Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Amendment No. 3, and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 3, to List and Trade Shares of the First Trust Municipal High Income ETF of First Trust Exchange-Traded Fund III, 69109-69122 [2016-24086]

Download as PDF Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices 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: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.43 Robert W. Errett, Deputy Secretary. [FR Doc. 2016–24007 Filed 10–4–16; 8:45 am] BILLING CODE 8011–01–P Electronic Comments SECURITIES AND EXCHANGE COMMISSION • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or [Release No. 34–78913; File No. SR– Nasdaq–2016–002] • Send an email to rule-comments@ sec.gov. Please include File Number SR– ISE–2016–22 on the subject line. Paper Comments asabaliauskas on DSK3SPTVN1PROD with NOTICES • 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–2016–22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–ISE– 2016–22 and should be submitted on or before October 26, 2016. VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Amendment No. 3, and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 3, to List and Trade Shares of the First Trust Municipal High Income ETF of First Trust Exchange-Traded Fund III September 23, 2016. I. Introduction On January 6, 2016, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of the First Trust Municipal High Income ETF (‘‘Fund’’) under Nasdaq Rule 5735. The proposed rule change was published for comment in the Federal Register on January 27, 2016.3 On February 16, 2016, the Exchange filed Amendment No. 1.4 On March 8, 2016, pursuant to Section 19(b)(2) of the Act,5 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.6 On April 26, 2016, the Commission instituted proceedings under Section 43 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 76944 (Jan. 21, 2016), 81 FR 4712. 4 Amendment No. 1 is available on the Commission’s Web site at: https://www.sec.gov/ comments/sr-bats-2015-100/bats2015100.shtml. 5 15 U.S.C. 78s(b)(2). 6 See Securities Exchange Act Release No. 34– 77320, 81 FR 13429 (Mar. 14, 2016). The Commission designated April 26, 2016, as the date by which the Commission would either approve or disapprove, or institute proceedings to determine whether to approve or disapprove, the proposed rule change. 1 15 PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 69109 19(b)(2)(B) of the Act 7 to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.8 In the Order Instituting Proceedings, the Commission solicited comments on specified matters related to the proposal.9 On June 24, 2016, the Exchange filed Amendment No. 2, which replaced the originally filed proposed rule change in its entirety.10 On July 21, 2016, the Commission designated a longer period for Commission action on the proposed rule change.11 On August 30, 2016, the Exchange filed Amendment No. 3, which replaced the originally filed proposed rule change (as previously modified by Amendments No. 1 and No. 2) in its entirety.12 The Commission has not received any comments on the proposed rule change. The Commission is publishing this notice to solicit comments on Amendment No. 3 from interested persons, and is approving the proposed rule change, as modified by Amendment No. 3, on an accelerated basis. II. The Exchange’s Description of the Proposed Rule Change In its filing with the Commission, Nasdaq included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. Nasdaq has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. 7 15 U.S.C. 78s(b)(2)(B). Securities Exchange Act Release No. 77871, 81 FR 26265 (May 2, 2016) (‘‘Order Instituting Proceedings’’). 9 Specifically, the Commission instituted proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,’’ and ‘‘to protect investors and the public interest.’’ See id., 81 FR at 26268. 10 Amendment No. 2 is available on the Commission’s Web site at: https://www.sec.gov/ comments/sr-nasdaq-2016-002/nasdaq20160022.pdf. 11 See Securities Exchange Act Release No. 78384, 81 FR 49286 (July 27, 2016) (designating September 23, 2016, as the date by which the Commission must either approve or disapprove the proposed rule change). 12 Amendment No. 3 is available on the Commission’s Web site at: https://www.sec.gov/ comments/sr-nasdaq-2016-002/nasdaq20160023.pdf. 8 See E:\FR\FM\05OCN1.SGM 05OCN1 69110 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change asabaliauskas on DSK3SPTVN1PROD with NOTICES 1. Purpose The Exchange proposes to list and trade the Shares of the Fund under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares 13 on the Exchange. The Fund will be an actively-managed exchangetraded fund (‘‘ETF’’). The Shares will be offered by the Trust, which was established as a Massachusetts business trust on January 9, 2008.14 The Trust is registered with the Commission as an investment company and has filed a registration statement on Form N–1A (‘‘Registration Statement’’) with the Commission.15 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 13 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. 14 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. 15 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. VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 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.16 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 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 16 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. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 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,17 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 which are ‘‘exempted securities’’ under Section 3(a)(12) of the Act (collectively, ‘‘Municipal Securities’’).18 Municipal Securities are generally issued by or on behalf of states, territories or possessions of the U.S. and the District 17 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 (i.e., the six-week period following the commencement of trading of Shares on the Exchange) and during periods of high cash inflows or outflows (i.e., rolling periods of seven calendar days during which inflows or outflows of cash, in the aggregate, exceed 10% of the Fund’s net assets as of the opening of business on the first day of such periods), 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. 18 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. E:\FR\FM\05OCN1.SGM 05OCN1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES 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 19 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. However, under normal market conditions, except for the initial invest-up period and periods of high cash inflows or outflows,20 the weighted average maturity of the Fund will be less than or equal to 14 years. 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) 21 19 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. 20 See supra note 17 regarding the meaning of the terms ‘‘initial invest-up period’’ and ‘‘periods of high cash inflows or outflows.’’ 21 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 VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 (commonly referred to as ‘‘high yield’’ or ‘‘junk’’ bonds); 22 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 ‘‘investment grade’’ Municipal Securities, which are 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. The Fund will be actively managed and will not be tied to an index. However, under normal market conditions, on a continuous basis determined at the time of purchase, its portfolio of Municipal Securities 23 will generally meet, as applicable, all except for two 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 ‘‘Fixed Income Securities.’’ Fixed 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. 22 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. 23 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. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 69111 Income Securities include, among other things, Municipal Securities.24 Therefore, the Fund’s 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’s portfolio of Municipal Securities 25 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. Under normal market conditions, the Fund’s portfolio of Municipal Securities 26 will include securities from a minimum of 13 nonaffiliated issuers.27 Therefore, the Fund’s portfolio of Municipal Securities will satisfy this requirement under normal market conditions. The Fund’s portfolio of Municipal Securities may not satisfy Rule 5705(b)(4)(A)(vi), which 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. However, as noted above, under normal market conditions, at least 80% of the Fund’s net assets (including investment borrowings) will be invested in Municipal Securities, which are ‘‘exempted securities’’ as defined in Section 3(a)(12) of the Act.28 The Fund’s portfolio of Municipal Securities will not generally satisfy Rule 5705(b)(4)(A)(ii), which requires that components that in the aggregate account for at least 75% of the weight 24 See supra note 23. 25 Id. 26 Id. 27 For purposes of this restriction, ‘‘non-affiliated issuers’’ are issuers that are not ‘‘affiliated persons’’ within the meaning of Section 2(a)(3) of the 1940 Act. Additionally, for purposes of this restriction, each state and each separate political subdivision, agency, authority, or instrumentality of such state, each multi-state agency or authority, and each guarantor, if any, will be treated as separate issuers of Municipal Securities. 28 See supra note 23. E:\FR\FM\05OCN1.SGM 05OCN1 69112 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices of the index or portfolio have a minimum original principal amount outstanding of $100 million or more. However, under normal market conditions, at least 40% (based on dollar amount invested) of the Municipal Securities in which the Fund invests 29 will be issued by issuers with total outstanding debt issuances that, in the aggregate, have a minimum amount of municipal debt outstanding at the time of purchase 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),30 but demonstrated that the portfolio of municipal securities in which the ETFs would invest would be sufficiently liquid. Similarly, under normal market conditions, the Fund’s portfolio of Municipal Securities (although not necessarily the Fund’s entire portfolio as a whole) will satisfy all except for two of the applicable requirements of Nasdaq Rule 5705(b)(4)(A), and a significant portion (at least 40% (based on dollar amount invested)) of the Municipal Securities in which the Fund invests 31 will be issued by issuers with total outstanding debt issuances that, in the aggregate, have a minimum amount of municipal debt outstanding at the time of purchase of $75 million or more, which should provide support regarding the anticipated liquidity of the Fund’s Municipal Securities portfolio. Other Investments With respect to up to 20% (in the aggregate) of its net assets, the Fund may invest in and hold the securities and other instruments (including cash) described below. The Fund may invest up to 20% of its net assets in short-term debt asabaliauskas on DSK3SPTVN1PROD with NOTICES 29 Id. 30 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). 31 See supra note 23. VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 instruments (described below), money market funds and other cash equivalents, taxable municipal securities or tax-exempt municipal securities that are not exempted securities under Section 3(a)(12) under the Act, 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. 