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 Low Duration Mortgage Opportunities ETF of First Trust Exchange-Traded Fund IV, 42386-42391 [2014-17034]
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Federal Register / Vol. 79, No. 139 / Monday, July 21, 2014 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 13 and paragraph (f) of Rule
19b–4 14 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
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 will institute proceedings
to determine whether the proposed rule
change 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:
emcdonald on DSK67QTVN1PROD 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–
CBOE–2014–055 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–CBOE–2014–055. 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
13 15
14 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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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–CBOE–
2014–055 and should be submitted on
or before August 11, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–17013 Filed 7–18–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72607; File No. SR–
NASDAQ–2014–057]
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
Low Duration Mortgage Opportunities
ETF of First Trust Exchange-Traded
Fund IV
July 15, 2014.
I. Introduction
On May 20, 2014, The NASDAQ
Stock Market LLC (‘‘Nasdaq’’ or the
‘‘Exchange’’) 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 Low Duration Mortgage
Opportunities 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 June 5, 2014.3 The
Commission received no comments on
the proposed rule change. This order
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. 72281
(May 30, 2014), 79 FR 32586 (‘‘Notice’’).
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1 15
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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
Shares will be offered by the Trust,
which was established as a
Massachusetts business trust on
September 15, 2010. 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.5 The Fund will be a series
of the Trust. First Trust Advisors L.P.
will be the investment adviser
(‘‘Adviser’’) to the Fund.6 First Trust
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.
5 See Post-Effective Amendment No. 69 to
Registration Statement on Form N–1A for the Trust,
dated May 16, 2014 (File Nos. 333–174332 and
811–22559). The Exchange states that the
Commission has issued an order granting certain
exemptive relief under the Investment Company
Act of 1940 (‘‘1940 Act’’). See Investment Company
Act Release No. 30029 (April 10, 2012) (File No.
812–13795) (‘‘Exemptive Relief’’). In addition, the
Exchange states that on December 6, 2012, the staff
of the Commission’s Division of Investment
Management (‘‘Division’’) issued a no-action letter
(‘‘No-Action Letter’’) relating to the use of
derivatives by actively-managed ETFs. See NoAction Letter dated December 6, 2012 from
Elizabeth G. Osterman, Associate Director, Office of
Exemptive Applications, Division. The Exchange
states that the No-Action Letter stated that the
Division would not recommend enforcement action
to the Commission under applicable provisions of
and rules under the 1940 Act if actively-managed
ETFs operating in reliance on specified orders
(which include the Exemptive Relief) invest in
options contracts, futures contracts, or swap
agreements, provided that they comply with certain
representations stated in the No-Action Letter.
6 The Exchange states that the Adviser is not a
broker-dealer, but it is affiliated with the
Distributor, a broker-dealer. The Exchange states
that the Adviser has implemented a fire wall with
respect to its broker-dealer affiliate regarding access
to information concerning the composition of or
changes to the portfolio, and 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. The
Exchange further states that, in the event (a) the
Adviser or any sub-adviser becomes, or becomes
newly affiliated with, a broker-dealer, or (b) any
new adviser or sub-adviser is a registered brokerdealer or becomes affiliated with a broker-dealer,
the adviser or sub-adviser, as applicable, will
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Federal Register / Vol. 79, No. 139 / Monday, July 21, 2014 / Notices
Portfolios L.P. (‘‘Distributor’’) will be
the principal underwriter and
distributor of the Fund’s Shares. The
Bank of New York Mellon Corporation
will act as the administrator, accounting
agent, custodian, and transfer agent to
the Fund.7
emcdonald on DSK67QTVN1PROD with NOTICES
Principal Investments
The primary investment objective of
the Fund will be to generate current
income, and its secondary objective will
be capital appreciation. Under normal
market conditions,8 the Fund will seek
to achieve its investment objectives by
investing at least 80% of its net assets
(including investment borrowings) in
the mortgage-related debt securities and
other mortgage-related instruments
(collectively, ‘‘Mortgage-Related
Investments’’) described below.
Under normal market conditions, the
Fund will invest in Mortgage-Related
Investments tied to residential and
commercial mortgages.9 MortgageRelated Investments 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.
Mortgage-Related Investments may be
fixed-rate instruments, or they may be
adjustable-rate instruments (‘‘ARMS’’).
The Mortgage-Related Investments in
which the Fund will invest may be, but
implement a fire wall with respect to its relevant
personnel or its broker-dealer affiliate, as
applicable, regarding access to information
concerning the composition of or changes to the
portfolio and will be subject to procedures designed
to prevent the use and dissemination of material
non-public information regarding the portfolio.
7 The Exchange states that the Fund currently
does not intend to use a sub-adviser.
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 fixed income markets or the
financial markets generally; operational issues
causing dissemination of inaccurate market
information; or force majeure type events such as
systems failure, natural or man-made disaster, act
of God, armed conflict, act of terrorism, riot, labor
disruption, or any similar intervening circumstance.
9 Mortgage-Related Investments consist of: (1)
Residential mortgage-backed securities (‘‘RMBS’’);
(2) commercial mortgage-backed securities
(‘‘CMBS’’); (3) stripped mortgage-backed securities
(‘‘SMBS’’), which are mortgage-backed securities
where mortgage payments are divided between
paying the loan’s principal and paying the loan’s
interest; and (4) collateralized mortgage obligations
(‘‘CMOs’’) and real estate mortgage investment
conduits (‘‘REMICs’’), which are mortgage-backed
securities that are divided into multiple classes,
with each class being entitled to a different share
of the principal and interest payments received
from the pool of underlying assets.
