Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Amendment No. 1, and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendments No. 1 and 2, Relating to the First Trust Municipal High Income ETF, 36460-36467 [2017-16400]
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36460
Federal Register / Vol. 82, No. 149 / Friday, August 4, 2017 / Notices
Monday, August 7, 2017, at 9:00 a.m.
Dated: August 2, 2017.
Julie S. Moore,
Secretary.
[FR Doc. 2017–16622 Filed 8–2–17; 4:15 pm]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736.
Extension:
Rule 498, SEC File No. 270–574, OMB
Control No. 3235–0648
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.) (‘‘Paperwork
Reduction Act’’), the Securities and
Exchange Commission (the
‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget (‘‘OMB’’) for
extension and approval.
Rule 498 (17 CFR 230.498) under the
Securities Act of 1933 (15 U.S.C. 77a et
seq.) (‘‘Securities Act’’) permits openend management investment companies
(‘‘funds’’) to satisfy their prospectus
delivery obligations under the Securities
Act by sending or giving key
information directly to investors in the
form of a summary prospectus
(‘‘Summary Prospectus’’) and providing
the statutory prospectus on a Web site.
Upon an investor’s request, funds are
also required to send the statutory
prospectus to the investor. In addition,
under rule 498, a fund that relies on the
rule to meet its statutory prospectus
delivery obligations must make
available, free of charge, the fund’s
current Summary Prospectus, statutory
prospectus, statement of additional
information, and most recent annual
and semi-annual reports to shareholders
at the Web site address specified in the
required Summary Prospectus legend.1
A Summary Prospectus that complies
with rule 498 is deemed to be a
prospectus that is authorized under
Section 10(b) of the Securities Act and
Section 24(g) of the Investment
Company Act of 1940 (15 U.S.C. 80a–1
et seq.).
1 17
CFR 270.498(e)(1).
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The purpose of rule 498 is to enable
a fund to provide investors with a
Summary Prospectus containing key
information necessary to evaluate an
investment in the fund. Unlike many
other federal information collections,
which are primarily for the use and
benefit of the collecting agency, this
information collection is primarily for
the use and benefit of investors. The
information filed with the Commission
also permits the verification of
compliance with securities law
requirements and assures the public
availability and dissemination of the
information.
Based on an analysis of fund filings,
the Commission estimates that
approximately 10,532 portfolios are
using a Summary Prospectus. The
Commission estimates that the annual
hourly burden per portfolio associated
with the compilation of the information
required on the cover page or the
beginning of the Summary Prospectus is
0.5 hours, and estimates that the annual
hourly burden per portfolio to comply
with the Web site posting requirement
is approximately 1 hour, requiring a
total of 1.5 hours per portfolio per year.2
Thus the total annual hour burden
associated with these requirements of
the rule is approximately 15,798.3 The
Commission estimates that the annual
cost burden is approximately $15,900
per portfolio, for a total annual cost
burden of approximately $167,458,800.4
Estimates of average burden hours are
made solely for the purposes of the
Paperwork Reduction Act and are not
derived from a comprehensive or even
a representative survey or study of the
costs of Commission rules and forms.
Under rule 498, use of the Summary
Prospectus is voluntary, but the rule’s
requirements regarding provision of the
statutory prospectus upon investor
request are mandatory for funds that
elect to send or give a Summary
Prospectus in reliance upon rule 498.
The information provided under rule
498 will not be kept confidential. An
agency may not conduct or sponsor, and
a person is not required to respond to,
a collection of information unless it
displays a currently valid OMB control
number.
2 0.5 hours per portfolio + 1 hour per portfolio =
1.5 hours per portfolio. The Commission believes
that funds that have opted to use the Summary
Prospectus have already incurred the estimated
one-time hour burden to initially comply with rule
498, and therefore the estimated burden hours to
initially comply with rule 498 and the associated
costs are not included in these estimates.
3 1.5 hours per portfolio × 10,532 portfolios =
15,798 hours.
4 $15,900 per portfolio × 9,082 portfolios =
$144,403,800.
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Written comments are invited on: (a)
Whether the collections of information
are necessary for the proper
performance of the functions of the
Commission, including whether the
information has practical utility; (b) the
accuracy of the Commission’s estimate
of the burdens of the collections of
information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burdens of the collections
of information on respondents,
including through the use of automated
collection techniques or other forms of
information technology. Consideration
will be given to comments and
suggestions submitted in writing within
60 days of this publication.
Please direct your written comments
to Pamela Dyson, Director/Chief
Information Officer, Securities and
Exchange Commission, C/O Remi
Pavlik-Simon, 100 F Street NE.,
Washington, DC 20549; or send an email
to: PRA_Mailbox@sec.gov.
Dated: July 31, 2017.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16391 Filed 8–3–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81265; File No. SR–
NASDAQ–2017–038]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Amendment No. 1, and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendments No. 1 and 2, Relating to
the First Trust Municipal High Income
ETF
July 31, 2017.
I. Introduction
On May 16, 2017, The NASDAQ
Stock Market LLC (‘‘Nasdaq’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
relating to the First Trust Municipal
High Income ETF (‘‘Fund’’) of First
Trust Exchange-Traded Fund III
(‘‘Trust’’), the shares of which have been
approved by the Commission for listing
and trading under Nasdaq Rule 5735
(‘‘Managed Fund Shares’’). The
proposed rule change was published for
1 15
2 17
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comment in the Federal Register on
June 2, 2017.3 On July 10, 2017, the
Exchange filed Amendment No. 1 to the
proposed rule change.4 On July 11,
2017, 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.5
On July 13, 2017, the Exchange filed
Amendment No. 2 to the proposed rule
change.6 The Commission has received
no comments on the proposal. The
Commission is publishing this notice to
solicit comments on Amendment No. 1
from interested persons, and is
approving the proposed rule change, as
modified by Amendments No. 1 and 2,
on an accelerated basis.
II. The Exchange’s Description of the
Proposed Rule Change, as Modified by
Amendments No. 1 and 2
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
3 See Securities Exchange Act Release No. 80802
(May 26, 2017), 82 FR 25648 (Jun. 2, 2017)
(‘‘Notice’’).
4 In Amendment No. 1, which amended and
replaced the proposed rule change in its entirety,
the Exchange: (a) modified the requirement that the
Fund invest at least 65% of its net assets in
Municipal Securities (as defined herein) that are
rated below investment grade to at least 50% of its
net assets; (b) modified the limitation that the Fund
invest up to 35% of its net assets in investment
grade Municipal Securities to up to 50% of its net
assets; and (c) removed references to the Liquidity
Rule. Amendment No. 1 to the proposed rule
change is available on the Commission’s Web site
at: https://www.sec.gov/comments/sr-nasdaq-2017038/nasdaq2017038-1841718-155073.pdf.
5 See Securities Exchange Act Release No. 81123
(Jul. 11, 2017), 82 FR 32737 (Jul. 17, 2017). The
Commission designated August 31, 2017, as the
date by which the Commission shall either approve
or disapprove, or institute proceedings to determine
whether to disapprove, the proposed rule change.
See id.
6 In Amendment No. 2, which partially amended
the proposed rule change, as modified by
Amendment No. 1, the Exchange provided the
rationale with respect to the modifications to the
percentages of investment grade and noninvestment grade Municipal Securities in which the
Fund may invest. Because Amendment No. 2 makes
clarifying changes and does not present unique or
novel regulatory issues, it is not subject to notice
and comment. Amendment No. 2 is available on the
Commission’s Web site at: https://www.sec.gov/
comments/sr-nasdaq-2017-038/nasdaq20170381851791-155341.pdf. See infra notes 30–32 (noting
where the Exchange provided the rationale with
respect to the modifications to the percentages of
investment grade and non-investment grade
Municipal Securities in Amendment No. 2).
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the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Commission has approved the
listing and trading of Shares under
Nasdaq Rule 5735, which governs the
listing and trading of Managed Fund
Shares on the Exchange.7 However, no
Shares are currently listed and traded
on the Exchange. The Exchange believes
the proposed rule change reflects no
significant issues not previously
addressed in the Prior Release.
The Fund is 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. The Trust, which is registered
with the Commission as an investment
company under the Investment
Company Act of 1940 (the ‘‘1940 Act’’),
has filed a registration statement on
Form N–1A (‘‘Registration Statement’’)
relating to the Fund with the
Commission. 8 The Fund is a series of
the Trust.
The primary purpose of this proposed
rule change is to modify certain
representations set forth in the Prior
Release. Since the Prior Release, in
evaluating its ability to construct a
portfolio that would both enable the
Fund to pursue its investment objectives
effectively and satisfy the
representations set forth in the Prior
Release, the Adviser determined that,
based on certain factors, including
regulatory and market developments
with portfolio management
implications, additional flexibility
would be needed to launch and operate
the Fund. Additionally, the Adviser
7 The Commission approved Nasdaq Rule 5735 in
Securities Exchange Act Release No. 57962 (June
13, 2008), 73 FR 35175 (June 20, 2008) (SR–
NASDAQ–2008–039). The Commission previously
approved the listing and trading of the Shares of the
Fund. See Securities Exchange Act Release No.
78913 (September 23, 2016), 81 FR 69109 (October
5, 2016) (SR–NASDAQ–2016–002) (‘‘Prior
Release’’).
8 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. Before
Shares are publicly offered, the Trust will file a
post-effective amendment to its Registration
Statement. The changes in this proposed rule
change will not be implemented for the Fund until
the post-effective amendment to the Registration
Statement becomes effective. First Trust Advisors
L.P. (the ‘‘Adviser’’) represents that the Adviser will
not implement the changes described herein until
the instant proposed rule change is operative.
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36461
took into account that recent increases
in interest rates have been accompanied
by substantial outflows from mutual
funds and ETFs, and that future interest
rate swings may spark increased market
volatility and trigger potentially
dramatic inflows and outflows. To
enable the Fund to operate effectively
(including, in addition to pursuing its
investment objectives, responding to
potential market volatility), the Adviser
believes that additional portfolio
management flexibility is needed and
warranted. Additionally, for the reasons
discussed in more detail below, the
Exchange believes that the proposal is
consistent with Section 6(b)(5) of the
Act.
