Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Income ETF of First Trust Exchange-Traded Fund IV, 38631-38639 [2014-15794]

Download as PDF Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or 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: tkelley on DSK3SPTVN1PROD with NOTICES 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– Phlx–2014–41 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–Phlx–2014–41. 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 the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–Phlx– 2014–41 and should be submitted on or before July 29, 2014. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Jill M. Peterson, Assistant Secretary. [FR Doc. 2014–15793 Filed 7–7–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72506; File No. SR– NASDAQ–2014–050] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Income ETF of First Trust Exchange-Traded Fund IV July 1, 2014. I. Introduction On May 5, 2014, The NASDAQ Stock Market LLC (‘‘Exchange’’ or ‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of the First Trust Strategic Income ETF (‘‘Fund’’) of First Trust Exchange-Traded Fund IV (‘‘Trust’’) under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares on the Exchange. The proposed rule change was published for comment in the Federal Register on May 21, 2014.3 The Commission received no comments on the proposed rule change. This order grants approval of the proposed rule change. II. Description of Proposed Rule Change The Exchange has made the following representations and statements in describing the Fund and its investment strategies, including other portfolio holdings and investment restrictions.4 General The Fund will be an actively-managed exchange-traded fund (‘‘ETF’’). The CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 72169 (May 15, 2014), 79 FR 29247 (‘‘Notice’’). 4 The Commission notes that additional information regarding the Trust, the Fund, and the Shares, including investment strategies, risks, net asset value (‘‘NAV’’) calculation, creation and redemption procedures, fees, Fund holdings disclosure policies, distributions, and taxes, among other information, is included in the Notice and the Registration Statement, as applicable. See Notice and Registration Statement, supra note 3 and infra note 5, respectively. PO 00000 25 17 1 15 Frm 00150 Fmt 4703 Sfmt 4703 38631 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 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’’).7 First Trust Portfolios L.P. (‘‘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. The primary investment objective of the Fund will be to seek risk-adjusted 5 The Commission has issued an order granting certain exemptive relief under the Investment Company Act of 1940 (15 U.S.C. 80a-1) (‘‘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 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). 7 The Exchange states that 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. The Exchange states that RBA is currently not affiliated with a broker-dealer. The Exchange states that the Adviser and the broker-dealer affiliated 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, the Exchange states that 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. Furthermore, the Exchange states that 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 subadviser 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-public information regarding such portfolio. E:\FR\FM\08JYN1.SGM 08JYN1 38632 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES income and its secondary objective will be capital appreciation. Under normal market conditions,8 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, which are described in more detail below, 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 below); (vi) dividend paying domestic equity securities and Depositary Receipts (as defined below), together with a related option overlay strategy; and (vii) other derivative instruments. 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.9 The 8 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. 9 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 VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 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 the Fund for such investment category, as set forth below. 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 (‘‘15% Limitation’’).10 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 Adviser will communicate with the various Management Teams regarding the Fund’s ongoing compliance with the 15% Limitation. Except as specifically provided herein, 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 nonaffiliated issuers of fixed income 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. 10 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). PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 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 exchangetraded equity securities of both domestic and foreign issuers, exchangetraded 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.11 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 Receipts’’).12 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. 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: 11 For a list of the current members of ISG, see www.isgportal.org. 12 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. E:\FR\FM\08JYN1.SGM 08JYN1 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES • 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.13 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. The high yield corporate bonds in which the Fund will invest will be rated below investment grade 14 at the time of purchase or unrated and deemed by the Adviser and/or the applicable Management Team to be of comparable quality,15 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. 13 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). 14 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’’). 15 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. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 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 16 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 PO 00000 16 See supra note 15. Frm 00152 Fmt 4703 Sfmt 4703 38633 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 loans are paid off, investors receive principal and interest payments.17 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’’).18 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 17 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. 18 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. E:\FR\FM\08JYN1.SGM 08JYN1 38634 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES 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.19 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’’).20 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. • 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 19 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. 20 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. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 U.S. and non-U.S. issuers.21 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 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,22 issued by foreign governments or their subdivisions, agencies and governmentsponsored enterprises (‘‘Sovereign 21 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. 22 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. PO 00000 Frm 00153 Fmt 4703 Sfmt 4703 Debt’’).23 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 (BBB-/ Baa3 or higher) at the time of purchase by at least one NRSRO and unrated securities judged to be of comparable quality 24 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.25 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 23 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. 