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are not required to be, issued or
guaranteed by the U.S. government or
by 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. governmentsponsored entities are referred to
collectively as ‘‘Government
Entities’’).10 The Fund may invest in
callable agency securities, which give
the issuer (the U.S. government agency)
the right to redeem the security prior to
maturity. The Fund will limit its
investments in Mortgage-Related
Investments that are not issued or
guaranteed by Government Entities to
20% of its net assets.11
Many Mortgage-Related Investments
are pass-through securities, which
means they provide investors with
monthly payments consisting of a pro
rata share of both regular interest and
principal payments as well as
unscheduled prepayments on the
underlying mortgage loans. Because
prepayment rates of individual mortgage
pools vary widely, the average life of a
particular pool cannot be predicted
accurately.
The Fund currently targets an
estimated effective duration 12 of three
10 Securities issued 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 NAV,
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 instrumentality and are not
guaranteed by the U.S. government. Other securities
issued by Government Entities 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.
11 For the avoidance of doubt, Mortgage-Related
Investments that are not issued or guaranteed by
Government Entities will be included for purposes
of the 80% requirement described in the first
paragraph under the heading ‘‘Principal
Investments.’’
12 In comparison to maturity (which is the date
on which a debt instrument ceases and the issuer
is obligated to repay the principal amount),
duration is a measure of the expected price
volatility of a debt instrument as a result of changes
in market rates of interest, based on the weighted
average timing of the instrument’s expected
principal and interest payments and other factors.
Duration differs from maturity in that it considers
a security’s yield, coupon payments, principal
payments, call features, and coupon adjustments in
addition to the amount of time until the security
finally matures. As the value of a security changes
over time, so will its duration. Prices of securities
with lower durations tend to be less sensitive to
interest rate changes than securities with higher
durations. In general, a portfolio of securities with
a lower duration can be expected to be less
PO 00000
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42387
years or less. The Adviser will calculate
the duration of the portfolio by
modeling the cash flows of all the
individual holdings, including the
impact of prepayment variability and
coupon adjustments, where applicable,
to determine the duration of each
holding and then aggregating based on
the size of the position. In performing
this duration calculation, the Adviser
will utilize third-party models.
The Fund may invest, without
limitation, in mortgage dollar rolls.13
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’’).14
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. 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.
Although the Fund intends to invest
primarily in investment grade
securities,15 the Fund may invest up to
sensitive to interest rate changes than a portfolio
with a higher duration.
13 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.
14 A TBA Transaction is a method of trading
mortgage-backed securities. TBA Transactions
generally are conducted in accordance with widelyaccepted guidelines that 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.
15 Investment grade securities include securities
with, at the time of investment, credit ratings
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Federal Register / Vol. 79, No. 139 / Monday, July 21, 2014 / Notices
20% of its net assets in securities of any
credit quality, including securities that
are below investment grade and
securities that are unrated and have not
been judged by the Adviser to be of
comparable quality to rated investment
grade securities.
emcdonald on DSK67QTVN1PROD with NOTICES
Other Investments
The Fund may invest in exchangelisted options on U.S. Treasury
securities, exchange-listed options on
U.S. Treasury futures contracts, and
exchange-listed U.S. Treasury futures
contracts.16 The use of these derivative
transactions may allow the Fund to
obtain net long or short exposures to
selected interest rates or durations.
These derivatives may also be used to
hedge risks associated with the Fund’s
other portfolio investments.
Under normal market conditions, no
more than 20% of the value of the
Fund’s net assets will be invested in
derivative instruments.17 The Fund’s
within the four highest rating categories of a
nationally recognized statistical rating organization
such as Moody’s Investors Service, Inc.
(‘‘Moody’s’’), Fitch Ratings (‘‘Fitch’’), Standard &
Poor’s Ratings Services, a division of The McGrawHill Companies, Inc. (‘‘S&P Ratings’’), or another
nationally recognized statistical rating organization
(‘‘NRSRO’’), and unrated securities judged to be of
comparable quality by the Adviser. Comparable
quality of unrated securities will be determined by
the Adviser based on fundamental credit analysis
of the unrated security and comparable NRSROrated securities. On a best-efforts basis, the Adviser
will attempt to make a rating determination based
on publicly available data. In making a ‘‘comparable
quality’’ determination, the Adviser may consider,
for example, whether the issuer of the security has
issued other rated securities, the nature and
provisions of the relevant security, whether the
obligations under the relevant security are
guaranteed by another entity and the rating of such
guarantor (if any), relevant cash flows,
macroeconomic analysis, and sector or industry
analysis.
16 At least 90% of the Fund’s net assets that are
invested in exchange-traded equity securities 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’’) or are parties to a comprehensive
surveillance sharing agreement with the Exchange.
17 The Fund will limit its direct investments in
futures and options on futures to the extent
necessary for the Adviser to claim the exclusion
from regulation as a ‘‘commodity pool operator’’
with respect to the Fund under Rule 4.5
promulgated by the Commodity Futures Trading
Commission (‘‘CFTC’’), as such rule may be
amended from time to time. Under Rule 4.5 as
currently in effect, the Fund will limit its trading
activity in futures and options on futures (excluding
activity for ‘‘bona fide hedging purposes,’’ as
defined by the CFTC) such that it will meet one of
the following tests: (i) Aggregate initial margin and
premiums required to establish its futures and
options on futures positions will not exceed 5% of
the liquidation value of the Fund’s portfolio, after
taking into account unrealized profits and losses on
such positions; or (ii) aggregate net notional value
of its futures and options on futures positions will
not exceed 100% of the liquidation value of the
Fund’s portfolio, after taking into account
unrealized profits and losses on such positions.
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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.