As a related matter, the Exchange
notes that although the Prior Release
included certain representations that
were based on the generic listing
standards for index-based ETFs, the
Exchange’s ‘‘generic listing standards’’
for actively-managed ETFs (the ‘‘Active
ETF Generic Listing Standards’’) 9 were
recently adopted and, with one
exception, the Fund’s proposed revised
representations would meet or exceed
similar requirements for portfolios of
fixed income securities set forth in
Nasdaq Rule 5735(b)(1)(B) under the
Active ETF Generic Listing Standards
(‘‘Rule 5735(b)(1)(B)’’). In addition, this
proposed rule change would make
certain changes to the description of the
Fund’s investments. Further, to provide
the Adviser with greater flexibility in
hedging interest rate risks associated
with the Fund’s portfolio investments,
this proposed rule change would
expand the Fund’s ability to invest in
derivatives by permitting it to invest in
over-the-counter (‘‘OTC’’) forward
contracts and OTC swaps, subject to a
limitation that would be consistent with
the limitation on investments in OTC
derivatives set forth in Nasdaq Rule
5735(b)(1)(E) under the Active ETF
Generic Listing Standards (‘‘Rule
5735(b)(1)(E)’’).
Changes to Representations
The Prior Release noted that the Fund
would be actively managed and not tied
to an index, but that under normal
market conditions, on a continuous
basis determined at the time of
purchase, its portfolio of Municipal
Securities (as defined in the Prior
Release) would 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),
9 See Securities Exchange Act Release No. 78918
(September 23, 2016), 81 FR 67033 (September 29,
2016).
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as described therein. More specifically,
the Prior Release stated that, under
normal market conditions, the Fund’s
portfolio of Municipal Securities would
meet the requirements of: (i) Nasdaq
Rule 5705(b)(4)(A)(i) (requiring that the
index or portfolio consist of ‘‘Fixed
Income Securities’’); (ii) Nasdaq Rule
5705(b)(4)(A)(iv) (requiring that no
component fixed income security
(excluding Treasury securities)
represent more than 30% of the weight
of the index or portfolio, and that the
five highest weighted component fixed
income securities do not, in the
aggregate, account for more than 65% of
the weight of the index or portfolio);
and (iii) Nasdaq Rule 5705(b)(4)(A)(v)
(requiring that an underlying index or
portfolio (excluding one consisting
entirely of exempted securities) include
securities from a minimum of 13 nonaffiliated issuers) (collectively, the
‘‘Rule 5705-Related Representations’’).
Additionally, the Prior Release noted
that Nasdaq Rule 5705(b)(4)(A)(iii)
(relating to convertible securities) was
inapplicable to the Fund’s portfolio of
Municipal Securities. Further, the Prior
Release provided that the Fund’s
portfolio of Municipal Securities may
not satisfy 5705(b)(4)(A)(vi) (requiring
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) and that it would not
generally satisfy Rule 5705(b)(4)(A)(ii)
(requiring that components that in the
aggregate account for at least 75% of the
weight of the index or portfolio have a
minimum original principal amount
outstanding of $100 million or more).
However, the Prior Release stated that
under normal market conditions, at least
40% (based on dollar amount invested)
of the Municipal Securities in which the
Fund invested would 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 ‘‘40/75
Representation’’).10
10 As noted in the Prior Release, 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), but
demonstrated that the portfolio of municipal
securities in which the ETFs would invest would
be sufficiently liquid (including 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
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In addition to the Rule 5705-Related
Representations and the 40/75
Representation, the Prior Release
provided that under normal market
conditions, except for the initial investup period and periods of high cash
inflows or outflows,11 the Fund’s
investments in Municipal Securities
would 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)
(collectively, the ‘‘Industry/State
Representations’’). Additionally, the
Prior Release stated that under normal
market conditions, except for the initial
invest-up period and periods of high
cash inflows or outflows, (a) with
respect to 75% of the Fund’s net assets,
the Fund’s exposure to any single
borrower (based on dollar amount
invested) would not exceed 3% of the
value of the Fund’s net assets and (b)
with respect to 15% of the Fund’s net
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)). See also Securities Exchange Act
Release Nos. 67985 (October 4, 2012), 77 FR 61804
(October 11, 2012) (SR–NYSEArca–2012–92) (order
approving listing and trading of iShares 2018 S&P
AMT-Free Municipal Series and iShares 2019 S&P
AMT-Free Municipal Series); 72464 (June 25, 2014),
79 FR 37373 (July 1, 2014) (SR–NYSEArca–2014–
45) (order approving continued listing and trading
of PowerShares Insured California Municipal Bond
Portfolio, PowerShares Insured National Municipal
Bond Portfolio and PowerShares Insured New York
Municipal Bond Portfolio); 72523 (July 2, 2014), 79
FR 39016 (July 9, 2014) (SR–NYSEArca–2014–37)
(order approving listing and trading of iShares 2020
S&P AMT-Free Municipal Series); 75468 (July 16,
2015), 80 FR 43500 (July 22, 2015) (SR–NYSEArca–
2015–25) (order approving listing and trading of
iShares iBonds Dec 2021 AMT-Free Muni Bond
ETF and iShares iBonds Dec 2022 AMT-Free Muni
Bond ETF); 78329 (July 14, 2016), 81 FR 47217 (July
20, 2016) (SR–BatsBZX–2016–01) (order approving
listing and trading of VanEck Vectors AMT-Free 6–
8 Year Municipal Index ETF, VanEck Vectors AMTFree 8–12 Year Municipal Index ETF, and VanEck
Vectors AMT-Free 12–17 Year Municipal Index
ETF); and 79885 (January 26, 2017), 82 FR 8963
(February 1, 2017) (SR–NYSEArca–2016–100)
(order approving listing and trading of Direxion
Daily Municipal Bond Taxable Bear 1X Fund).
11 As described in the Prior Release, the term
‘‘initial invest-up period’’ means the six-week
period following the commencement of trading of
Shares on the Exchange and the term ‘‘periods of
high cash inflows or outflows’’ means 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.
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assets, the Fund’s exposure to any single
borrower (based on dollar amount
invested) would not exceed 5% of the
value of the Fund’s net assets
(collectively, the ‘‘Borrower Exposure
Representations’’).
The Prior Release also provided that
under normal market conditions, except
for the initial invest-up period and
periods of high cash inflows or
outflows, (a) with respect to the
Municipal Securities in which the Fund
invested that were rated investment
grade by each nationally recognized
statistical rating organization
(‘‘NRSRO’’) rating such securities, at the
time of purchase, the applicable
borrower would 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 invested (referred to as
‘‘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, would have
a weighted average of principal
municipal debt outstanding of $50
million or more (collectively, the
‘‘Borrower Debt Representations’’ and,
together with the Borrower Exposure
Representations, the Industry/State
Representations, the 40/75
Representation and the Rule 5705Related Representations, the ‘‘Prior
Representations’’).
As indicated above, the Adviser has
reconsidered the Prior Representations
and concluded that additional flexibility
will be needed to launch and operate
the Fund. As a result, in this proposed
rule change, the Exchange is proposing
that, going forward: (a) The Prior
Representations, except for the
Industry/State Representations, would
be deleted and (b) the representations
included in the next two paragraphs
(referred to as the ‘‘New
Representations’’) would be added.
Further, the Exchange notes that the
New Representations have been
designed to correspond to the
requirements of Rule 5735(b)(1)(B), as
these are more readily adapted to the
Fund (as an actively-managed ETF) than
the generic listing standards for indexbased ETFs upon which the Rule 5705Related Representations were based.
Although as described below, certain
of the New Representations would meet
or exceed similar requirements set forth
in Rule 5735(b)(1)(B), it is not
anticipated that the Fund would meet
the requirement that components that in
the aggregate account for at least 75% of
the fixed income weight of the portfolio
each have a minimum original principal
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amount outstanding of $100 million or
more (the ‘‘Generic 100
Requirement’’).12 In general terms, the
Fund would operate as an activelymanaged ETF that normally invests in a
portfolio of Municipal Securities (as
defined in the Prior Release, with the
modification described below). The
Adviser notes that debt issuance sizes
for municipal obligations are generally
smaller than for corporate obligations.13
Furthermore, as a general matter,
municipal borrowers in certain
industries in which the Fund currently
intends to invest significantly 14 tend to
have less outstanding debt than
municipal borrowers in other municipal
industries. Therefore, under normal
market conditions, except for the initial
invest-up period and periods of high
cash inflows or outflows,15 at least 40%
(based on dollar amount invested) of the
Municipal Securities in which the Fund
invests 16 would 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 $50 million
or more (the ‘‘40/50 Representation’’).
Based on its expertise and
understanding of the municipal
securities market and the manner in
which municipal securities generally
trade, the Adviser believes that,
notwithstanding both the previous more
stringent 40/75 Representation and the
Generic 100 Requirement, the 40/50
Representation is appropriate in light of
the Fund’s investment objectives and
the manner in which the Fund intends
to pursue them.17 Given the nature of
12 See
Nasdaq Rule 5735(b)(1)(B)(i).
indicated above in note 10, various ETFs
seeking to track indexes comprised of municipal
securities have previously sought and obtained
approval by the Commission of proposed rule
changes because they would not meet the
requirement under the applicable generic listing
standards that is similar to the Generic 100
Requirement.
14 These industries include charter schools, senior
living facilities (i.e., continuing care retirement
communities (‘‘CCRCs’’)) and special tax districts,
among others. As noted in the Prior Release, 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
‘‘borrower’’ is the conduit borrower (i.e., the party
on which a bondholder must rely for repayment)
and in the case of other municipal financings, the
‘‘borrower’’ is the issuer of the municipal securities.
15 See note 11 regarding the meaning of the terms
‘‘initial invest-up period’’ and ‘‘periods of high cash
inflows or outflows.’’
16 For the avoidance of doubt, in the case of
Municipal Securities that are issued by entities
whose underlying assets are municipal bonds
(‘‘Municipal Entities’’), the underlying municipal
bonds would be taken into account.
17 The Adviser notes that individual issues of
municipal securities represented by CUSIPs (i.e.,
the specific identifying numbers for securities) may
13 As
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the municipal securities market and the
manner in which municipal securities
generally trade, the expected availability
of Municipal Securities that would
satisfy the Fund’s investment
parameters, and the debt issuance
profiles of the corresponding issuers
and borrowers, the 40/50 Representation
should both provide the Fund with
flexibility to construct its portfolio and,
when combined with the Industry/State
Representations and the other New
Representations included in this filing
(including certain representations set
forth below pertaining to fixed income
securities weightings and number of
non-affiliated issuers that are based on,
but more stringent than, as applicable,
the requirements set forth in Rule
5735(b)(1)(B)), should support the
potential for diversity and liquidity,
thereby mitigating the Commission’s
concerns about manipulation.18
Under normal market conditions,
except for the initial invest-up period
and periods of high cash inflows or
outflows,19 no component fixed income
security (excluding the U.S. government
securities described under the heading
‘‘Other Investments’’ in the Prior
Release) would represent more than
15% of the Fund’s net assets, and the
five most heavily weighted component
be placed into categories according to common
characteristics (such as rating, geographical region,
purpose, and maturity). Municipal securities that
share similar characteristics generally tend to trade
similarly to one another; therefore, within these
categories, issues may be considered somewhat
fungible from a portfolio management perspective,
allowing one CUSIP to be represented by another
that shares similar characteristics for purposes of
developing an investment strategy. Moreover, when
municipal securities are close substitutes for one
another, pricing vendors may be able to use
executed trade information from similar municipal
securities as pricing inputs for an individual
security. This can make individual securities more
liquid because valuations for a single security are
generally better estimators of actual trading prices
when they are informed by trades in a large group
of closely related securities.
