Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To List and Trade Shares of the First Trust Municipal High Income ETF of First Trust Exchange-Traded Fund III, 4712-4721 [2016-01542]

Download as PDF 4712 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices 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 shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: asabaliauskas on DSK5VPTVN1PROD 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 No. SR–ISE– 2016–03 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–ISE–2016–03. 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 such 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–ISE– VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 2016–03 and should be submitted by February 17, 2016. are collectively referred to herein as the ‘‘Shares.’’ For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Brent J. Fields, Secretary. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [FR Doc. 2016–01663 Filed 1–26–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76944; File No. SR– NASDAQ–2016–002] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To List and Trade Shares of the First Trust Municipal High Income ETF of First Trust Exchange-Traded Fund III January 21, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 6, 2016, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in in Items I and II below, which Items have been prepared by Nasdaq. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Nasdaq proposes to list and trade the shares of the First Trust Municipal High Income ETF (the ‘‘Fund’’) of First Trust Exchange-Traded Fund III (the ‘‘Trust’’) under Nasdaq Rule 5735 (‘‘Managed Fund Shares’’).3 The shares of the Fund 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 20, 2008) (SRNASDAQ–2008–039). There are already multiple actively-managed funds listed on the Exchange; see, e.g., Securities Exchange Act Release Nos. 71913 (April 9, 2014), 79 FR 21333 (April 15, 2014) (SR– NASDAQ–2014–019) (order approving listing and trading of First Trust Managed Municipal ETF); 69464 (April 26, 2013), 78 FR 25774 (May 2, 2013) (SR–NASDAQ–2013–036) (order approving listing and trading of First Trust Senior Loan Fund); 66489 (February 29, 2012), 77 FR 13379 (March 6, 2012) (SR–NASDAQ–2012–004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund). The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders. 1 15 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 In its filing with the Commission, Nasdaq included statements concerning the purpose of, and basis for, the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade the Shares of the Fund under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares 4 on the Exchange. The Fund will be an actively-managed exchange-traded fund (‘‘ETF’’). The Shares will be offered by the Trust, which was established as a Massachusetts business trust on January 9, 2008.5 The Trust is registered with the Commission as an investment company and has filed a registration statement on Form N–1A (‘‘Registration Statement’’) with the 4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1) (the ‘‘1940 Act’’) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Index Fund Shares, listed and traded on the Exchange under Nasdaq Rule 5705, seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. 5 The Commission has issued an order, upon which the Trust may rely, granting certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 30029 (April 10, 2012) (File No. 812–13795) (the ‘‘Exemptive Relief’’). In addition, 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 of Investment Management. 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. E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES Commission.6 The Fund will be a series of the Trust. The Fund intends to qualify each year as a regulated investment company (‘‘RIC’’) under Subchapter M of the Internal Revenue Code of 1986, as amended. First Trust Advisors L.P. will be the investment adviser (‘‘Adviser’’) to the Fund. First Trust Portfolios L.P. (the ‘‘Distributor’’) will be the principal underwriter and distributor of the Fund’s Shares. Brown Brothers Harriman & Co. (‘‘BBH’’) will act as the administrator, accounting agent, custodian and transfer agent to the Fund. Paragraph (g) of Rule 5735 provides that if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a brokerdealer, such investment adviser shall erect a ‘‘fire wall’’ between the investment adviser and the brokerdealer with respect to access to information concerning the composition and/or changes to such investment company portfolio.7 In addition, paragraph (g) further requires that personnel who make decisions on the open-end fund’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material, non-public information regarding the open-end fund’s portfolio. Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with the establishment of a ‘‘fire wall’’ between the investment adviser and the broker-dealer reflects 6 See Post-Effective Amendment No. 27 to Registration Statement on Form N–1A for the Trust, dated August 31, 2015 (File Nos. 333–176976 and 811–22245). The descriptions of the Fund and the Shares contained herein are based, in part, on information in the Registration Statement. 7 An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). As a result, the Adviser 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. VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 the applicable open-end fund’s portfolio, not an underlying benchmark index, as is the case with index-based funds. The Adviser is not a brokerdealer, but it is affiliated with the Distributor, a broker-dealer, and has implemented a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio. In addition, personnel who make decisions on the Fund’s portfolio composition will be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the Fund’s portfolio. In the event (a) the Adviser or any sub-adviser registers as a brokerdealer or becomes newly affiliated with a broker-dealer, or (b) any new adviser or sub-adviser is a registered brokerdealer or becomes affiliated with another broker-dealer, it will implement a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning the composition and/or changes to the portfolio and will be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding such portfolio. The Fund currently does not intend to use a sub-adviser. First Trust Municipal High Income ETF Principal Investments The primary investment objective of the Fund will be to generate current income that is exempt from regular federal income taxes and its secondary objective will be long-term capital appreciation. Under normal market conditions,8 the Fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in municipal debt securities that pay interest that is exempt from regular 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 or labor disruption or any similar intervening circumstance. On a temporary basis, including for 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; for example, it may hold a higher than normal proportion of its assets in 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 securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 4713 federal income taxes (collectively, ‘‘Municipal Securities’’).9 Municipal Securities are generally issued by or on behalf of states, territories or possessions of the U.S. and the District of Columbia and their political subdivisions, agencies, authorities and other instrumentalities. The types of Municipal Securities in which the Fund may invest include municipal lease obligations (and certificates of participation in such obligations), municipal general obligation bonds, municipal revenue bonds, municipal notes, municipal cash equivalents, private activity bonds (including without limitation industrial development bonds), and prerefunded 10 and escrowed to maturity bonds. In addition, Municipal Securities include securities issued by entities whose underlying assets are municipal bonds (i.e., tender option bond (TOB) trusts and custodial receipts trusts). The Fund may invest in Municipal Securities of any maturity. Under normal market conditions, the Fund will invest at least 65% of its net assets in Municipal Securities that are, at the time of investment, rated below investment grade (i.e., not rated Baa3/ BBB- or above) by at least one nationally recognized statistical rating organization (‘‘NRSRO’’) rating such securities (or Municipal Securities that are unrated and determined by the Adviser to be of comparable quality) 11 (commonly 9 Assuming compliance with the investment requirements and limitations described herein, the Fund may invest up to 100% of its net assets in Municipal Securities that pay interest that generates income subject to the federal alternative minimum tax. 10 A pre-refunded municipal bond is a municipal bond that has been refunded to a call date on or before the final maturity of principal and remains outstanding in the municipal market. The payment of principal and interest of the pre-refunded municipal bonds held by the Fund will be funded from securities in a designated escrow account that holds U.S. Treasury securities or other obligations of the U.S. government (including its agencies and instrumentalities). As the payment of principal and interest is generated from securities held in a designated escrow account, the pledge of the municipality has been fulfilled and the original pledge of revenue by the municipality is no longer in place. The escrow account securities pledged to pay the principal and interest of the pre-refunded municipal bond do not guarantee the price movement of the bond before maturity. Investment in pre-refunded municipal bonds held by the Fund may subject the Fund to interest rate risk, market risk and credit risk. In addition, while a secondary market exists for pre-refunded municipal bonds, if the Fund sells pre-refunded municipal bonds prior to maturity, the price received may be more or less than the original cost, depending on market conditions at the time of sale. 11 Comparable quality of unrated Municipal Securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable rated securities. On a best efforts basis, the Adviser will attempt to make a E:\FR\FM\27JAN1.SGM Continued 27JAN1 4714 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES referred to as ‘‘high yield’’ or ‘‘junk’’ bonds); 12 however, the Fund will consider pre-refunded or escrowed to maturity bonds, regardless of rating, to be investment grade securities. The Fund may invest up to 35% of its net assets in Municipal Securities that are, at the time of investment, rated investment grade (i.e., rated Baa3/BBBor above) by each NRSRO rating such securities (or Municipal Securities that are unrated and determined by the Adviser to be of comparable quality). If, subsequent to purchase by the Fund, a Municipal Security held by the Fund experiences an improvement in credit quality and becomes investment grade, the Fund may continue to hold the Municipal Security and it will not cause the Fund to violate the 35% investment limitation; however, the Municipal Security will be taken into account for purposes of determining whether purchases of additional Municipal Securities will cause the Fund to violate such limitation. The Fund will be actively managed and will not be tied to an index. However, the Fund believes that, under normal market conditions, on a continuous basis determined at the time of purchase, its portfolio of Municipal Securities 13 will generally meet, as applicable, all except for one of the criteria for non-actively managed, index-based, fixed income ETFs contained in Nasdaq Rule 5705(b)(4)(A), as described below. Nasdaq Rule 5705(b)(4)(A)(i) requires that the index or portfolio consist of rating determination based on publicly available data. In making a ‘‘comparable quality’’ determination, the Adviser may consider, for example, whether the issuer of the security has issued other rated securities, the nature and provisions of the relevant security, whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any), relevant cash flows, macroeconomic analysis, and/or sector or industry analysis. 12 The Municipal Securities in which the Fund will invest to satisfy this 65% investment requirement may include Municipal Securities that are currently in default and not expected to pay the current coupon (‘‘Distressed Municipal Securities’’). The Fund may invest up to 10% of its net assets in Distressed Municipal Securities. If, subsequent to purchase by the Fund, a Municipal Security held by the Fund becomes a Distressed Municipal Security, the Fund may continue to hold the Distressed Municipal Security and it will not cause the Fund to violate the 10% limitation; however, the Distressed Municipal Security will be taken into account for purposes of determining whether purchases of additional Municipal Securities will cause the Fund to violate such limitation. 13 For purposes of this statement and the discussion of the requirements of Nasdaq Rule 5705(b)(4)(A) below, with respect to Municipal Securities that are issued by entities whose underlying assets are municipal bonds, the underlying municipal bonds, rather than the securities issued by such entities, will be taken into account. VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 ‘‘Fixed Income Securities.’’ Since ‘‘Fixed Income Securities’’ include, among other things, municipal securities, the Fund believes that its portfolio of Municipal Securities will satisfy this requirement under normal market conditions. Nasdaq Rule 5705(b)(4)(A)(iii) applies to convertible securities and, therefore, since Municipal Securities do not include convertible securities, this requirement is not applicable. Nasdaq Rule 5705(b)(4)(A)(iv) requires that no component fixed income security (excluding Treasury securities) will represent more than 30% of the weight of the index or portfolio, and that the five highest weighted component fixed income securities will not in the aggregate account for more than 65% of the weight of the index or portfolio. The Fund believes that its portfolio of Municipal Securities will satisfy this requirement under normal market conditions. Nasdaq Rule 5705(b)(4)(A)(v) requires that an underlying index or portfolio (excluding one consisting entirely of exempted securities) include securities from a minimum of 13 non-affiliated issuers. Since, under Section 3(a)(12) of the Act, exempted securities include municipal securities, the Fund believes that its portfolio of Municipal Securities will satisfy this requirement under normal market conditions. Nasdaq Rule 5705(b)(4)(A)(vi) requires that component securities that in the aggregate account for at least 90% of the weight of the index or portfolio be either exempted securities or from a specified type of issuer. Since, as noted above, exempted securities include municipal securities, the Fund believes that its portfolio of Municipal Securities will satisfy this requirement under normal market conditions. The Fund does not believe that its portfolio of Municipal Securities will satisfy Rule 5705(b)(4)(A)(ii), which requires that components that in the aggregate account for at least 75% of the weight of the index or portfolio have a minimum original principal amount outstanding of $100 million or more. However, the Fund believes that, under normal market conditions, at least 40% (based on dollar amount invested) of the Municipal Securities in which the Fund invests will be issued by issuers with total outstanding debt issuances that, in the aggregate, have a minimum original principal amount outstanding of $75 million or more. The Commission has previously issued orders approving proposed rule changes relating to the listing and trading under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 (which governs the listing and trading of fixed-income index ETFs on NYSE Arca, Inc.), to various ETFs that track indexes comprised of municipal securities (including high-yield municipal index ETFs) that did not meet the analogous requirement included in Commentary .02(a)(2) to NYSE Arca Equities Rule 5.2(j)(3),14 but demonstrated that the portfolio of municipal securities in which the ETFs would invest would be sufficiently liquid. Similarly, the Fund is of the view that its belief that its portfolio of Municipal Securities will satisfy all except for one of the applicable requirements of Nasdaq Rule 5705(b)(4)(A), coupled with its belief that a significant portion (at least 40% (based on dollar amount invested)) of the Municipal Securities in which the Fund invests will be issued by issuers with total outstanding debt issuances that, in the aggregate, have a minimum original principal amount outstanding of $75 million or more, should provide support regarding the anticipated liquidity of its Municipal Securities portfolio. Other Investments Under normal market conditions, the Fund will invest substantially all of its assets to meet its investment objectives as described above. In addition, the Fund may invest its assets or hold cash as generally described below. The Fund may invest up to 10% of its net assets in taxable municipal securities. The Fund may also invest up to 10% of its net assets in short-term debt instruments (described below), money market funds and other cash equivalents, or it may hold cash. The percentage of the Fund invested in such holdings or held in cash will vary and will depend on several factors, including market conditions. Short-term debt instruments, which do not include Municipal Securities, are issued by issuers having a long-term debt rating of at least A-/A3 (as applicable) by Standard & Poor’s Ratings Services (‘‘S&P Ratings’’), Moody’s Investors Service, Inc. (‘‘Moody’s’’) or Fitch Ratings (‘‘Fitch’’) and have a maturity of one year or less. 14 See, e.g., Securities Exchange Act Release Nos. 75376 (July 7, 2015), 80 FR 40113 (July 13, 2015) (SR–NYSEArca-2015–18) (order approving listing and trading of Vanguard Tax-Exempt Bond Index Fund); 71232 (January 3, 2014), 79 FR 1662 (January 9, 2014) (SR–NYSEArca–2013–118) (order approving listing and trading of Market Vectors Short High-Yield Municipal Index ETF); and 63881 (February 9, 2011), 76 FR 9065 (February 16, 2011) (SR–NYSEArca–2010–120) (order approving listing and trading of SPDR Nuveen S&P High Yield Municipal Bond ETF). E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES The Fund may invest in the following short-term debt instruments: (1) Fixed rate and floating rate U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities; (2) certificates of deposit issued against funds deposited in a bank or savings and loan association; (3) bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions; (4) repurchase agreements,15 which involve purchases of debt securities; (5) bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest; and (6) commercial paper, which is short-term unsecured promissory notes.16 With respect to up to 20% of its net assets, the Fund may (i) invest in the securities of other investment companies registered under the 1940 Act, including money market funds, other ETFs,17 open-end funds (other than money market funds and other ETFs), and closed-end funds and (ii) acquire short positions in the securities of the foregoing investment companies. With respect to up to 20% of its net assets, the Fund may (i) invest in exchange-listed options on U.S. Treasury securities, exchange-listed 15 The Fund intends to enter into repurchase agreements only with financial institutions and dealers believed by the Adviser to present minimal credit risks in accordance with criteria approved by the Board of Trustees of the Trust (‘‘Trust Board’’). The Adviser will review and monitor the creditworthiness of such institutions. The Adviser will monitor the value of the collateral at the time the transaction is entered into and at all times during the term of the repurchase agreement. 