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 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 may
adopt a defensive strategy when the
Adviser believes that 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 defined
to include, without limitation, the
following: (1) Fixed rate and floating
rate U.S. government securities,
including bills, notes, and bonds
differing as to maturity and rates of
interest, which are either issued or
guaranteed by the U.S. Treasury or by
U.S. government agencies or
instrumentalities; (2) certificates of
deposit issued against funds deposited
in a bank or a savings and loan
association; (3) bankers’ acceptances,
which are short-term credit instruments
used to finance commercial
transactions; (4) repurchase
agreements,18 which involve purchases
of debt securities; (5) bank time
deposits, which are monies kept on
deposit with banks or savings and loan
associations for a stated period of time
at a fixed rate of interest; and (6)
commercial paper, which is short-term
18 The Fund intends to enter into repurchase
agreements only with financial institutions and
dealers believed by the Adviser to present minimal
credit risks in accordance with criteria approved by
the Board of Trustees of the Trust (‘‘Trust Board’’).
The Adviser will review and monitor the
creditworthiness of such institutions. The Adviser
will monitor the value of the collateral at the time
the transaction is entered into and at all times
during the term of the repurchase agreement.
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
unsecured promissory notes. The Fund
may only invest in commercial paper
rated A–1 or higher by S&P Ratings,
Prime-1 or higher by Moody’s, or F1 or
higher by Fitch.
In addition to its investments in
Mortgage-Related Investments issued or
guaranteed by Government Entities (as
described in Principal Investments
above) and in the short-term debt
securities described in clause (1) of the
preceding paragraph, the Fund may also
invest up to 20% of its net assets in
other direct obligations of the U.S.
government and in other securities
issued or guaranteed by Government
Entities. Such investments may include,
without limitation, U.S. government
inflation-indexed securities.19
The Fund may invest up to 20% of its
net assets in the securities of other
investment companies, including
money market funds (as noted above)
and other ETFs.20
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 securities
deemed illiquid by the Adviser.21 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
19 Inflation-indexed securities are fixed-income
securities that are structured to provide protection
against inflation. The value of the security’s
principal or the interest income paid on the security
is adjusted to track changes in an official inflation
measure. The U.S. Treasury uses the Consumer
Price Index for Urban Consumers as the inflation
measure.
20 An ETF is an investment company registered
under the 1940 Act that holds a portfolio of
securities. Many ETFs are designed to track the
performance of a securities index, including
industry, sector, country, and region indexes. ETFs
included in the Fund will be listed and traded in
the U.S. on registered exchanges. The Fund may
invest in the securities of ETFs in excess of the
limits imposed under the 1940 Act pursuant to
exemptive orders obtained by other ETFs and their
sponsors from the Commission. In addition, the
Fund may invest in the securities of certain other
investment companies in excess of the limits
imposed under the 1940 Act pursuant to an
exemptive order that the Trust has obtained from
the Commission. 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.
21 In reaching liquidity decisions, the Adviser
may consider the following factors: the frequency
of trades and quotes for the security; the number of
dealers wishing to purchase or sell the security and
the number of other potential purchasers; dealer
undertakings to make a market in the security; and
the nature of the security and the nature of the
marketplace in which it trades (e.g., the time
needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer).
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Federal Register / Vol. 79, No. 139 / Monday, July 21, 2014 / Notices
emcdonald on DSK67QTVN1PROD with NOTICES
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets. Illiquid assets include
securities subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets as determined in accordance
with Commission staff guidance.
The Fund may not invest 25% or
more of the value of its total assets in
securities of issuers in any one industry.
This restriction does not apply to
obligations issued or guaranteed by the
U.S. government, or by its agencies or
instrumentalities, or to securities of
other investment companies.
The Fund intends to qualify each year
as a regulated investment company
under Subchapter M of the Internal
Revenue Code of 1986, as amended.
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 22 and the rules and
regulations thereunder applicable to a
national securities exchange.23 In
particular, the Commission finds that
the proposal is consistent with Section
6(b)(5) of the Act,24 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,25 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
22 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).
24 15 U.S.C. 78f(b)(5).
25 15 U.S.C. 78k–1(a)(1)(C)(iii).
23 In
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17:14 Jul 18, 2014
Jkt 232001
accordance with the Unlisted Trading
Privileges and the Consolidated Tape
Association (‘‘CTA’’) plans for the
Shares. In addition, the Intraday
Indicative Value,26 as defined in Nasdaq
Rule 5735(c)(3), available on the
NASDAQ OMX Information LLC
proprietary index data service, will be
widely disseminated by one or more
major market data vendors and broadly
displayed at least every 15 seconds
during the Regular Market Session.27 On
each business day, before
commencement of trading in Shares in
the Regular Market Session 28 on the
Exchange, the Fund will disclose on its
Web site the identities and quantities of
the portfolio of securities and other
assets (the ‘‘Disclosed Portfolio’’ as
defined in Nasdaq Rule 5735(c)(2)) held
by the Fund that will form the basis for
the Fund’s calculation of NAV at the
end of the business day.29 The Fund’s
custodian, through the National
Securities Clearing Corporation
(‘‘NSCC’’), will make available on each
business day, prior to the opening of
business of the Exchange, the list of the
26 According to the Exchange, the Intraday
Indicative Value reflects an estimated intraday
value of the Fund’s Disclosed Portfolio. The
Intraday Indicative Value 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.
27 Currently, the NASDAQ OMX Global Index
Data Service (‘‘GIDS’’) is the NASDAQ OMX global
index data feed service. The Exchange represents
that GIDS offers real-time updates, daily summary
messages, and access to widely followed indexes
and Intraday Indicative Values for ETFs and that
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.