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,32 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.33 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, 34 open-end funds (other 32 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. 33 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. 34 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 PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 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 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.35 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 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. 35 In reaching liquidity decisions, the Adviser may consider the following factors: the frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). E:\FR\FM\05OCN1.SGM 05OCN1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES markets as determined in accordance with Commission staff guidance.36 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.37 In addition, under normal market conditions, except for the initial invest-up period and periods of high cash inflows or outflows,38 the Fund’s investments in Municipal Securities will provide exposure (based on dollar amount invested) to (a) at least 10 different industries 39 (with no more than 25% of the value of the Fund’s net assets comprised of Municipal Securities that provide exposure to any single industry) and (b) at least 15 different states (with no more than 30% of the value of the Fund’s net assets comprised of Municipal Securities that provide exposure to any single state).40 Under normal market conditions, except for the initial invest-up period 36 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). 37 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). 38 See supra note 17 regarding the meaning of the terms ‘‘initial invest-up period’’ and ‘‘periods of high cash inflows or outflows.’’ 39 The municipal industry classification system used by the Fund will divide the municipal securities universe into distinct categories that are intended to reflect either the use of proceeds generated by particular subsets of municipal securities or the collateral/sources of repayment securing/backing such municipal securities. For example, municipal bonds associated with the airport industry are issued to construct or expand an airport and/or related facilities and are secured by revenues generated from the use of the airport. 40 For the avoidance of doubt, in the case of Municipal Securities that are issued by entities whose underlying assets are municipal bonds, the underlying municipal bonds will be taken into account. VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 and periods of high cash inflows or outflows,41 (a) with respect to 75% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 3% of the value of the Fund’s net assets and (b) with respect to 15% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 5% of the value of the Fund’s net assets.42 Under normal market conditions, except for the initial invest-up period and periods of high cash inflows or outflows,43 (a) with respect to the Municipal Securities in which the Fund invests that are rated investment grade by each NRSRO rating such securities, at the time of purchase, the applicable borrower will be obligated to pay debt service on issues of municipal obligations that have an aggregate principal amount outstanding of $100 million or more and (b) with respect to all other Municipal Securities in which the Fund invests (‘‘Clause B Munis’’),44 at the time of purchase of a Clause B Muni, the borrowers of all Clause B Munis held by the Fund, in the aggregate, will have a weighted average of principal municipal debt outstanding of $50 million or more.45 In complying with this requirement, the Fund will calculate the weighted average of all principal municipal debt outstanding of all Clause B Muni borrowers at the time of purchase of a new Clause B Muni based on (i) the most recent information available on debt outstanding of the new Clause B Muni purchase and (ii) the debt outstanding information available at the previous time of original purchase 41 See supra note 17 regarding the meaning of the terms ‘‘initial invest-up period’’ and ‘‘periods of high cash inflows or outflows.’’ 42 For this purpose, (a) in the case of a municipal conduit financing (in general terms, the issuance of municipal securities by an issuer to finance a project to be used primarily by a third party (the ‘‘conduit borrower’’)), the term ‘‘borrower’’ will refer to the conduit borrower (i.e., the party on which a bondholder must rely for repayment) and (b) in the case of other municipal financings, the term ‘‘borrower’’ will refer to the issuer of the municipal securities. In addition, for the avoidance of doubt, in the case of Municipal Securities that are issued by entities whose underlying assets are municipal bonds, the underlying municipal bonds will be taken into account. 43 See note 17 regarding the meaning of the terms ‘‘initial invest-up period’’ and ‘‘periods of high cash inflows or outflows.’’ 44 For the avoidance of doubt, unrated Municipal Securities, regardless of credit quality, will be Clause B Munis. 45 For purposes of this paragraph, see supra note 42 for the meaning of the term ‘‘borrower’’. In addition, for the avoidance of doubt, in the case of Municipal Securities that are issued by entities whose underlying assets are municipal bonds, the underlying municipal bonds will be taken into account. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 69113 of all other existing Clause B Muni borrowers already held in the Fund.46 Purchases that add to an existing borrower position will result in updated debt calculations for that borrower using the most recent information available. Notwithstanding the foregoing, in the case of a Municipal Security that is a pre-refunded or escrowed to maturity bond, such Municipal Security will be included in clause (a) of the first sentence of this paragraph only if it was rated investment grade by each NRSRO rating such security immediately prior to being pre-refunded or escrowed to maturity, as applicable, and will otherwise be a Clause B Muni. Creation and Redemption of Shares The Fund will issue and redeem Shares on a continuous basis at net asset value (‘‘NAV’’) 47 only in large blocks of Shares (‘‘Creation Units’’) in transactions with authorized participants, generally including 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’’).48 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 (which may include cashin-lieu amounts) 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 46 The Fund will not be required to update information regarding debt outstanding for borrowers of Clause B Munis already held in the Fund. 47 The NAV of the Fund’s Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange (‘‘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. 48 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\05OCN1.SGM 05OCN1 69114 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices creations and redemptions of Creation Units. All standard orders to create Creation Units must be received by the transfer agent no later than the closing time of the regular trading session on the 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. asabaliauskas on DSK3SPTVN1PROD with NOTICES 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 VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 Service’’).49 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’’) 50 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 49 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. 50 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 00079 Fmt 4703 Sfmt 4703 ‘‘Other Investments’’ (collectively, ‘‘Short-Term Debt Instruments’’); and (c) except as provided below, taxable and other municipal securities that are not Municipal Securities. Debt instruments may be valued at evaluated mean prices, 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 and other 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 E:\FR\FM\05OCN1.SGM 05OCN1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices 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. 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 DSK3SPTVN1PROD 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’’),51 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 52 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.53 The Fund’s disclosure of derivative positions in the 51 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. 52 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). 53 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 18:15 Oct 04, 2016 Jkt 241001 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. 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,54 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, 54 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 00080 Fmt 4703 Sfmt 4703 69115 ‘‘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. exchangelisted options will be available via the Options Price Reporting Authority. One source of price information for Municipal Securities and taxable and other municipal securities will be the Electronic Municipal Market Access (‘‘EMMA’’) of the Municipal Securities Rulemaking Board (‘‘MSRB’’).55 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 and other 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 55 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\05OCN1.SGM 05OCN1 69116 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices 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. 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. asabaliauskas on DSK3SPTVN1PROD with NOTICES 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 56 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Nasdaq will halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121, including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the other assets constituting the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. Trading Rules Nasdaq deems the Shares to be equity securities, thus rendering trading in the Shares subject to Nasdaq’s existing rules governing the trading of equity securities. Nasdaq will allow trading in 56 See 17 CFR 240.10A–3. VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 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.57 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’’),58 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 57 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. 58 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 00081 Fmt 4703 Sfmt 4703 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.59 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. 59 For Municipal Securities, trade information can generally be found on the MSRB’s EMMA. E:\FR\FM\05OCN1.SGM 05OCN1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices Additionally, the Information Circular will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Circular will also disclose the trading hours of the Shares of the Fund and the applicable NAV Calculation Time for the Shares. The Information Circular will disclose that information about the Shares of the Fund will be publicly available on the Fund’s Web site. asabaliauskas on DSK3SPTVN1PROD with NOTICES Continued Listing Representations All statements and representations made in this filing regarding (a) the description of the portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange rules and surveillance procedures shall constitute continued listing requirements for listing the Shares on the Exchange. In addition, the issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the Nasdaq 5800 Series. 