24 See supra note 15. 25 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. E:\FR\FM\08JYN1.SGM 08JYN1 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES (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,26 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.27 In addition, the Fund may invest in IShares,28 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. 26 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. 27 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. 28 As a matter of clarification, the ‘‘I-Shares’’ referred to herein are not ‘‘iShares’’ ETFs. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 I-Shares themselves have limited voting rights which are similar to those applicable to MLP common units. IShares 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.29 In connection with its investments in dividend paying domestic equity securities, the Fund may use an option overlay strategy (‘‘Option Overlay Strategy’’).30 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.31 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 (‘‘20% Limitation’’).32 In general, the Fund may 29 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. 30 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). 31 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. 32 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 PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 38635 invest in exchange-listed futures contracts, exchange-listed options, exchange-listed options on futures contracts, and exchange-listed stock index options.33 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 34 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. 33 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. 34 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 E:\FR\FM\08JYN1.SGM Continued 08JYN1 38636 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices 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 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. 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.35 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. tkelley on DSK3SPTVN1PROD with NOTICES 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 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. 35 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. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 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 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; 36 (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,37 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 36 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. 37 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. PO 00000 Frm 00155 Fmt 4703 Sfmt 4703 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 investments in other ETFs described above.38 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.39 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.40 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. 38 See supra note 9. 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. 40 See supra note 10 and accompanying text. 39 Junior E:\FR\FM\08JYN1.SGM 08JYN1 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices The Fund will not concentrate in any one industry. 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. III. Discussion and Commission’s Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act 41 and the rules and regulations thereunder applicable to a national securities exchange.42 In particular, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,43 which requires, among other things, that the Exchange’s rules be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission notes that the Fund and the Shares must comply with the initial and continued listing criteria in NASDAQ Rule 5735 for the Shares to be listed and traded on the Exchange. The Commission finds that the proposal to list and trade the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the Act,44 which sets forth Congress’ finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for, and transactions in, securities. Quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the Consolidated Tape Association (‘‘CTA’’) plans for the Shares. In addition, the Intraday Indicative Value,45 as defined in Nasdaq 41 15 U.S.C. 78f. approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 43 15 U.S.C. 78f(b)(5). 44 15 U.S.C. 78k–1(a)(1)(C)(iii). 45 According to the Exchange, the Intraday Indicative Value reflects an estimated intraday value of the Fund’s Disclosed Portfolio, and will be based upon the current value for the components of the Disclosed Portfolio. 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. The Intraday Indicative Value should not be tkelley on DSK3SPTVN1PROD with NOTICES 42 In VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 Rule 5735(c)(3), will be available on the NASDAQ OMX Information LLC proprietary index data service,46 and 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.47 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 identities and quantities of the portfolio of securities and other assets (‘‘Disclosed Portfolio’’) held by the Fund that will form the basis for the Fund’s calculation of NAV at the end of the business day.48 The Fund’s custodian, through the National Securities Clearing Corporation, will make available on each business day, prior to the opening of business on the Exchange, the list of the names and quantities of instruments, as well as the estimated amount of cash, comprising the creation basket of the Fund for that day. The NAV of the Fund 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.49 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 underlying U.S. exchange-listed equity securities will be available via the CTA high-speed line, viewed as a ‘‘real time’’ update of the NAV per Share of the Fund, which is calculated only once a day. 46 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. 47 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). 48 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. 49 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. PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 38637 and will be available from the national securities exchange on which they are listed. Pricing information for the underlying exchange-traded equity securities (including ETFs, exchangetraded 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. The Commission further believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately and to prevent trading when a reasonable degree of transparency cannot be assured. The 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. 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 in the Shares may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable,50 and trading in 50 These reasons may include: (1) The extent to which trading is not occurring in the securities and/ or the other assets composing 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. With respect to trading halts, the Exchange E:\FR\FM\08JYN1.SGM Continued 08JYN1 38638 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices tkelley on DSK3SPTVN1PROD with NOTICES the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth additional circumstances under which trading in the Shares of the Fund may be halted. The Exchange states that it has a general policy prohibiting the distribution of material, non-public information by its employees. Further, the Commission notes that the Reporting Authority that provides the Disclosed Portfolio must implement and maintain, or be subject to, procedures designed to prevent the use and dissemination of material, non-public information regarding the actual components of the portfolio.51 The Adviser and certain Sub-Advisers are affiliated with broker-dealers and 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 Fund’s portfolio.52 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.53 The Exchange further 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 may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. 