18 The Exchange notes that, in addition to
approving the Fund in the Prior Release, the
Commission has also approved for listing and
trading shares of other actively-managed ETFs that
principally hold municipal securities. See, e.g.,
Securities Exchange Act Release Nos. 60981
(November 10, 2009), 74 FR 59594 (November 18,
2009) (SR–NYSEArca–2009–79) (order approving
listing and trading of PIMCO Short Term Municipal
Bond Strategy Fund and PIMCO Intermediate
Municipal Bond Strategy Fund); 71617 (February
26, 2014), 79 FR 12257 (March 4, 2014) (SR–
NYSEArca–2013–135) (order approving listing and
trading of db–X Managed Municipal Bond Fund);
71913 (April 9, 2014), 79 FR 21333 (April 15, 2014)
(SR–NASDAQ–2014–019) (order approving listing
and trading of First Trust Managed Municipal ETF);
and 79293 (November 10, 2016), 81 FR 81189
(November 17, 2016) (SR–NYSEArca–2016–107)
(order approving listing and trading of Cumberland
Municipal Bond ETF).
19 See note 11 regarding the meaning of the terms
‘‘initial invest-up period’’ and ‘‘periods of high cash
inflows or outflows.’’
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36463
fixed income securities in the Fund’s
portfolio (excluding U.S. government
securities) would not, in the aggregate,
account for more than 25% of the
Fund’s net assets.20 Further, under
normal market conditions, except for
the initial invest-up period and periods
of high cash inflows or outflows,21 the
Fund’s portfolio of Municipal Securities
would include securities from a
minimum of 30 non-affiliated issuers.22
Moreover, under normal market
conditions, except for the initial investup period and periods of high cash
inflows or outflows,23 component
securities that in the aggregate account
for at least 90% of the weight of the
Fund’s portfolio of Municipal Securities
would be exempted securities as
defined in Section 3(a)(12) of the Act
(the ‘‘Exempted Securities
Representation’’).24 Additionally, to the
20 See the Active ETF Generic Listing Standards
requirement set forth in Nasdaq Rule
5735(b)(1)(B)(ii), which provides that no component
fixed income security (excluding U.S. Treasury
securities and government-sponsored entity
(‘‘GSE’’) securities) may represent more than 30%
of the fixed income weight of the portfolio, and that
the five most heavily weighted component fixed
income securities in the portfolio (excluding U.S.
Treasury securities and GSE securities) may not in
the aggregate account for more than 65% of the
fixed income weight of the portfolio. For the
avoidance of doubt, in the case of Municipal
Securities that are issued by Municipal Entities, the
underlying municipal bonds would be taken into
account.
21 See note 11 regarding the meaning of the terms
‘‘initial invest-up period’’ and ‘‘periods of high cash
inflows or outflows.’’
22 For the avoidance of doubt, in the case of
Municipal Securities that are issued by Municipal
Entities, the underlying municipal bonds would be
taken into account. 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,
would be treated as separate, non-affiliated issuers
of Municipal Securities. The Active ETF Generic
Listing Standards requirement set forth in Nasdaq
Rule 5735(b)(1)(B)(iii) provides that generally, an
underlying portfolio (excluding exempted
securities) that includes fixed income securities
must include a minimum of 13 non-affiliated
issuers. Although not required, if the Fund’s
portfolio of Municipal Securities is comprised
entirely of securities that meet the definition of
‘‘municipal securities’’ set forth in Section 3(a)(29)
of the Act, then such portfolio would also be
comprised entirely of ‘‘exempted securities’’ as
defined in Section 3(a)(12) of the Act and, therefore,
the requirements of Rule 5735(b)(1)(B)(iii) would
not pertain to such portfolio; see the Exempted
Securities Representation below (which refers to
90% of the weight of the Fund’s portfolio of
Municipal Securities).
23 See note 11 regarding the meaning of the terms
‘‘initial invest-up period’’ and ‘‘periods of high cash
inflows or outflows.’’
24 See the Active ETF Generic Listing Standards
requirement set forth in Nasdaq Rule
5735(b)(1)(B)(iv)(d). For the avoidance of doubt, in
the case of Municipal Securities that are issued by
Municipal Entities, the underlying municipal bonds
would be taken into account.
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extent the Fund invests in Municipal
Securities that are mortgage-backed or
asset-backed securities, such
investments would not account, in the
aggregate, for more than 20% of the
weight of the fixed income portion of
the Fund’s portfolio.25
The New Representations differ from
the Prior Representations and do not, in
certain respects, comply with Rule
5735(b)(1)(B) (particularly with respect
to the Generic 100 Requirement).
However, taking into account the nature
of the municipal securities market and
the manner in which municipal
securities generally trade, in light of the
requirements that the New
Representations and the Industry/State
Representations would impose (e.g.,
concerning municipal debt outstanding,
fixed income securities weightings,
issuer diversification, the nature of the
securities in which the Fund would
invest (including representations
relating to exempted securities and
mortgage-backed and asset-backed
securities), and exposure to industries
and states), they should provide support
regarding the anticipated diversity and
liquidity of the Fund’s Municipal
Securities portfolio and should mitigate
the risks associated with manipulation,
while also providing the Adviser with
the necessary flexibility to operate the
Fund as intended.
Changes to Description of Certain Fund
Investments
The Prior Release stated that under
normal market conditions, the Fund
would 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’’). In light of the
Exempted Securities Representation,
going forward, the Exchange proposes to
revise the foregoing by deleting the
phrase ‘‘which are ‘exempted securities’
under Section 3(a)(12) of the Act.’’ In
addition, the Prior Release stated that
the Fund ‘‘may invest up to 20% of its
net assets in short-term debt
instruments . . . , 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.’’ Going
forward, the Exchange proposes to
revise the foregoing by replacing the
phrase ‘‘taxable municipal securities or
25 See the Active ETF Generic Listing Standards
requirement set forth in Nasdaq Rule
5735(b)(1)(B)(v).
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tax-exempt municipal securities that are
not exempted securities under Section
3(a)(12) under the Act,’’ with the phrase
‘‘and taxable municipal securities and
other municipal securities that are not
Municipal Securities,’’.
Additionally, the Prior Release stated
that under normal market conditions,
the Fund would 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
NRSRO rating such securities (or
Municipal Securities that are unrated
and determined by the Adviser to be of
comparable quality) (the ‘‘Below
Investment Grade Requirement’’). The
Prior Release also provided that the
Fund could invest up to 35% of its net
assets in ‘‘investment grade’’ Municipal
Securities (meaning 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)) (the ‘‘Investment
Grade Limitation’’). Going forward, the
Exchange proposes to modify the Below
Investment Grade Requirement by
replacing the phrase ‘‘Under normal
market conditions, the Fund will invest
at least 65% of its net assets’’ with the
following: ‘‘Under normal market
conditions, except for the initial investup period and periods of high cash
inflows or outflows, the Fund will
invest at least 50% of its net assets’’.26
Further, the Exchange proposes to
modify the Investment Grade Limitation
by replacing the phrase ‘‘The Fund may
invest up to 35% of its net assets’’ with
the following: ‘‘Under normal market
conditions, except for the initial investup period and periods of high cash
inflows or outflows, the Fund may not
invest more than 50% of its net
assets’’.27
26 See note 11 regarding the meaning of the terms
‘‘initial invest-up period’’ and ‘‘periods of high cash
inflows or outflows.’’ In addition, to conform to the
change to the Below Investment Grade
Requirement, the Exchange proposes that, going
forward, the phrase ‘‘65% investment requirement’’
be replaced with ‘‘50% investment requirement’’ in
the following statement included in the Prior
Release: ‘‘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’’).’’
27 See note 11 regarding the meaning of the terms
‘‘initial invest-up period’’ and ‘‘periods of high cash
inflows or outflows.’’ In addition, to conform to the
change to the Investment Grade Limitation, the
Exchange proposes that, going forward, the phrase
‘‘35% investment limitation’’ be replaced with
‘‘50% investment limitation’’ in the following
statement included in the Prior Release: ‘‘If,
PO 00000
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Fmt 4703
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Changes To Expand Permitted
Derivatives Investments
As described in the Prior Release, 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 (collectively, the ‘‘Listed
Derivatives’’) and (ii) acquire short
positions in the Listed Derivatives. No
changes are being proposed with respect
to the Fund’s investments in the Listed
Derivatives. Going forward, however,
the Exchange proposes that the Fund’s
ability to invest in derivatives would be
expanded to permit it to also invest in
OTC forward contracts and OTC swaps
(collectively, the ‘‘OTC Derivatives’’) to
hedge interest rate risks associated with
the Fund’s portfolio investments.
On both an initial and continuing
basis, no more than 20% of the assets
in the Fund’s portfolio would be
invested in the OTC Derivatives and, for
purposes of calculating this limitation,
the Fund’s investment in the OTC
Derivatives would be calculated as the
aggregate gross notional value of the
OTC Derivatives.28 The Fund would
only enter into transactions in the OTC
Derivatives with counterparties that the
Adviser reasonably believes are capable
of performing under the applicable
contract or agreement.29 The Fund’s
investments in both Listed Derivatives
and OTC Derivatives would be
consistent with the Fund’s investment
objectives and the 1940 Act and would
not be used to seek to achieve a multiple
or inverse multiple of an index.
The OTC Derivatives would typically
be valued using information provided
by a Pricing Service (as defined in the
Prior Release). Pricing information for
the OTC Derivatives would be available
from major broker-dealer firms and/or
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.’’
28 This limitation is consistent with the limitation
set forth in Rule 5735(b)(1)(E).
29 The Fund would seek, where possible, to use
counterparties, as applicable, whose financial status
is such that the risk of default is reduced; however,
the risk of losses resulting from default is still
possible. The Adviser would evaluate the
creditworthiness of counterparties on an ongoing
basis. In addition to information provided by credit
agencies, the Adviser’s analysis would evaluate
each approved counterparty using various methods
of analysis and may consider the Adviser’s past
experience with the counterparty, its known
disciplinary history and its share of market
participation.