28 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
4:00 p.m. or 4:15 p.m., Eastern Time; and (3) PostMarket Session from 4:00 p.m. or 4:15 p.m. to 8:00
p.m., Eastern Time).
29 The Fund’s disclosure of derivative positions in
the Disclosed Portfolio will include information
that market participants can use to value these
positions intraday. On a daily basis, the Fund will
disclose on the Fund’s Web site the following
information regarding each portfolio holding, as
applicable to the type of holding: Ticker symbol,
CUSIP number or other identifier, if any; a
description of the holding (including the type of
holding); the identity of the security or other asset
or instrument underlying the holding, if any; for
options, the option strike price; quantity held (as
measured by, for example, par value, notional value
or number of shares, contracts or units); maturity
date, if any; coupon rate, if any; effective date, if
any; market value of the holding; and the
percentage weighting of the holding in the Fund’s
portfolio.
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42389
names and quantities of the
instruments, as well as amount of cash
(if any), constituting the creation basket
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.30 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. Intraday executable
price information for fixed income
securities, exchange-traded equity
securities, and derivatives held by the
Fund will be available from major
broker-dealer firms and major market
data vendors. Additionally, FINRA’s
TRACE will be a source of price
information for certain of the MortgageRelated Investments held by the Fund.
For exchange-traded assets, intraday
price information will be available
directly from the applicable listing
exchanges. Intraday price information
will also generally be available through
subscription services, which can be
accessed by authorized participants and
other investors. Registered open-end
management investment companies
(other than ETFs) are generally priced
once each business day, and these
prices are available through the
applicable fund’s Web site or major
market data vendors. 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.
Trading in Shares of the Fund will be
halted under the conditions specified in
Nasdaq Rules 4120 and 4121, including
the trading pause provisions under
30 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 this
amount by the total number of Shares outstanding.
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emcdonald on DSK67QTVN1PROD with NOTICES
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,31 and trading in the Shares
will be subject to Nasdaq Rule
5735(d)(2)(D), which sets forth
circumstances under which trading in
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, nonpublic information regarding the actual
components of the portfolio.32 In
addition, the Exchange states that the
Adviser is not a broker-dealer, but it is
affiliated with a broker-dealer and has
implemented a fire wall with respect to
its broker-dealer affiliate regarding
access to information concerning the
composition or for changes to the
portfolio, and personnel who make
decisions on the Fund’s portfolio
composition will be subject to
procedures designed to prevent the use
and dissemination of material nonpublic information regarding the Fund’s
portfolio.33 The Exchange represents
31 These reasons may include: (1) The extent to
which trading is not occurring in the securities and/
or the other assets constituting the Disclosed
Portfolio of the Fund; or (2) whether other unusual
conditions or circumstances detrimental to the
maintenance of a fair and orderly market are
present. 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.
32 See Nasdaq Rule 5735(d)(2)(B)(ii).
33 See supra note 6. 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 its 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 nonpublic 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.
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17:14 Jul 18, 2014
Jkt 232001
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.34 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.
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 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 other
exchange-traded assets with other
markets and other entities that are
members of ISG,35 and FINRA may
obtain trading information regarding
trading in the Shares and the other
exchange-traded assets from such
markets and other entities. In addition,
the Exchange may obtain information
regarding trading in the Shares and the
other exchange-traded assets 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.
34 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.
35 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed Portfolio may trade on
markets that are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.
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(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.36
(6) At least 90% of the Fund’s net
assets that are invested in exchangetraded equity securities and exchangetraded 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.
(7) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid securities (calculated
at the time of investment), including
securities deemed illiquid by the
Adviser. The Fund will monitor its
portfolio liquidity on an ongoing basis
to determine whether, in light of current
circumstances, an adequate level of
liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets.
(8) Under normal market conditions,
the Fund will seek to achieve its
investment objectives by investing at
least 80% of its net assets (including
investment borrowings) in MortgageRelated Investments. The Fund will
limit its investments in MortgageRelated Investments that are not issued
or guaranteed by Government Entities to
20% of its net assets.
(9) Under normal market conditions,
no more than 20% of the value of the
Fund’s net assets will be invested in
36 See
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21JYN1
Federal Register / Vol. 79, No. 139 / Monday, July 21, 2014 / Notices
derivative instruments. 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.
(10) The Fund intends to invest
primarily in investment grade securities
and will limit investments in securities
of any credit quality, including
securities that are below investment
grade and securities that are unrated
and have not been judged by the
Adviser to be of comparable quality to
rated investment grade securities, to
20% of its net assets.
(11) A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice, and the Exchange’s
description of the Fund.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 37 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,38 that the
proposed rule change (SR–NASDAQ–
2014–057) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–17034 Filed 7–18–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[File No. 500–1]
In the Matter of Cubed, Inc.; Order of
Suspension of Trading
emcdonald on DSK67QTVN1PROD with NOTICES
July 17, 2014.
It appears to the Securities and
Exchange Commission (‘‘Commission’’)
that there is a lack of current and
accurate information concerning the
securities of Cubed, Inc. (‘‘Cubed’’),
particularly with respect to the
company’s current financial condition.
Cubed is a Nevada corporation with its
principal place of business located in
37 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
39 17 CFR 200.30–3(a)(12).
38 15
VerDate Mar<15>2010
17:14 Jul 18, 2014
Jkt 232001
Las Vegas, Nevada. Its stock is quoted
on OTC Link, operated by OTC Markets
Group Inc., under the ticker: CRPT. The
Commission is of the opinion that the
public interest and the protection of
investors require a suspension of trading
in the securities of Cubed.