51 See Nasdaq Rule 5735(d)(2)(B)(ii). 52 See supra note 7. The Exchange states that an investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (‘‘Advisers Act’’). As a result, the Adviser and 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. 53 The Exchange states that FINRA surveils trading on the Exchange pursuant to a regulatory services agreement and that the Exchange is responsible for FINRA’s performance under this regulatory services agreement. VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 applicable federal securities laws. Moreover, prior to the commencement of trading, the Exchange states that it will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. The Exchange represents that the Shares are deemed to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. In support of this proposal, the Exchange has made representations, including the following: (1) The Shares will be subject to Nasdaq Rule 5735, which sets forth the initial and continued listing criteria applicable to Managed Fund Shares. (2) The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. (3) 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. (4) Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (a) The procedures for purchases and redemptions of Shares in creation units (and that Shares are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq members with respect to recommending transactions in the Shares to customers; (c) how information regarding the Intraday Indicative Value is disseminated; (d) the risks involved in trading the Shares during the Pre-Market and Post-Market Sessions when an updated Intraday Indicative Value will not be calculated PO 00000 Frm 00157 Fmt 4703 Sfmt 4703 or publicly disseminated; (e) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (f) trading information. (5) For initial and continued listing, the Fund must be in compliance with Rule 10A–3 under the Act.54 (6) 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 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. (7) At least 90% of the Fund’s net assets that are invested in exchangetraded equity securities of both domestic and foreign issuers, exchangetraded 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 Depositary Receipts in which the Fund invests will be exchange-traded and will not include unsponsored Depositary Receipts. Any exchangetraded 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. (8) The Fund represents that its portfolio will include a minimum of 13 non-affiliated issuers of fixed income securities. (9) 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%. (10) 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. (11) The Fund may invest up to 15% of its net assets in junior loans. (12) The Fund will limit its investments in mortgage-backed 54 17 E:\FR\FM\08JYN1.SGM CFR 240.10A–3. 08JYN1 Federal Register / Vol. 79, No. 130 / Tuesday, July 8, 2014 / Notices securities that are not issued or guaranteed by Government Entities to 20% of its net assets. (13) 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. (14) Under normal market conditions, at least 80% of the Sovereign Debt in which the Fund invests will be issued by issuers with outstanding debt of at least $200 million (or the foreign currency equivalent thereof). (15) 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 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. 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. (16) A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. This approval order is based on all of the Exchange’s representations, including those set forth above and in the Notice, and the Exchange’s description of the Fund. For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 55 and the rules and regulations thereunder applicable to a national securities exchange. tkelley on DSK3SPTVN1PROD with NOTICES IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,56 that the proposed rule change (SR–NASDAQ– 2014–050) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.57 Jill M. Peterson, Assistant Secretary. [FR Doc. 2014–15794 Filed 7–7–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72501; File No. SR–NYSE– 2014–31] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 86 To Extend the Hours for the Core Bond Trading Session for NYSE Bonds SM and Amending Rule 88 To Make Corresponding Changes Related to Bonds Liquidity Providers July 1, 2014. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that June 25, 2014, New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the selfregulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 86 to extend the hours for the Core Bond Trading Session for NYSE Bonds SM and to amend Rule 88 to make corresponding changes related to Bonds Liquidity Providers (‘‘BLPs’’). The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change CFR 200.30–3(a)(12). U.S.C.78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 38639 and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rule 86 to extend the hours for the Core Bond Trading Session for NYSE Bonds and to amend Rule 88 to make corresponding changes related to BLPs.4 NYSE Bonds is the Exchange’s electronic system for receiving, processing, executing, and reporting bids, offers, and executions in bonds. Rule 86 prescribes how bonds are traded through the NYSE Bonds trading platform, including the receipt, execution, and reporting of bond transactions. Rule 88 provides for BLPs, which are member organizations that electronically enter orders from off the Floor of the Exchange into NYSE Bonds. NYSE Bonds has three Bond Trading Sessions: (1) the Opening Bond Trading Session, (2) the Core Bond Trading Session, and (3) the Late Bond Trading Session. The Opening Bond Trading Session currently commences at 4:00 a.m. Eastern Time (‘‘ET’’) and concludes at 9:30 a.m. ET. The Core Bond Trading Session currently commences at 9:30 a.m. ET and concludes at 4:00 p.m. ET. The Late Bond Trading Session currently commences at 4:00 p.m. ET and concludes at 8:00 p.m. ET. The Exchange proposes to extend the hours of the Core Bond Trading Session so that it would commence at 8:00 a.m. ET and end at 5:00 p.m. ET, adding a total of 2.5 hours to the Core Bond Trading Session and better aligning its hours with those of other bond trading venues. The Exchange proposes to amend the references to the various time periods throughout Rule 86 to effect this change, including, for example, that the Core Bond Auction would commence at 8:00 a.m. ET instead of the current 9:30 a.m. ET. The Exchange would announce the date on which the expanded Core Bond Trading Session hours would take effect via Trader Update. The Exchange notes, for example, that the proposed extended Core Bond Trading Session would also result in the ability for an ‘‘NYSE Bonds Good ‘Til Cancelled 57 17 1 15 55 15 U.S.C. 78f(b)(5). 56 15 U.S.C. 78s(b)(2). VerDate Mar<15>2010 16:48 Jul 07, 2014 Jkt 232001 PO 00000 Frm 00158 Fmt 4703 Sfmt 4703 4 Terms not defined herein shall have the meaning prescribed under Rule 86 or Rule 88, as applicable. E:\FR\FM\08JYN1.SGM 08JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 130 (Tuesday, July 8, 2014)]
[Notices]
[Pages 38631-38639]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15794]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72506; File No. SR-NASDAQ-2014-050]