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major market data vendors and/or
Pricing Services (as defined in the Prior
Release).
The Adviser represents that there
would be no change to the Fund’s
investment objectives. Except as
provided herein, all other facts
presented and representations made in
the Prior Release would remain
unchanged. The Fund and the Shares
would comply with all initial and
continued listing requirements under
Nasdaq Rule 5735.
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. Except as provided
herein, all other facts presented and
representations made in the Prior
Release would remain unchanged. The
Fund would comply with all the initial
and continued listing requirements
under Nasdaq Rule 5735.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares
would be listed and traded on the
Exchange pursuant to the initial and
continued listing criteria in Nasdaq Rule
5735 and, except as provided herein, all
other facts presented and
representations made in the Prior
Release would remain unchanged. The
Exchange notes that Shares have not yet
been listed on the Exchange. Consistent
with the Prior Release, the Exchange
represents that trading in the Shares
would be subject to the existing trading
surveillances, administered by both
Nasdaq and also the Financial Industry
Regulatory Authority (‘‘FINRA’’), on
behalf of the Exchange, which are
designed to detect violations of
Exchange rules and applicable federal
securities laws.
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 Adviser
represents that taking into account the
nature of the municipal securities
market and the manner in which
municipal securities generally trade, in
light of the requirements that the New
Representations, the Industry/State
Representations, the modified Below
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Investment Grade Requirement and the
modified Investment Grade Limitation
would impose (e.g., concerning
municipal debt outstanding, fixed
income securities weightings, issuer
diversification, the nature of the
securities in which the Fund would
invest (including representations
relating to exempted securities and
mortgage-backed and asset-backed
securities), exposure to industries and
states, and investments in below
investment grade Municipal Securities),
they should provide support regarding
the anticipated diversity and liquidity of
the Fund’s Municipal Securities
portfolio and should mitigate the risks
associated with manipulation, while
also providing the Adviser with the
necessary flexibility to operate the Fund
as intended.30
With one exception, the New
Representations would meet or exceed
similar requirements for portfolios of
fixed income securities set forth in Rule
5735(b)(1)(B). In this regard, it is not
anticipated that the Fund would meet
the Generic 100 Requirement. Based on
its expertise and understanding of the
municipal securities market and the
manner in which municipal securities
generally trade, the Adviser believes
that, notwithstanding both the previous
more stringent 40/75 Representation
and the Generic 100 Requirement, the
40/50 Representation is appropriate in
light of the Fund’s investment objectives
and the manner in which the Fund
intends to pursue them. Further, given
the nature of the municipal securities
market and the manner in which
municipal securities generally trade, the
expected availability of Municipal
Securities that would satisfy the Fund’s
investment parameters, and the debt
issuance profiles of the corresponding
issuers and borrowers, the 40/50
Representation should both provide the
Fund with flexibility to construct its
portfolio and, when combined with the
Industry/State Representations, the
other New Representations, the
modified Below Investment Grade
Requirement and the modified
Investment Grade Limitation, should
support the potential for diversity and
liquidity, thereby mitigating the
Commission’s concerns about
manipulation.31
In connection with the proposal to
modify the Below Investment Grade
Requirement and the Investment Grade
Limitation, the Exchange notes that the
Fund’s ability to invest in investment
grade Municipal Securities would be
expanded. Accordingly, Nasdaq believes
30 See
31 See
PO 00000
Amendment No. 2, supra note 6.
id.
Frm 00110
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36465
that this is consistent with the Act
because the liquidity profile of the
Fund’s potential pool of Municipal
Securities is expected to increase, which
should lessen manipulation concerns.32
Further, in connection with the
proposal to permit the Fund to invest in
the OTC Derivatives, the Exchange notes
that the ability to invest in the OTC
Derivatives would provide the Adviser
with additional flexibility in hedging
interest rate risks associated with the
Fund’s portfolio investments and would
be subject to a limitation that is
consistent with the limitation set forth
in Rule 5735(b)(1)(E). Additionally, the
Fund would only enter into transactions
in the OTC Derivatives with
counterparties that the Adviser
reasonably believes are capable of
performing under the applicable
contract or agreement.
In addition, a large amount of
information would be publicly available
regarding the Fund and the Shares,
thereby promoting market transparency.
Moreover, the Intraday Indicative Value
(as described in the Prior Release),
available on the NASDAQ OMX
Information LLC proprietary index data
service, would 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 would 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.
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. The
Exchange notes that the Fund does not
yet have publicly offered Shares and
does not yet have Shares listed and
traded on the Exchange. Before Shares
are publicly offered, the Trust will file
a post-effective amendment to its
Registration Statement. The Shares will
not be publicly offered until the posteffective amendment to the Registration
Statement becomes effective.
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
32 See
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of the purposes of the Act. The
Exchange believes that the proposed
rule change would provide the Adviser
with the flexibility needed to proceed
with launching the Fund,
accommodating the listing and trading
of Managed Fund Shares for an
additional actively-managed exchangetraded product, thereby enhancing
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
No written comments were either
solicited or received.
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the Exchange’s proposal is
consistent with the requirements of
Section 6 of the Act 33 and the rules and
regulations thereunder applicable to a
national securities exchange.34 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,35 which
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
As described above, the Exchange
proposes to: (a) Delete all of the Prior
Representations (including the 40/75
Representation), except for the Industry/
State Representations; and (b) apply the
New Representations. According to the
Exchange, the Fund’s proposed New
Representations would meet the
requirements of Nasdaq Rule
5735(b)(1)(B), with the exception of the
Generic 100 Requirement. In lieu of the
Generic 100 Requirement, the Exchange
proposes to apply New Representations,
which include the 40/50
Representation. Specifically, the 40/50
Representation requires that, under
normal market conditions and except
for the initial invest-up period and
periods of high cash inflows or
outflows, at least 40% (based on dollar
amount invested) of the Municipal
Securities in which the Fund invests
33 15
U.S.C. 78f.
approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
35 15 U.S.C. 78f(b)(5).
34 In
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would 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 $50 million or more.
The Commission believes that,
because this Fund is a series of Managed
Fund Shares under Nasdaq Rule 5735,
it is reasonable and appropriate for the
Exchange to use the Active ETF Generic
Listing Standards of Nasdaq Rule 5735
as a point of comparison, rather than to
apply the 5705-Related Representations
from the Prior Release, which were
based on standards applicable to the
listing and trading of Index Fund
Shares.36 The Exchange acknowledges
that the 40/50 Representation is less
stringent than the 40/75 Representation
provided in the Prior Release. The
Commission notes, however, that the
Exchange’s proposed 40/50
Representation is consistent with
similar requirements applicable to other
series of Managed Fund Shares that
invest in municipal securities.37 The
Commission also notes that, according
to the Exchange, the ‘‘Industry/State
Representations’’ from the Prior Release
would remain in effect with respect to
this Fund.
The Commission further notes that, as
part of the proposed New
Representations, the Exchange has made
the following additional representations
with respect to the Fund and the
requirements applicable to its
Municipal Securities investments:
(1) No component fixed income
security (excluding the U.S. government
securities described under the heading
‘‘Other Investments’’ in the Prior
Release) would represent more than
15% of the Fund’s net assets, and the
five most heavily weighted component
fixed income securities in the Fund’s
portfolio (excluding U.S. government
securities) would not, in the aggregate,
account for more than 25% of the
Fund’s net assets.38
(2) Under normal market conditions,
except for the initial invest-up period
36 See supra note 9 (order approving the adoption
of generic listing standards for Managed Fund
Shares).
37 See, e.g., Securities Exchange Act Release No.
80745 (May 23, 2017), 82 FR 24755 (May 30, 2016)
(SR–NASDAQ–2017–033) (order approving the
listing and trading of shares of the First Trust
California Municipal High Income ETF) (‘‘CA
Municipal ETF’’).
38 See Nasdaq Rule 5735(b)(1)(B)(ii) (requiring
that no component fixed income security
(excluding U.S. Treasury securities and
government-sponsored entity (‘‘GSE’’) securities)
may represent more than 30% of the fixed income
weight of the portfolio, and that the five most
heavily weighted component fixed income
securities in the portfolio (excluding U.S. Treasury
securities and GSE securities) may not in the
aggregate account for more than 65% of the fixed
income weight of the portfolio).
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Frm 00111
Fmt 4703
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and periods of high cash inflows or
outflows, the Fund’s portfolio of
Municipal Securities would include
securities from a minimum of 30 nonaffiliated issuers.39
(3) Under normal market conditions,
except for the initial invest-up period
and periods of high cash inflows or
outflows, component securities that in
the aggregate account for at least 90% of
the weight of the Fund’s portfolio of
Municipal Securities would be
exempted securities as defined in
Section 3(a)(12) of the Act.40
(4) To the extent the Fund invests in
Municipal Securities that are mortgagebacked or asset-backed securities, such
investments would not account, in the
aggregate, for more than 20% of the
weight of the fixed income portion of
the Fund’s portfolio.41
(5) No more than 20% of the Fund’s
assets will be invested in OTC
Derivatives, and, for purposes of
calculating this limitation, the Fund’s
investment in the OTC Derivatives
would be calculated as the aggregate
gross notional value of the OTC
Derivatives.
The Exchange also proposes to change
the description of certain fund
investments to remove references to
‘‘exempted securities’’ as a redundancy
because Section 3(a)(12) of the Act
exempts certain Municipal Securities.
The Commission believes that this
clarifying change is reasonable, in light
of the representations provided by the
Exchange with respect to the Fund’s
Municipal Securities investment
restrictions.
39 The Exchange has clarified that, 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,
would be treated as separate, non-affiliated issuers
of Municipal Securities. See Nasdaq Rule
5735(b)(1)(B)(iii) (requiring that an underlying
portfolio that includes fixed income securities,
excluding exempted securities, must include a
minimum of 13 non-affiliated issuers). The
Exchange further clarifies that if the Fund’s
portfolio of Municipal Securities is composed
entirely of securities that meet the definition of
‘‘municipal securities’’ set forth in Section 3(a)(29)
of the Act, then the portfolio would also be
composed entirely of ‘‘exempted securities’’ as
defined in Section 3(a)(12) of the Act and, therefore,
the requirements of Rule 5735(b)(1)(B)(iii) would
not pertain to the portfolio.
40 See Nasdaq Rule 5735(b)(1)(B)(iv)(d). See also
id. (describing Nasdaq Rule 5735(b)(1)(B)(iii) and
applicability of this requirement if the Fund’s
portfolio of Municipal Securities is comprised
entirely of securities that meet the definition of
‘‘exempted securities’’ under the Act).