Therefore, it is ordered, pursuant to
Section 12(k) of the Securities Exchange
Act of 1934, that trading in the
securities of the above-listed company is
suspended for the period from 9:30 a.m.
EDT on July 17, 2014, through 11:59
p.m. EDT on July 30, 2014.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014–17186 Filed 7–17–14; 11:15 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice 8800]
30-Day Notice of Proposed Information
Collection: Medical Examination for
Immigrant or Refugee Applicant
Notice of request for public
comment and submission to OMB of
proposed collection of information.
ACTION:
The Department of State has
submitted the information collection
described below to the Office of
Management and Budget (OMB) for
approval. In accordance with the
Paperwork Reduction Act of 1995 we
are requesting comments on this
collection from all interested
individuals and organizations. The
purpose of this Notice is to allow 30
days for public comment.
DATES: Submit comments directly to the
Office of Management and Budget
(OMB) up to August 20, 2014.
ADDRESSES: Direct comments to the
Department of State Desk Officer in the
Office of Information and Regulatory
Affairs at the Office of Management and
Budget (OMB). You may submit
comments by the following methods:
• Email: oira_submission@
omb.eop.gov. You must include the DS
form number, information collection
title, and the OMB control number in
the subject line of your message.
• Fax: 202–395–5806. Attention: Desk
Officer for Department of State.
FOR FURTHER INFORMATION CONTACT:
Direct requests for additional
information regarding the collection
listed in this notice, including requests
for copies of the proposed collection
instrument and supporting documents,
to Sydney Taylor at PRA_
BurdenComments@state.gov.
SUMMARY:
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42391
SUPPLEMENTARY INFORMATION:
• Title of Information Collection:
Medical Examination for Immigrant or
Refugee Applicant.
• OMB Control Number: 1405–0113.
• Type of Request: Revision of a
Currently Approved Collection.
• Originating Office: CA/VO/L/R.
• Form Number: DS–2053, DS–3024,
DS–3025, DS–3026, DS–3030, DS–2054.
• Respondents: Immigrant or Refugee
Applicant.
• Estimated Number of Respondents:
660,000.
• Estimated Number of Responses:
660,000.
• Average Time per Response: 1 hour.
• Total Estimated Burden Time:
660,000 hours.
• Frequency: Once per respondent.
• Obligation to Respond: Required to
Obtain or Retain a Benefit.
We are soliciting public comments to
permit the Department to:
• Evaluate whether the proposed
information collection is necessary for
the proper functions of the Department.
• Evaluate the accuracy of our
estimate of the time and cost burden for
this proposed collection, including the
validity of the methodology and
assumptions used.
• Enhance the quality, utility, and
clarity of the information to be
collected.
• Minimize the reporting burden on
those who are to respond, including the
use of automated collection techniques
or other forms of information
technology.
Please note that comments submitted in
response to this Notice are public
record. Before including any detailed
personal information, you should be
aware that your comments as submitted,
including your personal information,
will be available for public review.
Abstract of Proposed Collection
Forms for this collection are
completed by panel physicians for
refugees and aliens seeking immigrant
visas to the U.S. The collection records
medical information necessary to
determine whether refugees or
immigrant visa applicants have medical
conditions affecting the public health
and requiring treatment.
Methodology
A panel physician, contracted by the
consular post in accordance with
instructions issued by the Centers for
Disease Control (CDC), performs the
medical examination of the applicant
and completes the forms. The CDC also
provides panel physicians with
technical instructions (TIs) for
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]]>Agencies
[Federal Register Volume 79, Number 139 (Monday, July 21, 2014)]
[Notices]
[Pages 42386-42391]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17034]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72607; File No. SR-NASDAQ-2014-057]
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 Low Duration Mortgage
Opportunities ETF of First Trust Exchange-Traded Fund IV
July 15, 2014.
I. Introduction
On May 20, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or the
``Exchange'') 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 Low Duration Mortgage Opportunities 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 June 5, 2014.\3\ The Commission received no comments on the
proposed rule change. This order grants approval of the proposed rule
change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 72281 (May 30,
2014), 79 FR 32586 (``Notice'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
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.\5\ The Fund will be a series of the
Trust. First Trust Advisors L.P. will be the investment adviser
(``Adviser'') to the Fund.\6\ First Trust
[[Page 42387]]
Portfolios L.P. (``Distributor'') will be the principal underwriter and
distributor of the Fund's Shares. The Bank of New York Mellon
Corporation will act as the administrator, accounting agent, custodian,
and transfer agent to the Fund.\7\
---------------------------------------------------------------------------
\5\ See Post-Effective Amendment No. 69 to Registration
Statement on Form N-1A for the Trust, dated May 16, 2014 (File Nos.
333-174332 and 811-22559). The Exchange states that the Commission
has issued an order granting certain exemptive relief under the
Investment Company Act of 1940 (``1940 Act''). See Investment
Company Act Release No. 30029 (April 10, 2012) (File No. 812-13795)
(``Exemptive Relief''). In addition, the Exchange states that on
December 6, 2012, the staff of the Commission's Division of
Investment Management (``Division'') issued a no-action letter
(``No-Action Letter'') relating to the use of derivatives by
actively-managed ETFs. See No-Action Letter dated December 6, 2012
from Elizabeth G. Osterman, Associate Director, Office of Exemptive
Applications, Division. The Exchange states that the No-Action
Letter stated that the Division would not recommend enforcement
action to the Commission under applicable provisions of and rules
under the 1940 Act if actively-managed ETFs operating in reliance on
specified orders (which include the Exemptive Relief) invest in
options contracts, futures contracts, or swap agreements, provided
that they comply with certain representations stated in the No-
Action Letter.