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 VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 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 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 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 69117 investing at least 80% of its net assets (including investment borrowings) in Municipal Securities. The Fund may invest up to 20% of its net assets in taxable municipal securities and in taxexempt municipal securities that are not 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. Under normal market conditions, except for the initial invest-up period and periods of high cash inflows or outflows,60 the Fund’s investments in Municipal Securities will provide exposure (based on dollar amount invested) to (a) at least 10 different industries (with no more than 25% of the value of the Fund’s net assets comprised of Municipal Securities that provide exposure to any single industry) and (b) at least 15 different states (with no more than 30% of the value of the Fund’s net assets comprised of Municipal Securities that provide exposure to any single state). In addition, under normal market conditions, except for the initial investup period and periods of high cash 60 See note 17 regarding the meaning of the terms ‘‘initial invest-up period’’ and ‘‘periods of high cash inflows or outflows.’’ E:\FR\FM\05OCN1.SGM 05OCN1 asabaliauskas on DSK3SPTVN1PROD with NOTICES 69118 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices inflows or outflows,61 (a) with respect to 75% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 3% of the value of the Fund’s net assets and (b) with respect to 15% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 5% of the value of the Fund’s net assets. The Exchange believes that the foregoing restrictions should mitigate the risks associated with manipulation in that they limit exposure to specific industries, states and borrowers. Further, under normal market conditions, except for the initial investup period and periods of high cash inflows or outflows,62 (a) with respect to the Municipal Securities in which the Fund invests that are rated investment grade by each NRSRO rating such securities, at the time of purchase, the applicable borrower will be obligated to pay debt service on issues of municipal obligations that have an aggregate principal amount outstanding of $100 million or more and (b) with respect to Clause B Munis, at the time of purchase of a Clause B Muni, the borrowers of all Clause B Munis held by the Fund, in the aggregate, will have a weighted average of principal municipal debt outstanding of $50 million or more. In complying with this requirement, the Fund will calculate the weighted average of all principal municipal debt outstanding of all Clause B Muni borrowers at the time of purchase of a new Clause B Muni based on (i) the most recent information available on debt outstanding of the new Clause B Muni purchase and (ii) the debt outstanding information available at the previous time of original purchase of all other existing Clause B Muni borrowers already held in the Fund.63 Purchases that add to an existing borrower position will result in updated debt calculations for that borrower using the most recent information available. Notwithstanding the foregoing, in the case of a Municipal Security that is a pre-refunded or escrowed to maturity bond, such Municipal Security will be included in clause (a) of the first sentence of this paragraph only if it was rated investment grade by each NRSRO rating such security immediately prior to being pre-refunded or escrowed to maturity, as applicable, and will otherwise be a Clause B Muni. The 61 Id. 62 Id. 63 The Fund will not be required to update information regarding debt outstanding for borrowers of Clause B Munis already held in the Fund. VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 Exchange believes that the foregoing restrictions should mitigate the risks associated with manipulation in that they impose requirements relating to the outstanding municipal debt of borrowers of Municipal Securities. 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 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 and other municipal securities will be PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 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 and other 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 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. E:\FR\FM\05OCN1.SGM 05OCN1 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices 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. asabaliauskas on DSK3SPTVN1PROD with NOTICES C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Discussion and Commission Findings After careful review, the Commission finds that the Exchange’s proposal to list and trade the Shares is consistent with the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.64 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Exchange Act,65 which requires, among other things, that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices, 64 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 65 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission also finds that the proposal to list and trade the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the Exchange Act,66 which sets forth Congress’ finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities. Quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and CTA plans for the Shares. 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,67 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.68 On each business day, before commencement of trading in Shares in the Regular Market Session 69 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.70 The Fund’s 66 15 U.S.C. 78k–1(a)(1)(C)(iii). supra note 54. 68 The Exchange states that several major market data vendors display or make widely available Portfolio Indicative Values taken from the CTA or other data feeds. 69 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). 70 The Fund’s disclosure of derivative positions in the Disclosed Portfolio will include information designed to allow 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 67 See PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 69119 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. The NAV of the Fund’s Shares will normally be determined as of the close of the regular trading session on the Exchange (ordinarily 4:00 p.m. Eastern time) on each 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. 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. One source of price information for Municipal Securities and taxable municipal securities will be the EMMA of the MSRB.71 Additionally, the MSRB offers trade data subscription services that permit subscribers to obtain sameday pricing information about municipal securities transactions. Moreover, pricing information for Municipal Securities, as well as for taxable and other 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 or from major market data vendors 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 open-end funds (excluding ETFs) are typically priced 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. 71 See supra note 55. E:\FR\FM\05OCN1.SGM 05OCN1 69120 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices asabaliauskas on DSK3SPTVN1PROD with NOTICES once each business day, and their prices will be available through the applicable fund’s Web site or from major market data vendors. 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. The Fund’s Web site will include a form of the prospectus for the Fund and additional data relating to NAV and other applicable quantitative information. The Commission further believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately and to prevent trading when a reasonable degree of transparency cannot be assured. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. Trading in Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120 and 4121 72 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. The Exchange represents that it has a general policy prohibiting the distribution of material, non-public information by its employees. 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. The Exchange represents that the Adviser is not a broker-dealer, but it is affiliated with the Distributor, a brokerdealer, and has implemented a fire wall with respect to its broker-dealer affiliate 72 These reasons may include: (1) The extent to which trading is not occurring in the securities and financial instruments comprising the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 regarding access to information concerning the composition of and/or changes to the portfolio.73 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. 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.74 The Commission believes that the Exchange’s procedures, combined with the Fund’s general adherence to the generic fixed income listing requirements in Nasdaq Rule 5705(b)(4)(A) on a continuous basis measured at the time of purchase are designed to mitigate the potential for price manipulation of the shares. Furthermore, the Commission believes that the investment restrictions discussed above appear reasonably designed to minimize the Fund’s susceptibility to manipulation. The Exchange represents that it deems the Shares to be equity securities, thus rendering the trading of the Shares subject to the Exchange’s existing rules governing the trading of equity securities. In support of this proposal, the Exchange has made the following additional representations: (1) The Shares will conform to the initial and continued listing criteria under Nasdaq Rule 5735.75 (2) The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions.76 (3) Trading in the Shares will be subject to the existing trading surveillances, administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws, and 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 federal securities laws applicable to trading on the Exchange.77 (4) FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchange73 See supra notes 16 and 23. Exchange states that FINRA surveils trading on the Exchange pursuant to a regulatory services agreement and that the Exchange is responsible for FINRA’s performance under this regulatory services agreement. See supra note 57. 75 See Amendment No. 3, supra note 12, at 33. 76 See id. at 29. 77 See id. at 30. 74 The PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 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 ISG, and FINRA may obtain trading information regarding trading in the Shares and in the exchange-listed securities and instruments held by the Fund from these 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.78 (5) Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (a) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq members with respect to recommending transactions in the Shares to customers; (c) how information regarding the Intraday Indicative Value and the Disclosed Portfolio is disseminated; (d) the risks involved in trading the Shares during the Pre-Market and Post-Market Sessions when an updated Intraday Indicative Value will not be calculated or publicly disseminated; (e) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (f) trading information. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act.79 (6) For initial and continued listing, the Fund must be in compliance with Rule 10A–3 80 under the Act.81 78 See id. at 30–31. id. at 31–32. 80 See 17 CFR 240.10A–3. 81 See Amendment No. 3, supra note 12, at 28. 