41 See Nasdaq Rule 5735(b)(1)(B)(v) (requiring
that non-agency, non-GSE and privately-issued
mortgage-related and other asset-backed securities
components of a portfolio must not account, in the
aggregate, for more than 20% of the weight of the
fixed income portion of the portfolio).
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The Commission notes that the
Exchange has represented that, other
than the proposed changes, the Fund
and the Shares will comply with all
other initial and continued listing
requirements under Nasdaq Rule 5735.
The Commission notes that, according
to the Exchange, there is no change to
the Fund’s investment objectives and
that, except as provided herein, all other
facts presented and representations
made in the Prior Release would remain
unchanged. Specifically, the
Commission notes that in the Prior
Release, the Exchange represented that
all statements and representations made
in the proposed rule change 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.42
This approval order is based on all of
the Exchange’s representations,
including those set forth above, in the
Notice, and in the Prior Release, as
applicable, 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, as modified by
Amendments No. 1 and 2, is consistent
with Section 6(b)(5) of the Act 43 and the
rules and regulations thereunder
applicable to a national securities
exchange.
IV. Solicitation of Comments on
Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 1 is consistent with the
Act. Comments may be submitted by
any of the following methods:
42 See
supra note 7.
43 15 U.S.C. 78f(b)(5).
VerDate Sep<11>2014
15:13 Aug 03, 2017
Jkt 241001
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–2017–038 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2017–038. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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–2017–038, and should be
submitted on or before August 25, 2017.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendments No. 1 and 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendments No. 1 and 2,
prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment No. 1 in the Federal
Register. In Amendment No. 1, the
Exchange: (a) Modified the requirement
that the Fund invest at least 65% of its
net assets in Municipal Securities that
are rated below investment grade to at
least 50% of its net assets; (b) modified
PO 00000
Frm 00112
Fmt 4703
Sfmt 9990
36467
the limitation that the Fund invest up to
35% of its net assets in investment
grade Municipal Securities to up to 50%
of its net assets; and (c) removed
references to the Liquidity Rule.
The Commission notes that
Amendment No. 1 supplements the
proposed rule change by providing
additional information regarding the
scope of the Fund’s permitted
investments in investment grade and
below investment grade Municipal
Securities. The Commission believes
that the proposed change to the Fund’s
investment parameters does not change
the Commission’s determination in the
Prior Release that the listing and trading
of the Shares on the Exchange is
consistent with the requirements of the
Act. In addition, the Commission
believes that Amendment No. 1 clarifies
the proposed rule change by deleting
references to the Liquidity Rule under
the 1940 Act. The Commission believes
that Amendment No. 1 does not raise
any novel or unique regulatory issues
under the Act. The changes and
additional information in Amendment
No. 1 helped the Commission to
evaluate whether the listing and trading
of the Shares would be consistent with
the protection of investors and the
public interest. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Act,44 to
approve the proposed rule change, as
modified by Amendments No. 1 and 2,
on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,45
that the proposed rule change (SR–
NASDAQ–2017–038), as modified by
Amendments No. 1 and 2 be, and it
hereby is, approved on an accelerated
basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–16400 Filed 8–3–17; 8:45 am]
BILLING CODE 8011–01–P
44 15
U.S.C. 78s(b)(2).
45 Id.
46 17
E:\FR\FM\04AUN1.SGM
CFR 200.30–3(a)(12).
04AUN1
]]>Agencies
[Federal Register Volume 82, Number 149 (Friday, August 4, 2017)]
[Notices]
[Pages 36460-36467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16400]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81265; File No. SR-NASDAQ-2017-038]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Amendment No. 1, and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendments No. 1 and
2, Relating to the First Trust Municipal High Income ETF
July 31, 2017.
I. Introduction
On May 16, 2017, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change relating to the First Trust Municipal High Income
ETF (``Fund'') of First Trust Exchange-Traded Fund III (``Trust''), the
shares of which have been approved by the Commission for listing and
trading under Nasdaq Rule 5735 (``Managed Fund Shares''). The proposed
rule change was published for
[[Page 36461]]
comment in the Federal Register on June 2, 2017.\3\ On July 10, 2017,
the Exchange filed Amendment No. 1 to the proposed rule change.\4\ On
July 11, 2017, 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.\5\ On July 13, 2017, the Exchange filed Amendment
No. 2 to the proposed rule change.\6\ The Commission has received no
comments on the proposal. The Commission is publishing this notice to
solicit comments on Amendment No. 1 from interested persons, and is
approving the proposed rule change, as modified by Amendments No. 1 and
2, on an accelerated basis.
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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. 80802 (May 26,
2017), 82 FR 25648 (Jun. 2, 2017) (``Notice'').
\4\ In Amendment No. 1, which amended and replaced the proposed
rule change in its entirety, the Exchange: (a) modified the
requirement that the Fund invest at least 65% of its net assets in
Municipal Securities (as defined herein) that are rated below
investment grade to at least 50% of its net assets; (b) modified the
limitation that the Fund invest up to 35% of its net assets in
investment grade Municipal Securities to up to 50% of its net
assets; and (c) removed references to the Liquidity Rule. Amendment
No. 1 to the proposed rule change is available on the Commission's
Web site at: https://www.sec.gov/comments/sr-nasdaq-2017-038/nasdaq2017038-1841718-155073.pdf.
\5\ See Securities Exchange Act Release No. 81123 (Jul. 11,
2017), 82 FR 32737 (Jul. 17, 2017). The Commission designated August
31, 2017, as the date by which the Commission shall either approve
or disapprove, or institute proceedings to determine whether to
disapprove, the proposed rule change. See id.
\6\ In Amendment No. 2, which partially amended the proposed
rule change, as modified by Amendment No. 1, the Exchange provided
the rationale with respect to the modifications to the percentages
of investment grade and non-investment grade Municipal Securities in
which the Fund may invest. Because Amendment No. 2 makes clarifying
changes and does not present unique or novel regulatory issues, it
is not subject to notice and comment. Amendment No. 2 is available
on the Commission's Web site at: https://www.sec.gov/comments/sr-nasdaq-2017-038/nasdaq2017038-1851791-155341.pdf. See infra notes
30-32 (noting where the Exchange provided the rationale with respect
to the modifications to the percentages of investment grade and non-
investment grade Municipal Securities in Amendment No. 2).
---------------------------------------------------------------------------
II. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendments No. 1 and 2
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Commission has approved the listing and trading of Shares under
Nasdaq Rule 5735, which governs the listing and trading of Managed Fund
Shares on the Exchange.\7\ However, no Shares are currently listed and
traded on the Exchange. The Exchange believes the proposed rule change
reflects no significant issues not previously addressed in the Prior
Release.
---------------------------------------------------------------------------
\7\ The Commission approved Nasdaq Rule 5735 in Securities
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June
20, 2008) (SR-NASDAQ-2008-039). The Commission previously approved
the listing and trading of the Shares of the Fund. See Securities
Exchange Act Release No. 78913 (September 23, 2016), 81 FR 69109
(October 5, 2016) (SR-NASDAQ-2016-002) (``Prior Release'').
---------------------------------------------------------------------------
The Fund is 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. The Trust, which is
registered with the Commission as an investment company under the
Investment Company Act of 1940 (the ``1940 Act''), has filed a
registration statement on Form N-1A (``Registration Statement'')
relating to the Fund with the Commission. \8\ The Fund is a series of
the Trust.
---------------------------------------------------------------------------
\8\ 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. Before Shares are publicly offered, the
Trust will file a post-effective amendment to its Registration
Statement. The changes in this proposed rule change will not be
implemented for the Fund until the post-effective amendment to the
Registration Statement becomes effective. First Trust Advisors L.P.
(the ``Adviser'') represents that the Adviser will not implement the
changes described herein until the instant proposed rule change is
operative.
---------------------------------------------------------------------------
The primary purpose of this proposed rule change is to modify
certain representations set forth in the Prior Release. Since the Prior
Release, in evaluating its ability to construct a portfolio that would
both enable the Fund to pursue its investment objectives effectively
and satisfy the representations set forth in the Prior Release, the
Adviser determined that, based on certain factors, including regulatory
and market developments with portfolio management implications,
additional flexibility would be needed to launch and operate the Fund.
Additionally, the Adviser took into account that recent increases in
interest rates have been accompanied by substantial outflows from
mutual funds and ETFs, and that future interest rate swings may spark
increased market volatility and trigger potentially dramatic inflows
and outflows. To enable the Fund to operate effectively (including, in
addition to pursuing its investment objectives, responding to potential
market volatility), the Adviser believes that additional portfolio
management flexibility is needed and warranted. Additionally, for the
reasons discussed in more detail below, the Exchange believes that the
proposal is consistent with Section 6(b)(5) of the Act.
As a related matter, the Exchange notes that although the Prior
Release included certain representations that were based on the generic
listing standards for index-based ETFs, the Exchange's ``generic
listing standards'' for actively-managed ETFs (the ``Active ETF Generic
Listing Standards'') \9\ were recently adopted and, with one exception,
the Fund's proposed revised representations would meet or exceed
similar requirements for portfolios of fixed income securities set
forth in Nasdaq Rule 5735(b)(1)(B) under the Active ETF Generic Listing
Standards (``Rule 5735(b)(1)(B)''). In addition, this proposed rule
change would make certain changes to the description of the Fund's
investments. Further, to provide the Adviser with greater flexibility
in hedging interest rate risks associated with the Fund's portfolio
investments, this proposed rule change would expand the Fund's ability
to invest in derivatives by permitting it to invest in over-the-counter
(``OTC'') forward contracts and OTC swaps, subject to a limitation that
would be consistent with the limitation on investments in OTC
derivatives set forth in Nasdaq Rule 5735(b)(1)(E) under the Active ETF
Generic Listing Standards (``Rule 5735(b)(1)(E)'').
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 78918 (September 23,
2016), 81 FR 67033 (September 29, 2016).
---------------------------------------------------------------------------
Changes to Representations
The Prior Release noted that the Fund would be actively managed and
not tied to an index, but that under normal market conditions, on a
continuous basis determined at the time of purchase, its portfolio of
Municipal Securities (as defined in the Prior Release) would 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),
[[Page 36462]]
as described therein. More specifically, the Prior Release stated that,
under normal market conditions, the Fund's portfolio of Municipal
Securities would meet the requirements of: (i) Nasdaq Rule
5705(b)(4)(A)(i) (requiring that the index or portfolio consist of
``Fixed Income Securities''); (ii) Nasdaq Rule 5705(b)(4)(A)(iv)
(requiring that no component fixed income security (excluding Treasury
securities) represent more than 30% of the weight of the index or
portfolio, and that the five highest weighted component fixed income
securities do not, in the aggregate, account for more than 65% of the
weight of the index or portfolio); and (iii) Nasdaq Rule
5705(b)(4)(A)(v) (requiring that an underlying index or portfolio
(excluding one consisting entirely of exempted securities) include
securities from a minimum of 13 non-affiliated issuers) (collectively,
the ``Rule 5705-Related Representations'').
