of judgment may play a 
greater role in valuation of debt securities than for other types of 
securities. Typically (other than as described below), corporate bonds, 
senior loans, Sovereign Debt, preferred securities that are treated as 
fixed income securities, and other debt securities in which the Fund 
may invest (as described under ``Other Investments'') will be valued 
using information provided by a Pricing Service. To the extent the 
foregoing securities have a remaining maturity of 60 days or less when 
purchased, they will be valued at cost adjusted for amortization of 
premiums and accretion of discounts. Overnight repurchase agreements 
will be valued at cost. Term repurchase agreements (i.e., those whose 
maturity exceeds seven days) will be valued at the average of the bid 
quotations obtained daily from at least two recognized dealers.
    In connection with valuation of the securities described in the 
preceding paragraph, the Fund's accounting agent will obtain all 
pricing data from a Pricing Service, or, if no price is available from 
a Pricing Service, then the accounting agent will contact the Adviser's 
pricing committee (``Pricing Committee''), which will attempt to obtain 
one or more broker quotes from the selling dealer or financial 
institution for the security daily and will value the security 
accordingly. In addition, with respect to the valuation of senior 
loans, as part of its review, the Pricing Committee may, in certain 
limited circumstances, override a value provided by the Pricing 
Service. If the Pricing Service does not provide a valuation for a 
particular senior loan, or if the Pricing Committee overrides a value 
of the senior loan, the senior loan will be valued using fair value 
pricing, as described below.
    Preferred securities that are treated as equity securities but that 
are not traded on an exchange will be valued at the mean of the bid and 
the ask price, if available, and otherwise at their last bid price. 
Exchange-traded preferred securities will be valued as described in the 
third paragraph of this ``Net Asset Value'' section.
    Mortgage-Related Investments will generally be valued by using a 
Pricing Service. If a Pricing Service does not cover a particular 
Mortgage-Related Investment, or discontinues covering a particular 
Mortgage-Related Investment, the Mortgage-Related Investment will be 
priced using broker quotes generally provided by brokers that make or 
participate in markets in the Mortgage-Related Investment. To derive 
values, Pricing Services and broker-dealers may use matrix pricing and 
valuation models, as well as recent market transactions for the same or 
similar assets. Occasionally, the Pricing Committee may determine that 
a Pricing Service price does not represent an accurate value of a 
Mortgage-Related Investment, based on broker quotes it receives, a 
recent trade in the Mortgage-Related Investment by the Fund, 
information from a portfolio manager, or other market information. In 
the event that the Pricing Committee determines that the Pricing 
Service price is unreliable or inaccurate based on such other 
information, broker quotes may be used. Additionally, if the Pricing 
Committee determines that the price of a Mortgage-Related Investment 
obtained from a Pricing Service and available broker quotes are 
unreliable or inaccurate due to market conditions or other reasons, or 
if a Pricing Service price or broker quote is unavailable, the security 
will be valued using fair value pricing, as described below.
    Certain securities may not be able to be priced by pre-established 
pricing methods. Such securities may be valued by the Trust Board or 
its delegate at fair value. The use of fair value pricing by the Fund 
will be governed by the Valuation Procedures and conducted in 
accordance with the provisions of the 1940 Act. Valuing the Fund's 
securities using fair value pricing will result in using prices for 
those securities that may differ from current market valuations or 
official closing prices on the applicable exchange.
    Because foreign securities exchanges may be open on different days 
than the days during which an investor may purchase or sell Shares, the 
value of the Fund's securities may change on days when investors are 
not able to purchase or sell Shares. Assets denominated in foreign 
currencies will be translated into U.S. dollars at the exchange rate of 
such currencies against the U.S. dollar as provided by a Pricing 
Service. The value of assets denominated in foreign currencies will be 
converted into U.S. dollars at the exchange rates in effect at the time 
of valuation.