\6\ The Exchange states that the Adviser is not a broker-dealer,
but it is affiliated with the Distributor, a broker-dealer. The
Exchange states that the Adviser has implemented a fire wall with
respect to its broker-dealer affiliate regarding access to
information concerning the composition of or changes to the
portfolio, and 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. The Exchange further states that, in
the event (a) the Adviser or any 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, the adviser or sub-adviser, as applicable, will
implement a fire wall with respect to its relevant personnel or its
broker-dealer affiliate, as applicable, regarding access to
information concerning the composition of or changes to the
portfolio and will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding
the portfolio.
\7\ The Exchange states that the Fund currently does not intend
to use a sub-adviser.
---------------------------------------------------------------------------
Principal Investments
The primary investment objective of the Fund will be to generate
current income, and its secondary objective will be capital
appreciation. Under normal market conditions,\8\ the Fund will seek to
achieve its investment objectives by investing at least 80% of its net
assets (including investment borrowings) in the mortgage-related debt
securities and other mortgage-related instruments (collectively,
``Mortgage-Related Investments'') described below.
---------------------------------------------------------------------------
\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 fixed income markets or the
financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
type events such as systems failure, natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot, labor
disruption, or any similar intervening circumstance.
---------------------------------------------------------------------------
Under normal market conditions, the Fund will invest in Mortgage-
Related Investments tied to residential and commercial mortgages.\9\
Mortgage-Related Investments 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. Mortgage-
Related Investments may be fixed-rate instruments, or they may be
adjustable-rate instruments (``ARMS'').
---------------------------------------------------------------------------
\9\ Mortgage-Related Investments consist of: (1) Residential
mortgage-backed securities (``RMBS''); (2) commercial mortgage-
backed securities (``CMBS''); (3) stripped mortgage-backed
securities (``SMBS''), which are mortgage-backed securities where
mortgage payments are divided between paying the loan's principal
and paying the loan's interest; and (4) collateralized mortgage
obligations (``CMOs'') and real estate mortgage investment conduits
(``REMICs''), which are mortgage-backed securities that are divided
into multiple classes, with each class being entitled to a different
share of the principal and interest payments received from the pool
of underlying assets.
---------------------------------------------------------------------------
The Mortgage-Related Investments in which the Fund will invest may
be, but are not required to be, issued or guaranteed by the U.S.
government or by 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'').\10\ The Fund may invest in callable agency
securities, which give the issuer (the U.S. government agency) the
right to redeem the security prior to maturity. The Fund will limit its
investments in Mortgage-Related Investments that are not issued or
guaranteed by Government Entities to 20% of its net assets.\11\
---------------------------------------------------------------------------
\10\ Securities issued 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 NAV,
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 instrumentality and are not guaranteed by
the U.S. government. Other securities issued by Government Entities
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.
\11\ For the avoidance of doubt, Mortgage-Related Investments
that are not issued or guaranteed by Government Entities will be
included for purposes of the 80% requirement described in the first
paragraph under the heading ``Principal Investments.''
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Many Mortgage-Related Investments are pass-through securities,
which means they provide investors with monthly payments consisting of
a pro rata share of both regular interest and principal payments as
well as unscheduled prepayments on the underlying mortgage loans.
Because prepayment rates of individual mortgage pools vary widely, the
average life of a particular pool cannot be predicted accurately.
The Fund currently targets an estimated effective duration \12\ of
three years or less. The Adviser will calculate the duration of the
portfolio by modeling the cash flows of all the individual holdings,
including the impact of prepayment variability and coupon adjustments,
where applicable, to determine the duration of each holding and then
aggregating based on the size of the position. In performing this
duration calculation, the Adviser will utilize third-party models.
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\12\ In comparison to maturity (which is the date on which a
debt instrument ceases and the issuer is obligated to repay the
principal amount), duration is a measure of the expected price
volatility of a debt instrument as a result of changes in market
rates of interest, based on the weighted average timing of the
instrument's expected principal and interest payments and other
factors. Duration differs from maturity in that it considers a
security's yield, coupon payments, principal payments, call
features, and coupon adjustments in addition to the amount of time
until the security finally matures. As the value of a security
changes over time, so will its duration. Prices of securities with
lower durations tend to be less sensitive to interest rate changes
than securities with higher durations. In general, a portfolio of
securities with a lower duration can be expected to be less
sensitive to interest rate changes than a portfolio with a higher
duration.
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The Fund may invest, without limitation, in mortgage dollar
rolls.\13\ 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'').\14\ 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. 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.
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\13\ 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.
\14\ A TBA Transaction is a method of trading mortgage-backed
securities. TBA Transactions generally are conducted in accordance
with widely-accepted guidelines that 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.
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Although the Fund intends to invest primarily in investment grade
securities,\15\ the Fund may invest up to
[[Page 42388]]
20% of its net assets in securities of any credit quality, including
securities that are below investment grade and securities that are
unrated and have not been judged by the Adviser to be of comparable
quality to rated investment grade securities.
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\15\ Investment grade securities include securities with, at the
time of investment, credit ratings within the four highest rating
categories of a nationally recognized statistical rating
organization such as Moody's Investors Service, Inc. (``Moody's''),
Fitch Ratings (``Fitch''), Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. (``S&P Ratings''), or
another nationally recognized statistical rating organization
(``NRSRO''), and unrated securities judged to be of comparable
quality by the Adviser. Comparable quality of unrated securities
will be determined by the Adviser based on fundamental credit
analysis of the unrated security and comparable NRSRO-rated
securities. On a best-efforts basis, the Adviser will attempt to
make a rating determination based on publicly available data. In
making a ``comparable quality'' determination, the Adviser may
consider, for example, whether the issuer of the security has issued
other rated securities, the nature and provisions of the relevant
security, whether the obligations under the relevant security are
guaranteed by another entity and the rating of such guarantor (if
any), relevant cash flows, macroeconomic analysis, and sector or
industry analysis.