79 See E:\FR\FM\05OCN1.SGM 05OCN1 asabaliauskas on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices (7) The Fund may invest up to 10% of its net assets in Distressed Municipal Securities.82 (8) Under normal market conditions, except for the initial invest-up period and periods of high cash inflows or outflows, (1) with respect to 75% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 3% of the value of the Fund’s net assets; and (2) with respect to 15% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 5% of the value of the Fund’s net assets.83 (9) Except for the initial invest-up period and periods of high cash inflows or outflows, the Fund’s investments in Municipal Securities will provide exposure to at least 15 different states, with no more than 30% of the value of the Fund’s net assets comprising Municipal Securities that provide exposure to any single state.84 (10) Except for the initial invest-up period and periods of high cash inflows or outflows, the Fund’s investments in Municipal Securities will provide exposure to at least 10 different industries with no more than 25% of the value of the Fund’s net assets comprising Municipal Securities that provide exposure to any single industry.85 The Exchange also represents that all statements and representations made in the proposed rule change, as modified by Amendment No. 3 regarding (a) the description of the portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange rules and surveillance procedures constitute continued listing requirements for listing the Shares on the Exchange. In addition, the issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the Nasdaq 5800 Series. This approval order is based on all of the Exchange’s representations, including those set forth above and in the Notice, and the Exchange’s description of the Fund. The Commission notes that the Fund and the 82 See id. at 35. 83 See id. at 17. 84 See id. at 16–17. 85 See id. VerDate Sep<11>2014 18:15 Oct 04, 2016 Shares must comply with the requirements of Nasdaq Rule 5735 to be listed and traded on the Exchange. For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 86 and the rules and regulations thereunder applicable to a national securities exchange. IV. Solicitation of Comments on Amendment No. 3 Interested persons are invited to submit written data, views, and arguments concerning whether Amendment No. 3 is consistent with the Exchange 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 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 86 15 Jkt 241001 PO 00000 U.S.C. 78f(b)(5). Frm 00086 Fmt 4703 Sfmt 4703 69121 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 October 26, 2016. V. Accelerated Approval of Proposed Rule Change as Modified by Amendment No. 3 The Commission finds good cause to approve the proposed rule change, as modified by Amendment No. 3, prior to the thirtieth day after the date of publication of notice of the filing of Amendment No. 3 in the Federal Register. Amendment No. 3 supplements the proposed rule change by clarifying the Fund’s general adherence to the quantitative standards set forth in NASDAQ 5705(b)(4)(A).87 In addition, the Exchange represents that it would adhere to certain investment restrictions, including but not limited to, the following: (1) With respect to 75% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 3% of the value of the Fund’s net assets; (2) with respect to 15% of the Fund’s net assets, the Fund’s exposure to any single borrower (based on dollar amount invested) will not exceed 5% of the value of the Fund’s net assets; (3) the Fund’s investments in Municipal Securities will provide exposure to at least 15 different states, with no more than 30% of the value of the Fund’s net assets comprising Municipal Securities that provide exposure to any single state; and (4) the Fund’s investments in Municipal Securities will provide exposure to at least 10 different industries with no more than 25% of the value of the Fund’s net assets comprising Municipal Securities that provide exposure to any single industry.88 The addition of these investment restrictions helped the Commission find that the proposed listing and trading of the Shares is consistent with the portion of Section 6(b)(5) of the Exchange Act,89 which requires that the rules of a national securities exchange must be designed to, among other things, prevent fraudulent and manipulative acts and practices and, in general, to protect investors and the public interest. 87 See Amendment No. 3, supra note 12, at 10– 13. 88 The Fund represents that it would adhere to these investment restrictions under normal market conditions, except for the initial invest-up period and periods of high cash inflows or outflows. See id. at 16–17. 89 15 U.S.C. 78f(b)(5). E:\FR\FM\05OCN1.SGM 05OCN1 69122 Federal Register / Vol. 81, No. 193 / Wednesday, October 5, 2016 / Notices Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,90 to approve the proposed rule change, as modified by Amendment No. 3, on an accelerated basis. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,91 that the proposed rule change (SR– Nasdaq–2016–002), as modified by Amendment No. 3 be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.92 Brent J. Fields, Secretary. [FR Doc. 2016–24086 Filed 10–4–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–78975] Order Extending a Temporary Exemption From Compliance With Rules 13n–1 to 13n–12 Under the Securities Exchange Act of 1934 September 29, 2016. I. Introduction asabaliauskas on DSK3SPTVN1PROD with NOTICES The Securities and Exchange Commission (‘‘Commission’’) is extending certain exemptions previously granted in connection with requirements applicable to securitybased swap data repositories. On March 18, 2016, pursuant to its authority in Section 36 of the Securities Exchange Act of 1934 (‘‘Exchange Act’’), the Commission granted a temporary exemption from compliance with Exchange Act Rules 13n–1 to 13n–12 until June 30, 2016, and at the same time extended exemptions from Exchange Act Sections 13(n)(5)(D)(i), 13(n)(5)(F), 13(n)(5)(G), 13(n)(5)(H), 13(n)(7)(A), 13(n)(7)(B), 13(n)(7)(C) and 29(b) that had been provided in the DFA Effective Date Order 1 (‘‘SDR Relief’’). The Commission’s March 18, 2016 order provides that the SDR Relief will expire on the earlier of (1) the date the Commission grants registration to an 90 15 U.S.C. 78s(b)(2). 91 Id. 92 17 CFR 200.30–3(a)(12). Temporary Exemptions and Other Temporary Relief, Together with Information on Compliance Dates for New Provisions of the Exchange Act Applicable to Security-Based Swaps, Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287 (June 22, 2011) (the ‘‘DFA Effective Date Order’’). 1 See VerDate Sep<11>2014 18:15 Oct 04, 2016 Jkt 241001 SDR or (2) June 30, 2016.2 The Commission granted those exemptions to help facilitate the potential submission of SDR applications. On June 30, 2016, the Commission extended the SDR Relief until October 5, 2016 to allow it additional time to review and consider issues related to the applications to register with the Commission as SDRs submitted by DTCC Data Repository (U.S.) LLC (‘‘DDR’’) and ICE Trade Vault, LLC (‘‘ICE Trade Vault’’).3 To allow the Commission additional time to review these applications prior to the compliance date for Rules 13n– 1 to 13n–12, as currently amended, (‘‘SDR Rules’’) and the expiration of the SDR Relief, the Commission is extending the exemptions granted in the June 2016 order.4 II. Discussion The SDR Rules Release 5 states that SDRs were required to be in compliance with the SDR Rules by March 18, 2016. The SDR Rules Release also notes that, absent an exemption, any SDR must be registered with the Commission and in compliance with the federal securities laws and the rules and regulations thereunder (including the applicable Dodd-Frank Act provisions and all of the SDR Rules).6 Rule 13n–1(c) provides that, within 90 days of the date of the publication of notice of the filing of an application for registration (or within such longer period as to which the applicant consents), the Commission will either grant the registration by order or institute proceedings to determine whether registration should be granted or denied. Two entities have filed applications to register with the Commission as SDRs. ICE Trade Vault filed with the Commission a Form SDR seeking registration as an SDR on March 29, 2016 and amended that form on April 18, 2016. The Commission’s notice of ICE Trade Vault’s application for registration as an SDR was published in the Federal Register on April 28, 2016.7 2 See Exchange Act Release No. 77400 (Mar. 18, 2016), 81 FR 15599 (Mar. 23, 2016) (‘‘March 2016 SDR Section 36 Order’’). 3 See Exchange Act Release No. 77699 (Apr. 22, 2016), 81 FR 25475 (Apr. 28, 2016) (‘‘ICE Trade Vault Notice’’) and Exchange Act Release No. 34– 78216 (June 30, 2016), 81 FR 44379 (July 7, 2016) (‘‘DDR Notice’’). 4 This relief applies to Rules 13n–1 to 13n–12 as amended, including amendments to Rule 13n-4 adopted by the Commission on August 29, 2016. See Exchange Act Release No. 78716 (Aug. 29, 2016), 81 FR 60585 (Sept. 2, 2016). 5 See Exchange Act Release No. 74246 (Feb. 11, 2015), 80 FR 14438 (Mar. 19, 2015) (‘‘SDR Rules Release’’). 6 See id., 80 FR at 14456. 7 See ICE Trade Vault Notice. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 The comment period closed on May 31, 2016. To date, the Commission has received six comment letters on the ICE Trade Vault application. DDR filed with the Commission a Form SDR seeking registration as an SDR on April 6, 2016 and amended that form on April 25, 2016. The Commission’s notice of DDR’s application for registration as an SDR was published in the Federal Register on July 7, 2016.8 The comment period closed on August 8, 2016. To date, the Commission has received four comment letters on the DDR application. Subject to certain exceptions, Section 36 of the Exchange Act 9 authorizes the Commission, by rule, regulation, or order, to exempt, either conditionally or unconditionally, any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of the Exchange Act or any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors. The Commission finds that it is necessary and appropriate in the public interest, and consistent with the protection of investors, to grant a temporary exemption from compliance with the SDR Rules and extend the SDR Relief. The commenters on the DDR and ICE Trade Vault SDR applications have raised issues that require further review and consideration. The Commission does not believe that the October 5, 2016, compliance date provides sufficient time for adequate consideration of the comments and any possible amendments to the respective applications. Therefore, to allow the Commission additional time prior to the compliance date for the SDR Rules and the expiration of the SDR Relief to review the first applications for registration of SDRs and consider issues related to those applications, the Commission hereby grants, pursuant to Section 36 of the Exchange Act, a temporary exemption from compliance with the SDR Rules and an extension of the SDR Relief until April 1, 2017. By the Commission. Robert W. Errett, Deputy Secretary. [FR Doc. 2016–23998 Filed 10–4–16; 8:45 am] BILLING CODE 8011–01–P 8 See 9 15 E:\FR\FM\05OCN1.SGM DDR Notice. U.S.C. 78mm. 05OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 193 (Wednesday, October 5, 2016)]
[Notices]
[Pages 69109-69122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24086]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78913; File No. SR-Nasdaq-2016-002]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 3, and Order Granting Accelerated 
Approval of Proposed Rule Change, as Modified by Amendment No. 3, to 
List and Trade Shares of the First Trust Municipal High Income ETF of 
First Trust Exchange-Traded Fund III

