Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, Relating to Listing and Trading of Shares of the NASDAQ-100 DIVS Index ETF Under Rule 5705, 45556-45560 [2014-18389]

Download as PDF 45556 Federal Register / Vol. 79, No. 150 / Tuesday, August 5, 2014 / Notices including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– MSRB–2014–06 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. mstockstill on DSK4VPTVN1PROD with NOTICES All submissions should refer to File Number SR–MSRB–2014–06. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the MSRB. 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–MSRB– 2014–06 and should be submitted on or before August 26, 2014. For the Commission, pursuant to delegated authority.25 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–18381 Filed 8–4–14; 8:45 am] BILLING CODE 8011–01–P 25 17 CFR § 200.30–3(a)(12). VerDate Mar<15>2010 18:16 Aug 04, 2014 Jkt 232001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72715; File No. SR– NASDAQ–2014–038] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, Relating to Listing and Trading of Shares of the NASDAQ–100 DIVS Index ETF Under Rule 5705 July 29, 2014. On April 10, 2014, The NASDAQ Stock Market LLC (‘‘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 Reality Shares NASDAQ–100 DIVS Index ETF (‘‘Fund’’) (formerly, Reality Shares NASDAQ–100 Isolated Dividend Growth Index ETF) under NASDAQ Rule 5705. The proposed rule change was published for comment in the Federal Register on April 30, 2014.3 On May 6, 2014, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and replaced the proposed rule change in its entirety.4 On June 4, 2014, the Exchange filed Amendment No. 2 to the proposed rule change.5 On June 13, 2014, pursuant to Section 19(b)(2) of the Act,6 the Commission designated a longer period within which to approve the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 72014 (Apr. 24, 2014), 79 FR 24465 (‘‘Notice’’). 4 In Amendment No. 1, the Exchange confirmed the hours of the three trading sessions on the Exchange, clarified the valuation of investments for purposes of calculating net asset value, clarified what information would be available on the Fund’s Web site, and provided additional information relating to surveillance with respect to certain assets held by the Fund. Amendment No. 1 provided clarification to the proposed rule change, and because it does not materially affect the substance of the proposed rule change or raise novel or unique regulatory issues, Amendment No. 1 is not subject to notice and comment. 5 The Exchange filed Amendment No. 2 to the proposal to reflect a name change to the Fund and the underlying index. Specifically, the Exchange replaced each reference to ‘‘Reality Shares NASDAQ–100 Isolated Dividend Growth ETF’’ in the proposal with ‘‘Reality Shares NASDAQ–100 DIVS Index ETF’’ and replaced each reference to ‘‘Reality Shares NASDAQ–100 Isolated Dividend Growth Index’’ in the proposal with ‘‘Reality Shares NASDAQ–100 DIVS Index.’’ Amendment No. 2 is a technical amendment and is not subject to notice and comment as it does not materially affect the substance of the filing. 6 15 U.S.C. 78s(b)(2). 2 17 PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.7 The Commission received no comment letters on the proposed rule change. This Order institutes proceedings under Section 19(b)(2)(B) of the Act 8 to determine whether to approve or disapprove the proposed rule change, as modified by Amendment Nos. 1 and 2 thereto. I. Description of the Proposal A. In General The Exchange proposes to list and trade Shares of the Fund under NASDAQ Rule 5705(b), which governs the listing and trading of Index Fund Shares 9 on the Exchange. The Shares of the Fund will be offered by the Reality Shares ETF Trust (‘‘Trust’’). The Trust will be registered with the Commission as an open-end management investment company.10 Reality Shares Advisors, LLC will serve as the investment adviser to the Fund (‘‘Adviser’’). ALPS Distributors, Inc. will be the principal underwriter and distributor of the Fund’s Shares. The Bank of New York Mellon will serve as administrator, custodian, and transfer agent for the Fund. B. The Exchange’s Description of the Fund The Exchange has made the following representations concerning the Fund. 7 See Securities Exchange Act Release No. 72384, 79 FR 35205 (June 19, 2014). The Commission designated a longer period within which to take action on the proposed rule change and designated July 29, 2014, as the date by which it should approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. 8 15 U.S.C. 78s(b)(2)(B). 9 Index Fund Shares that are issued by an openend investment company and listed and traded on the Exchange under NASDAQ Rule 5705 seek to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index, or combination thereof. See Rule 5705(b)(1)(A). 10 According to the Exchange, the Trust will be registered under the Investment Company Act of 1940 (‘‘1940 Act’’). On November 12, 2013, the Trust filed a registration statement on Form N–1A under the Securities Act of 1933 (‘‘1933 Act’’) and under the 1940 Act relating to the Fund, as amended by Pre-Effective Amendment Number 1, filed with the Commission on February 6, 2014 (File Nos. 333–192288 and 811–22911) (the ‘‘Registration Statement’’). The description of the operation of the Trust and the Fund herein is based, in part, on the Registration Statement. In addition, the Commission has issued an order granting certain exemptive relief to the Trust under the 1940 Act. Investment Company Act Release No. 30678 (Aug. 27, 2013) (‘‘Exemptive Order’’). The Exchange states that investments made by the Fund will comply with the conditions set forth in the Exemptive Order. E:\FR\FM\05AUN1.SGM 05AUN1 Federal Register / Vol. 79, No. 150 / Tuesday, August 5, 2014 / Notices The Fund will seek long-term capital appreciation by tracking the performance of the Reality Shares NASDAQ–100 DIVS Index (‘‘Index’’). The Index was developed and is maintained by Reality Shares, Inc. (‘‘Index Provider’’).11 The Adviser is a wholly-owned subsidiary of the Index Provider. The Index Provider is not registered as a broker-dealer and is not affiliated with any broker-dealer.12 The Adviser is not registered as a brokerdealer and is not affiliated with any broker-dealer.13 mstockstill on DSK4VPTVN1PROD with NOTICES 1. Index Methodology The Index will be calculated using a proprietary, rules-based methodology designed to track market expectations for dividend growth conveyed in realtime using the mid-point of the bid-ask spread on NASDAQ–100 Index options and options on exchange-traded funds (‘‘ETFs’’) designed to track the NASDAQ–100 Index.14 All options included in the Index will be listed and traded on a U.S. national securities exchange. The Index will consist of a minimum of 20 components.15 The prices of index and ETF options reflect the market trading prices of the securities included in the applicable underlying index or ETF, as well as market expectations regarding the level of dividends to be paid on those indexes or ETFs during the term of the option. 11 The Index will be calculated by International Data Corporation, which is not affiliated with the Adviser, the Index Provider, or The NASDAQ OMX Group and which is not a broker-dealer or fund advisor. Rule 5705(b)(5)(A)(i) states that if an index is maintained by a fund advisor or a broker-dealer, the fund advisor or broker-dealer shall erect a ‘‘fire wall’’ around the personnel who have access to information concerning changes and adjustments to the index. 12 The Adviser and the Index Provider have represented that a fire wall exists around the respective personnel who have access to information concerning changes and adjustments to the Index. 