Additionally, the Prior Release noted that Nasdaq Rule
5705(b)(4)(A)(iii) (relating to convertible securities) was
inapplicable to the Fund's portfolio of Municipal Securities. Further,
the Prior Release provided that the Fund's portfolio of Municipal
Securities may not satisfy 5705(b)(4)(A)(vi) (requiring 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) and that it would not generally satisfy Rule
5705(b)(4)(A)(ii) (requiring that components that in the aggregate
account for at least 75% of the weight of the index or portfolio have a
minimum original principal amount outstanding of $100 million or more).
However, the Prior Release stated that under normal market conditions,
at least 40% (based on dollar amount invested) of the Municipal
Securities in which the Fund invested would 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 ``40/75 Representation'').\10\
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\10\ As noted in the Prior Release, 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), but demonstrated that the portfolio of municipal
securities in which the ETFs would invest would be sufficiently
liquid (including 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)). See also Securities Exchange Act Release Nos.
67985 (October 4, 2012), 77 FR 61804 (October 11, 2012) (SR-
NYSEArca-2012-92) (order approving listing and trading of iShares
2018 S&P AMT-Free Municipal Series and iShares 2019 S&P AMT-Free
Municipal Series); 72464 (June 25, 2014), 79 FR 37373 (July 1, 2014)
(SR-NYSEArca-2014-45) (order approving continued listing and trading
of PowerShares Insured California Municipal Bond Portfolio,
PowerShares Insured National Municipal Bond Portfolio and
PowerShares Insured New York Municipal Bond Portfolio); 72523 (July
2, 2014), 79 FR 39016 (July 9, 2014) (SR-NYSEArca-2014-37) (order
approving listing and trading of iShares 2020 S&P AMT-Free Municipal
Series); 75468 (July 16, 2015), 80 FR 43500 (July 22, 2015) (SR-
NYSEArca-2015-25) (order approving listing and trading of iShares
iBonds Dec 2021 AMT-Free Muni Bond ETF and iShares iBonds Dec 2022
AMT-Free Muni Bond ETF); 78329 (July 14, 2016), 81 FR 47217 (July
20, 2016) (SR-BatsBZX-2016-01) (order approving listing and trading
of VanEck Vectors AMT-Free 6-8 Year Municipal Index ETF, VanEck
Vectors AMT-Free 8-12 Year Municipal Index ETF, and VanEck Vectors
AMT-Free 12-17 Year Municipal Index ETF); and 79885 (January 26,
2017), 82 FR 8963 (February 1, 2017) (SR-NYSEArca-2016-100) (order
approving listing and trading of Direxion Daily Municipal Bond
Taxable Bear 1X Fund).
---------------------------------------------------------------------------
In addition to the Rule 5705-Related Representations and the 40/75
Representation, the Prior Release provided that under normal market
conditions, except for the initial invest-up period and periods of high
cash inflows or outflows,\11\ the Fund's investments in Municipal
Securities would 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) (collectively, the ``Industry/State Representations'').
Additionally, the Prior Release stated that under normal market
conditions, except for the initial invest-up period and periods of high
cash inflows or outflows, (a) with respect to 75% of the Fund's net
assets, the Fund's exposure to any single borrower (based on dollar
amount invested) would 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) would
not exceed 5% of the value of the Fund's net assets (collectively, the
``Borrower Exposure Representations'').
---------------------------------------------------------------------------
\11\ As described in the Prior Release, the term ``initial
invest-up period'' means the six-week period following the
commencement of trading of Shares on the Exchange and the term
``periods of high cash inflows or outflows'' means 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 Prior Release also provided that under normal market
conditions, except for the initial invest-up period and periods of high
cash inflows or outflows, (a) with respect to the Municipal Securities
in which the Fund invested that were rated investment grade by each
nationally recognized statistical rating organization (``NRSRO'')
rating such securities, at the time of purchase, the applicable
borrower would 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 invested (referred to as ``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, would have a weighted average
of principal municipal debt outstanding of $50 million or more
(collectively, the ``Borrower Debt Representations'' and, together with
the Borrower Exposure Representations, the Industry/State
Representations, the 40/75 Representation and the Rule 5705-Related
Representations, the ``Prior Representations'').
As indicated above, the Adviser has reconsidered the Prior
Representations and concluded that additional flexibility will be
needed to launch and operate the Fund. As a result, in this proposed
rule change, the Exchange is proposing that, going forward: (a) The
Prior Representations, except for the Industry/State Representations,
would be deleted and (b) the representations included in the next two
paragraphs (referred to as the ``New Representations'') would be added.
Further, the Exchange notes that the New Representations have been
designed to correspond to the requirements of Rule 5735(b)(1)(B), as
these are more readily adapted to the Fund (as an actively-managed ETF)
than the generic listing standards for index-based ETFs upon which the
Rule 5705-Related Representations were based.
Although as described below, certain of the New Representations
would meet or exceed similar requirements set forth in Rule
5735(b)(1)(B), it is not anticipated that the Fund would meet the
requirement that components that in the aggregate account for at least
75% of the fixed income weight of the portfolio each have a minimum
original principal
[[Page 36463]]
amount outstanding of $100 million or more (the ``Generic 100
Requirement'').\12\ In general terms, the Fund would operate as an
actively-managed ETF that normally invests in a portfolio of Municipal
Securities (as defined in the Prior Release, with the modification
described below). The Adviser notes that debt issuance sizes for
municipal obligations are generally smaller than for corporate
obligations.\13\ Furthermore, as a general matter, municipal borrowers
in certain industries in which the Fund currently intends to invest
significantly \14\ tend to have less outstanding debt than municipal
borrowers in other municipal industries. Therefore, under normal market
conditions, except for the initial invest-up period and periods of high
cash inflows or outflows,\15\ at least 40% (based on dollar amount
invested) of the Municipal Securities in which the Fund invests \16\
would 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 $50 million or more (the ``40/50
Representation''). Based on its expertise and understanding of the
municipal securities market and the manner in which municipal
securities generally trade, the Adviser believes that, notwithstanding
both the previous more stringent 40/75 Representation and the Generic
100 Requirement, the 40/50 Representation is appropriate in light of
the Fund's investment objectives and the manner in which the Fund
intends to pursue them.\17\ Given the nature of the municipal
securities market and the manner in which municipal securities
generally trade, the expected availability of Municipal Securities that
would satisfy the Fund's investment parameters, and the debt issuance
profiles of the corresponding issuers and borrowers, the 40/50
Representation should both provide the Fund with flexibility to
construct its portfolio and, when combined with the Industry/State
Representations and the other New Representations included in this
filing (including certain representations set forth below pertaining to
fixed income securities weightings and number of non-affiliated issuers
that are based on, but more stringent than, as applicable, the
requirements set forth in Rule 5735(b)(1)(B)), should support the
potential for diversity and liquidity, thereby mitigating the
Commission's concerns about manipulation.\18\
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\12\ See Nasdaq Rule 5735(b)(1)(B)(i).
\13\ As indicated above in note 10, various ETFs seeking to
track indexes comprised of municipal securities have previously
sought and obtained approval by the Commission of proposed rule
changes because they would not meet the requirement under the
applicable generic listing standards that is similar to the Generic
100 Requirement.
\14\ These industries include charter schools, senior living
facilities (i.e., continuing care retirement communities
(``CCRCs'')) and special tax districts, among others. As noted in
the Prior Release, 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 ``borrower'' is the conduit borrower
(i.e., the party on which a bondholder must rely for repayment) and
in the case of other municipal financings, the ``borrower'' is the
issuer of the municipal securities.
\15\ See note 11 regarding the meaning of the terms ``initial
invest-up period'' and ``periods of high cash inflows or outflows.''
\16\ For the avoidance of doubt, in the case of Municipal
Securities that are issued by entities whose underlying assets are
municipal bonds (``Municipal Entities''), the underlying municipal
bonds would be taken into account.
\17\ The Adviser notes that individual issues of municipal
securities represented by CUSIPs (i.e., the specific identifying
numbers for securities) may be placed into categories according to
common characteristics (such as rating, geographical region,
purpose, and maturity). Municipal securities that share similar
characteristics generally tend to trade similarly to one another;
therefore, within these categories, issues may be considered
somewhat fungible from a portfolio management perspective, allowing
one CUSIP to be represented by another that shares similar
characteristics for purposes of developing an investment strategy.
Moreover, when municipal securities are close substitutes for one
another, pricing vendors may be able to use executed trade
information from similar municipal securities as pricing inputs for
an individual security. This can make individual securities more
liquid because valuations for a single security are generally better
estimators of actual trading prices when they are informed by trades
in a large group of closely related securities.
\18\ The Exchange notes that, in addition to approving the Fund
in the Prior Release, the Commission has also approved for listing
and trading shares of other actively-managed ETFs that principally
hold municipal securities. See, e.g., Securities Exchange Act
Release Nos. 60981 (November 10, 2009), 74 FR 59594 (November 18,
2009) (SR-NYSEArca-2009-79) (order approving listing and trading of
PIMCO Short Term Municipal Bond Strategy Fund and PIMCO Intermediate
Municipal Bond Strategy Fund); 71617 (February 26, 2014), 79 FR
12257 (March 4, 2014) (SR-NYSEArca-2013-135) (order approving
listing and trading of db-X Managed Municipal Bond Fund); 71913
(April 9, 2014), 79 FR 21333 (April 15, 2014) (SR-NASDAQ-2014-019)
(order approving listing and trading of First Trust Managed
Municipal ETF); and 79293 (November 10, 2016), 81 FR 81189 (November
17, 2016) (SR-NYSEArca-2016-107) (order approving listing and
trading of Cumberland Municipal Bond ETF).