16 The Fund may only invest in commercial paper rated A–3 or higher by S&P Ratings, Prime-3 or higher by Moody’s or F3 or higher by Fitch. 17 An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities. Many ETFs are designed to track the performance of a securities index, including industry, sector, country and region indexes. ETFs included in the Fund will be listed and traded in the U.S. on registered exchanges. The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission. In addition, the Fund may invest in the securities of certain other investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order that the Trust has obtained from the Commission. See Investment Company Act Release No. 30377 (February 5, 2013) (File No. 812– 13895). The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705), Portfolio Depository Receipts (as described in Nasdaq Rule 5705), and Managed Fund Shares (as described in Nasdaq Rule 5735). While the Fund may invest in inverse ETFs, the Fund will not invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs. VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 options on U.S. Treasury futures contracts, and exchange-listed U.S. Treasury futures contracts and (ii) acquire short positions in the foregoing derivatives. Transactions in the foregoing derivatives may allow the Fund to obtain net long or short exposures to selected interest rates. These derivatives may also be used to hedge risks, including interest rate risks and credit risks, associated with the Fund’s portfolio investments. The Fund’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. Investment Restrictions The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser.18 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.19 18 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). 19 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), footnote 34. See also Investment Company Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ‘‘Restricted Securities’’); Investment Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N–1A). A fund’s portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund. See Investment Company Act Release No. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a–7 under the 1940 Act); Investment Company Act Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the Securities Act of 1933). PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 4715 The Fund may not invest 25% or more of the value of its total assets in securities of issuers in any one industry. This restriction does not apply to (a) Municipal Securities issued by governments or political subdivisions of governments, (b) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities, or (c) securities of other investment companies.20 Creation and Redemption of Shares The Fund will issue and redeem Shares on a continuous basis at net asset value (‘‘NAV’’) 21 only in large blocks of Shares (‘‘Creation Units’’) in transactions with authorized participants, generally including brokerdealers and large institutional investors (‘‘Authorized Participants’’). Creation Units generally will consist of 50,000 Shares, although this may change from time to time. Creation Units, however, are not expected to consist of less than 50,000 Shares. As described in the Registration Statement and consistent with the Exemptive Relief, the Fund will issue and redeem Creation Units in exchange for an in-kind portfolio of instruments and/or cash in lieu of such instruments (the ‘‘Creation Basket’’).22 In addition, if there is a difference between the NAV attributable to a Creation Unit and the market value of the Creation Basket exchanged for the Creation Unit, the party conveying instruments with the lower value will pay to the other an amount in cash equal to the difference (referred to as the ‘‘Cash Component’’). Creations and redemptions must be made by or through an Authorized Participant that has executed an agreement that has been agreed to by the Distributor and BBH with respect to creations and redemptions of Creation Units. All standard orders to create Creation Units must be received by the transfer agent no later than the closing 20 See Form N–1A, Item 9. The Commission has taken the position that a fund is concentrated if it invests more than 25% of the value of its total assets in any one industry. See, e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 (November 21, 1975). 21 The NAV of the Fund’s Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange (‘‘NYSE’’), generally 4:00 p.m., Eastern Time (the ‘‘NAV Calculation Time’’). NAV per Share will be calculated by dividing the Fund’s net assets by the number of Fund Shares outstanding. For more information regarding the valuation of Fund investments in calculating the Fund’s NAV, see the Registration Statement. 22 Subject to, and in accordance with, the provisions of the Exemptive Relief, it is expected that the Fund will typically issue and redeem Creation Units on a cash basis; however, at times, it may issue and redeem Creation Units on an inkind (or partially in-kind) basis. E:\FR\FM\27JAN1.SGM 27JAN1 4716 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES time of the regular trading session on the NYSE (ordinarily 4:00 p.m., Eastern Time) (the ‘‘Closing Time’’), in each case on the date such order is placed in order for the creation of Creation Units to be effected based on the NAV of Shares as next determined on such date after receipt of the order in proper form. Shares may be redeemed only in Creation Units at their NAV next determined after receipt, not later than the Closing Time, of a redemption request in proper form by the Fund through the transfer agent and only on a business day. The Fund’s custodian, through the National Securities Clearing Corporation, will make available on each business day, prior to the opening of business of the Exchange, the list of the names and quantities of the instruments comprising the Creation Basket, as well as the estimated Cash Component (if any), for that day. The published Creation Basket will apply until a new Creation Basket is announced on the following business day prior to commencement of trading in the Shares. Net Asset Value The Fund’s NAV will be determined as of the close of regular trading on the NYSE on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV will be determined as of that time. NAV per Share will be calculated for the Fund by taking the value of the Fund’s total assets, including interest or dividends accrued but not yet collected, less all liabilities, including accrued expenses and dividends declared but unpaid, and dividing such amount by the total number of Shares outstanding. The result, rounded to the nearest cent, will be the NAV per Share. All valuations will be subject to review by the Trust Board or its delegate. The Fund’s investments will be valued daily. As described more specifically below, investments traded on an exchange (i.e., a regulated market), will generally be valued at market value prices that represent last sale or official closing prices. In addition, as described more specifically below, non-exchange traded investments (including Municipal Securities) will generally be valued using prices obtained from third-party pricing services (each, a ‘‘Pricing Service’’).23 If, however, valuations for any of the Fund’s investments cannot be readily obtained as provided in the 23 The Adviser may use various Pricing Services or discontinue the use of any Pricing Services, as approved by the Trust Board from time to time. VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 preceding manner, or the Pricing Committee of the Adviser (the ‘‘Pricing Committee’’) 24 questions the accuracy or reliability of valuations that are so obtained, such investments will be valued at fair value, as determined by the Pricing Committee, in accordance with valuation procedures (which may be revised from time to time) adopted by the Trust Board (the ‘‘Valuation Procedures’’), and in accordance with provisions of the 1940 Act. The Pricing Committee’s fair value determinations may require subjective judgments about the value of an asset. The fair valuations attempt to estimate the value at which an asset could be sold at the time of pricing, although actual sales could result in price differences, which could be material. Certain securities, including in particular Municipal Securities, in which the Fund may invest will not be listed on any securities exchange or board of trade. Such securities will typically be bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an overthe-counter secondary market, although typically no formal market makers will exist. Certain securities, particularly debt securities, will have few or no trades, or trade infrequently, and information regarding a specific security may not be widely available or may be incomplete. Accordingly, determinations of the value of debt securities may be based on infrequent and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of debt securities than for other types of securities. The information summarized below is based on the Valuation Procedures as currently in effect; however, as noted above, the Valuation Procedures are amended from time to time and, therefore, such information is subject to change. The following investments will typically be valued using information provided by a Pricing Service: (a) Except as provided below, Municipal Securities; (b) except as provided below, short-term U.S. government securities, commercial paper, and bankers’ acceptances, all as set forth under ‘‘Other Investments’’ (collectively, ‘‘Short-Term Debt Instruments’’); and (c) except as provided below, taxable municipal securities. Debt instruments may be valued at evaluated mean prices, 24 The Pricing Committee will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the Fund’s portfolio. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 as provided by Pricing Services. Pricing Services typically value non-exchangetraded instruments utilizing a range of market-based inputs and assumptions, including readily available market quotations obtained from broker-dealers making markets in such instruments, cash flows, and transactions for comparable instruments. In pricing certain instruments, the Pricing Services may consider information about an instrument’s issuer or market activity provided by the Adviser. Municipal Securities, Short-Term Debt Instruments and taxable municipal securities having a remaining maturity of 60 days or less when purchased will typically be valued at cost adjusted for amortization of premiums and accretion of discounts, provided the Pricing Committee has determined that the use of amortized cost is an appropriate reflection of value given market and issuer-specific conditions existing at the time of the determination. Repurchase agreements will typically be valued as follows: Overnight repurchase agreements will be valued at amortized cost when it represents the best estimate of value. Term repurchase agreements (i.e., those whose maturity exceeds seven days) will be valued at the average of the bid quotations obtained daily from at least two recognized dealers. Equity securities (including ETFs and closed-end funds) listed on any exchange other than the Exchange will typically be valued at the last sale price on the exchange on which they are principally traded on the business day as of which such value is being determined. Such equity securities (including ETFs and closed-end funds) listed on the Exchange will typically be valued at the official closing price on the business day as of which such value is being determined. If there has been no sale on such day, or no official closing price in the case of securities traded on the Exchange, such equity securities will typically be valued using fair value pricing. Such equity securities traded on more than one securities exchange will be valued at the last sale price or official closing price, as applicable, on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. Money market funds and other registered open-end management investment companies (other than ETFs, which will be valued as described above) will typically be valued at their net asset values as reported by such registered open-end management investment companies to Pricing Services. E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices Exchange-listed derivatives (including options on U.S. Treasury securities, options on U.S. Treasury futures contracts, and U.S. Treasury futures contracts) will typically be valued at the closing price in the market where such instruments are principally traded. asabaliauskas on DSK5VPTVN1PROD with NOTICES Availability of Information The Fund’s Web site (www.ftportfolios.com), which will be publicly available prior to the public offering of Shares, will include a form of the prospectus for the Fund that may be downloaded. The Web site will include the Shares’ ticker, CUSIP and exchange information along with additional quantitative information updated on a daily basis, including, for the Fund: (1) Daily trading volume, the prior business day’s reported NAV and closing price, mid-point of the bid/ask spread at the time of calculation of such NAV (the ‘‘Bid/Ask Price’’),25 and a calculation of the premium and discount of the Bid/Ask Price against the NAV; and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters. On each business day, before commencement of trading in Shares in the Regular Market Session26 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.27 The Fund’s disclosure of derivative positions in the Disclosed Portfolio will include sufficient information for market participants to 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 25 The Bid/Ask Price of the Fund will be determined using the midpoint of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fund’s NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. 26 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange: (1) PreMarket Session from 4 a.m. to 9:30 a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 4:15 p.m., Eastern Time; and (3) PostMarket Session from 4 p.m. or 4:15 p.m. to 8 p.m., Eastern Time). 27 Under accounting procedures to be followed by the Fund, trades made on the prior business day (‘‘T’’) will be booked and reflected in NAV on the current business day (‘‘T+1’’). Accordingly, the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day. VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 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 percentage weighting of the holding in the Fund’s portfolio. The Web site information will be publicly available at no charge. In addition, for the Fund, an estimated value, defined in Rule 5735(c)(3) as the ‘‘Intraday Indicative Value,’’ that reflects an estimated intraday value of the Fund’s Disclosed Portfolio, will be disseminated. Moreover, the Intraday Indicative Value, available on the NASDAQ OMX Information LLC proprietary index data service,28 will be based upon the current value for the components of the Disclosed Portfolio and will be updated and widely disseminated by one or more major market data vendors and broadly displayed at least every 15 seconds during the Regular Market Session. The Intraday Indicative Value will be based on quotes and closing prices provided by a dealer who makes a market in those instruments. Premiums and discounts between the Intraday Indicative Value and the market price may occur. This should not be viewed as a ‘‘real time’’ update of the NAV per Share of the Fund, which is calculated only once a day. The dissemination of the Intraday Indicative Value, together with the Disclosed Portfolio, will allow investors to determine the value of the underlying portfolio of the Fund on a daily basis and will provide a close estimate of that value throughout the trading day. Investors will also be able to obtain the Fund’s Statement of Additional Information (‘‘SAI’’), the Fund’s annual and semi-annual reports (together, ‘‘Shareholder Reports’’), and its Form N–CSR and Form N–SAR, filed twice a year. The Fund’s SAI and Shareholder Reports will be available free upon request from the Fund, and those documents and the Form N–CSR and Form N–SAR may be viewed on-screen 28 Currently, the NASDAQ OMX Global Index Data Service (‘‘GIDS’’) is the Nasdaq global index data feed service, offering real-time updates, daily summary messages, and access to widely followed indexes and Intraday Indicative Values for ETFs. GIDS provides investment professionals with the daily information needed to track or trade Nasdaq indexes, listed ETFs, or third-party partner indexes and ETFs. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 4717 or downloaded from the Commission’s Web site at www.sec.gov. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the Consolidated Tape Association (‘‘CTA’’) plans for the Shares. Quotation and last sale information for exchange-listed equity securities (including other ETFs and closed-end funds) will be available from the exchanges on which they are traded as well as in accordance with any applicable CTA plans. Quotation and last sale information for U.S. exchangelisted options will be available via the Options Price Reporting Authority. One source of price information for Municipal Securities and taxable municipal securities will be the Electronic Municipal Market Access (‘‘EMMA’’) of the Municipal Securities Rulemaking Board (‘‘MSRB’’).29 Additionally, the MSRB offers trade data subscription services that permit subscribers to obtain same-day pricing information about municipal securities transactions. Moreover, pricing information for Municipal Securities, as well as for taxable municipal securities, Short-Term Debt Instruments (including short-term U.S. government securities, commercial paper, and bankers’ acceptances), and repurchase agreements will be available from major broker-dealer firms and/or major market data vendors and/or Pricing Services. Pricing information for exchangelisted derivatives (including options on U.S. Treasury securities, options on U.S. Treasury futures contracts, and U.S. Treasury futures contracts), ETFs and closed-end funds will be available from the applicable listing exchange and from major market data vendors. Money market funds and other openend funds (excluding ETFs) are typically priced once each business day and their prices will be available through the applicable fund’s Web site or from major market data vendors. 