13 The Adviser and the Index Provider have represented that a fire wall exists around the respective personnel who have access to information concerning changes and adjustments to the Index. The Exchange notes that, in the event (a) the Adviser, any sub-adviser, or the Index Provider becomes registered as a broker-dealer or newly affiliated with a broker-dealer, or (b) any new adviser, sub-adviser, or Index Provider is a registered broker-dealer or becomes affiliated with a broker-dealer, that entity will implement a fire wall with respect to their relevant personnel or 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. 14 The Index will not directly measure or track actual dividend payments or the actual growth in dividend payments, but will instead track market expectations of dividend growth as implied by the prices of the options that make up the Index. 15 Rule 5705(b)(3). VerDate Mar<15>2010 18:16 Aug 04, 2014 Jkt 232001 The Index constituents, and therefore most of the Fund’s portfolio holdings, will consist of multiple corresponding near-term and long-term put and call option combinations on the same reference assets (i.e., options on the NASDAQ–100 Index or the NASDAQ– 100 ETF) with the same strike price. Because option prices reflect both stock price and dividend expectations, they can be used in combination to isolate either price exposure or dividend expectations. The use of near-term and long-term put and call option combinations on the same reference asset with the same strike price, but with different maturities, is designed to gain exposure to the expected dividends of the securities in the NASDAQ–100 Index while neutralizing the impact of stock price movements. Over time, the Index will increase or decrease in value as the dividend spread between the near-term and long-term option combinations increases or decreases as a result of changing market expectations for dividend growth. 2. Principal Investments of the Fund The Fund will seek long-term capital appreciation and will seek investment results that, before fees and expenses, generally correspond to the performance of the Index. At least 80% of the Fund’s total assets (exclusive of collateral held from securities lending, if any) will be invested in the component securities of the Index. The Fund will seek a correlation of 0.95 or better between its performance and the performance of its Index. A figure of 1.00 would represent perfect correlation. The Fund generally will use a representative sampling investment strategy. The Fund will buy (i.e., hold a ‘‘long’’ position in) and sell (i.e., hold a ‘‘short’’ position in) put and call options. The Fund will have a strategy of taking both a long position in a security through its ex-dividend date (the last date an investor can own the security and receive dividends paid on the security) and a corresponding short position in the same security immediately thereafter. This is designed to allow the Fund to isolate its exposure to the growth of the level of dividends expected to be paid on a security while minimizing its exposure to changes in the trading price of that security. The Fund will buy and sell U.S. exchange-listed options on the NASDAQ–100 Index and U.S. exchangelisted options on ETFs designed to track the NASDAQ–100 Index. A put option gives the purchaser of the option the right to sell, and the issuer of the option the obligation to buy, the underlying security or instrument on a specified PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 45557 date or during a specified period of time. A call option on a security gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security or instrument on a specified date or during a specified period of time. The Fund will invest in a combination of put and call options designed to allow the Fund to isolate its exposure to the growth of the level of expected dividends reflected in options on the NASDAQ–100 Index and options on ETFs tracking the NASDAQ–100 Index, while minimizing the Fund’s exposure to changes in the trading price of such securities. 3. Other Investments of the Fund While, as described above, at least 80% of the Fund’s total assets (exclusive of collateral held from securities lending, if any) will be invested in the component securities of the Index, the Fund may invest up to 20% of the Fund’s total assets in other securities and financial instruments, as described below. The Fund may invest in U.S. exchange-listed futures contracts on the NASDAQ–100 Index and ETFs designed to track the NASDAQ–100 Index and may invest in forward contracts on the NASDAQ–100 Index and ETFs designed to track the NASDAQ–100 Index. The Fund’s use of exchange-listed futures contracts and forward contracts is designed to allow the Fund to isolate its exposure to the growth of the level of expected dividends reflected in options on the NASDAQ–100 Index and options on ETFs tracking the NASDAQ–100 Index, while minimizing the Fund’s exposure to changes in the trading price of such securities. The Fund may also buy and sell OTC options on the NASDAQ–100 Index and on ETFs designed to track the NASDAQ–100 Index. The Fund may enter into dividend and total return swap transactions (including equity swap transactions) based on the NASDAQ–100 Index and ETFs designed to track the NASDAQ– 100 Index.16 In a typical swap transaction, one party agrees to make periodic payments to another party (‘‘counterparty’’) based on the change in market value or level of a specified rate, index, or asset. In return, the counterparty agrees to make periodic payments to the first party based on the return of a different specified rate, index, or asset. Swap transactions are usually done on a net basis, with the 16 The Fund will transact only with swap dealers that have in place an ISDA agreement with the Fund. E:\FR\FM\05AUN1.SGM 05AUN1 mstockstill on DSK4VPTVN1PROD with NOTICES 45558 Federal Register / Vol. 79, No. 150 / Tuesday, August 5, 2014 / Notices Fund receiving or paying only the net amount of the two payments. In a typical dividend swap transaction, the Fund would pay the swap counterparty a premium and would be entitled to receive the value of the actual dividends paid on the subject index during the term of the swap contract. In a typical total return swap transaction, the Fund might exchange long or short exposures to the return of the underlying securities or index to isolate the value of the dividends paid on the underlying securities or index constituents. The Fund also may engage in interest rate swap transactions. In a typical interest rate swap transaction, one stream of future interest payments is exchanged for another. Such transactions often take the form of an exchange of a fixed payment for a variable payment based on a future interest rate. The Fund intends to use interest rate swap transactions to manage or hedge exposure to interest rate fluctuations. The Fund may invest up to 20% of its assets (exclusive of collateral held from securities lending, if any) in exchangelisted equity securities and derivative instruments (specifically, futures contracts, forward contracts, and swap transactions) 17 relating to the Index and its component securities that the Adviser believes will help the Fund track the Index. For example, the Fund may buy and sell ETFs and, to a limited extent, individual large-capitalization equity securities listed and traded on a U.S. national securities exchange. The Fund may invest in the securities of other investment companies (including money market funds) to the extent permitted under the 1940 Act. The Fund’s short positions and its investments in swaps, futures contracts, forward contracts, and options based on the NASDAQ–100 Index and ETFs designed to track the NASDAQ–100 Index will be backed by investments in cash, high-quality short-term debt securities, and money-market