Availability of Information

    The Fund's Web site (www.ftportfolios.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Web site 
will include the Shares' ticker, Cusip and exchange information along 
with additional quantitative information updated on a daily basis, 
including, for the Fund: (1) Daily trading volume, the prior business 
day's reported NAV and closing price, midpoint of the bid/ask spread at 
the time of calculation of such NAV (the ``Bid/Ask Price''),\48\ and a 
calculation of the premium and discount of the Bid/Ask Price against 
the NAV; and (2) data in chart format displaying the frequency 
distribution of discounts and premiums of the daily Bid/Ask Price 
against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Regular Market Session \49\ on the 
Exchange, the Fund will disclose on its Web site the identities and 
quantities of the portfolio of securities and other assets (the 
``Disclosed Portfolio'' as defined in Nasdaq Rule 5735(c)(2)) held by 
the Fund that will form the basis for the

[[Page 29256]]

Fund's calculation of NAV at the end of the business day.\50\ The 
Disclosed Portfolio will include, as applicable, the names, quantities, 
percentage weightings and market values of the portfolio securities, 
financial instruments, and other assets held by the Fund. The Web site 
information will be publicly available at no charge.
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    \48\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \49\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., Eastern time; (2) Regular Market Session from 9:30 a.m. to 4 
p.m. or 4:15 p.m., Eastern time; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m., Eastern time).
    \50\ 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.
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    In addition, for the Fund, an estimated value, defined in Rule 
5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's Disclosed Portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value, available on the 
NASDAQ OMX Information LLC proprietary index data service,\51\ will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated by one or more 
major market data vendors and broadly displayed at least every 15 
seconds during the Regular Market Session. The Intraday Indicative 
Value will be based on quotes and closing prices from the securities' 
local market and may not reflect events that occur subsequent to the 
local market's close. Premiums and discounts between the Intraday 
Indicative Value and the market price may occur. This should not be 
viewed as a ``real time'' update of the NAV per Share of the Fund, 
which is calculated only once a day.
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    \51\ 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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    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of the Fund on a daily basis and will provide 
a close estimate of that value throughout the trading day.
    Investors will also be able to obtain the Fund's Statement of 
Additional Information (``SAI''), the Fund's annual and semi-annual 
reports (together, ``Shareholder Reports''), and its Form N-CSR and 
Form N-SAR, filed twice a year. The Fund's SAI and Shareholder Reports 
will be available free upon request from the Fund, and those documents 
and the Form N-CSR and Form N-SAR may be viewed on-screen or downloaded 
from the Commission's Web site at www.sec.gov. Information regarding 
market price and trading volume of the Shares will be continually 
available on a real-time basis throughout the day on brokers' computer 
screens and other electronic services. Information regarding the 
previous day's closing price and trading volume information for the 
Shares will be published daily in the financial section of newspapers. 
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 (``CTA'') plans for the Shares. Quotation and last 
sale information for U.S. exchange-listed equity securities will be 
available via the CTA high-speed line, and will be available from the 
national securities exchange on which they are listed. Pricing 
information for exchange-traded equity securities (including ETFs, 
exchange-traded preferred securities, and the exchange-traded equity 
securities described under ``Dividend Paying Domestic Equity Securities 
and Depositary Receipts and Related Option Overlay Strategy'' and 
``Equity Securities of Energy Infrastructure Companies''), exchange-
traded derivative instruments and Depositary Receipts will be available 
from the exchanges on which they trade and from major market data 
vendors. Pricing information for corporate bonds, senior loans, non-
exchange traded preferred securities, Sovereign Debt, Mortgage-Related 
Investments, forward currency contracts, non-deliverable forward 
currency contracts, and debt securities in which the Fund may invest 
that are described under ``Other Investments'' will be available from 
major broker-dealer firms and/or major market data vendors and/or 
Pricing Services. An additional source of price information for certain 
fixed income securities is FINRA's TRACE. Information relating to U.S. 
exchange-listed options will be available via the Options Price 
Reporting Authority.
    Additional information regarding the Fund and the Shares, including 
investment strategies, risks, creation and redemption procedures, fees, 
Fund holdings disclosure policies, distributions and taxes will be 
included in the Registration Statement. All terms relating to the Fund 
that are referred to, but not defined in, this proposed rule change 
will be defined in the Registration Statement.

Initial and Continued Listing

    The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and/or continued 
listing, the Fund must be in compliance with Rule 10A-3 \52\ under the 
Act. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. 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.
---------------------------------------------------------------------------

    \52\ See 17 CFR 240.10A-3.
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Trading Halts

    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. Nasdaq will halt trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). 
Trading 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 and/or the other assets 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.

Trading Rules

    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity securities. Nasdaq will allow trading in the Shares 
from 4:00 a.m. until 8:00 p.m., Eastern time. The Exchange has 
appropriate rules to facilitate transactions in the Shares during all 
trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum 
price variation for quoting and entry of orders in Managed Fund Shares 
traded on the Exchange is $0.01.