29 Information available on EMMA includes nextday information regarding municipal securities transactions and par amounts traded. In addition, a source of price information for certain taxable municipal securities is the Trade Reporting and Compliance Engine (‘‘TRACE’’) of the Financial Industry Regulatory Authority (‘‘FINRA’’). E:\FR\FM\27JAN1.SGM 27JAN1 4718 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices Additional information regarding the Fund and the Shares, including investment strategies, risks, creation and redemption procedures, fees, Fund holdings disclosure policies, distributions and taxes will be included in the Registration Statement. Initial and Continued Listing The Shares will be subject to Rule 5735, which sets forth the initial and continued listing criteria applicable to Managed Fund Shares. The Exchange represents that, for initial and continued listing, the Fund must be in compliance with Rule 10A–3 30 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Nasdaq will halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121, including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the other assets constituting the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. asabaliauskas on DSK5VPTVN1PROD with NOTICES Trading Rules Nasdaq deems the Shares to be equity securities, thus rendering trading in the Shares subject to Nasdaq’s existing rules governing the trading of equity securities. Nasdaq will allow trading in the Shares from 4:00 a.m. until 8:00 p.m., Eastern Time. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum price variation for quoting and entry of orders 30 See 17 CFR 240.10A–3. VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 in Managed Fund Shares traded on the Exchange is $0.01. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both Nasdaq and also FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.31 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchangelisted securities and instruments held by the Fund (including closed-end funds, ETFs, exchange-listed options on U.S. Treasury securities, exchange-listed options on U.S. Treasury futures, and exchange-listed U.S. Treasury futures contracts) with other markets and other entities that are members of the Intermarket Surveillance Group (‘‘ISG’’),32 and FINRA may obtain trading information regarding trading in the Shares and such exchange-listed securities and instruments held by the Fund from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares and the exchange-listed securities and instruments held by the Fund from markets and other entities that are members of ISG, which includes securities and futures exchanges, or with which the Exchange has in place a comprehensive surveillance sharing agreement. Moreover, FINRA, on behalf of the Exchange, will be able to access, as needed, trade information for certain 31 FINRA surveils trading on the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. 32 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 fixed income securities held by the Fund reported to FINRA’s TRACE.33 At least 90% of the Fund’s net assets that are invested 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 (in the aggregate) will be invested in instruments that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. All of the Fund’s net assets that are invested in exchange-listed equity securities (including closed-end funds and ETFs) will be invested in securities that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq members with respect to recommending transactions in the Shares to customers; (3) how information regarding the Intraday Indicative Value and the Disclosed Portfolio is disseminated; (4) the risks involved in trading the Shares during the Pre-Market and Post-Market Sessions when an updated Intraday Indicative Value will not be calculated or publicly disseminated; (5) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. Additionally, the Information Circular will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Circular will also disclose the trading hours of the Shares of the 33 For Municipal Securities, trade information can generally be found on the MSRB’s EMMA. E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices asabaliauskas on DSK5VPTVN1PROD with NOTICES Fund and the applicable NAV Calculation Time for the Shares. The Information Circular will disclose that information about the Shares of the Fund will be publicly available on the Fund’s Web site. 2. Statutory Basis Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in general and Section 6(b)(5) of the Act in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule 5735. The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both Nasdaq and also FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws. The Adviser is not a broker-dealer, but it is affiliated with a broker-dealer and is required to implement a ‘‘fire wall’’ with respect to such broker-dealer affiliate regarding access to information concerning the composition and/or changes to the Fund’s portfolio. In addition, paragraph (g) of Nasdaq Rule 5735 further requires that personnel who make decisions on the open-end fund’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the open-end fund’s portfolio. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchangelisted securities and instruments held by the Fund (including closed-end funds, ETFs, 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) with other markets and other entities that are members of ISG, and FINRA may obtain trading information regarding trading in the Shares and such exchange-listed securities and instruments held by the Fund from such markets and other entities. In addition, the Exchange may obtain information regarding trading in VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 the Shares and the exchange-listed securities and instruments held by the Fund from markets and other entities that are members of ISG, which includes securities and futures exchanges, or with which the Exchange has in place a comprehensive surveillance sharing agreement. Moreover, FINRA, on behalf of the Exchange, will be able to access, as needed, trade information for certain fixed income securities held by the Fund reported to FINRA’s TRACE. At least 90% of the Fund’s net assets that are invested in exchange-listed options on U.S. Treasury securities, exchangelisted options on U.S. Treasury futures contracts, and exchange-listed U.S. Treasury futures contracts (in the aggregate) will be invested in instruments that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. All of the Fund’s net assets that are invested in exchange-listed equity securities (including closed-end funds and ETFs) will be invested in securities that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. The primary investment objective of the Fund will be to generate current income that is exempt from regular federal income taxes and its secondary objective will be long-term capital appreciation. Under normal market conditions, the Fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in Municipal Securities. Under normal market conditions, the Fund will invest at least 65% of its net assets in Municipal Securities that are, at the time of investment, rated below investment grade by at least one NRSRO rating such securities (or Municipal Securities that are unrated and determined by the Adviser to be of comparable quality) (commonly referred to as ‘‘high yield’’ or ‘‘junk’’ bonds). The Fund may invest up to 10% of its net assets in taxable municipal securities. In addition, the Fund may invest up to 10% of its net assets in Distressed Municipal Securities. With respect to up to 20% of its net assets, the Fund may (i) 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 and (ii) acquire short positions in the foregoing derivatives. The Fund’s investments in derivative instruments will be consistent with the Fund’s investment objectives and the 1940 Act and will not PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 4719 be used to seek to achieve a multiple or inverse multiple of an index. Also, the Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser. 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’s investments will be valued daily. Investments traded on an exchange (i.e., a regulated market), will generally be valued at market value prices that represent last sale or official closing prices. Non-exchange traded investments (including Municipal Securities) will generally be valued using prices obtained from a Pricing Service. If, however, valuations for any of the Fund’s investments cannot be readily obtained as provided in the preceding two sentences, or the Pricing Committee questions the accuracy or reliability of valuations that are so obtained, such investments will be valued at fair value, as determined by the Pricing Committee, in accordance with the Valuation Procedures and in accordance with provisions of the 1940 Act. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information will be publicly available regarding the Fund and the Shares, thereby promoting market transparency. Moreover, the Intraday Indicative Value, available on the NASDAQ OMX Information LLC proprietary index data service, will be widely disseminated by one or more major market data vendors and broadly displayed at least every 15 seconds during the Regular Market Session. On each business day, before commencement of trading in Shares in the Regular Market Session on the Exchange, the Fund will disclose on its E:\FR\FM\27JAN1.SGM 27JAN1 asabaliauskas on DSK5VPTVN1PROD with NOTICES 4720 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices Web site the Disclosed Portfolio that will form the basis for the Fund’s calculation of NAV at the end of the business day. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services, and quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares. One source of price information for Municipal Securities and taxable municipal securities will be the MSRB’s EMMA. Additionally, the MSRB offers trade data subscription services that permit subscribers to obtain same-day pricing information about municipal securities transactions. Moreover, pricing information for Municipal Securities, as well as for taxable municipal securities, Short-Term Debt Instruments (including short-term U.S. government securities, commercial paper, and bankers’ acceptances), and repurchase agreements will be available from major broker-dealer firms and/or major market data vendors and/or Pricing Services. Pricing information for exchangelisted derivatives (including options on U.S. Treasury securities, options on U.S. Treasury futures contracts, and U.S. Treasury futures contracts), ETFs and closed-end funds will be available from the applicable listing exchange and from major market data vendors. Money market funds and other openend funds (excluding ETFs) are typically priced once each business day and their prices will be available through the applicable fund’s Web site or from 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. Trading in Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120 and 4121 or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. The proposed rule change is designed to perfect the mechanism of a free and VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of activelymanaged exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchangelisted securities and instruments held by the Fund (including closed-end funds, ETFs, 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) with other markets and other entities that are members of ISG, and FINRA may obtain trading information regarding trading in the Shares and such exchange-listed securities and instruments held by the Fund from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares and the exchange-listed securities and instruments held by the Fund from markets and other entities that are members of ISG, which includes securities and futures exchanges, or with which the Exchange has in place a comprehensive surveillance sharing agreement. Furthermore, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. For the above reasons, Nasdaq believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that the proposed rule change will facilitate the listing and trading of an additional type of activelymanaged exchange-traded fund that will enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission shall: (a) by order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2016–002 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2016–002. 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 E:\FR\FM\27JAN1.SGM 27JAN1 Federal Register / Vol. 81, No. 17 / Wednesday, January 27, 2016 / Notices office of Nasdaq. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NASDAQ–2016–002 and should be submitted on or before February 17, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Brent J. Fields, Secretary. [FR Doc. 2016–01542 Filed 1–26–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76952; File No. SR–BX– 2016–003] Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding SQF Port Fees January 21, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1, and Rule 19b–4 thereunder,2 notice is hereby given that on January 12, 2016, NASDAQ OMX BX, Inc. (‘‘BX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, 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. asabaliauskas on DSK5VPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to modify BX Options Market (‘‘BX Options’’) Chapter XV, Section 3, entitled ‘‘BX Options Market—Access Services,’’ which governs pricing for BX members using BX Options,3 BX’s facility for executing and routing standardized equity and index options. Specifically, the Exchange proposes to add new streaming quote interface (‘‘SQF’’) Port Fees.4 34 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 References in this proposal to Chapter and Series refer to BX Options rules, unless otherwise indicated. 4 SQF Ports are described in detail below. 1 15 VerDate Sep<11>2014 19:41 Jan 26, 2016 Jkt 238001 The text of the proposed rule change is available on the Exchange’s Web site at https:// nasdaqomxbx.cchwallstreet.com/, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the 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 BX Options Chapter XV, Section 3(b) to add new SQF Port Fees. Currently, BX Options Chapter XV, Section 3 lists port fees as follows: (b) Port Fees, per port, per month, per mnemonic as follows: Order Entry Port Fee ...................... CTI Port Fee ................................... BX Depth Port Fee 1 ....................... BX TOP Port Fee 1 ......................... Order Entry DROP Port Fee .......... SQF Port Fee 1 ............................... $200.00 200.00 200.00 200.00 200.00 0.00 1 BX Depth and BX Top Port fees will be assessed to non-BX Participants and BX Participants. Today, if an option participant transacting business on BX Options (‘‘Participant’’) 5 has one mnemonic 6 and 20 SQF Ports, in a month the Participant would not pay anything (20 × $0.00). The Exchange now proposes to assess an SQF Fee, which is currently set at $0.00. This change is described below. The SQF Port is a port that allows a Participant acting as a BX Options Market Maker (‘‘Market Maker’’) 7 to 5 Options Participants may transact options business via the Exchange Trading System. See BX Options Chapter II, Section 1. 6 A ‘‘mnemonic’’ is a unique identifier consisting of a four character alpha code. 7 The term ‘‘Market Maker’’ or (‘‘M’’) means a Participant that has registered as a Market Maker on BX Options pursuant to Chapter VII, Section 2, and must also remain in good standing pursuant to Chapter VII, Section 4. In order to receive Market PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 4721 enter his markets into the BX Options markets. The SQF Port also allows a Market Maker to access information such as execution reports and other relevant data through a single feed. Market Makers rely on data available through the SQF Port to provide them the necessary information to perform market making activities in a swift and meaningful way. This proposal establishes that SQF Ports, which are not currently fee liable, will be fee liable. Prospectively, fees for SQF Ports will to be assessed per port, per month.8 Change 1—SQF Port Fees SQF Port Fees are currently set at $0.00 and as such are not fee liable for Participants that are Market Makers. The Exchange is now proposing in BX Options Chapter XV, Section 3(b) a fee of $500 per port, per month for SQF Ports. The Exchange had not initially made the SQF Ports fee liable in order to incentivize more Market Makers to make markets on the Exchange. The Exchange believes that this strategy has been successful in incentivizing Market Makers and that the Exchange no longer needs to offer SQF Ports without fee liability. Therefore, the Exchange is proposing a $500 SQF Port Fee that is significantly lower than that of other exchanges.9 Moreover, the Exchange is proposing that the SQF Port Fee will be per port, per month similarly to how the same fee is offered on other exchanges.10 The Exchange believes the continued availability of SQF Ports, even where fee liable as discussed, will continue to incentivize Market Makers to make markets on the Exchange. The Exchange believes that it is reasonable to impose an SQF Port Fee so that the Exchange may begin to partially recoup the costs of maintaining and enhancing SQF Ports.11 Maker pricing in all securities, the Participant must be registered as a Market Maker in at least one security. 8 All current port fee assessments (e.g., CTI Port Fee, Order Entry Port Fee, and SQF Port Fee) are assessed per port, per month, per mnemonic. See BX Options Chapter XV, Section 3. For additional information regarding SQF generally, see https:// www.nasdaqtrader.com/content/technicalsupport/ specifications/TradingProducts/sqfnom2.0.pdf. This document applies to BX Options, NASDAQ Options Market (‘‘NOM’’), and NASDAQ OMX Phlx LLC (‘‘Phlx’’). NOM, Phlx, and BX Options are options exchanges of Nasdaq, Inc. 9 The proposed $500 SQF Port Fee is, for example, significantly lower than the current $750 NOM SQF Port Fee. See NOM Chapter XV, Section 3(b). 10 For example, the NOM SQF Port Fee is similarly offered per port, per month. See NOM Chapter XV, Section 3(b). 11 The Exchange is proposing to delete the ‘‘1’’ indicating applicability of note 1 to the SQF Port Fee, as note 1 is clearly applicable only to BX Depth and BX Top Port fees. E:\FR\FM\27JAN1.SGM 27JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 17 (Wednesday, January 27, 2016)]
[Notices]
[Pages 4712-4721]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01542]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76944; File No. SR-NASDAQ-2016-002]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To List and Trade Shares of 
the First Trust Municipal High Income ETF of First Trust Exchange-
Traded Fund III