instruments in an amount equal to the Fund’s maximum liability under the applicable position or contract or will otherwise be offset in accordance with Section 18 of the 1940 Act. Short-term debt securities and money market instruments include shares of fixed income or money market mutual funds, commercial paper, certificates of deposit, bankers’ acceptances, U.S. 17 Where practicable, the Fund intends to invest in swaps cleared through a central clearing house (‘‘Cleared Swaps’’). Currently, only certain of the interest rate swaps in which the Fund intends to invest are Cleared Swaps, while the dividend and total return swaps (including equity swaps) in which the Fund may invest are currently not Cleared Swaps. VerDate Mar<15>2010 18:16 Aug 04, 2014 Jkt 232001 Government Securities (including securities issued or guaranteed by the U.S. government or its authorities, agencies, or instrumentalities), repurchase agreements,18 and bonds that are rated BBB or higher. In addition to the investments described above, and in a manner consistent with its investment objective, the Fund may invest a limited portion of its net assets in high-quality, shortterm debt securities and money market instruments for cash management purposes.19 The Fund will attempt to limit counterparty risk in non-cleared swap, forward, and OTC option contracts by entering into such contracts only with counterparties the Adviser believes are creditworthy and by limiting the Fund’s exposure to each counterparty. The Adviser will monitor the creditworthiness of each counterparty and the Fund’s exposure to each counterparty on an ongoing basis.20 The Exchange represents that the Fund’s investments in swaps, futures contracts, forward contracts, and options will be consistent with the Fund’s investment objective and with the requirements of the 1940 Act.21 18 The Fund may enter into repurchase agreements with banks and broker-dealers. A repurchase agreement is an agreement under which securities are acquired by a fund from a securities dealer or bank, subject to resale at an agreed-upon price on a later date. The acquiring fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the fund is delayed or prevented from exercising its rights to dispose of the collateral securities. 19 The Fund may invest in shares of money market mutual funds to the extent permitted by the 1940 Act. 20 The Fund will seek, where possible, to use counterparties, as applicable, whose financial status is such that the risk of default is reduced; however, the risk of losses resulting from default is still possible. The Adviser will evaluate the creditworthiness of counterparties on an ongoing basis. In addition to information provided by credit agencies, the Adviser will evaluate each approved counterparty using various methods of analysis, such as, for example, the counterparty’s liquidity in the event of default, the counterparty’s reputation, the Adviser’s past experience with the counterparty, and the counterparty’s share of market participation. 21 To limit the potential risk associated with such transactions, the Fund will segregate or ‘‘earmark’’ assets determined to be liquid by the Adviser in accordance with procedures established by the Trust’s Board of Trustees and in accordance with the 1940 Act (or, as permitted by applicable regulation, will enter into certain offsetting positions) to cover its obligations arising from such transactions. These procedures have been adopted consistent with Section 18 of the 1940 Act and related Commission guidance. In addition, the Fund will include appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that certain transactions of the Fund, including the Fund’s use of derivatives, may give rise to leverage, causing the Fund to be more volatile than if it had not been PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 4. Investment Restrictions of the Fund To the extent the Index concentrates (i.e., holds 25% or more of its total assets) in the securities of a particular industry or group of industries, the Fund will concentrate its investments to approximately the same extent as the Index. The Fund may hold up to an aggregate amount of 15% of its net assets in assets (calculated at the time of investment) deemed illiquid by the Adviser, consistent with Commission guidance.22 The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of the Fund’s net assets are held in illiquid assets. Illiquid assets include securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets as determined in accordance with Commission staff guidance. The Fund may make secured loans of its portfolio securities; however, securities loans will not be made if, as a result, the aggregate amount of all outstanding securities loans by the Fund exceeds 33 1/3% of its total assets (including the market value of collateral received). To the extent the Fund engages in securities lending, securities loans will be made to broker-dealers that the Adviser believes to be of relatively high credit standing pursuant to agreements requiring that the loans continuously be collateralized by cash, liquid securities, or shares of other investment companies with a value at least equal to the market value of the loaned securities. The Fund will be classified as a ‘‘nondiversified’’ investment company under the 1940 Act and intends to qualify for, and to elect treatment as, a separate regulated investment company under Subchapter M of the Internal Revenue Code. The Exchange represents that the Fund’s investments will be consistent with its investment objective and will leveraged. To mitigate leveraging risk, the Adviser will segregate or ‘‘earmark’’ liquid assets or otherwise cover the transactions that may give rise to such risk. 22 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). E:\FR\FM\05AUN1.SGM 05AUN1 Federal Register / Vol. 79, No. 150 / Tuesday, August 5, 2014 / Notices not be used to provide multiple returns of a benchmark or to produce leveraged returns. II. Proceedings to Determine Whether To Approve or Disapprove SR– NASDAQ–2014–038 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 23 to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change. Pursuant to Section 19(b)(2)(B) of the Act,24 the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,’’ and ‘‘to protect investors and the public interest.’’ 25 mstockstill on DSK4VPTVN1PROD with NOTICES III. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposal is consistent with Section 6(b)(5) or any other provision of the Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4, any request for an opportunity to make an oral presentation.26 23 15 U.S.C. 78s(b)(2)(B). 24 Id. 25 15 U.S.C. 78f(b)(5). 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 26 Section VerDate Mar<15>2010 18:16 Aug 04, 2014 Jkt 232001 Interested persons are invited to submit written data, views, and arguments regarding whether the proposal should be approved or disapproved by August 26, 2014. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by September 9, 2014. The Commission asks that commenters address the sufficiency of the Exchange’s statements in support of the proposal, which are set forth in the Notice,27 as modified by Amendment Nos. 1 and 2 to the proposed rule change, in addition to any other comments they may wish to submit about the proposed rule change. In particular, the Commission seeks comment on the following: 1. Because the Index is designed to reflect changes in market expectations of future dividend growth, rather than to track actual dividend growth, is the Fund’s investment strategy fundamentally based on an assumption that the options markets systemically underprice dividend growth? What are commenters’ views regarding whether investors would be able to understand the strategy, risks, potential rewards, assumptions, and expected performance of the Fund’s strategy? 