September 23, 2016.

I. Introduction

    On January 6, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the First Trust Municipal High Income ETF (``Fund'') 
under Nasdaq Rule 5735. The proposed rule change was published for 
comment in the Federal Register on January 27, 2016.\3\ On February 16, 
2016, the Exchange filed Amendment No. 1.\4\ On March 8, 2016, pursuant 
to Section 19(b)(2) of the Act,\5\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76944 (Jan. 21, 
2016), 81 FR 4712.
    \4\ Amendment No. 1 is available on the Commission's Web site 
at: https://www.sec.gov/comments/sr-bats-2015-100/bats2015100.shtml.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 34-77320, 81 FR 
13429 (Mar. 14, 2016). The Commission designated April 26, 2016, as 
the date by which the Commission would either approve or disapprove, 
or institute proceedings to determine whether to approve or 
disapprove, the proposed rule change.
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    On April 26, 2016, the Commission instituted proceedings under 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.\8\ 
In the Order Instituting Proceedings, the Commission solicited comments 
on specified matters related to the proposal.\9\
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    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 77871, 81 FR 26265 
(May 2, 2016) (``Order Instituting Proceedings'').
    \9\ Specifically, the Commission instituted proceedings to allow 
for additional analysis of the proposed rule change's consistency 
with Section 6(b)(5) of the Act, which requires, among other things, 
that the rules of a national securities exchange be ``designed to 
prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade,'' and ``to protect investors 
and the public interest.'' See id., 81 FR at 26268.
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    On June 24, 2016, the Exchange filed Amendment No. 2, which 
replaced the originally filed proposed rule change in its entirety.\10\
---------------------------------------------------------------------------

    \10\ Amendment No. 2 is available on the Commission's Web site 
at: https://www.sec.gov/comments/sr-nasdaq-2016-002/nasdaq2016002-2.pdf.
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    On July 21, 2016, the Commission designated a longer period for 
Commission action on the proposed rule change.\11\ On August 30, 2016, 
the Exchange filed Amendment No. 3, which replaced the originally filed 
proposed rule change (as previously modified by Amendments No. 1 and 
No. 2) in its entirety.\12\
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    \11\ See Securities Exchange Act Release No. 78384, 81 FR 49286 
(July 27, 2016) (designating September 23, 2016, as the date by 
which the Commission must either approve or disapprove the proposed 
rule change).
    \12\ Amendment No. 3 is available on the Commission's Web site 
at: https://www.sec.gov/comments/sr-nasdaq-2016-002/nasdaq2016002-3.pdf.
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    The Commission has not received any comments on the proposed rule 
change. The Commission is publishing this notice to solicit comments on 
Amendment No. 3 from interested persons, and is approving the proposed 
rule change, as modified by Amendment No. 3, on an accelerated basis.

II. The Exchange's Description of the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. Nasdaq 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

[[Page 69110]]

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 \13\ 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.\14\ The Trust is registered with the Commission as an 
investment company and has filed a registration statement on Form N-1A 
(``Registration Statement'') with the Commission.\15\ 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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    \13\ 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.
    \14\ 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.
    \15\ 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.\16\ 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.
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    \16\ 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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    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.
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,\17\ 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 which are 
``exempted securities'' under Section 3(a)(12) of the Act 
(collectively, ``Municipal Securities'').\18\ Municipal Securities are 
generally issued by or on behalf of states, territories or possessions 
of the U.S. and the District

[[Page 69111]]

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 \19\ 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).
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    \17\ 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 (i.e., the six-week period following the commencement of 
trading of Shares on the Exchange) and during periods of high cash 
inflows or outflows (i.e., rolling periods of seven calendar days 
during which inflows or outflows of cash, in the aggregate, exceed 
10% of the Fund's net assets as of the opening of business on the 
first day of such periods), 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.
    \18\ 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.
    \19\ 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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    The Fund may invest in Municipal Securities of any maturity. 
However, under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows,\20\ the 
weighted average maturity of the Fund will be less than or equal to 14 
years.
---------------------------------------------------------------------------

    \20\ See supra note 17 regarding the meaning of the terms 
``initial invest-up period'' and ``periods of high cash inflows or 
outflows.''
---------------------------------------------------------------------------

    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) \21\ (commonly referred to as ``high yield'' or 
``junk'' bonds); \22\ however, the Fund will consider pre-refunded or 
escrowed to maturity bonds, regardless of rating, to be investment 
grade securities.
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    \21\ 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.
    \22\ 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.
---------------------------------------------------------------------------

    The Fund may invest up to 35% of its net assets in ``investment 
grade'' Municipal Securities, which are 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.
    The Fund will be actively managed and will not be tied to an index. 
However, under normal market conditions, on a continuous basis 
determined at the time of purchase, its portfolio of Municipal 
Securities \23\ will generally meet, as applicable, all except for two 
of the criteria for non-actively managed, index-based, fixed income 
ETFs contained in Nasdaq Rule 5705(b)(4)(A), as described below.
---------------------------------------------------------------------------

    \23\ 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.
---------------------------------------------------------------------------

    Nasdaq Rule 5705(b)(4)(A)(i) requires that the index or portfolio 
consist of ``Fixed Income Securities.'' Fixed Income Securities 
include, among other things, Municipal Securities.\24\ Therefore, the 
Fund's portfolio of Municipal Securities will satisfy this requirement 
under normal market conditions.
---------------------------------------------------------------------------

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

    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's portfolio of Municipal Securities \25\ will 
satisfy this requirement under normal market conditions.
---------------------------------------------------------------------------

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

    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. Under 
normal market conditions, the Fund's portfolio of Municipal Securities 
\26\ will include securities from a minimum of 13 non-affiliated 
issuers.\27\ Therefore, the Fund's portfolio of Municipal Securities 
will satisfy this requirement under normal market conditions.
---------------------------------------------------------------------------