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

July 1, 2014.

I. Introduction

    On May 5, 2014, The NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the First 
Trust Strategic Income ETF (``Fund'') of First Trust Exchange-Traded 
Fund IV (``Trust'') under Nasdaq Rule 5735, which governs the listing 
and trading of Managed Fund Shares on the Exchange. The proposed rule 
change was published for comment in the Federal Register on May 21, 
2014.\3\ The Commission received no comments on the proposed rule 
change. This order grants approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 72169 (May 15, 
2014), 79 FR 29247 (``Notice'').
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II. Description of Proposed Rule Change

    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategies, including other 
portfolio holdings and investment restrictions.\4\
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    \4\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, net asset value (``NAV'') calculation, creation 
and redemption procedures, fees, Fund holdings disclosure policies, 
distributions, and taxes, among other information, is included in 
the Notice and the Registration Statement, as applicable. See Notice 
and Registration Statement, supra note 3 and infra note 5, 
respectively.
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General

    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 under Subchapter M of the Internal Revenue Code of 1986, as 
amended.
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    \5\ The Commission has issued an order granting certain 
exemptive relief under the Investment Company Act of 1940 (15 U.S.C. 
80a-1) (``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 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).
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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'').\7\ First Trust Portfolios L.P. 
(``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.
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    \7\ The Exchange states that 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. The Exchange states that RBA is currently not affiliated 
with a broker-dealer. The Exchange states that the Adviser and the 
broker-dealer affiliated 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, the Exchange states that 
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. Furthermore, the Exchange states that 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-public information regarding such portfolio.
---------------------------------------------------------------------------

    The primary investment objective of the Fund will be to seek risk-
adjusted

[[Page 38632]]

income and its secondary objective will be capital appreciation. Under 
normal market conditions,\8\ 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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    \8\ 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.
---------------------------------------------------------------------------