2. With respect to the trading of the Shares on the Exchange, do commenters believe that the Exchange’s rules governing sales practices are adequately designed to ensure the suitability of recommendations regarding the Shares? Why or why not? If not, should the Exchange’s rules governing sales practices be enhanced? If so, in what ways? 3. How closely do commenters think the market price of the Shares will track the Fund’s intraday indicative value (‘‘IIV’’) or the intraday value of the Index? Are certain of these values likely to be more volatile than others? If so, how would this affect trading in the Shares? Are the Shares likely to trade with a significant premium or discount to IIV? What are commenters’ views of how effectively the IIV of the Fund would represent the Fund’s portfolio? What are commenters’ views of how the Shares’ market price, the Fund’s IIV, and the intraday value of the Index will relate to one another during times of market stress? 94–29 (June 4, 1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). 27 See supra note 3. PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 45559 4. Does the liquidity of the long-dated options in which the Fund will invest differ materially from that of the shortdated options in which the Fund will invest? If so, how would that affect the ability of market makers to engage in arbitrage or to hedge their positions while making a market in the Shares? Would the liquidity characteristics of the Index components or of the options in the Fund’s portfolio affect the calculation of the Index value, the calculation of the Fund’s IIV, the calculation of the Fund’s NAV, or the ability of market makers or other market participants to value the Shares? If so, how? Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2014–038 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 Numbers SR–NASDAQ–2014–038. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of these filings 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 E:\FR\FM\05AUN1.SGM 05AUN1 45560 Federal Register / Vol. 79, No. 150 / Tuesday, August 5, 2014 / Notices should refer to File Number SR– NASDAQ–2014–038 and should be submitted on or before August 26, 2014. Rebuttal comments should be submitted by September 9, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–18389 Filed 8–4–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–72704; File No. SR–CBOE– 2014–060 Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change To Amend Rule 24.19 July 29, 2014. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 25, 2014, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. mstockstill on DSK4VPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rule related to Multi-Class Broad-Based Index Option Spread Orders. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the 28 17 CFR 200.30–3(a)(57). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 18:16 Aug 04, 2014 Jkt 232001 proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rule 24.19. This Rule allows Trading Permit Holders (‘‘TPHs’’) to execute Multi-Class Broad-Based Index Option Spread Orders (‘‘Multi-Class Spread Orders’’) that meet certain qualifying criteria. Currently, not all Multi-Class Spread Orders may be entered electronically due to systems constraints. The Exchange is in the process of modifying its electronic order-entry systems to provide for the electronic entry and validation of all Multi-Class Spread Orders to the floor of the Exchange. This will provide for an enhanced audit trail that will better allow regulatory oversight in connection with the provisions of Rule 24.19. For the Exchange’s systems to determine that two separate legs are part of the same Multi-Class Spread Order (allowing for treatment as a Multi-Class Spread Order), both legs must be entered together on a single order ticket. As such, the Exchange proposes to amend Rule 24.19 to state that ‘‘MultiClass Spread Orders must be entered on a single order ticket at time of systemization to be eligible for the procedures and relief set out in this Rule.’’ 3 The Multi-Class Spread Order type will enforce the permitted combinations of options covered by Rule 24.19. The Exchange will not accept Multi-Class Spread Orders with invalid combinations. While the proposed rule change allows for all Multi-Class Spread Orders to be entered electronically, all Multi-Class Spread Orders will still be executed in open outcry on the Exchange’s trading floor. Because the current method for representing and executing Multi-Class Spread Orders is manual and must occur only in open outcry, the current 3 The Exchange notes that the substance of this proposal was published in a prior proposal which was published for the entire 21 day comment period, and no comments were received. That prior proposal provided for several changes to Rule 24.19; however, this proposal specifically relates to the electronic entry and validation of Multi-Class Spread Orders and can be considered and approved without reference to the other proposed changes in the prior proposal. See Securities Exchange Act Release No. 71872 (April 4, 2014), 79 FR 19940 (April 10, 2014) (SR–CBOE–2014–026). PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 language states that a Multi-Class Spread Order may be represented at the trading station of either Broad-Based Option comprising the order, and also requires that the TPH initiating the order in the trading crowd to contact an Order Book Official (‘‘OBO’’), Designated Primary Market-Maker (‘‘DPM’’), or appropriate Exchange staff, as applicable, at the other trading station to have a notice of such order disseminated to the other trading crowd. The proposed rule change will require that a Multi-Class Spread Order be represented at the primary trading station, and states that the TPH representing the order must contact the DPM or Exchange staff 4 (as applicable) at the other trading station in order to provide notice of such order for dissemination to the other trading crowd. Each Broad-Based Index Option has a trading station. The primary trading station is the first trading station at which the Multi-Class Spread Order is represented. The floor broker representing the Multi-Class Spread Order may determine which trading station should be the primary trading station. The current rule states that notice of a Multi-Class Spread order ‘‘shall be disseminated by the Recipient who shall verbalize the terms of the order to the other trading crowd.’’ However, the Exchange proposes to replace the word ‘‘verbalize’’ with the word ‘‘announce’’, as the Exchange is currently contemplating changes that will allow such notice to be posted on screens electronically to the other trading crowd (which could be a more efficient method of posting such order information). This ensures that all market participants at both physical trading locations are aware of the terms of the order being processed. The proposed rule change will enhance and improve the process of sending Multi-Class Spread Orders to the floor of the Exchange, as well as enhance the Exchange’s audit trail with respect to such orders. No later than 90 days following the effective date of the proposed rule change, the Exchange will announce to TPHs via Regulatory Circular the implementation date by which TPHs must be in compliance with the changes described herein. The implementation date will be no later than 180 days following the effective date of the proposed rule change, and will be at least 30 days following the release of the abovementioned Regulatory Circular (in order to give TPHs ample time to come into 4 The Exchange proposes to remove the reference to contacting an OBO, as the Exchange no longer has OBOs. E:\FR\FM\05AUN1.SGM 05AUN1