January 21, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 6, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in in Items I 
and II below, which Items have been prepared by Nasdaq. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to list and trade the shares of the First Trust 
Municipal High Income ETF (the ``Fund'') of First Trust Exchange-Traded 
Fund III (the ``Trust'') under Nasdaq Rule 5735 (``Managed Fund 
Shares'').\3\ The shares of the Fund are collectively referred to 
herein as the ``Shares.''
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    \3\ The Commission approved Nasdaq Rule 5735 in Securities 
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 
20, 2008) (SR- NASDAQ-2008-039). There are already multiple 
actively-managed funds listed on the Exchange; see, e.g., Securities 
Exchange Act Release Nos. 71913 (April 9, 2014), 79 FR 21333 (April 
15, 2014) (SR-NASDAQ-2014-019) (order approving listing and trading 
of First Trust Managed Municipal ETF); 69464 (April 26, 2013), 78 FR 
25774 (May 2, 2013) (SR-NASDAQ-2013-036) (order approving listing 
and trading of First Trust Senior Loan Fund); 66489 (February 29, 
2012), 77 FR 13379 (March 6, 2012) (SR-NASDAQ-2012-004) (order 
approving listing and trading of WisdomTree Emerging Markets 
Corporate Bond Fund). The Exchange believes the proposed rule change 
raises no significant issues not previously addressed in those prior 
Commission orders.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares \4\ on the Exchange. The Fund will be an actively-
managed exchange-traded fund (``ETF''). The Shares will be offered by 
the Trust, which was established as a Massachusetts business trust on 
January 9, 2008.\5\ The Trust is registered with the Commission as an 
investment company and has filed a registration statement on Form N-1A 
(``Registration Statement'') with the