    \26\ Id.
    \27\ For purposes of this restriction, ``non-affiliated 
issuers'' are issuers that are not ``affiliated persons'' within the 
meaning of Section 2(a)(3) of the 1940 Act. Additionally, for 
purposes of this restriction, each state and each separate political 
subdivision, agency, authority, or instrumentality of such state, 
each multi-state agency or authority, and each guarantor, if any, 
will be treated as separate issuers of Municipal Securities.
---------------------------------------------------------------------------

    The Fund's portfolio of Municipal Securities may not satisfy Rule 
5705(b)(4)(A)(vi), which 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. However, as noted above, under normal market conditions, at 
least 80% of the Fund's net assets (including investment borrowings) 
will be invested in Municipal Securities, which are ``exempted 
securities'' as defined in Section 3(a)(12) of the Act.\28\
---------------------------------------------------------------------------

    \28\ See supra note 23.
---------------------------------------------------------------------------

    The Fund's portfolio of Municipal Securities will not generally 
satisfy Rule 5705(b)(4)(A)(ii), which requires that components that in 
the aggregate account for at least 75% of the weight

[[Page 69112]]

of the index or portfolio have a minimum original principal amount 
outstanding of $100 million or more. However, under normal market 
conditions, at least 40% (based on dollar amount invested) of the 
Municipal Securities in which the Fund invests \29\ will be issued by 
issuers with total outstanding debt issuances that, in the aggregate, 
have a minimum amount of municipal debt outstanding at the time of 
purchase 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),\30\ but demonstrated that the portfolio 
of municipal securities in which the ETFs would invest would be 
sufficiently liquid. Similarly, under normal market conditions, the 
Fund's portfolio of Municipal Securities (although not necessarily the 
Fund's entire portfolio as a whole) will satisfy all except for two of 
the applicable requirements of Nasdaq Rule 5705(b)(4)(A), and a 
significant portion (at least 40% (based on dollar amount invested)) of 
the Municipal Securities in which the Fund invests \31\ will be issued 
by issuers with total outstanding debt issuances that, in the 
aggregate, have a minimum amount of municipal debt outstanding at the 
time of purchase of $75 million or more, which should provide support 
regarding the anticipated liquidity of the Fund's Municipal Securities 
portfolio.
---------------------------------------------------------------------------

    \29\ Id.
    \30\ 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).
    \31\ See supra note 23.
---------------------------------------------------------------------------

Other Investments
    With respect to up to 20% (in the aggregate) of its net assets, the 
Fund may invest in and hold the securities and other instruments 
(including cash) described below.
    The Fund may invest up to 20% of its net assets in short-term debt 
instruments (described below), money market funds and other cash 
equivalents, taxable municipal securities or tax-exempt municipal 
securities that are not exempted securities under Section 3(a)(12) 
under the Act, 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.
    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,\32\ 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.\33\
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    \32\ 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.
    \33\ 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, \34\ 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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    \34\ 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.\35\ 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

[[Page 69113]]

markets as determined in accordance with Commission staff guidance.\36\
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    \35\ 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).
    \36\ 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).
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    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to (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.\37\ In addition, under 
normal market conditions, except for the initial invest-up period and 
periods of high cash inflows or outflows,\38\ the Fund's investments in 
Municipal Securities will provide exposure (based on dollar amount 
invested) to (a) at least 10 different industries \39\ (with no more 
than 25% of the value of the Fund's net assets comprised of Municipal 
Securities that provide exposure to any single industry) and (b) at 
least 15 different states (with no more than 30% of the value of the 
Fund's net assets comprised of Municipal Securities that provide 
exposure to any single state).\40\
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    \37\ 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).
    \38\ See supra note 17 regarding the meaning of the terms 
``initial invest-up period'' and ``periods of high cash inflows or 
outflows.''
    \39\ The municipal industry classification system used by the 
Fund will divide the municipal securities universe into distinct 
categories that are intended to reflect either the use of proceeds 
generated by particular subsets of municipal securities or the 
collateral/sources of repayment securing/backing such municipal 
securities. For example, municipal bonds associated with the airport 
industry are issued to construct or expand an airport and/or related 
facilities and are secured by revenues generated from the use of the 
airport.
    \40\ For the avoidance of doubt, in the case of Municipal 
Securities that are issued by entities whose underlying assets are 
municipal bonds, the underlying municipal bonds will be taken into 
account.
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    Under normal market conditions, except for the initial invest-up 
period and periods of high cash inflows or outflows,\41\ (a) with 
respect to 75% of the Fund's net assets, the Fund's exposure to any 
single borrower (based on dollar amount invested) will not exceed 3% of 
the value of the Fund's net assets and (b) with respect to 15% of the 
Fund's net assets, the Fund's exposure to any single borrower (based on 
dollar amount invested) will not exceed 5% of the value of the Fund's 
net assets.\42\
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    \41\ See supra note 17 regarding the meaning of the terms 
``initial invest-up period'' and ``periods of high cash inflows or 
outflows.''
    \42\ For this purpose, (a) in the case of a municipal conduit 
financing (in general terms, the issuance of municipal securities by 
an issuer to finance a project to be used primarily by a third party 
(the ``conduit borrower'')), the term ``borrower'' will refer to the 
conduit borrower (i.e., the party on which a bondholder must rely 
for repayment) and (b) in the case of other municipal financings, 
the term ``borrower'' will refer to the issuer of the municipal 
securities. In addition, for the avoidance of doubt, in the case of 
Municipal Securities that are issued by entities whose underlying 
assets are municipal bonds, the underlying municipal bonds will be 
taken into account.
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    Under normal market conditions, except for the initial invest-up 
period and periods of high cash inflows or outflows,\43\ (a) with 
respect to the Municipal Securities in which the Fund invests that are 
rated investment grade by each NRSRO rating such securities, at the 
time of purchase, the applicable borrower will be obligated to pay debt 
service on issues of municipal obligations that have an aggregate 
principal amount outstanding of $100 million or more and (b) with 
respect to all other Municipal Securities in which the Fund invests 
(``Clause B Munis''),\44\ at the time of purchase of a Clause B Muni, 
the borrowers of all Clause B Munis held by the Fund, in the aggregate, 
will have a weighted average of principal municipal debt outstanding of 
$50 million or more.\45\ In complying with this requirement, the Fund 
will calculate the weighted average of all principal municipal debt 
outstanding of all Clause B Muni borrowers at the time of purchase of a 
new Clause B Muni based on (i) the most recent information available on 
debt outstanding of the new Clause B Muni purchase and (ii) the debt 
outstanding information available at the previous time of original 
purchase of all other existing Clause B Muni borrowers already held in 
the Fund.\46\ Purchases that add to an existing borrower position will 
result in updated debt calculations for that borrower using the most 
recent information available. Notwithstanding the foregoing, in the 
case of a Municipal Security that is a pre-refunded or escrowed to 
maturity bond, such Municipal Security will be included in clause (a) 
of the first sentence of this paragraph only if it was rated investment 
grade by each NRSRO rating such security immediately prior to being 
pre-refunded or escrowed to maturity, as applicable, and will otherwise 
be a Clause B Muni.
---------------------------------------------------------------------------

    \43\ See note 17 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
    \44\ For the avoidance of doubt, unrated Municipal Securities, 
regardless of credit quality, will be Clause B Munis.
    \45\ For purposes of this paragraph, see supra note 42 for the 
meaning of the term ``borrower''. In addition, for the avoidance of 
doubt, in the case of Municipal Securities that are issued by 
entities whose underlying assets are municipal bonds, the underlying 
municipal bonds will be taken into account.
    \46\ The Fund will not be required to update information 
regarding debt outstanding for borrowers of Clause B Munis already 
held in the Fund.
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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'') \47\ only in large blocks of Shares (``Creation 
Units'') in transactions with authorized participants, generally 
including broker-dealers and large institutional investors 
(``Authorized Participants''). Creation Units generally will consist of 
50,000 Shares, although this may change from time to time. Creation 
Units, however, are not expected to consist of less than 50,000 Shares. 
As described in the Registration Statement and consistent with the 
Exemptive Relief, the Fund will issue and redeem Creation Units in 
exchange for an in-kind portfolio of instruments and/or cash in lieu of 
such instruments (the ``Creation Basket'').\48\ 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 (which may include cash-in-lieu 
amounts) 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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    \47\ The NAV of the Fund's Shares generally will be calculated 
once daily Monday through Friday as of the close of regular trading 
on the New York Stock Exchange (``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.
    \48\ 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