    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, which are described in more detail below, 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 below); (vi) dividend paying 
domestic equity securities and Depositary Receipts (as defined below), 
together with a related option overlay strategy; and (vii) other 
derivative instruments.
    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.\9\ 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 the Fund for such investment category, 
as set forth below.
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    \9\ 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 (``15% Limitation'').\10\ 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 Adviser 
will communicate with the various Management Teams regarding the Fund's 
ongoing compliance with the 15% Limitation.
---------------------------------------------------------------------------

    \10\ 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).
---------------------------------------------------------------------------

    Except as specifically provided herein, 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.\11\
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    \11\ 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 Receipts'').\12\ The Depositary 
Receipts in which the Fund invests will be exchange-traded and will not 
include unsponsored Depositary Receipts.
---------------------------------------------------------------------------

    \12\ 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.
    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:

[[Page 38633]]

     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.\13\ 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.
---------------------------------------------------------------------------

    \13\ 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 \14\ at the time of purchase or unrated 
and deemed by the Adviser and/or the applicable Management Team to be 
of comparable quality,\15\ 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.
---------------------------------------------------------------------------

    \14\ 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'').
    \15\ 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 \16\ 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.
---------------------------------------------------------------------------

    \16\ See supra note 15.
---------------------------------------------------------------------------

    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 loans are paid off, investors receive principal and 
interest payments.\17\
---------------------------------------------------------------------------

    \17\ 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'').\18\ 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

[[Page 38634]]

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.
---------------------------------------------------------------------------

    \18\ 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.\19\ 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'').\20\ 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.
---------------------------------------------------------------------------

    \19\ 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.
    \20\ 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.
---------------------------------------------------------------------------

     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.\21\ 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.
---------------------------------------------------------------------------

    \21\ 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,\22\ issued by foreign 
governments or their subdivisions, agencies and government-sponsored 
enterprises (``Sovereign Debt'').\23\ 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 (BBB-/Baa3 or higher) at 
the time of purchase by at least one NRSRO and unrated securities 
judged to be of comparable quality \24\ 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.
---------------------------------------------------------------------------

    \22\ 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.
    \23\ 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.
    \24\ See supra note 15.
---------------------------------------------------------------------------

    The Fund intends to invest in Sovereign Debt of issuers in both 
developed and emerging markets.\25\ 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

[[Page 38635]]

(or the foreign currency equivalent thereof).
---------------------------------------------------------------------------

    \25\ 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.
---------------------------------------------------------------------------

     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,\26\ 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'').
---------------------------------------------------------------------------

    \26\ 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.\27\ In addition, the Fund may invest in I-Shares,\28\ 
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.
---------------------------------------------------------------------------

    \27\ 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.
    \28\ 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.\29\ In connection with its investments in dividend 
paying domestic equity securities, the Fund may use an option overlay 
strategy (``Option Overlay Strategy'').\30\ 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.
---------------------------------------------------------------------------

    \29\ 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.
    \30\ 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.\31\ 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 (``20% Limitation'').\32\ In general, the Fund 
may invest in exchange-listed futures contracts, exchange-listed 
options, exchange-listed options on futures contracts, and exchange-
listed stock index options.\33\
---------------------------------------------------------------------------

    \31\ 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.
    \32\ 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.
    \33\ 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 \34\

[[Page 38636]]

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.
---------------------------------------------------------------------------

    \34\ 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.
    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.\35\
---------------------------------------------------------------------------

    \35\ 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; \36\ (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,\37\ 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.
---------------------------------------------------------------------------

    \36\ 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.
    \37\ 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 investments 
in other ETFs described above.\38\
---------------------------------------------------------------------------

    \38\ See supra note 9.
---------------------------------------------------------------------------

    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.\39\
---------------------------------------------------------------------------

    \39\ 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.\40\ 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.
---------------------------------------------------------------------------

    \40\ See supra note 10 and accompanying text.