[[Page 4713]]

Commission.\6\ The Fund will be a series of the Trust. The Fund intends 
to qualify each year as a regulated investment company (``RIC'') under 
Subchapter M of the Internal Revenue Code of 1986, as amended.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') organized 
as an open-end investment company or similar entity that invests in 
a portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Index Fund Shares, listed 
and traded on the Exchange under Nasdaq Rule 5705, seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specific foreign or domestic stock index, fixed 
income securities index or combination thereof.
    \5\ The Commission has issued an order, upon which the Trust may 
rely, granting certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 30029 (April 10, 2012) (File No. 
812-13795) (the ``Exemptive Relief''). In addition, 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 of Investment Management. 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\ See Post-Effective Amendment No. 27 to Registration 
Statement on Form N-1A for the Trust, dated August 31, 2015 (File 
Nos. 333-176976 and 811-22245). The descriptions of the Fund and the 
Shares contained herein are based, in part, on information in the 
Registration Statement.
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    First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund. First Trust Portfolios L.P. (the 
``Distributor'') will be the principal underwriter and distributor of 
the Fund's Shares. Brown Brothers Harriman & Co. (``BBH'') will act as 
the administrator, accounting agent, custodian and transfer agent to 
the Fund.
    Paragraph (g) of Rule 5735 provides that if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect a ``fire 
wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio.\7\ In addition, paragraph 
(g) further requires that personnel who make decisions on the open-end 
fund's portfolio composition must be subject to procedures designed to 
prevent the use and dissemination of material, non-public information 
regarding the open-end fund's portfolio. Rule 5735(g) is similar to 
Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with 
the establishment of a ``fire wall'' between the investment adviser and 
the broker-dealer reflects the applicable open-end fund's portfolio, 
not an underlying benchmark index, as is the case with index-based 
funds. The Adviser is not a broker-dealer, but it is affiliated with 
the Distributor, a broker-dealer, and has implemented a fire wall with 
respect to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio. In 
addition, personnel who make decisions on the Fund's portfolio 
composition will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
Fund's portfolio. In the event (a) the Adviser or any sub-adviser 
registers as a broker-dealer 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 another broker-dealer, it will 
implement a fire wall with respect to its relevant personnel and/or 
such broker-dealer affiliate, as applicable, regarding access to 
information concerning the composition and/or changes to the portfolio 
and will be subject to procedures designed to prevent the use and 
dissemination of material non-public information regarding such 
portfolio. The Fund currently does not intend to use a sub-adviser.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser 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.
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First Trust Municipal High Income ETF
Principal Investments
    The primary investment objective of the Fund will be to generate 
current income that is exempt from regular federal income taxes and its 
secondary objective will be long-term capital appreciation. Under 
normal market conditions,\8\ the Fund will seek to achieve its 
investment objectives by investing at least 80% of its net assets 
(including investment borrowings) in municipal debt securities that pay 
interest that is exempt from regular federal income taxes 
(collectively, ``Municipal Securities'').\9\ Municipal Securities are 
generally issued by or on behalf of states, territories or possessions 
of the U.S. and the District of Columbia and their political 
subdivisions, agencies, authorities and other instrumentalities. The 
types of Municipal Securities in which the Fund may invest include 
municipal lease obligations (and certificates of participation in such 
obligations), municipal general obligation bonds, municipal revenue 
bonds, municipal notes, municipal cash equivalents, private activity 
bonds (including without limitation industrial development bonds), and 
pre-refunded \10\ and escrowed to maturity bonds. In addition, 
Municipal Securities include securities issued by entities whose 
underlying assets are municipal bonds (i.e., tender option bond (TOB) 
trusts and custodial receipts trusts). The Fund may invest in Municipal 
Securities of any maturity.
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    \8\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the fixed income markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance. On a temporary 
basis, including for 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; for 
example, it may hold a higher than normal proportion of its assets 
in 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 securities in which the Fund normally 
invests have elevated risks due to political or economic factors and 
in other extraordinary circumstances.
    \9\ Assuming compliance with the investment requirements and 
limitations described herein, the Fund may invest up to 100% of its 
net assets in Municipal Securities that pay interest that generates 
income subject to the federal alternative minimum tax.
    \10\ A pre-refunded municipal bond is a municipal bond that has 
been refunded to a call date on or before the final maturity of 
principal and remains outstanding in the municipal market. The 
payment of principal and interest of the pre-refunded municipal 
bonds held by the Fund will be funded from securities in a 
designated escrow account that holds U.S. Treasury securities or 
other obligations of the U.S. government (including its agencies and 
instrumentalities). As the payment of principal and interest is 
generated from securities held in a designated escrow account, the 
pledge of the municipality has been fulfilled and the original 
pledge of revenue by the municipality is no longer in place. The 
escrow account securities pledged to pay the principal and interest 
of the pre-refunded municipal bond do not guarantee the price 
movement of the bond before maturity. Investment in pre-refunded 
municipal bonds held by the Fund may subject the Fund to interest 
rate risk, market risk and credit risk. In addition, while a 
secondary market exists for pre-refunded municipal bonds, if the 
Fund sells pre-refunded municipal bonds prior to maturity, the price 
received may be more or less than the original cost, depending on 
market conditions at the time of sale.
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    Under normal market conditions, the Fund will invest at least 65% 
of its net assets in Municipal Securities that are, at the time of 
investment, rated below investment grade (i.e., not rated Baa3/BBB- or 
above) by at least one nationally recognized statistical rating 
organization (``NRSRO'') rating such securities (or Municipal 
Securities that are unrated and determined by the Adviser to be of 
comparable quality) \11\ (commonly