[[Page 69114]]

creations and redemptions of Creation Units. All standard orders to 
create Creation Units must be received by the transfer agent no later 
than the closing time of the regular trading session on the 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'').\49\ 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'') \50\ 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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    \49\ 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.
    \50\ 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.
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    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 and 
other municipal securities that are not 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 and 
other 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

[[Page 69115]]

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.
    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''),\51\ 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 \52\ 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.\53\ 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.
---------------------------------------------------------------------------

    \51\ 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.
    \52\ 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).
    \53\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.
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    In addition, for the Fund, an estimated value, defined in Rule 
5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's Disclosed Portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value, available on the 
NASDAQ OMX Information LLC proprietary index data service,\54\ 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.
---------------------------------------------------------------------------

    \54\ 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 and other municipal securities will be the Electronic Municipal 
Market Access (``EMMA'') of the Municipal Securities Rulemaking Board 
(``MSRB'').\55\ 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 and other 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.
---------------------------------------------------------------------------

    \55\ 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

[[Page 69116]]

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.
    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 \56\ 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.
---------------------------------------------------------------------------

    \56\ 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.\57\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and applicable 
federal securities laws.
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    \57\ 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''),\58\ 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.\59\
---------------------------------------------------------------------------

    \58\ 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.
    \59\ 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.

[[Page 69117]]

    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV Calculation Time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the Fund's 
Web site.
Continued Listing Representations
    All statements and representations made in this filing regarding 
(a) the description of the portfolio, (b) limitations on portfolio 
holdings or reference assets, or (c) the applicability of Exchange 
rules and surveillance procedures shall constitute continued listing 
requirements for listing the Shares on the Exchange. In addition, the 
issuer has represented to the Exchange that it will advise the Exchange 
of any failure by the Fund to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Act, the Exchange will monitor for compliance with the continued 
listing requirements. If the Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under the Nasdaq 5800 Series.
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. The Fund may invest up 
to 20% of its net assets in taxable municipal securities and in tax-
exempt municipal securities that are not 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.
    Under normal market conditions, except for the initial invest-up 
period and periods of high cash inflows or outflows,\60\ the Fund's 
investments in Municipal Securities will provide exposure (based on 
dollar amount invested) to (a) at least 10 different industries (with 
no more than 25% of the value of the Fund's net assets comprised of 
Municipal Securities that provide exposure to any single industry) and 
(b) at least 15 different states (with no more than 30% of the value of 
the Fund's net assets comprised of Municipal Securities that provide 
exposure to any single state). In addition, under normal market 
conditions, except for the initial invest-up period and periods of high 
cash

[[Page 69118]]

inflows or outflows,\61\ (a) with respect to 75% of the Fund's net 
assets, the Fund's exposure to any single borrower (based on dollar 
amount invested) will not exceed 3% of the value of the Fund's net 
assets and (b) with respect to 15% of the Fund's net assets, the Fund's 
exposure to any single borrower (based on dollar amount invested) will 
not exceed 5% of the value of the Fund's net assets. The Exchange 
believes that the foregoing restrictions should mitigate the risks 
associated with manipulation in that they limit exposure to specific 
industries, states and borrowers.
---------------------------------------------------------------------------

    \60\ See note 17 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
    \61\ Id.
---------------------------------------------------------------------------

    Further, under normal market conditions, except for the initial 
invest-up period and periods of high cash inflows or outflows,\62\ (a) 
with respect to the Municipal Securities in which the Fund invests that 
are rated investment grade by each NRSRO rating such securities, at the 
time of purchase, the applicable borrower will be obligated to pay debt 
service on issues of municipal obligations that have an aggregate 
principal amount outstanding of $100 million or more and (b) with 
respect to Clause B Munis, at the time of purchase of a Clause B Muni, 
the borrowers of all Clause B Munis held by the Fund, in the aggregate, 
will have a weighted average of principal municipal debt outstanding of 
$50 million or more. In complying with this requirement, the Fund will 
calculate the weighted average of all principal municipal debt 
outstanding of all Clause B Muni borrowers at the time of purchase of a 
new Clause B Muni based on (i) the most recent information available on 
debt outstanding of the new Clause B Muni purchase and (ii) the debt 
outstanding information available at the previous time of original 
purchase of all other existing Clause B Muni borrowers already held in 
the Fund.\63\ Purchases that add to an existing borrower position will 
result in updated debt calculations for that borrower using the most 
recent information available. Notwithstanding the foregoing, in the 
case of a Municipal Security that is a pre-refunded or escrowed to 
maturity bond, such Municipal Security will be included in clause (a) 
of the first sentence of this paragraph only if it was rated investment 
grade by each NRSRO rating such security immediately prior to being 
pre-refunded or escrowed to maturity, as applicable, and will otherwise 
be a Clause B Muni. The Exchange believes that the foregoing 
restrictions should mitigate the risks associated with manipulation in 
that they impose requirements relating to the outstanding municipal 
debt of borrowers of Municipal Securities.
---------------------------------------------------------------------------

    \62\ Id.
    \63\ The Fund will not be required to update information 
regarding debt outstanding for borrowers of Clause B Munis already 
held in the Fund.
---------------------------------------------------------------------------

    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 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 and other 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 and other 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 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.
    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 open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, FINRA, on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares 
and the exchange-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.

[[Page 69119]]

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 actively-managed exchange-traded fund that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\64\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act,\65\ which requires, among other things, that the Exchange's rules 
be designed to prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \64\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \65\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission also finds that the proposal to list and trade the 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Exchange Act,\66\ which sets forth Congress' finding that it is in 
the public interest and appropriate for the protection of investors and 
the maintenance of fair and orderly markets to assure the availability 
to brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities. Quotation and last sale 
information for the Shares will be available via Nasdaq proprietary 
quote and trade services, as well as in accordance with the Unlisted 
Trading Privileges and CTA plans for the Shares.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

    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,\67\ 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.\68\
---------------------------------------------------------------------------

    \67\ See supra note 54.
    \68\ The Exchange states that several major market data vendors 
display or make widely available Portfolio Indicative Values taken 
from the CTA or other data feeds.
---------------------------------------------------------------------------

    On each business day, before commencement of trading in Shares in 
the Regular Market Session \69\ 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.\70\ 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.
---------------------------------------------------------------------------

    \69\ 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).
    \70\ The Fund's disclosure of derivative positions in the 
Disclosed Portfolio will include information designed to allow 
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.
---------------------------------------------------------------------------

    The NAV of the Fund's Shares will normally be determined as of the 
close of the regular trading session on the Exchange (ordinarily 4:00 
p.m. Eastern time) on each 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. 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.
    One source of price information for Municipal Securities and 
taxable municipal securities will be the EMMA of the MSRB.\71\ 
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 and other 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 
or from major market data vendors or Pricing Services.
---------------------------------------------------------------------------

    \71\ See supra note 55.
---------------------------------------------------------------------------

    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

[[Page 69120]]

once each business day, and their prices will be available through the 
applicable fund's Web site or from major market data vendors. 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. The Fund's Web site will include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information.
    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange will obtain a representation from the issuer of 
the Shares that the NAV per Share will be calculated daily and that the 
NAV and the Disclosed Portfolio will be made available to all market 
participants at the same time. Trading in Shares of the Fund will be 
halted under the conditions specified in Nasdaq Rules 4120 and 4121 
\72\ 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.
---------------------------------------------------------------------------