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Under normal market conditions, except for the initial invest-up
period and periods of high cash inflows or outflows,\19\ no component
fixed income security (excluding the U.S. government securities
described under the heading ``Other Investments'' in the Prior Release)
would represent more than 15% of the Fund's net assets, and the five
most heavily weighted component fixed income securities in the Fund's
portfolio (excluding U.S. government securities) would not, in the
aggregate, account for more than 25% of the Fund's net assets.\20\
Further, under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows,\21\ the Fund's
portfolio of Municipal Securities would include securities from a
minimum of 30 non-affiliated issuers.\22\ Moreover, under normal market
conditions, except for the initial invest-up period and periods of high
cash inflows or outflows,\23\ component securities that in the
aggregate account for at least 90% of the weight of the Fund's
portfolio of Municipal Securities would be exempted securities as
defined in Section 3(a)(12) of the Act (the ``Exempted Securities
Representation'').\24\ Additionally, to the
[[Page 36464]]
extent the Fund invests in Municipal Securities that are mortgage-
backed or asset-backed securities, such investments would not account,
in the aggregate, for more than 20% of the weight of the fixed income
portion of the Fund's portfolio.\25\
---------------------------------------------------------------------------
\19\ See note 11 regarding the meaning of the terms ``initial
invest-up period'' and ``periods of high cash inflows or outflows.''
\20\ See the Active ETF Generic Listing Standards requirement
set forth in Nasdaq Rule 5735(b)(1)(B)(ii), which provides that no
component fixed income security (excluding U.S. Treasury securities
and government-sponsored entity (``GSE'') securities) may represent
more than 30% of the fixed income weight of the portfolio, and that
the five most heavily weighted component fixed income securities in
the portfolio (excluding U.S. Treasury securities and GSE
securities) may not in the aggregate account for more than 65% of
the fixed income weight of the portfolio. For the avoidance of
doubt, in the case of Municipal Securities that are issued by
Municipal Entities, the underlying municipal bonds would be taken
into account.
\21\ See note 11 regarding the meaning of the terms ``initial
invest-up period'' and ``periods of high cash inflows or outflows.''
\22\ For the avoidance of doubt, in the case of Municipal
Securities that are issued by Municipal Entities, the underlying
municipal bonds would be taken into account. 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,
would be treated as separate, non-affiliated issuers of Municipal
Securities. The Active ETF Generic Listing Standards requirement set
forth in Nasdaq Rule 5735(b)(1)(B)(iii) provides that generally, an
underlying portfolio (excluding exempted securities) that includes
fixed income securities must include a minimum of 13 non-affiliated
issuers. Although not required, if the Fund's portfolio of Municipal
Securities is comprised entirely of securities that meet the
definition of ``municipal securities'' set forth in Section 3(a)(29)
of the Act, then such portfolio would also be comprised entirely of
``exempted securities'' as defined in Section 3(a)(12) of the Act
and, therefore, the requirements of Rule 5735(b)(1)(B)(iii) would
not pertain to such portfolio; see the Exempted Securities
Representation below (which refers to 90% of the weight of the
Fund's portfolio of Municipal Securities).
\23\ See note 11 regarding the meaning of the terms ``initial
invest-up period'' and ``periods of high cash inflows or outflows.''
\24\ See the Active ETF Generic Listing Standards requirement
set forth in Nasdaq Rule 5735(b)(1)(B)(iv)(d). For the avoidance of
doubt, in the case of Municipal Securities that are issued by
Municipal Entities, the underlying municipal bonds would be taken
into account.
\25\ See the Active ETF Generic Listing Standards requirement
set forth in Nasdaq Rule 5735(b)(1)(B)(v).
---------------------------------------------------------------------------
The New Representations differ from the Prior Representations and
do not, in certain respects, comply with Rule 5735(b)(1)(B)
(particularly with respect to the Generic 100 Requirement). However,
taking into account the nature of the municipal securities market and
the manner in which municipal securities generally trade, in light of
the requirements that the New Representations and the Industry/State
Representations would impose (e.g., concerning municipal debt
outstanding, fixed income securities weightings, issuer
diversification, the nature of the securities in which the Fund would
invest (including representations relating to exempted securities and
mortgage-backed and asset-backed securities), and exposure to
industries and states), they should provide support regarding the
anticipated diversity and liquidity of the Fund's Municipal Securities
portfolio and should mitigate the risks associated with manipulation,
while also providing the Adviser with the necessary flexibility to
operate the Fund as intended.
Changes to Description of Certain Fund Investments
The Prior Release stated that under normal market conditions, the
Fund would 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''). In light
of the Exempted Securities Representation, going forward, the Exchange
proposes to revise the foregoing by deleting the phrase ``which are
`exempted securities' under Section 3(a)(12) of the Act.'' In addition,
the Prior Release stated that the Fund ``may invest up to 20% of its
net assets in short-term debt instruments . . . , 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.''
Going forward, the Exchange proposes to revise the foregoing by
replacing the phrase ``taxable municipal securities or tax-exempt
municipal securities that are not exempted securities under Section
3(a)(12) under the Act,'' with the phrase ``and taxable municipal
securities and other municipal securities that are not Municipal
Securities,''.
Additionally, the Prior Release stated that under normal market
conditions, the Fund would 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
NRSRO rating such securities (or Municipal Securities that are unrated
and determined by the Adviser to be of comparable quality) (the ``Below
Investment Grade Requirement''). The Prior Release also provided that
the Fund could invest up to 35% of its net assets in ``investment
grade'' Municipal Securities (meaning 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)) (the ``Investment Grade Limitation''). Going forward, the
Exchange proposes to modify the Below Investment Grade Requirement by
replacing the phrase ``Under normal market conditions, the Fund will
invest at least 65% of its net assets'' with the following: ``Under
normal market conditions, except for the initial invest-up period and
periods of high cash inflows or outflows, the Fund will invest at least
50% of its net assets''.\26\ Further, the Exchange proposes to modify
the Investment Grade Limitation by replacing the phrase ``The Fund may
invest up to 35% of its net assets'' with the following: ``Under normal
market conditions, except for the initial invest-up period and periods
of high cash inflows or outflows, the Fund may not invest more than 50%
of its net assets''.\27\
---------------------------------------------------------------------------
\26\ See note 11 regarding the meaning of the terms ``initial
invest-up period'' and ``periods of high cash inflows or outflows.''
In addition, to conform to the change to the Below Investment Grade
Requirement, the Exchange proposes that, going forward, the phrase
``65% investment requirement'' be replaced with ``50% investment
requirement'' in the following statement included in the Prior
Release: ``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'').''
\27\ See note 11 regarding the meaning of the terms ``initial
invest-up period'' and ``periods of high cash inflows or outflows.''
In addition, to conform to the change to the Investment Grade
Limitation, the Exchange proposes that, going forward, the phrase
``35% investment limitation'' be replaced with ``50% investment
limitation'' in the following statement included in the Prior
Release: ``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.''
---------------------------------------------------------------------------
Changes To Expand Permitted Derivatives Investments
As described in the Prior Release, 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 (collectively, the ``Listed Derivatives'')
and (ii) acquire short positions in the Listed Derivatives. No changes
are being proposed with respect to the Fund's investments in the Listed
Derivatives. Going forward, however, the Exchange proposes that the
Fund's ability to invest in derivatives would be expanded to permit it
to also invest in OTC forward contracts and OTC swaps (collectively,
the ``OTC Derivatives'') to hedge interest rate risks associated with
the Fund's portfolio investments.
On both an initial and continuing basis, no more than 20% of the
assets in the Fund's portfolio would be invested in the OTC Derivatives
and, for purposes of calculating this limitation, the Fund's investment
in the OTC Derivatives would be calculated as the aggregate gross
notional value of the OTC Derivatives.\28\ The Fund would only enter
into transactions in the OTC Derivatives with counterparties that the
Adviser reasonably believes are capable of performing under the
applicable contract or agreement.\29\ The Fund's investments in both
Listed Derivatives and OTC Derivatives would be consistent with the
Fund's investment objectives and the 1940 Act and would not be used to
seek to achieve a multiple or inverse multiple of an index.
---------------------------------------------------------------------------
\28\ This limitation is consistent with the limitation set forth
in Rule 5735(b)(1)(E).
\29\ The Fund would seek, where possible, to use counterparties,
as applicable, whose financial status is such that the risk of
default is reduced; however, the risk of losses resulting from
default is still possible. The Adviser would evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser's analysis
would evaluate each approved counterparty using various methods of
analysis and may consider the Adviser's past experience with the
counterparty, its known disciplinary history and its share of market
participation.
---------------------------------------------------------------------------
The OTC Derivatives would typically be valued using information
provided by a Pricing Service (as defined in the Prior Release).
Pricing information for the OTC Derivatives would be available from
major broker-dealer firms and/or
[[Page 36465]]
major market data vendors and/or Pricing Services (as defined in the
Prior Release).
The Adviser represents that there would be no change to the Fund's
investment objectives. Except as provided herein, all other facts
presented and representations made in the Prior Release would remain
unchanged. The Fund and the Shares would comply with all initial and
continued listing requirements under Nasdaq Rule 5735.
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. Except as provided herein, all other
facts presented and representations made in the Prior Release would
remain unchanged. The Fund would comply with all the initial and
continued listing requirements under Nasdaq Rule 5735.
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares would be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in Nasdaq Rule 5735 and, except
as provided herein, all other facts presented and representations made
in the Prior Release would remain unchanged. The Exchange notes that
Shares have not yet been listed on the Exchange. Consistent with the
Prior Release, the Exchange represents that trading in the Shares would
be subject to the existing trading surveillances, administered by both
Nasdaq and also the Financial Industry Regulatory Authority
(``FINRA''), on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities laws.
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 Adviser represents that taking into account the nature of the
municipal securities market and the manner in which municipal
securities generally trade, in light of the requirements that the New
Representations, the Industry/State Representations, the modified Below
Investment Grade Requirement and the modified Investment Grade
Limitation would impose (e.g., concerning municipal debt outstanding,
fixed income securities weightings, issuer diversification, the nature
of the securities in which the Fund would invest (including
representations relating to exempted securities and mortgage-backed and
asset-backed securities), exposure to industries and states, and
investments in below investment grade Municipal Securities), they
should provide support regarding the anticipated diversity and
liquidity of the Fund's Municipal Securities portfolio and should
mitigate the risks associated with manipulation, while also providing
the Adviser with the necessary flexibility to operate the Fund as
intended.\30\
---------------------------------------------------------------------------
\30\ See Amendment No. 2, supra note 6.
---------------------------------------------------------------------------
With one exception, the New Representations would meet or exceed
similar requirements for portfolios of fixed income securities set
forth in Rule 5735(b)(1)(B). In this regard, it is not anticipated that
the Fund would meet the Generic 100 Requirement. Based on its expertise
and understanding of the municipal securities market and the manner in
which municipal securities generally trade, the Adviser believes that,
notwithstanding both the previous more stringent 40/75 Representation
and the Generic 100 Requirement, the 40/50 Representation is
appropriate in light of the Fund's investment objectives and the manner
in which the Fund intends to pursue them. Further, given the nature of
the municipal securities market and the manner in which municipal
securities generally trade, the expected availability of Municipal
Securities that would satisfy the Fund's investment parameters, and the
debt issuance profiles of the corresponding issuers and borrowers, the
40/50 Representation should both provide the Fund with flexibility to
construct its portfolio and, when combined with the Industry/State
Representations, the other New Representations, the modified Below
Investment Grade Requirement and the modified Investment Grade
Limitation, should support the potential for diversity and liquidity,
thereby mitigating the Commission's concerns about manipulation.\31\
---------------------------------------------------------------------------
\31\ See id.