Agencies

[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45556-45560]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18389]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72715; File No. SR-NASDAQ-2014-038]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, 
Relating to Listing and Trading of Shares of the NASDAQ-100 DIVS Index 
ETF Under Rule 5705

July 29, 2014.
    On April 10, 2014, The NASDAQ Stock Market LLC (``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 Reality Shares NASDAQ-100 DIVS Index 
ETF (``Fund'') (formerly, Reality Shares NASDAQ-100 Isolated Dividend 
Growth Index ETF) under NASDAQ Rule 5705. The proposed rule change was 
published for comment in the Federal Register on April 30, 2014.\3\ On 
May 6, 2014, the Exchange filed Amendment No. 1 to the proposed rule 
change, which amended and replaced the proposed rule change in its 
entirety.\4\ On June 4, 2014, the Exchange filed Amendment No. 2 to the 
proposed rule change.\5\ On June 13, 2014, pursuant to Section 19(b)(2) 
of the Act,\6\ the Commission designated a longer period within which 
to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\7\ The Commission received no comment letters on 
the proposed rule change. This Order institutes proceedings under 
Section 19(b)(2)(B) of the Act \8\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment Nos. 1 
and 2 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 72014 (Apr. 24, 
2014), 79 FR 24465 (``Notice'').
    \4\ In Amendment No. 1, the Exchange confirmed the hours of the 
three trading sessions on the Exchange, clarified the valuation of 
investments for purposes of calculating net asset value, clarified 
what information would be available on the Fund's Web site, and 
provided additional information relating to surveillance with 
respect to certain assets held by the Fund. Amendment No. 1 provided 
clarification to the proposed rule change, and because it does not 
materially affect the substance of the proposed rule change or raise 
novel or unique regulatory issues, Amendment No. 1 is not subject to 
notice and comment.
    \5\ The Exchange filed Amendment No. 2 to the proposal to 
reflect a name change to the Fund and the underlying index. 
Specifically, the Exchange replaced each reference to ``Reality 
Shares NASDAQ-100 Isolated Dividend Growth ETF'' in the proposal 
with ``Reality Shares NASDAQ-100 DIVS Index ETF'' and replaced each 
reference to ``Reality Shares NASDAQ-100 Isolated Dividend Growth 
Index'' in the proposal with ``Reality Shares NASDAQ-100 DIVS 
Index.'' Amendment No. 2 is a technical amendment and is not subject 
to notice and comment as it does not materially affect the substance 
of the filing.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 72384, 79 FR 35205 
(June 19, 2014). The Commission designated a longer period within 
which to take action on the proposed rule change and designated July 
29, 2014, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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I. Description of the Proposal