    \72\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities and financial instruments 
comprising the Disclosed Portfolio of the Fund; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance 
of a fair and orderly market are present. With respect to trading 
halts, the Exchange may consider all relevant factors in exercising 
its discretion to halt or suspend trading in the Shares of the Fund.
---------------------------------------------------------------------------

    The Exchange represents that it has a general policy prohibiting 
the distribution of material, non-public information by its employees. 
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. The Exchange represents that 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 of and/or changes to the portfolio.\73\
---------------------------------------------------------------------------

    \73\ See supra notes 16 and 23.
---------------------------------------------------------------------------

    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. 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.\74\ The Commission believes 
that the Exchange's procedures, combined with the Fund's general 
adherence to the generic fixed income listing requirements in Nasdaq 
Rule 5705(b)(4)(A) on a continuous basis measured at the time of 
purchase are designed to mitigate the potential for price manipulation 
of the shares. Furthermore, the Commission believes that the investment 
restrictions discussed above appear reasonably designed to minimize the 
Fund's susceptibility to manipulation.
---------------------------------------------------------------------------

    \74\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement. See supra note 57.
---------------------------------------------------------------------------

    The Exchange represents that it deems the Shares to be equity 
securities, thus rendering the trading of the Shares subject to the 
Exchange's existing rules governing the trading of equity securities.
    In support of this proposal, the Exchange has made the following 
additional representations:
    (1) The Shares will conform to the initial and continued listing 
criteria under Nasdaq Rule 5735.\75\
---------------------------------------------------------------------------

    \75\ See Amendment No. 3, supra note 12, at 33.
---------------------------------------------------------------------------

    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.\76\
---------------------------------------------------------------------------

    \76\ See id. at 29.
---------------------------------------------------------------------------

    (3) Trading in the Shares will be subject to the existing trading 
surveillances, administered by FINRA on behalf of the Exchange, which 
are designed to detect violations of Exchange rules and applicable 
federal securities laws, and 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 federal 
securities laws applicable to trading on the Exchange.\77\
---------------------------------------------------------------------------

    \77\ See id. at 30.
---------------------------------------------------------------------------

    (4) 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 ISG, and FINRA may obtain trading information regarding 
trading in the Shares and in the exchange-listed securities and 
instruments held by the Fund from these 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.\78\
---------------------------------------------------------------------------

    \78\ See id. at 30-31.
---------------------------------------------------------------------------

    (5) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how information regarding 
the Intraday Indicative Value and the Disclosed Portfolio is 
disseminated; (d) the risks involved in trading the Shares during the 
Pre-Market and Post-Market Sessions when an updated Intraday Indicative 
Value will not be calculated or publicly disseminated; (e) the 
requirement that members deliver a prospectus to investors purchasing 
newly issued Shares prior to or concurrently with the confirmation of a 
transaction; and (f) trading information. The Information Circular will 
also discuss any exemptive, no-action and interpretive relief granted 
by the Commission from any rules under the Act.\79\
---------------------------------------------------------------------------

    \79\ See id. at 31-32.
---------------------------------------------------------------------------

    (6) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 \80\ under the Act.\81\
---------------------------------------------------------------------------

    \80\ See 17 CFR 240.10A-3.
    \81\ See Amendment No. 3, supra note 12, at 28.

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[[Page 69121]]

    (7) The Fund may invest up to 10% of its net assets in Distressed 
Municipal Securities.\82\
---------------------------------------------------------------------------

    \82\ See id. at 35.
---------------------------------------------------------------------------

    (8) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, (1) with 
respect to 75% of the Fund's net assets, the Fund's exposure to any 
single borrower (based on dollar amount invested) will not exceed 3% of 
the value of the Fund's net assets; and (2) with respect to 15% of the 
Fund's net assets, the Fund's exposure to any single borrower (based on 
dollar amount invested) will not exceed 5% of the value of the Fund's 
net assets.\83\
---------------------------------------------------------------------------

    \83\ See id. at 17.
---------------------------------------------------------------------------

    (9) Except for the initial invest-up period and periods of high 
cash inflows or outflows, the Fund's investments in Municipal 
Securities will provide exposure to at least 15 different states, with 
no more than 30% of the value of the Fund's net assets comprising 
Municipal Securities that provide exposure to any single state.\84\
---------------------------------------------------------------------------

    \84\ See id. at 16-17.
---------------------------------------------------------------------------

    (10) Except for the initial invest-up period and periods of high 
cash inflows or outflows, the Fund's investments in Municipal 
Securities will provide exposure to at least 10 different industries 
with no more than 25% of the value of the Fund's net assets comprising 
Municipal Securities that provide exposure to any single industry.\85\
---------------------------------------------------------------------------

    \85\ See id.
---------------------------------------------------------------------------

    The Exchange also represents that all statements and 
representations made in the proposed rule change, as modified by 
Amendment No. 3 regarding (a) the description of the portfolio, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules and surveillance procedures constitute 
continued listing requirements for listing the Shares on the Exchange. 
In addition, the issuer has represented to the Exchange that it will 
advise the Exchange of any failure by the Fund to comply with the 
continued listing requirements, and, pursuant to its obligations under 
Section 19(g)(1) of the Act, the Exchange will monitor for compliance 
with the continued listing requirements. If the Fund is not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under the Nasdaq 5800 Series.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Fund. The Commission notes that the 
Fund and the Shares must comply with the requirements of Nasdaq Rule 
5735 to be listed and traded on the Exchange.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \86\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 3

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 3 is consistent with the 
Exchange 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 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-Nasdaq-2016-002 and should 
be submitted on or before October 26, 2016.

V. Accelerated Approval of Proposed Rule Change as Modified by 
Amendment No. 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 3, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
3 in the Federal Register. Amendment No. 3 supplements the proposed 
rule change by clarifying the Fund's general adherence to the 
quantitative standards set forth in NASDAQ 5705(b)(4)(A).\87\ In 
addition, the Exchange represents that it would adhere to certain 
investment restrictions, including but not limited to, the following:
---------------------------------------------------------------------------

    \87\ See Amendment No. 3, supra note 12, at 10-13.
---------------------------------------------------------------------------

    (1) With respect to 75% of the Fund's net assets, the Fund's 
exposure to any single borrower (based on dollar amount invested) will 
not exceed 3% of the value of the Fund's net assets;
    (2) with respect to 15% of the Fund's net assets, the Fund's 
exposure to any single borrower (based on dollar amount invested) will 
not exceed 5% of the value of the Fund's net assets;
    (3) the Fund's investments in Municipal Securities will provide 
exposure to at least 15 different states, with no more than 30% of the 
value of the Fund's net assets comprising Municipal Securities that 
provide exposure to any single state; and
    (4) the Fund's investments in Municipal Securities will provide 
exposure to at least 10 different industries with no more than 25% of 
the value of the Fund's net assets comprising Municipal Securities that 
provide exposure to any single industry.\88\
---------------------------------------------------------------------------

    \88\ The Fund represents that it would adhere to these 
investment restrictions under normal market conditions, except for 
the initial invest-up period and periods of high cash inflows or 
outflows. See id. at 16-17.
---------------------------------------------------------------------------

    The addition of these investment restrictions helped the Commission 
find that the proposed listing and trading of the Shares is consistent 
with the portion of Section 6(b)(5) of the Exchange Act,\89\ which 
requires that the rules of a national securities exchange must be 
designed to, among other things, prevent fraudulent and manipulative 
acts and practices and, in general, to protect investors and the public 
interest.

[[Page 69122]]

Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\90\ to approve the proposed rule change, 
as modified by Amendment No. 3, on an accelerated basis.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78f(b)(5).
    \90\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\91\ that the proposed rule change (SR-Nasdaq-2016-002), 
as modified by Amendment No. 3 be, and it hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \91\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\92\
---------------------------------------------------------------------------

    \92\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2016-24086 Filed 10-4-16; 8:45 am]
 BILLING CODE 8011-01-P

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