---------------------------------------------------------------------------

[[Page 38637]]

    The Fund will not concentrate in any one industry. 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.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \41\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\42\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\43\ which 
requires, among other things, that the Exchange's rules be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The Commission notes that the Fund and the Shares must comply 
with the initial and continued listing criteria in NASDAQ Rule 5735 for 
the Shares to be listed and traded on the Exchange.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78f.
    \42\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\44\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last 
sale information for the Shares will be available via Nasdaq 
proprietary quote and trade services, as well as in accordance with the 
Unlisted Trading Privileges and the Consolidated Tape Association 
(``CTA'') plans for the Shares. In addition, the Intraday Indicative 
Value,\45\ as defined in Nasdaq Rule 5735(c)(3), will be available on 
the NASDAQ OMX Information LLC proprietary index data service,\46\ and 
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.\47\ 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 identities and quantities of the 
portfolio of securities and other assets (``Disclosed Portfolio'') held 
by the Fund that will form the basis for the Fund's calculation of NAV 
at the end of the business day.\48\ The Fund's custodian, through the 
National Securities Clearing Corporation, will make available on each 
business day, prior to the opening of business on the Exchange, the 
list of the names and quantities of instruments, as well as the 
estimated amount of cash, comprising the creation basket of the Fund 
for that day. The NAV of the Fund 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.\49\ 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 underlying 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 the underlying 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.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \45\ According to the Exchange, the Intraday Indicative Value 
reflects an estimated intraday value of the Fund's Disclosed 
Portfolio, and will be based upon the current value for the 
components of the Disclosed Portfolio. 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. The Intraday 
Indicative Value should not be viewed as a ``real time'' update of 
the NAV per Share of the Fund, which is calculated only once a day.
    \46\ 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.
    \47\ 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).
    \48\ 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.
    \49\ 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 Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The 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. 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 in 
the Shares may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable,\50\ and trading in

[[Page 38638]]

the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets 
forth additional circumstances under which trading in the Shares of the 
Fund may be halted. The Exchange states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees. Further, the Commission notes that the Reporting Authority 
that provides the Disclosed Portfolio must implement and maintain, or 
be subject to, procedures designed to prevent the use and dissemination 
of material, non-public information regarding the actual components of 
the portfolio.\51\ The Adviser and certain Sub-Advisers are affiliated 
with broker-dealers and 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 Fund's 
portfolio.\52\ 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.\53\ The Exchange further 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. Moreover, prior to the 
commencement of trading, the Exchange states that it will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares.
---------------------------------------------------------------------------

    \50\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities and/or the other assets composing 
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. 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.
    \51\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \52\ See supra note 7. The Exchange states that an investment 
adviser to an open-end fund is required to be registered under the 
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the 
Adviser and 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.
    \53\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
---------------------------------------------------------------------------

    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including the following:
    (1) The Shares will be subject to Nasdaq Rule 5735, which sets 
forth the initial and continued listing criteria applicable to Managed 
Fund Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) 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.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in creation units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how information regarding 
the Intraday Indicative Value is disseminated; (d) the risks involved 
in trading the Shares during the Pre-Market and Post-Market Sessions 
when an updated Intraday Indicative Value will not be calculated or 
publicly disseminated; (e) the requirement that members deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (f) trading 
information.
    (5) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.10A-3.
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    (6) 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 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.
    (7) 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 Depositary Receipts in which 
the Fund invests will be exchange-traded and will not include 
unsponsored Depositary Receipts. 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.
    (8) The Fund represents that its portfolio will include a minimum 
of 13 non-affiliated issuers of fixed income securities.
    (9) 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%.
    (10) 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.
    (11) The Fund may invest up to 15% of its net assets in junior 
loans.
    (12) The Fund will limit its investments in mortgage-backed

[[Page 38639]]

securities that are not issued or guaranteed by Government Entities to 
20% of its net assets.
    (13) 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.
    (14) Under normal market conditions, at least 80% of the Sovereign 
Debt in which the Fund invests will be issued by issuers with 
outstanding debt of at least $200 million (or the foreign currency 
equivalent thereof).
    (15) 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 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. 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.
    (16) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \55\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\56\ that the proposed rule change (SR-NASDAQ-2014-050) be, and it 
hereby is, approved.
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    \56\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
---------------------------------------------------------------------------

    \57\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15794 Filed 7-7-14; 8:45 am]
BILLING CODE 8011-01-P

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