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Other Investments
The Fund may invest in exchange-listed options on U.S. Treasury
securities, exchange-listed options on U.S. Treasury futures contracts,
and exchange-listed U.S. Treasury futures contracts.\16\ The use of
these derivative transactions may allow the Fund to obtain net long or
short exposures to selected interest rates or durations. These
derivatives may also be used to hedge risks associated with the Fund's
other portfolio investments.
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\16\ At least 90% of the Fund's net assets that are invested in
exchange-traded equity securities 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'') or are parties to a comprehensive surveillance sharing
agreement with the Exchange.
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Under normal market conditions, no more than 20% of the value of
the Fund's net assets will be invested in derivative instruments.\17\
The Fund's investments in derivative instruments will be consistent
with the Fund's investment objectives and the 1940 Act and will not be
used to seek to achieve a multiple or inverse multiple of an index.
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\17\ The Fund will limit its direct investments in futures and
options on futures to the extent necessary for the Adviser to claim
the exclusion from regulation as a ``commodity pool operator'' with
respect to the Fund under Rule 4.5 promulgated by the Commodity
Futures Trading Commission (``CFTC''), as such rule may be amended
from time to time. Under Rule 4.5 as currently in effect, the Fund
will limit its trading activity in futures and options on futures
(excluding activity for ``bona fide hedging purposes,'' as defined
by the CFTC) such that it will meet one of the following tests: (i)
Aggregate initial margin and premiums required to establish its
futures and options on futures positions will not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account
unrealized profits and losses on such positions; or (ii) aggregate
net notional value of its futures and options on futures positions
will not exceed 100% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses
on such positions.
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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 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 may adopt a defensive strategy when the Adviser believes that
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 defined to include, without
limitation, the following: (1) Fixed rate and floating rate U.S.
government securities, including bills, notes, and bonds differing as
to maturity and rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities; (2) certificates of deposit issued against funds
deposited in a bank or a savings and loan association; (3) bankers'
acceptances, which are short-term credit instruments used to finance
commercial transactions; (4) repurchase agreements,\18\ which involve
purchases of debt securities; (5) bank time deposits, which are monies
kept on deposit with banks or savings and loan associations for a
stated period of time at a fixed rate of interest; and (6) commercial
paper, which is short-term unsecured promissory notes. The Fund may
only invest in commercial paper rated A-1 or higher by S&P Ratings,
Prime-1 or higher by Moody's, or F1 or higher by Fitch.
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\18\ The Fund intends to enter into repurchase agreements only
with financial institutions and dealers believed by the Adviser to
present minimal credit risks in accordance with criteria approved by
the Board of Trustees of the Trust (``Trust Board''). The Adviser
will review and monitor the creditworthiness of such institutions.
The Adviser will monitor the value of the collateral at the time the
transaction is entered into and at all times during the term of the
repurchase agreement.
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In addition to its investments in Mortgage-Related Investments
issued or guaranteed by Government Entities (as described in Principal
Investments above) and in the short-term debt securities described in
clause (1) of the preceding paragraph, the Fund may also invest up to
20% of its net assets in other direct obligations of the U.S.
government and in other securities issued or guaranteed by Government
Entities. Such investments may include, without limitation, U.S.
government inflation-indexed securities.\19\
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\19\ Inflation-indexed securities are fixed-income securities
that are structured to provide protection against inflation. The
value of the security's principal or the interest income paid on the
security is adjusted to track changes in an official inflation
measure. The U.S. Treasury uses the Consumer Price Index for Urban
Consumers as the inflation measure.
---------------------------------------------------------------------------
The Fund may invest up to 20% of its net assets in the securities
of other investment companies, including money market funds (as noted
above) and other ETFs.\20\
---------------------------------------------------------------------------
\20\ An ETF is an investment company registered under the 1940
Act that holds a portfolio of securities. Many ETFs are designed to
track the performance of a securities index, including industry,
sector, country, and region indexes. ETFs included in the Fund will
be listed and traded in the U.S. on registered exchanges. The Fund
may invest in the securities of ETFs in excess of the limits imposed
under the 1940 Act pursuant to exemptive orders obtained by other
ETFs and their sponsors from the Commission. In addition, the Fund
may invest in the securities of certain other investment companies
in excess of the limits imposed under the 1940 Act pursuant to an
exemptive order that the Trust has obtained from the Commission. The
ETFs in which the Fund may invest include Index Fund Shares (as
described in Nasdaq Rule 5705), Portfolio Depository Receipts (as
described in Nasdaq Rule 5705), and Managed Fund Shares (as
described in Nasdaq Rule 5735). While the Fund may invest in inverse
ETFs, the Fund will not invest in leveraged or inverse leveraged
(e.g., 2X or -3X) ETFs.
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The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including securities deemed illiquid by the Adviser.\21\ 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
[[Page 42389]]
order to maintain adequate liquidity if, through a change in values,
net assets, or other circumstances, more than 15% of the Fund's net
assets are held in illiquid assets. Illiquid assets include securities
subject to contractual or other restrictions on resale and other
instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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\21\ In reaching liquidity decisions, the Adviser may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer).
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The Fund may not invest 25% or more of the value of its total
assets in securities of issuers in any one industry. This restriction
does not apply to obligations issued or guaranteed by the U.S.
government, or by its agencies or instrumentalities, or to securities
of other investment companies.