[[Page 4714]]

referred to as ``high yield'' or ``junk'' bonds); \12\ however, the 
Fund will consider pre-refunded or escrowed to maturity bonds, 
regardless of rating, to be investment grade securities. The Fund may 
invest up to 35% of its net assets in Municipal Securities that are, at 
the time of investment, rated investment grade (i.e., rated Baa3/BBB- 
or above) by each NRSRO rating such securities (or Municipal Securities 
that are unrated and determined by the Adviser to be of comparable 
quality). If, subsequent to purchase by the Fund, a Municipal Security 
held by the Fund experiences an improvement in credit quality and 
becomes investment grade, the Fund may continue to hold the Municipal 
Security and it will not cause the Fund to violate the 35% investment 
limitation; however, the Municipal Security will be taken into account 
for purposes of determining whether purchases of additional Municipal 
Securities will cause the Fund to violate such limitation.
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    \11\ Comparable quality of unrated Municipal Securities will be 
determined by the Adviser based on fundamental credit analysis of 
the unrated security and comparable rated securities. On a best 
efforts basis, the Adviser will attempt to make a rating 
determination based on publicly available data. In making a 
``comparable quality'' determination, the Adviser may consider, for 
example, whether the issuer of the security has issued other rated 
securities, the nature and provisions of the relevant security, 
whether the obligations under the relevant security are guaranteed 
by another entity and the rating of such guarantor (if any), 
relevant cash flows, macroeconomic analysis, and/or sector or 
industry analysis.
    \12\ The Municipal Securities in which the Fund will invest to 
satisfy this 65% investment requirement may include Municipal 
Securities that are currently in default and not expected to pay the 
current coupon (``Distressed Municipal Securities''). The Fund may 
invest up to 10% of its net assets in Distressed Municipal 
Securities. If, subsequent to purchase by the Fund, a Municipal 
Security held by the Fund becomes a Distressed Municipal Security, 
the Fund may continue to hold the Distressed Municipal Security and 
it will not cause the Fund to violate the 10% limitation; however, 
the Distressed Municipal Security will be taken into account for 
purposes of determining whether purchases of additional Municipal 
Securities will cause the Fund to violate such limitation.
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    The Fund will be actively managed and will not be tied to an index. 
However, the Fund believes that, under normal market conditions, on a 
continuous basis determined at the time of purchase, its portfolio of 
Municipal Securities \13\ will generally meet, as applicable, all 
except for one of the criteria for non-actively managed, index-based, 
fixed income ETFs contained in Nasdaq Rule 5705(b)(4)(A), as described 
below.
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    \13\ For purposes of this statement and the discussion of the 
requirements of Nasdaq Rule 5705(b)(4)(A) below, with respect to 
Municipal Securities that are issued by entities whose underlying 
assets are municipal bonds, the underlying municipal bonds, rather 
than the securities issued by such entities, will be taken into 
account.
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    Nasdaq Rule 5705(b)(4)(A)(i) requires that the index or portfolio 
consist of ``Fixed Income Securities.'' Since ``Fixed Income 
Securities'' include, among other things, municipal securities, the 
Fund believes that its portfolio of Municipal Securities will satisfy 
this requirement under normal market conditions.
    Nasdaq Rule 5705(b)(4)(A)(iii) applies to convertible securities 
and, therefore, since Municipal Securities do not include convertible 
securities, this requirement is not applicable.
    Nasdaq Rule 5705(b)(4)(A)(iv) requires that no component fixed 
income security (excluding Treasury securities) will represent more 
than 30% of the weight of the index or portfolio, and that the five 
highest weighted component fixed income securities will not in the 
aggregate account for more than 65% of the weight of the index or 
portfolio. The Fund believes that its portfolio of Municipal Securities 
will satisfy this requirement under normal market conditions.
    Nasdaq Rule 5705(b)(4)(A)(v) requires that an underlying index or 
portfolio (excluding one consisting entirely of exempted securities) 
include securities from a minimum of 13 non-affiliated issuers. Since, 
under Section 3(a)(12) of the Act, exempted securities include 
municipal securities, the Fund believes that its portfolio of Municipal 
Securities will satisfy this requirement under normal market 
conditions.
    Nasdaq Rule 5705(b)(4)(A)(vi) requires that component securities 
that in the aggregate account for at least 90% of the weight of the 
index or portfolio be either exempted securities or from a specified 
type of issuer. Since, as noted above, exempted securities include 
municipal securities, the Fund believes that its portfolio of Municipal 
Securities will satisfy this requirement under normal market 
conditions.
    The Fund does not believe that its portfolio of Municipal 
Securities will satisfy Rule 5705(b)(4)(A)(ii), which requires that 
components that in the aggregate account for at least 75% of the weight 
of the index or portfolio have a minimum original principal amount 
outstanding of $100 million or more. However, the Fund believes that, 
under normal market conditions, at least 40% (based on dollar amount 
invested) of the Municipal Securities in which the Fund invests will be 
issued by issuers with total outstanding debt issuances that, in the 
aggregate, have a minimum original principal amount outstanding of $75 
million or more. The Commission has previously issued orders approving 
proposed rule changes relating to the listing and trading under NYSE 
Arca Equities Rule 5.2(j)(3), Commentary .02 (which governs the listing 
and trading of fixed-income index ETFs on NYSE Arca, Inc.), to various 
ETFs that track indexes comprised of municipal securities (including 
high-yield municipal index ETFs) that did not meet the analogous 
requirement included in Commentary .02(a)(2) to NYSE Arca Equities Rule 
5.2(j)(3),\14\ but demonstrated that the portfolio of municipal 
securities in which the ETFs would invest would be sufficiently liquid. 
Similarly, the Fund is of the view that its belief that its portfolio 
of Municipal Securities will satisfy all except for one of the 
applicable requirements of Nasdaq Rule 5705(b)(4)(A), coupled with its 
belief that a significant portion (at least 40% (based on dollar amount 
invested)) of the Municipal Securities in which the Fund invests will 
be issued by issuers with total outstanding debt issuances that, in the 
aggregate, have a minimum original principal amount outstanding of $75 
million or more, should provide support regarding the anticipated 
liquidity of its Municipal Securities portfolio.
---------------------------------------------------------------------------

    \14\ See, e.g., Securities Exchange Act Release Nos. 75376 (July 
7, 2015), 80 FR 40113 (July 13, 2015) (SR-NYSEArca-2015-18) (order 
approving listing and trading of Vanguard Tax-Exempt Bond Index 
Fund); 71232 (January 3, 2014), 79 FR 1662 (January 9, 2014) (SR-
NYSEArca-2013-118) (order approving listing and trading of Market 
Vectors Short High-Yield Municipal Index ETF); and 63881 (February 
9, 2011), 76 FR 9065 (February 16, 2011) (SR-NYSEArca-2010-120) 
(order approving listing and trading of SPDR Nuveen S&P High Yield 
Municipal Bond ETF).
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Other Investments
    Under normal market conditions, the Fund will invest substantially 
all of its assets to meet its investment objectives as described above. 
In addition, the Fund may invest its assets or hold cash as generally 
described below.
    The Fund may invest up to 10% of its net assets in taxable 
municipal securities. The Fund may also invest up to 10% of its net 
assets in short-term debt instruments (described below), money market 
funds and other cash equivalents, or it may hold cash. The percentage 
of the Fund invested in such holdings or held in cash will vary and 
will depend on several factors, including market conditions.
    Short-term debt instruments, which do not include Municipal 
Securities, are issued by issuers having a long-term debt rating of at 
least A-/A3 (as applicable) by Standard & Poor's Ratings Services 
(``S&P Ratings''), Moody's Investors Service, Inc. (``Moody's'') or 
Fitch Ratings (``Fitch'') and have a maturity of one year or less.

[[Page 4715]]

    The Fund may invest in the following short-term debt instruments: 
(1) Fixed rate and floating rate U.S. government securities, including 
bills, notes and bonds differing as to maturity and rates of interest, 
which are either issued or guaranteed by the U.S. Treasury or by U.S. 
government agencies or instrumentalities; (2) certificates of deposit 
issued against funds deposited in a bank or savings and loan 
association; (3) bankers' acceptances, which are short-term credit 
instruments used to finance commercial transactions; (4) repurchase 
agreements,\15\ which involve purchases of debt securities; (5) bank 
time deposits, which are monies kept on deposit with banks or savings 
and loan associations for a stated period of time at a fixed rate of 
interest; and (6) commercial paper, which is short-term unsecured 
promissory notes.\16\
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    \15\ The Fund intends to enter into repurchase agreements only 
with financial institutions and dealers believed by the Adviser to 
present minimal credit risks in accordance with criteria approved by 
the Board of Trustees of the Trust (``Trust Board''). The Adviser 
will review and monitor the creditworthiness of such institutions. 
The Adviser will monitor the value of the collateral at the time the 
transaction is entered into and at all times during the term of the 
repurchase agreement.
    \16\ The Fund may only invest in commercial paper rated A-3 or 
higher by S&P Ratings, Prime-3 or higher by Moody's or F3 or higher 
by Fitch.
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    With respect to up to 20% of its net assets, the Fund may (i) 
invest in the securities of other investment companies registered under 
the 1940 Act, including money market funds, other ETFs,\17\ open-end 
funds (other than money market funds and other ETFs), and closed-end 
funds and (ii) acquire short positions in the securities of the 
foregoing investment companies.
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    \17\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. Many ETFs are designed to 
track the performance of a securities index, including industry, 
sector, country and region indexes. ETFs included in the Fund will 
be listed and traded in the U.S. on registered exchanges. The Fund 
may invest in the securities of ETFs in excess of the limits imposed 
under the 1940 Act pursuant to exemptive orders obtained by other 
ETFs and their sponsors from the Commission. In addition, the Fund 
may invest in the securities of certain other investment companies 
in excess of the limits imposed under the 1940 Act pursuant to an 
exemptive order that the Trust has obtained from the Commission. See 
Investment Company Act Release No. 30377 (February 5, 2013) (File 
No. 812-13895). The ETFs in which the Fund may invest include Index 
Fund Shares (as described in Nasdaq Rule 5705), Portfolio Depository 
Receipts (as described in Nasdaq Rule 5705), and Managed Fund Shares 
(as described in Nasdaq Rule 5735). While the Fund may invest in 
inverse ETFs, the Fund will not invest in leveraged or inverse 
leveraged (e.g., 2X or -3X) ETFs.
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    With respect to up to 20% of its net assets, the Fund may (i) 
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 and (ii) acquire short 
positions in the foregoing derivatives. Transactions in the foregoing 
derivatives may allow the Fund to obtain net long or short exposures to 
selected interest rates. These derivatives may also be used to hedge 
risks, including interest rate risks and credit risks, associated with 
the Fund's portfolio investments. The Fund'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.
Investment Restrictions
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser.\18\ 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.\19\
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    \18\ 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).
    \19\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also Investment Company Act 
Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) 
(Statement Regarding ``Restricted Securities''); Investment Company 
Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) 
(Revisions of Guidelines to Form N-1A). A fund's portfolio security 
is illiquid if it cannot be disposed of in the ordinary course of 
business within seven days at approximately the value ascribed to it 
by the fund. See Investment Company Act Release No. 14983 (March 12, 
1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 
under the 1940 Act); Investment Company Act Release No. 17452 (April 
23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under 
the Securities Act of 1933).
---------------------------------------------------------------------------