Surveillance

    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both Nasdaq and 
also

[[Page 29257]]

FINRA, on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\53\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and applicable 
federal securities laws.
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    \53\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    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 
regarding trading in the Shares and the exchange-traded securities and 
instruments held by the Fund with other markets and other entities that 
are members of ISG \54\ and FINRA may obtain trading information 
regarding trading in the Shares and the exchange-traded securities and 
instruments held by the Fund from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and the exchange-traded securities and instruments held by the 
Fund 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. Moreover, 
FINRA, on behalf of the Exchange, will be able to access, as needed, 
trade information for certain fixed income securities held by the Fund 
reported to FINRA's TRACE.
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    \54\ 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.
---------------------------------------------------------------------------

    At least 90% of the Fund's net assets that are invested in 
exchange-traded equity securities of both domestic and foreign issuers, 
exchange-traded products and exchange-traded derivatives (in the 
aggregate) will be invested in investments that trade in markets that 
are members of ISG or are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
    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, 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: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Intraday Indicative Value is disseminated; (4) 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; (5) the requirement that members deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (6) trading 
information. The Information Circular will also discuss any exemptive, 
no-action and interpretive relief granted by the Commission from any 
rules under the Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV Calculation Time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the Fund's 
Web site.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act in general and Section 6(b)(5) of the Act 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, in general, to protect 
investors and the public interest.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Nasdaq Rule 5735. The 
Exchange represents that trading in the Shares will be subject to the 
existing trading surveillances, administered by both Nasdaq and also 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities laws.
    Neither the Adviser nor any Sub-Adviser is a broker-dealer, 
although the Adviser, First Trust Global, EIP and Stonebridge are each 
affiliated with a broker-dealer and each is required to implement a 
``fire wall'' with respect to such broker-dealer affiliate regarding 
access to information concerning the composition and/or changes to the 
Fund's portfolio. RBA is not currently affiliated with a broker-dealer. 
In addition, paragraph (g) of Nasdaq Rule 5735 further requires that 
personnel who make decisions on the open-end fund's portfolio 
composition must be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
open-end fund's portfolio.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-traded securities and 
instruments held by the Fund with other markets and other entities that 
are members of ISG and FINRA may obtain trading information regarding 
trading in the Shares and the exchange-traded securities and 
instruments held by the Fund from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and the exchange-traded securities and instruments held by the 
Fund 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. Moreover, 
FINRA, on behalf of the Exchange, will be able to access, as needed, 
trade information for certain fixed income securities held by the Fund 
reported to FINRA's TRACE. At least 90% of the Fund's net assets that 
are invested in exchange-traded equity securities of both domestic and 
foreign issuers, exchange-traded products and exchange-traded 
derivatives (in the aggregate) will be invested in investments that 
trade in markets that are members of ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.
    The primary investment objective of the Fund will be to seek risk-
adjusted income and its secondary objective will be capital 
appreciation. Under normal market conditions, the Fund will seek to 
achieve its objectives by following a strategic and tactical asset 
allocation process that will provide diversified

[[Page 29258]]