A. In General

    The Exchange proposes to list and trade Shares of the Fund under 
NASDAQ Rule 5705(b), which governs the listing and trading of Index 
Fund Shares \9\ on the Exchange. The Shares of the Fund will be offered 
by the Reality Shares ETF Trust (``Trust''). The Trust will be 
registered with the Commission as an open-end management investment 
company.\10\ Reality Shares Advisors, LLC will serve as the investment 
adviser to the Fund (``Adviser''). ALPS Distributors, Inc. will be the 
principal underwriter and distributor of the Fund's Shares. The Bank of 
New York Mellon will serve as administrator, custodian, and transfer 
agent for the Fund.
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    \9\ Index Fund Shares that are issued by an open-end investment 
company and listed and traded on the Exchange under NASDAQ Rule 5705 
seek to provide investment results that correspond generally to the 
price and yield performance of a specific foreign or domestic stock 
index, fixed income securities index, or combination thereof. See 
Rule 5705(b)(1)(A).
    \10\ According to the Exchange, the Trust will be registered 
under the Investment Company Act of 1940 (``1940 Act''). On November 
12, 2013, the Trust filed a registration statement on Form N-1A 
under the Securities Act of 1933 (``1933 Act'') and under the 1940 
Act relating to the Fund, as amended by Pre-Effective Amendment 
Number 1, filed with the Commission on February 6, 2014 (File Nos. 
333-192288 and 811-22911) (the ``Registration Statement''). The 
description of the operation of the Trust and the Fund herein is 
based, in part, on the Registration Statement. In addition, the 
Commission has issued an order granting certain exemptive relief to 
the Trust under the 1940 Act. Investment Company Act Release No. 
30678 (Aug. 27, 2013) (``Exemptive Order''). The Exchange states 
that investments made by the Fund will comply with the conditions 
set forth in the Exemptive Order.
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B. The Exchange's Description of the Fund

    The Exchange has made the following representations concerning the 
Fund.

[[Page 45557]]

    The Fund will seek long-term capital appreciation by tracking the 
performance of the Reality Shares NASDAQ-100 DIVS Index (``Index''). 
The Index was developed and is maintained by Reality Shares, Inc. 
(``Index Provider'').\11\ The Adviser is a wholly-owned subsidiary of 
the Index Provider. The Index Provider is not registered as a broker-
dealer and is not affiliated with any broker-dealer.\12\ The Adviser is 
not registered as a broker-dealer and is not affiliated with any 
broker-dealer.\13\
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    \11\ The Index will be calculated by International Data 
Corporation, which is not affiliated with the Adviser, the Index 
Provider, or The NASDAQ OMX Group and which is not a broker-dealer 
or fund advisor. Rule 5705(b)(5)(A)(i) states that if an index is 
maintained by a fund advisor or a broker-dealer, the fund advisor or 
broker-dealer shall erect a ``fire wall'' around the personnel who 
have access to information concerning changes and adjustments to the 
index.
    \12\ The Adviser and the Index Provider have represented that a 
fire wall exists around the respective personnel who have access to 
information concerning changes and adjustments to the Index.
    \13\ The Adviser and the Index Provider have represented that a 
fire wall exists around the respective personnel who have access to 
information concerning changes and adjustments to the Index. The 
Exchange notes that, in the event (a) the Adviser, any sub-adviser, 
or the Index Provider becomes registered as a broker-dealer or newly 
affiliated with a broker-dealer, or (b) any new adviser, sub-
adviser, or Index Provider is a registered broker-dealer or becomes 
affiliated with a broker-dealer, that entity will implement a fire 
wall with respect to their relevant personnel or 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.
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1. Index Methodology
    The Index will be calculated using a proprietary, rules-based 
methodology designed to track market expectations for dividend growth 
conveyed in real-time using the mid-point of the bid-ask spread on 
NASDAQ-100 Index options and options on exchange-traded funds 
(``ETFs'') designed to track the NASDAQ-100 Index.\14\ All options 
included in the Index will be listed and traded on a U.S. national 
securities exchange. The Index will consist of a minimum of 20 
components.\15\
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    \14\ The Index will not directly measure or track actual 
dividend payments or the actual growth in dividend payments, but 
will instead track market expectations of dividend growth as implied 
by the prices of the options that make up the Index.
    \15\ Rule 5705(b)(3).
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    The prices of index and ETF options reflect the market trading 
prices of the securities included in the applicable underlying index or 
ETF, as well as market expectations regarding the level of dividends to 
be paid on those indexes or ETFs during the term of the option. The 
Index constituents, and therefore most of the Fund's portfolio 
holdings, will consist of multiple corresponding near-term and long-
term put and call option combinations on the same reference assets 
(i.e., options on the NASDAQ-100 Index or the NASDAQ-100 ETF) with the 
same strike price. Because option prices reflect both stock price and 
dividend expectations, they can be used in combination to isolate 
either price exposure or dividend expectations. The use of near-term 
and long-term put and call option combinations on the same reference 
asset with the same strike price, but with different maturities, is 
designed to gain exposure to the expected dividends of the securities 
in the NASDAQ-100 Index while neutralizing the impact of stock price 
movements. Over time, the Index will increase or decrease in value as 
the dividend spread between the near-term and long-term option 
combinations increases or decreases as a result of changing market 
expectations for dividend growth.
2. Principal Investments of the Fund
    The Fund will seek long-term capital appreciation and will seek 
investment results that, before fees and expenses, generally correspond 
to the performance of the Index. At least 80% of the Fund's total 
assets (exclusive of collateral held from securities lending, if any) 
will be invested in the component securities of the Index. The Fund 
will seek a correlation of 0.95 or better between its performance and 
the performance of its Index. A figure of 1.00 would represent perfect 
correlation. The Fund generally will use a representative sampling 
investment strategy.
    The Fund will buy (i.e., hold a ``long'' position in) and sell 
(i.e., hold a ``short'' position in) put and call options. The Fund 
will have a strategy of taking both a long position in a security 
through its ex-dividend date (the last date an investor can own the 
security and receive dividends paid on the security) and a 
corresponding short position in the same security immediately 
thereafter. This is designed to allow the Fund to isolate its exposure 
to the growth of the level of dividends expected to be paid on a 
security while minimizing its exposure to changes in the trading price 
of that security.
    The Fund will buy and sell U.S. exchange-listed options on the 
NASDAQ-100 Index and U.S. exchange-listed options on ETFs designed to 
track the NASDAQ-100 Index. A put option gives the purchaser of the 
option the right to sell, and the issuer of the option the obligation 
to buy, the underlying security or instrument on a specified date or 
during a specified period of time. A call option on a security gives 
the purchaser of the option the right to buy, and the writer of the 
option the obligation to sell, the underlying security or instrument on 
a specified date or during a specified period of time. The Fund will 
invest in a combination of put and call options designed to allow the 
Fund to isolate its exposure to the growth of the level of expected 
dividends reflected in options on the NASDAQ-100 Index and options on 
ETFs tracking the NASDAQ-100 Index, while minimizing the Fund's 
exposure to changes in the trading price of such securities.
3. Other Investments of the Fund
    While, as described above, at least 80% of the Fund's total assets 
(exclusive of collateral held from securities lending, if any) will be 
invested in the component securities of the Index, the Fund may invest 
up to 20% of the Fund's total assets in other securities and financial 
instruments, as described below.
    The Fund may invest in U.S. exchange-listed futures contracts on 
the NASDAQ-100 Index and ETFs designed to track the NASDAQ-100 Index 
and may invest in forward contracts on the NASDAQ-100 Index and ETFs 
designed to track the NASDAQ-100 Index. The Fund's use of exchange-
listed futures contracts and forward contracts is designed to allow the 
Fund to isolate its exposure to the growth of the level of expected 
dividends reflected in options on the NASDAQ-100 Index and options on 
ETFs tracking the NASDAQ-100 Index, while minimizing the Fund's 
exposure to changes in the trading price of such securities. The Fund 
may also buy and sell OTC options on the NASDAQ-100 Index and on ETFs 
designed to track the NASDAQ-100 Index.
    The Fund may enter into dividend and total return swap transactions 
(including equity swap transactions) based on the NASDAQ-100 Index and 
ETFs designed to track the NASDAQ-100 Index.\16\ In a typical swap 
transaction, one party agrees to make periodic payments to another 
party (``counterparty'') based on the change in market value or level 
of a specified rate, index, or asset. In return, the counterparty 
agrees to make periodic payments to the first party based on the return 
of a different specified rate, index, or asset. Swap transactions are 
usually done on a net basis, with the