    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to (a) Municipal Securities issued by governments or 
political subdivisions of governments, (b) obligations issued or 
guaranteed by the U.S. government, its agencies or instrumentalities, 
or (c) securities of other investment companies.\20\
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    \20\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
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Creation and Redemption of Shares
    The Fund will issue and redeem Shares on a continuous basis at net 
asset value (``NAV'') \21\ only in large blocks of Shares (``Creation 
Units'') in transactions with authorized participants, generally 
including broker-dealers and large institutional investors 
(``Authorized Participants''). Creation Units generally will consist of 
50,000 Shares, although this may change from time to time. Creation 
Units, however, are not expected to consist of less than 50,000 Shares. 
As described in the Registration Statement and consistent with the 
Exemptive Relief, the Fund will issue and redeem Creation Units in 
exchange for an in-kind portfolio of instruments and/or cash in lieu of 
such instruments (the ``Creation Basket'').\22\ In addition, if there 
is a difference between the NAV attributable to a Creation Unit and the 
market value of the Creation Basket exchanged for the Creation Unit, 
the party conveying instruments with the lower value will pay to the 
other an amount in cash equal to the difference (referred to as the 
``Cash Component'').
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    \21\ The NAV of the Fund's Shares generally will be calculated 
once daily Monday through Friday as of the close of regular trading 
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m., 
Eastern Time (the ``NAV Calculation Time''). NAV per Share will be 
calculated by dividing the Fund's net assets by the number of Fund 
Shares outstanding. For more information regarding the valuation of 
Fund investments in calculating the Fund's NAV, see the Registration 
Statement.
    \22\ Subject to, and in accordance with, the provisions of the 
Exemptive Relief, it is expected that the Fund will typically issue 
and redeem Creation Units on a cash basis; however, at times, it may 
issue and redeem Creation Units on an in-kind (or partially in-kind) 
basis.
---------------------------------------------------------------------------

    Creations and redemptions must be made by or through an Authorized 
Participant that has executed an agreement that has been agreed to by 
the Distributor and BBH with respect to creations and redemptions of 
Creation Units. All standard orders to create Creation Units must be 
received by the transfer agent no later than the closing

[[Page 4716]]

time of the regular trading session on the NYSE (ordinarily 4:00 p.m., 
Eastern Time) (the ``Closing Time''), in each case on the date such 
order is placed in order for the creation of Creation Units to be 
effected based on the NAV of Shares as next determined on such date 
after receipt of the order in proper form. Shares may be redeemed only 
in Creation Units at their NAV next determined after receipt, not later 
than the Closing Time, of a redemption request in proper form by the 
Fund through the transfer agent and only on a business day.
    The Fund's custodian, through the National Securities Clearing 
Corporation, will make available on each business day, prior to the 
opening of business of the Exchange, the list of the names and 
quantities of the instruments comprising the Creation Basket, as well 
as the estimated Cash Component (if any), for that day. The published 
Creation Basket will apply until a new Creation Basket is announced on 
the following business day prior to commencement of trading in the 
Shares.
Net Asset Value
    The Fund's NAV will be determined as of the close of regular 
trading on the NYSE on each day the NYSE is open for trading. If the 
NYSE closes early on a valuation day, the NAV will be determined as of 
that time. NAV per Share will be calculated for the Fund by taking the 
value of the Fund's total assets, including interest or dividends 
accrued but not yet collected, less all liabilities, including accrued 
expenses and dividends declared but unpaid, and dividing such amount by 
the total number of Shares outstanding. The result, rounded to the 
nearest cent, will be the NAV per Share. All valuations will be subject 
to review by the Trust Board or its delegate.
    The Fund's investments will be valued daily. As described more 
specifically below, investments traded on an exchange (i.e., a 
regulated market), will generally be valued at market value prices that 
represent last sale or official closing prices. In addition, as 
described more specifically below, non-exchange traded investments 
(including Municipal Securities) will generally be valued using prices 
obtained from third-party pricing services (each, a ``Pricing 
Service'').\23\ If, however, valuations for any of the Fund's 
investments cannot be readily obtained as provided in the preceding 
manner, or the Pricing Committee of the Adviser (the ``Pricing 
Committee'') \24\ questions the accuracy or reliability of valuations 
that are so obtained, such investments will be valued at fair value, as 
determined by the Pricing Committee, in accordance with valuation 
procedures (which may be revised from time to time) adopted by the 
Trust Board (the ``Valuation Procedures''), and in accordance with 
provisions of the 1940 Act. The Pricing Committee's fair value 
determinations may require subjective judgments about the value of an 
asset. The fair valuations attempt to estimate the value at which an 
asset could be sold at the time of pricing, although actual sales could 
result in price differences, which could be material.
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    \23\ The Adviser may use various Pricing Services or discontinue 
the use of any Pricing Services, as approved by the Trust Board from 
time to time.
    \24\ The Pricing Committee will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the Fund's portfolio.
---------------------------------------------------------------------------

    Certain securities, including in particular Municipal Securities, 
in which the Fund may invest will not be listed on any securities 
exchange or board of trade. Such securities will typically be bought 
and sold by institutional investors in individually negotiated private 
transactions that function in many respects like an over-the-counter 
secondary market, although typically no formal market makers will 
exist. Certain securities, particularly debt securities, will have few 
or no trades, or trade infrequently, and information regarding a 
specific security may not be widely available or may be incomplete. 
Accordingly, determinations of the value of debt securities may be 
based on infrequent and dated information. Because there is less 
reliable, objective data available, elements of judgment may play a 
greater role in valuation of debt securities than for other types of 
securities.
    The information summarized below is based on the Valuation 
Procedures as currently in effect; however, as noted above, the 
Valuation Procedures are amended from time to time and, therefore, such 
information is subject to change.
    The following investments will typically be valued using 
information provided by a Pricing Service: (a) Except as provided 
below, Municipal Securities; (b) except as provided below, short-term 
U.S. government securities, commercial paper, and bankers' acceptances, 
all as set forth under ``Other Investments'' (collectively, ``Short-
Term Debt Instruments''); and (c) except as provided below, taxable 
municipal securities. Debt instruments may be valued at evaluated mean 
prices, as provided by Pricing Services. Pricing Services typically 
value non-exchange-traded instruments utilizing a range of market-based 
inputs and assumptions, including readily available market quotations 
obtained from broker-dealers making markets in such instruments, cash 
flows, and transactions for comparable instruments. In pricing certain 
instruments, the Pricing Services may consider information about an 
instrument's issuer or market activity provided by the Adviser.
    Municipal Securities, Short-Term Debt Instruments and taxable 
municipal securities having a remaining maturity of 60 days or less 
when purchased will typically be valued at cost adjusted for 
amortization of premiums and accretion of discounts, provided the 
Pricing Committee has determined that the use of amortized cost is an 
appropriate reflection of value given market and issuer-specific 
conditions existing at the time of the determination.
    Repurchase agreements will typically be valued as follows:
    Overnight repurchase agreements will be valued at amortized cost 
when it represents the best estimate of value. Term repurchase 
agreements (i.e., those whose maturity exceeds seven days) will be 
valued at the average of the bid quotations obtained daily from at 
least two recognized dealers.
    Equity securities (including ETFs and closed-end funds) listed on 
any exchange other than the Exchange will typically be valued at the 
last sale price on the exchange on which they are principally traded on 
the business day as of which such value is being determined. Such 
equity securities (including ETFs and closed-end funds) listed on the 
Exchange will typically be valued at the official closing price on the 
business day as of which such value is being determined. If there has 
been no sale on such day, or no official closing price in the case of 
securities traded on the Exchange, such equity securities will 
typically be valued using fair value pricing. Such equity securities 
traded on more than one securities exchange will be valued at the last 
sale price or official closing price, as applicable, on the business 
day as of which such value is being determined at the close of the 
exchange representing the principal market for such securities.
    Money market funds and other registered open-end management 
investment companies (other than ETFs, which will be valued as 
described above) will typically be valued at their net asset values as 
reported by such registered open-end management investment companies to 
Pricing Services.

[[Page 4717]]

    Exchange-listed derivatives (including options on U.S. Treasury 
securities, options on U.S. Treasury futures contracts, and U.S. 
Treasury futures contracts) will typically be valued at the closing 
price in the market where such instruments are principally traded.
Availability of Information
    The Fund's Web site (www.ftportfolios.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Web site 
will include the Shares' ticker, CUSIP and exchange information along 
with additional quantitative information updated on a daily basis, 
including, for the Fund: (1) Daily trading volume, the prior business 
day's reported NAV and closing price, mid-point of the bid/ask spread 
at the time of calculation of such NAV (the ``Bid/Ask Price''),\25\ and 
a calculation of the premium and discount of the Bid/Ask Price against 
the NAV; and (2) data in chart format displaying the frequency 
distribution of discounts and premiums of the daily Bid/Ask Price 
against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Regular Market Session\26\ 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.\27\ The Fund's disclosure of derivative positions in the 
Disclosed Portfolio will include sufficient information for market 
participants to 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 
percentage weighting of the holding in the Fund's portfolio. The Web 
site information will be publicly available at no charge.
---------------------------------------------------------------------------

    \25\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \26\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to 4 
p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m., Eastern Time).
    \27\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.
---------------------------------------------------------------------------