exposure to income-producing asset classes. The Adviser will determine 
the Fund's strategic allocation among various general investment 
categories and allocate the Fund's assets to Management Teams which 
will employ their respective management strategies. In general, except 
as applicable to any specific investment category, the fixed income and 
equity securities in which the Fund will invest may be issued by U.S. 
and non-U.S. issuers of all kinds and of any capitalization range and 
credit quality. The Fund's exposure to any single country (outside of 
the U.S.) will generally be limited to 20% of the Fund's net assets and 
the portion of the Fund's net assets that may be denominated in 
currencies other than the U.S. dollar is not expected to exceed 30%. In 
connection with its investments in high yield corporate bonds and 
senior loans, under normal market conditions, the Fund will seek to 
invest at least 75% of its net assets that are invested in such bonds 
and loans (in the aggregate) in bonds and loans that, at the time of 
original issuance, have at least $100 million par amount outstanding. 
The Fund will limit its investments in mortgage-backed securities that 
are not issued or guaranteed by Government Entities to 20% of its net 
assets. The Mortgage-Related Investments in which the Fund invests will 
primarily consist of investment grade securities (i.e., securities with 
credit ratings within the four highest rating categories of an NRSRO at 
the time of purchase or securities that are unrated and deemed by the 
Adviser and/or the applicable Management Team to be of comparable 
quality at the time of purchase). Under normal market conditions, the 
Fund will seek to invest at least 75% of its net assets that are 
invested in preferred securities in preferred securities that have a 
minimum initial issuance amount of at least $100 million. In addition, 
initially, at least 50% of the Fund's net assets that are invested in 
preferred securities will be invested in exchange-listed preferred 
securities, although this percentage may decrease in the future. At 
least 50% of the Fund's net assets that are invested in Sovereign Debt 
will be invested in securities of issuers rated investment grade at the 
time of purchase by at least one NRSRO and unrated securities judged to 
be of comparable quality by the Adviser and/or the applicable 
Management Team. In addition, the Fund expects that, under normal 
market conditions, at least 80% of the Sovereign Debt in which it 
invests will be issued by issuers with outstanding debt of at least 
$200 million (or the foreign currency equivalent thereof). The Fund may 
invest in derivative instruments. Not including the Option Overlay 
Strategy, no more than 20% of the value of the Fund's net assets will 
be invested in derivative instruments. Because the Option Overlay 
Strategy will be excluded from the foregoing 20% limitation, the Fund's 
total investments in derivative instruments may exceed 20% of the value 
of its net assets. The Fund will comply with the regulatory 
requirements of the Commission to maintain assets as ``cover,'' 
maintain segregated accounts, and/or make margin payments when it takes 
positions in derivative instruments involving obligations to third 
parties (i.e., instruments other than purchase options). 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. Also, 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 and/or the applicable 
Management Team. 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. 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 proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
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, a large amount of 
information will be publicly available regarding the Fund and the 
Shares, thereby promoting market transparency. Moreover, the Intraday 
Indicative Value, available on the NASDAQ OMX Information LLC 
proprietary index data service, will be widely disseminated by one or 
more major market data vendors and broadly displayed at least every 15 
seconds during the Regular Market Session. On each business day, before 
commencement of trading in Shares in the Regular Market Session on the 
Exchange, the Fund will disclose on its Web site the Disclosed 
Portfolio that will form the basis for the Fund's calculation of NAV at 
the end of the business day. 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 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 CTA plans for the Shares. Quotation and last sale information 
for U.S. exchange-listed equity securities will be available via the 
CTA high-speed line, and will be available from the national securities 
exchange on which they are listed. Pricing information for exchange-
traded equity securities (including ETFs, exchange-traded preferred 
securities, and the exchange-traded equity securities described under 
``Dividend Paying Domestic Equity Securities and Depositary Receipts 
and Related Option Overlay Strategy'' and ``Equity Securities of Energy 
Infrastructure Companies''), exchange-traded derivative instruments and 
Depositary Receipts will be available from the exchanges on which they 
trade and from major market data vendors. Pricing information for 
corporate bonds, senior loans, non-exchange traded preferred 
securities, Sovereign Debt, Mortgage-Related Investments, forward 
currency contracts, non-deliverable forward currency contracts, and 
debt securities in which the Fund may invest that are described under 
``Other Investments'' will be available from major broker-dealer firms 
and/or major market data vendors and/or Pricing Services. An additional 
source of price information for certain fixed income securities is 
FINRA's TRACE. Information relating to U.S. exchange-listed options 
will be available via the Options Price Reporting Authority.
    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. Trading in Shares of the Fund will be halted 
under the conditions specified in Nasdaq Rules 4120 and 4121 or because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable, and trading in the Shares will 
be subject to Nasdaq

[[Page 29259]]

Rule 5735(d)(2)(D), which sets forth circumstances under which Shares 
of the Fund may be halted. In addition, as noted above, investors will 
have ready access to information regarding the Fund's holdings, the 
Intraday Indicative Value, the Disclosed Portfolio, and quotation and 
last sale information for the Shares.
    The Fund's investments will be valued daily at market value or, in 
the absence of market value with respect to any investment, at fair 
value, in each case in accordance with the Valuation Procedures and the 
1940 Act.
    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 in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, FINRA, on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares 
and the exchange-traded securities and instruments held by the Fund 
with other markets and other entities that are members of ISG and FINRA 
may obtain trading information regarding trading in the Shares and the 
exchange-traded securities and instruments held by the Fund from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares and in the exchange-traded 
securities and instruments held by the Fund 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. Furthermore, as noted above, investors 
will have ready access to information regarding the Fund's holdings, 
the Intraday Indicative Value, the Disclosed Portfolio, and quotation 
and last sale information for the Shares.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded fund that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace.

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) 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-2014-050 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-050. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site https://www.sec.gov/rules/sro.shtml. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of 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-2014-050 and should be submitted 
on or before June 11, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
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    \55\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11740 Filed 5-20-14; 8:45 am]
BILLING CODE 8011-01-P

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