[[Page 45558]]

Fund receiving or paying only the net amount of the two payments. In a 
typical dividend swap transaction, the Fund would pay the swap 
counterparty a premium and would be entitled to receive the value of 
the actual dividends paid on the subject index during the term of the 
swap contract. In a typical total return swap transaction, the Fund 
might exchange long or short exposures to the return of the underlying 
securities or index to isolate the value of the dividends paid on the 
underlying securities or index constituents. The Fund also may engage 
in interest rate swap transactions. In a typical interest rate swap 
transaction, one stream of future interest payments is exchanged for 
another. Such transactions often take the form of an exchange of a 
fixed payment for a variable payment based on a future interest rate. 
The Fund intends to use interest rate swap transactions to manage or 
hedge exposure to interest rate fluctuations.
---------------------------------------------------------------------------

    \16\ The Fund will transact only with swap dealers that have in 
place an ISDA agreement with the Fund.
---------------------------------------------------------------------------

    The Fund may invest up to 20% of its assets (exclusive of 
collateral held from securities lending, if any) in exchange-listed 
equity securities and derivative instruments (specifically, futures 
contracts, forward contracts, and swap transactions) \17\ relating to 
the Index and its component securities that the Adviser believes will 
help the Fund track the Index. For example, the Fund may buy and sell 
ETFs and, to a limited extent, individual large-capitalization equity 
securities listed and traded on a U.S. national securities exchange.
---------------------------------------------------------------------------

    \17\ Where practicable, the Fund intends to invest in swaps 
cleared through a central clearing house (``Cleared Swaps''). 
Currently, only certain of the interest rate swaps in which the Fund 
intends to invest are Cleared Swaps, while the dividend and total 
return swaps (including equity swaps) in which the Fund may invest 
are currently not Cleared Swaps.
---------------------------------------------------------------------------

    The Fund may invest in the securities of other investment companies 
(including money market funds) to the extent permitted under the 1940 
Act.
    The Fund's short positions and its investments in swaps, futures 
contracts, forward contracts, and options based on the NASDAQ-100 Index 
and ETFs designed to track the NASDAQ-100 Index will be backed by 
investments in cash, high-quality short-term debt securities, and 
money-market instruments in an amount equal to the Fund's maximum 
liability under the applicable position or contract or will otherwise 
be offset in accordance with Section 18 of the 1940 Act. Short-term 
debt securities and money market instruments include shares of fixed 
income or money market mutual funds, commercial paper, certificates of 
deposit, bankers' acceptances, U.S. Government Securities (including 
securities issued or guaranteed by the U.S. government or its 
authorities, agencies, or instrumentalities), repurchase 
agreements,\18\ and bonds that are rated BBB or higher.
---------------------------------------------------------------------------

    \18\ The Fund may enter into repurchase agreements with banks 
and broker-dealers. A repurchase agreement is an agreement under 
which securities are acquired by a fund from a securities dealer or 
bank, subject to resale at an agreed-upon price on a later date. The 
acquiring fund bears a risk of loss in the event that the other 
party to a repurchase agreement defaults on its obligations and the 
fund is delayed or prevented from exercising its rights to dispose 
of the collateral securities.
---------------------------------------------------------------------------

    In addition to the investments described above, and in a manner 
consistent with its investment objective, the Fund may invest a limited 
portion of its net assets in high-quality, short-term debt securities 
and money market instruments for cash management purposes.\19\
---------------------------------------------------------------------------

    \19\ The Fund may invest in shares of money market mutual funds 
to the extent permitted by the 1940 Act.
---------------------------------------------------------------------------