The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
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 \22\
and the rules and regulations thereunder applicable to a national
securities exchange.\23\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,\24\ 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.
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\22\ 15 U.S.C. 78f.
\23\ 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).
\24\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\25\ 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,\26\ as defined in Nasdaq Rule 5735(c)(3), available on the
NASDAQ OMX Information LLC proprietary index data service, will be
widely disseminated by one or more major market data vendors and
broadly displayed at least every 15 seconds during the Regular Market
Session.\27\ On each business day, before commencement of trading in
Shares in the Regular Market Session \28\ on the Exchange, the Fund
will disclose on its Web site the identities and quantities of the
portfolio of securities and other assets (the ``Disclosed Portfolio''
as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form
the basis for the Fund's calculation of NAV at the end of the business
day.\29\ The Fund's custodian, through the National Securities Clearing
Corporation (``NSCC''), will make available on each business day, prior
to the opening of business of the Exchange, the list of the names and
quantities of the instruments, as well as amount of cash (if any),
constituting the creation basket 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.\30\
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. Intraday executable price information for fixed
income securities, exchange-traded equity securities, and derivatives
held by the Fund will be available from major broker-dealer firms and
major market data vendors. Additionally, FINRA's TRACE will be a source
of price information for certain of the Mortgage-Related Investments
held by the Fund. For exchange-traded assets, intraday price
information will be available directly from the applicable listing
exchanges. Intraday price information will also generally be available
through subscription services, which can be accessed by authorized
participants and other investors. Registered open-end management
investment companies (other than ETFs) are generally priced once each
business day, and these prices are available through the applicable
fund's Web site or major market data vendors. 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.
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\25\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\26\ According to the Exchange, the Intraday Indicative Value
reflects an estimated intraday value of the Fund's Disclosed
Portfolio. The Intraday Indicative Value 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.
\27\ Currently, the NASDAQ OMX Global Index Data Service
(``GIDS'') is the NASDAQ OMX global index data feed service. The
Exchange represents that GIDS offers real-time updates, daily
summary messages, and access to widely followed indexes and Intraday
Indicative Values for ETFs and that 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.
\28\ 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
4:00 p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session
from 4:00 p.m. or 4:15 p.m. to 8:00 p.m., Eastern Time).
\29\ The Fund's disclosure of derivative positions in the
Disclosed Portfolio will include information that market
participants can use to value these positions intraday. On a daily
basis, the Fund will disclose on the Fund's Web site the following
information regarding each portfolio holding, as applicable to the
type of holding: Ticker symbol, CUSIP number or other identifier, if
any; a description of the holding (including the type of holding);
the identity of the security or other asset or instrument underlying
the holding, if any; for options, the option strike price; quantity
held (as measured by, for example, par value, notional value or
number of shares, contracts or units); maturity date, if any; coupon
rate, if any; effective date, if any; market value of the holding;
and the percentage weighting of the holding in the Fund's portfolio.
\30\ 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
this amount by the total number of Shares outstanding.
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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. Trading in Shares of the Fund will be
halted under the conditions specified in Nasdaq Rules 4120 and 4121,
including the trading pause provisions under
[[Page 42390]]
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,\31\ and trading in
the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets
forth circumstances under which trading in 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.\32\ In addition, the Exchange states that the Adviser is not
a broker-dealer, but it is affiliated with a broker-dealer and has
implemented a fire wall with respect to its broker-dealer affiliate
regarding access to information concerning the composition or for
changes to the portfolio, and 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.\33\ 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.\34\ 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.
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\31\ These reasons may include: (1) The extent to which trading
is not occurring in the securities and/or the other assets
constituting the Disclosed Portfolio of the Fund; or (2) whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. 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.
\32\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\33\ See supra note 6. 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 its 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.
\34\ 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.
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The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including the following:
(1) The Shares will be subject to 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 other exchange-traded assets
with other markets and other entities that are members of ISG,\35\ and
FINRA may obtain trading information regarding trading in the Shares
and the other exchange-traded assets from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares and the other exchange-traded assets from markets
and other entities that are members of ISG, which includes securities
and futures exchanges, or with which the Exchange has in place a
comprehensive surveillance sharing agreement. Moreover, FINRA, on
behalf of the Exchange, will be able to access, as needed, trade
information for certain fixed income securities held by the Fund
reported to FINRA's TRACE.
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\35\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio may trade on markets that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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(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.\36\
---------------------------------------------------------------------------
\36\ See 17 CFR 240.10A-3.
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(6) At least 90% of the Fund's net assets that are invested in
exchange-traded equity securities 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.
(7) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including securities deemed illiquid by the Adviser. The Fund will
monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets.
(8) Under normal market conditions, the Fund will seek to achieve
its investment objectives by investing at least 80% of its net assets
(including investment borrowings) in Mortgage-Related Investments. The
Fund will limit its investments in Mortgage-Related Investments that
are not issued or guaranteed by Government Entities to 20% of its net
assets.
(9) Under normal market conditions, no more than 20% of the value
of the Fund's net assets will be invested in
[[Page 42391]]
derivative instruments. 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.
(10) The Fund intends to invest primarily in investment grade
securities and will limit investments in securities of any credit
quality, including securities that are below investment grade and
securities that are unrated and have not been judged by the Adviser to
be of comparable quality to rated investment grade securities, to 20%
of its net assets.
(11) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice, and
the Exchange's description of the Fund.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \37\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\37\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\38\ that the proposed rule change (SR-NASDAQ-2014-057) be, and it
hereby is, approved.
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\38\ 15 U.S.C. 78s(b)(2).
\39\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17034 Filed 7-18-14; 8:45 am]
BILLING CODE 8011-01-P