    In addition, for the Fund, an estimated value, defined in Rule 
5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's Disclosed Portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value, available on the 
NASDAQ OMX Information LLC proprietary index data service,\28\ will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated by one or more 
major market data vendors and broadly displayed at least every 15 
seconds during the Regular Market Session. The Intraday Indicative 
Value will be based on quotes and closing prices provided by a dealer 
who makes a market in those instruments. Premiums and discounts between 
the Intraday Indicative Value and the market price may occur. This 
should not be viewed as a ``real time'' update of the NAV per Share of 
the Fund, which is calculated only once a day.
---------------------------------------------------------------------------

    \28\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the Nasdaq global index data feed service, offering 
real-time updates, daily summary messages, and access to widely 
followed indexes and Intraday Indicative Values for ETFs. GIDS 
provides investment professionals with the daily information needed 
to track or trade Nasdaq indexes, listed ETFs, or third-party 
partner indexes and ETFs.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of the Fund on a daily basis and will provide 
a close estimate of that value throughout the trading day.
    Investors will also be able to obtain the Fund's Statement of 
Additional Information (``SAI''), the Fund's annual and semi-annual 
reports (together, ``Shareholder Reports''), and its Form N-CSR and 
Form N-SAR, filed twice a year. The Fund's SAI and Shareholder Reports 
will be available free upon request from the Fund, and those documents 
and the Form N-CSR and Form N-SAR may be viewed on-screen or downloaded 
from the Commission's Web site at www.sec.gov. Information regarding 
market price and trading volume of the Shares will be continually 
available on a real-time basis throughout the day on brokers' computer 
screens and other electronic services.
    Information regarding the previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers. Quotation and last sale information 
for the Shares will be available via Nasdaq proprietary quote and trade 
services, as well as in accordance with the Unlisted Trading Privileges 
and the Consolidated Tape Association (``CTA'') plans for the Shares. 
Quotation and last sale information for exchange-listed equity 
securities (including other ETFs and closed-end funds) will be 
available from the exchanges on which they are traded as well as in 
accordance with any applicable CTA plans. Quotation and last sale 
information for U.S. exchange-listed options will be available via the 
Options Price Reporting Authority.
    One source of price information for Municipal Securities and 
taxable municipal securities will be the Electronic Municipal Market 
Access (``EMMA'') of the Municipal Securities Rulemaking Board 
(``MSRB'').\29\ Additionally, the MSRB offers trade data subscription 
services that permit subscribers to obtain same-day pricing information 
about municipal securities transactions. Moreover, pricing information 
for Municipal Securities, as well as for taxable municipal securities, 
Short-Term Debt Instruments (including short-term U.S. government 
securities, commercial paper, and bankers' acceptances), and repurchase 
agreements will be available from major broker-dealer firms and/or 
major market data vendors and/or Pricing Services.
---------------------------------------------------------------------------

    \29\ Information available on EMMA includes next-day information 
regarding municipal securities transactions and par amounts traded. 
In addition, a source of price information for certain taxable 
municipal securities is the Trade Reporting and Compliance Engine 
(``TRACE'') of the Financial Industry Regulatory Authority 
(``FINRA'').
---------------------------------------------------------------------------

    Pricing information for exchange-listed derivatives (including 
options on U.S. Treasury securities, options on U.S. Treasury futures 
contracts, and U.S. Treasury futures contracts), ETFs and closed-end 
funds will be available from the applicable listing exchange and from 
major market data vendors.
    Money market funds and other open-end funds (excluding ETFs) are 
typically priced once each business day and their prices will be 
available through the applicable fund's Web site or from major market 
data vendors.

[[Page 4718]]

    Additional information regarding the Fund and the Shares, including 
investment strategies, risks, creation and redemption procedures, fees, 
Fund holdings disclosure policies, distributions and taxes will be 
included in the Registration Statement.
Initial and Continued Listing
    The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and continued 
listing, the Fund must be in compliance with Rule 10A-3 \30\ under the 
Act. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. The Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time.
---------------------------------------------------------------------------

    \30\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. Nasdaq will halt trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). 
Trading may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
These may include: (1) The extent to which trading is not occurring in 
the securities and/or the other assets constituting the Disclosed 
Portfolio of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
5735(d)(2)(D), which sets forth circumstances under which Shares of the 
Fund may be halted.
Trading Rules
    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity securities. Nasdaq will allow trading in the Shares 
from 4:00 a.m. until 8:00 p.m., Eastern Time. The Exchange has 
appropriate rules to facilitate transactions in the Shares during all 
trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum 
price variation for quoting and entry of orders in Managed Fund Shares 
traded on the Exchange is $0.01.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both Nasdaq and 
also FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\31\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and applicable 
federal securities laws.
---------------------------------------------------------------------------

    \31\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-listed securities and 
instruments held by the Fund (including closed-end funds, ETFs, 
exchange-listed options on U.S. Treasury securities, exchange-listed 
options on U.S. Treasury futures, and exchange-listed U.S. Treasury 
futures contracts) with other markets and other entities that are 
members of the Intermarket Surveillance Group (``ISG''),\32\ and FINRA 
may obtain trading information regarding trading in the Shares and such 
exchange-listed securities and instruments held by the Fund from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares and the exchange-listed 
securities and instruments held by the Fund from markets and other 
entities that are members of ISG, which includes securities and futures 
exchanges, or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. Moreover, FINRA, on behalf of the 
Exchange, will be able to access, as needed, trade information for 
certain fixed income securities held by the Fund reported to FINRA's 
TRACE.\33\
---------------------------------------------------------------------------

    \32\ 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.
    \33\ For Municipal Securities, trade information can generally 
be found on the MSRB's EMMA.
---------------------------------------------------------------------------

    At least 90% of the Fund's net assets that are invested 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 (in the aggregate) will be invested in 
instruments that trade in markets that are members of ISG or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange. All of the Fund's net assets that are invested in exchange-
listed equity securities (including closed-end funds and ETFs) will be 
invested in securities that trade in markets that are members of ISG or 
are parties to a comprehensive surveillance sharing agreement with the 
Exchange.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Intraday Indicative Value and the Disclosed Portfolio is 
disseminated; (4) the risks involved in trading the Shares during the 
Pre-Market and Post-Market Sessions when an updated Intraday Indicative 
Value will not be calculated or publicly disseminated; (5) the 
requirement that members deliver a prospectus to investors purchasing 
newly issued Shares prior to or concurrently with the confirmation of a 
transaction; and (6) trading information. The Information Circular will 
also discuss any exemptive, no-action and interpretive relief granted 
by the Commission from any rules under the Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the

[[Page 4719]]

Fund and the applicable NAV Calculation Time for the Shares. The 
Information Circular will disclose that information about the Shares of 
the Fund will be publicly available on the Fund's Web site.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act in general and Section 6(b)(5) of the Act in particular in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Nasdaq Rule 5735. The 
Exchange represents that trading in the Shares will be subject to the 
existing trading surveillances, administered by both Nasdaq and also 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities laws.
    The Adviser is not a broker-dealer, but it is affiliated with a 
broker-dealer and is required to implement a ``fire wall'' with respect 
to such broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the Fund's portfolio. In 
addition, paragraph (g) of Nasdaq Rule 5735 further requires that 
personnel who make decisions on the open-end fund's portfolio 
composition must be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
open-end fund's portfolio.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-listed securities and 
instruments held by the Fund (including closed-end funds, ETFs, 
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) with other markets and other entities that 
are members of ISG, and FINRA may obtain trading information regarding 
trading in the Shares and such exchange-listed securities and 
instruments held by the Fund from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and the exchange-listed securities and instruments held by the 
Fund from markets and other entities that are members of ISG, which 
includes securities and futures exchanges, or with which the Exchange 
has in place a comprehensive surveillance sharing agreement. Moreover, 
FINRA, on behalf of the Exchange, will be able to access, as needed, 
trade information for certain fixed income securities held by the Fund 
reported to FINRA's TRACE. At least 90% of the Fund's net assets that 
are invested in exchange-listed options on U.S. Treasury securities, 
exchange-listed options on U.S. Treasury futures contracts, and 
exchange-listed U.S. Treasury futures contracts (in the aggregate) will 
be invested in instruments that trade in markets that are members of 
ISG or are parties to a comprehensive surveillance sharing agreement 
with the Exchange. All of the Fund's net assets that are invested in 
exchange-listed equity securities (including closed-end funds and ETFs) 
will be invested in securities that trade in markets that are members 
of ISG or are parties to a comprehensive surveillance sharing agreement 
with the Exchange.
    The primary investment objective of the Fund will be to generate 
current income that is exempt from regular federal income taxes and its 
secondary objective will be long-term capital appreciation. Under 
normal market conditions, the Fund will seek to achieve its investment 
objectives by investing at least 80% of its net assets (including 
investment borrowings) in Municipal Securities. Under normal market 
conditions, the Fund will invest at least 65% of its net assets in 
Municipal Securities that are, at the time of investment, rated below 
investment grade by at least one NRSRO rating such securities (or 
Municipal Securities that are unrated and determined by the Adviser to 
be of comparable quality) (commonly referred to as ``high yield'' or 
``junk'' bonds). The Fund may invest up to 10% of its net assets in 
taxable municipal securities. In addition, the Fund may invest up to 
10% of its net assets in Distressed Municipal Securities. With respect 
to up to 20% of its net assets, the Fund may (i) 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 and (ii) acquire short positions in the foregoing 
derivatives. The Fund's investments in derivative instruments will be 
consistent with the Fund's investment objectives and the 1940 Act and 
will not be used to seek to achieve a multiple or inverse multiple of 
an index. Also, the Fund may hold up to an aggregate amount of 15% of 
its net assets in illiquid assets (calculated at the time of 
investment), including Rule 144A securities deemed illiquid by the 
Adviser. 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's investments will be valued daily. Investments traded on 
an exchange (i.e., a regulated market), will generally be valued at 
market value prices that represent last sale or official closing 
prices. Non-exchange traded investments (including Municipal 
Securities) will generally be valued using prices obtained from a 
Pricing Service. If, however, valuations for any of the Fund's 
investments cannot be readily obtained as provided in the preceding two 
sentences, or the Pricing Committee questions the accuracy or 
reliability of valuations that are so obtained, such investments will 
be valued at fair value, as determined by the Pricing Committee, in 
accordance with the Valuation Procedures and in accordance with 
provisions of the 1940 Act.
    The proposed rule change

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