    The Fund will attempt to limit counterparty risk in non-cleared 
swap, forward, and OTC option contracts by entering into such contracts 
only with counterparties the Adviser believes are creditworthy and by 
limiting the Fund's exposure to each counterparty. The Adviser will 
monitor the creditworthiness of each counterparty and the Fund's 
exposure to each counterparty on an ongoing basis.\20\
---------------------------------------------------------------------------

    \20\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, the Adviser will 
evaluate each approved counterparty using various methods of 
analysis, such as, for example, the counterparty's liquidity in the 
event of default, the counterparty's reputation, the Adviser's past 
experience with the counterparty, and the counterparty's share of 
market participation.
---------------------------------------------------------------------------

    The Exchange represents that the Fund's investments in swaps, 
futures contracts, forward contracts, and options will be consistent 
with the Fund's investment objective and with the requirements of the 
1940 Act.\21\
---------------------------------------------------------------------------

    \21\ To limit the potential risk associated with such 
transactions, the Fund will segregate or ``earmark'' assets 
determined to be liquid by the Adviser in accordance with procedures 
established by the Trust's Board of Trustees and in accordance with 
the 1940 Act (or, as permitted by applicable regulation, will enter 
into certain offsetting positions) to cover its obligations arising 
from such transactions. These procedures have been adopted 
consistent with Section 18 of the 1940 Act and related Commission 
guidance. In addition, the Fund will include appropriate risk 
disclosure in its offering documents, including leveraging risk. 
Leveraging risk is the risk that certain transactions of the Fund, 
including the Fund's use of derivatives, may give rise to leverage, 
causing the Fund to be more volatile than if it had not been 
leveraged. To mitigate leveraging risk, the Adviser will segregate 
or ``earmark'' liquid assets or otherwise cover the transactions 
that may give rise to such risk.
---------------------------------------------------------------------------

4. Investment Restrictions of the Fund
    To the extent the Index concentrates (i.e., holds 25% or more of 
its total assets) in the securities of a particular industry or group 
of industries, the Fund will concentrate its investments to 
approximately the same extent as the Index.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in assets (calculated at the time of investment) deemed illiquid 
by the Adviser, consistent with Commission guidance.\22\ The Fund will 
monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
---------------------------------------------------------------------------

    \22\ 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).
---------------------------------------------------------------------------

    The Fund may make secured loans of its portfolio securities; 
however, securities loans will not be made if, as a result, the 
aggregate amount of all outstanding securities loans by the Fund 
exceeds 33 1/3% of its total assets (including the market value of 
collateral received). To the extent the Fund engages in securities 
lending, securities loans will be made to broker-dealers that the 
Adviser believes to be of relatively high credit standing pursuant to 
agreements requiring that the loans continuously be collateralized by 
cash, liquid securities, or shares of other investment companies with a 
value at least equal to the market value of the loaned securities.
    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act and intends to qualify for, and to elect 
treatment as, a separate regulated investment company under Subchapter 
M of the Internal Revenue Code. The Exchange represents that the Fund's 
investments will be consistent with its investment objective and will

[[Page 45559]]

not be used to provide multiple returns of a benchmark or to produce 
leveraged returns.

II. Proceedings to Determine Whether To Approve or Disapprove SR-
NASDAQ-2014-038 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \23\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\24\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \25\
---------------------------------------------------------------------------

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

III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\26\
---------------------------------------------------------------------------

    \26\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by August 26, 2014. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 9, 2014.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\27\ as modified by Amendment Nos. 1 and 2 to the 
proposed rule change, in addition to any other comments they may wish 
to submit about the proposed rule change. In particular, the Commission 
seeks comment on the following:
---------------------------------------------------------------------------

    \27\ See supra note 3.
---------------------------------------------------------------------------

    1. Because the Index is designed to reflect changes in market 
expectations of future dividend growth, rather than to track actual 
dividend growth, is the Fund's investment strategy fundamentally based 
on an assumption that the options markets systemically underprice 
dividend growth? What are commenters' views regarding whether investors 
would be able to understand the strategy, risks, potential rewards, 
assumptions, and expected performance of the Fund's strategy?
    2. With respect to the trading of the Shares on the Exchange, do 
commenters believe that the Exchange's rules governing sales practices 
are adequately designed to ensure the suitability of recommendations 
regarding the Shares? Why or why not? If not, should the Exchange's 
rules governing sales practices be enhanced? If so, in what ways?
    3. How closely do commenters think the market price of the Shares 
will track the Fund's intraday indicative value (``IIV'') or the 
intraday value of the Index? Are certain of these values likely to be 
more volatile than others? If so, how would this affect trading in the 
Shares? Are the Shares likely to trade with a significant premium or 
discount to IIV? What are commenters' views of how effectively the IIV 
of the Fund would represent the Fund's portfolio? What are commenters' 
views of how the Shares' market price, the Fund's IIV, and the intraday 
value of the Index will relate to one another during times of market 
stress?
    4. Does the liquidity of the long-dated options in which the Fund 
will invest differ materially from that of the short-dated options in 
which the Fund will invest? If so, how would that affect the ability of 
market makers to engage in arbitrage or to hedge their positions while 
making a market in the Shares? Would the liquidity characteristics of 
the Index components or of the options in the Fund's portfolio affect 
the calculation of the Index value, the calculation of the Fund's IIV, 
the calculation of the Fund's NAV, or the ability of market makers or 
other market participants to value the Shares? If so, how?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-038 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 Numbers SR-NASDAQ-2014-038. 
This file number should be included on the subject line if email is 
used. To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE., Washington, DC 20549, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of these filings 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

[[Page 45560]]

should refer to File Number SR-NASDAQ-2014-038 and should be submitted 
on or before August 26, 2014. Rebuttal comments should be submitted by 
September 9, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18389 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P
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