---------------------------------------------------------------------------
In connection with the proposal to modify the Below Investment
Grade Requirement and the Investment Grade Limitation, the Exchange
notes that the Fund's ability to invest in investment grade Municipal
Securities would be expanded. Accordingly, Nasdaq believes that this is
consistent with the Act because the liquidity profile of the Fund's
potential pool of Municipal Securities is expected to increase, which
should lessen manipulation concerns.\32\
---------------------------------------------------------------------------
\32\ See id.
---------------------------------------------------------------------------
Further, in connection with the proposal to permit the Fund to
invest in the OTC Derivatives, the Exchange notes that the ability to
invest in the OTC Derivatives would provide the Adviser with additional
flexibility in hedging interest rate risks associated with the Fund's
portfolio investments and would be subject to a limitation that is
consistent with the limitation set forth in Rule 5735(b)(1)(E).
Additionally, the Fund would only enter into transactions in the OTC
Derivatives with counterparties that the Adviser reasonably believes
are capable of performing under the applicable contract or agreement.
In addition, a large amount of information would be publicly
available regarding the Fund and the Shares, thereby promoting market
transparency. Moreover, the Intraday Indicative Value (as described in
the Prior Release), available on the NASDAQ OMX Information LLC
proprietary index data service, would 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 would 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.
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. The Exchange notes that the Fund does not yet have
publicly offered Shares and does not yet have Shares listed and traded
on the Exchange. Before Shares are publicly offered, the Trust will
file a post-effective amendment to its Registration Statement. The
Shares will not be publicly offered until the post-effective amendment
to the Registration Statement becomes effective.
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
[[Page 36466]]
of the purposes of the Act. The Exchange believes that the proposed
rule change would provide the Adviser with the flexibility needed to
proceed with launching the Fund, accommodating the listing and trading
of Managed Fund Shares for an additional actively-managed exchange-
traded product, thereby enhancing 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
No written comments were either solicited or received.
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal is consistent with the requirements of Section 6 of the Act
\33\ and the rules and regulations thereunder applicable to a national
securities exchange.\34\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\35\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78f.
\34\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As described above, the Exchange proposes to: (a) Delete all of the
Prior Representations (including the 40/75 Representation), except for
the Industry/State Representations; and (b) apply the New
Representations. According to the Exchange, the Fund's proposed New
Representations would meet the requirements of Nasdaq Rule
5735(b)(1)(B), with the exception of the Generic 100 Requirement. In
lieu of the Generic 100 Requirement, the Exchange proposes to apply New
Representations, which include the 40/50 Representation. Specifically,
the 40/50 Representation requires that, under normal market conditions
and except for the initial invest-up period and periods of high cash
inflows or outflows, at least 40% (based on dollar amount invested) of
the Municipal Securities in which the Fund invests would 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 $50 million or more.
The Commission believes that, because this Fund is a series of
Managed Fund Shares under Nasdaq Rule 5735, it is reasonable and
appropriate for the Exchange to use the Active ETF Generic Listing
Standards of Nasdaq Rule 5735 as a point of comparison, rather than to
apply the 5705-Related Representations from the Prior Release, which
were based on standards applicable to the listing and trading of Index
Fund Shares.\36\ The Exchange acknowledges that the 40/50
Representation is less stringent than the 40/75 Representation provided
in the Prior Release. The Commission notes, however, that the
Exchange's proposed 40/50 Representation is consistent with similar
requirements applicable to other series of Managed Fund Shares that
invest in municipal securities.\37\ The Commission also notes that,
according to the Exchange, the ``Industry/State Representations'' from
the Prior Release would remain in effect with respect to this Fund.
---------------------------------------------------------------------------
\36\ See supra note 9 (order approving the adoption of generic
listing standards for Managed Fund Shares).
\37\ See, e.g., Securities Exchange Act Release No. 80745 (May
23, 2017), 82 FR 24755 (May 30, 2016) (SR-NASDAQ-2017-033) (order
approving the listing and trading of shares of the First Trust
California Municipal High Income ETF) (``CA Municipal ETF'').
---------------------------------------------------------------------------
The Commission further notes that, as part of the proposed New
Representations, the Exchange has made the following additional
representations with respect to the Fund and the requirements
applicable to its Municipal Securities investments:
(1) No component fixed income security (excluding the U.S.
government securities described under the heading ``Other Investments''
in the Prior Release) would represent more than 15% of the Fund's net
assets, and the five most heavily weighted component fixed income
securities in the Fund's portfolio (excluding U.S. government
securities) would not, in the aggregate, account for more than 25% of
the Fund's net assets.\38\
---------------------------------------------------------------------------
\38\ See Nasdaq Rule 5735(b)(1)(B)(ii) (requiring that no
component fixed income security (excluding U.S. Treasury securities
and government-sponsored entity (``GSE'') securities) may represent
more than 30% of the fixed income weight of the portfolio, and that
the five most heavily weighted component fixed income securities in
the portfolio (excluding U.S. Treasury securities and GSE
securities) may not in the aggregate account for more than 65% of
the fixed income weight of the portfolio).
---------------------------------------------------------------------------
(2) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the Fund's
portfolio of Municipal Securities would include securities from a
minimum of 30 non-affiliated issuers.\39\
---------------------------------------------------------------------------
\39\ The Exchange has clarified that, 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, would be
treated as separate, non-affiliated issuers of Municipal Securities.
See Nasdaq Rule 5735(b)(1)(B)(iii) (requiring that an underlying
portfolio that includes fixed income securities, excluding exempted
securities, must include a minimum of 13 non-affiliated issuers).
The Exchange further clarifies that if the Fund's portfolio of
Municipal Securities is composed entirely of securities that meet
the definition of ``municipal securities'' set forth in Section
3(a)(29) of the Act, then the portfolio would also be composed
entirely of ``exempted securities'' as defined in Section 3(a)(12)
of the Act and, therefore, the requirements of Rule
5735(b)(1)(B)(iii) would not pertain to the portfolio.
---------------------------------------------------------------------------
(3) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, component
securities that in the aggregate account for at least 90% of the weight
of the Fund's portfolio of Municipal Securities would be exempted
securities as defined in Section 3(a)(12) of the Act.\40\
---------------------------------------------------------------------------
\40\ See Nasdaq Rule 5735(b)(1)(B)(iv)(d). See also id.
(describing Nasdaq Rule 5735(b)(1)(B)(iii) and applicability of this
requirement if the Fund's portfolio of Municipal Securities is
comprised entirely of securities that meet the definition of
``exempted securities'' under the Act).
---------------------------------------------------------------------------
(4) To the extent the Fund invests in Municipal Securities that are
mortgage-backed or asset-backed securities, such investments would not
account, in the aggregate, for more than 20% of the weight of the fixed
income portion of the Fund's portfolio.\41\
---------------------------------------------------------------------------
\41\ See Nasdaq Rule 5735(b)(1)(B)(v) (requiring that non-
agency, non-GSE and privately-issued mortgage-related and other
asset-backed securities components of a portfolio must not account,
in the aggregate, for more than 20% of the weight of the fixed
income portion of the portfolio).
---------------------------------------------------------------------------
(5) No more than 20% of the Fund's assets will be invested in OTC
Derivatives, and, for purposes of calculating this limitation, the
Fund's investment in the OTC Derivatives would be calculated as the
aggregate gross notional value of the OTC Derivatives.
The Exchange also proposes to change the description of certain
fund investments to remove references to ``exempted securities'' as a
redundancy because Section 3(a)(12) of the Act exempts certain
Municipal Securities. The Commission believes that this clarifying
change is reasonable, in light of the representations provided by the
Exchange with respect to the Fund's Municipal Securities investment
restrictions.
[[Page 36467]]
The Commission notes that the Exchange has represented that, other
than the proposed changes, the Fund and the Shares will comply with all
other initial and continued listing requirements under Nasdaq Rule
5735. The Commission notes that, according to the Exchange, there is no
change to the Fund's investment objectives and that, except as provided
herein, all other facts presented and representations made in the Prior
Release would remain unchanged. Specifically, the Commission notes that
in the Prior Release, the Exchange represented that all statements and
representations made in the proposed rule change 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.\42\
---------------------------------------------------------------------------
\42\ See supra note 7.
---------------------------------------------------------------------------
This approval order is based on all of the Exchange's
representations, including those set forth above, in the Notice, and in
the Prior Release, as applicable, 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, as modified by Amendments No. 1 and 2, is consistent with
Section 6(b)(5) of the Act \43\ and the rules and regulations
thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2017-038 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2017-038. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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-2017-038, and should
be submitted on or before August 25, 2017.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendments No. 1 and 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendments No. 1 and 2, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
No. 1 in the Federal Register. In Amendment No. 1, the Exchange: (a)
Modified the requirement that the Fund invest at least 65% of its net
assets in Municipal Securities that are rated below investment grade to
at least 50% of its net assets; (b) modified the limitation that the
Fund invest up to 35% of its net assets in investment grade Municipal
Securities to up to 50% of its net assets; and (c) removed references
to the Liquidity Rule.
The Commission notes that Amendment No. 1 supplements the proposed
rule change by providing additional information regarding the scope of
the Fund's permitted investments in investment grade and below
investment grade Municipal Securities. The Commission believes that the
proposed change to the Fund's investment parameters does not change the
Commission's determination in the Prior Release that the listing and
trading of the Shares on the Exchange is consistent with the
requirements of the Act. In addition, the Commission believes that
Amendment No. 1 clarifies the proposed rule change by deleting
references to the Liquidity Rule under the 1940 Act. The Commission
believes that Amendment No. 1 does not raise any novel or unique
regulatory issues under the Act. The changes and additional information
in Amendment No. 1 helped the Commission to evaluate whether the
listing and trading of the Shares would be consistent with the
protection of investors and the public interest. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\44\ to approve the proposed rule change, as modified by Amendments
No. 1 and 2, on an accelerated basis.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\45\ that the proposed rule change (SR-NASDAQ-2017-038),
as modified by Amendments No. 1 and 2 be, and it hereby is, approved on
an accelerated basis.
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\45\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16400 Filed 8-3-17; 8:45 am]
BILLING CODE 8011-01-P
