Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To List and Trade the Shares of the Western Asset Total Return ETF, 1062-1079 [2018-00161]

Download as PDF 1062 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices the date of the filing. However, Rule 19b–4(f)(6)(iii) 26 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange notes that the proposal will promote consistency between the Exchange and its affiliated exchanges, and is part of a larger technology integration that will ultimately reduce complexity for Users of the Exchange that are also participants on other Cboe Affiliated Exchanges. The Exchange further notes that allowing the Exchange to move forward with the proposed changes without an operative delay will ensure that the technology integration can continue with periodic but measured changes rather than implementing several changes at once. Furthermore, the Exchange states that the implementation of the risk controls will help to avoid potentially erroneous executions. The Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Accordingly, the Commission hereby waives the operative delay and designates the proposed rule change as operative upon filing.27 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (1) Necessary or appropriate in the public interest; (2) for the protection of investors; or (3) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. sradovich on DSK3GMQ082PROD with NOTICES IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 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– CboeEDGX–2017–009 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–CboeEDGX–2017–009. 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 website (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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CboeEDGX–2017–009 and should be submitted on or before January 30, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–00160 Filed 1–8–18; 8:45 am] BILLING CODE 8011–01–P 26 17 CFR 240.19b–4(f)(6)(iii). purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 27 For VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 28 17 PO 00000 CFR 200.30–3(a)(12). Frm 00050 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82439; File No. SR– NASDAQ–2017–128] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To List and Trade the Shares of the Western Asset Total Return ETF January 3, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 20, 2017, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade the shares of the Western Asset Total Return ETF (the ‘‘Fund’’), a series of Legg Mason ETF Investment Trust (the ‘‘Trust’’) under Nasdaq Rule 5735 (‘‘Managed Fund Shares’’).3 The shares 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 20, 2008) (SR– NASDAQ–2008–039). There are already multiple actively-managed funds listed on the Exchange. See, e.g., Securities Exchange Act Release Nos. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) (SR–NASDAQ–2017–039) (order approving listing and trading of Guggenheim Limited Duration ETF); 78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR–NASDAQ–2016–061) (order approving listing and trading of First Trust Equity Market Neutral ETF); 78443 (July 29, 2016), 81 FR 51517 (August 4, 2016) (SR–NASDAQ–2016–064) (order approving listing and trading of First Trust Strategic Mortgage REIT ETF); 71913 (April 9, 2014), 79 FR 21333 (April 15, 2014) (SR–NASDAQ–2014–019) (order approving listing and trading of First Trust Managed Municipal ETF); 69464 (April 26, 2013), 78 FR 25774 (May 2, 2013) (SR–NASDAQ–2013– 036) (order approving listing and trading of First Trust Senior Loan Fund); 66489 (February 29, 2012), 77 FR 13379 (March 6, 2012) (SR–NASDAQ– 2012–004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund); see also filings for similar ETFs listed on other national securities exchanges: Securities Exchange Act Release Nos. 80657 (May 11, 2017) 82 FR 22702 (May 17, 2017) (SR–NYSE Arca–2017– 09) (order approving listing and trading of Janus Short Duration Income ETF); 79683 (December 23, 2016), 81 FR 96539 (December 30, 2016) (SR– NYSEArca–2016–82) (order approving listing and trading of JPMorgan Diversified Event Driven ETF); 77904 (May 25, 2016), 81 FR 35101 (SR–NYSE Arca–2016–17) (order approving listing and trading of JPMorgan Diversified Alternative ETF); 68870 2 17 E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices of the Fund are collectively referred to herein as the ‘‘Shares.’’ II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change sradovich on DSK3GMQ082PROD with NOTICES 1. Purpose The Exchange proposes to list and trade the Shares of the Fund under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares 4 on the Exchange. The Fund will be an exchange-traded fund (‘‘ETF’’) that is actively managed. The Shares will be offered by the Trust, which was established as a Maryland statutory trust on June 8, 2015.5 The Exchange notes (February 8 2013), 78 FR 11245 (February 15, 2013) (SR–NYSEArca–2012–139) (order approving listing and trading of First Trust Preferred Securities and Income ETF). The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders. 4 A Managed Fund Share is a security that represents an interest in an investment company registered as an investment company under the Investment Company Act of 1940 (15 U.S.C. 80a– 1) (the ‘‘1940 Act’’) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objective and policies. In contrast, an open-end investment company that issues Index Fund Shares, listed and traded on the Exchange under Nasdaq Rule 5705, seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. 5 The Commission has issued an order, upon which the Trust may rely, granting certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 32391 (December 13, 2016) (File No. 812–14547) (the ‘‘Exemptive Relief’’). In addition, on December 6, 2012, the staff of the Commission’s Division of Investment Management (‘‘Division’’) issued a noaction letter (‘‘No-Action Letter’’) relating to the use of derivatives by actively-managed ETFs. See NoAction Letter dated December 6, 2012 from Elizabeth G. Osterman, Associate Director, Office of Exemptive Applications, Division of Investment Management. The No-Action Letter stated that the Division would not recommend enforcement action to the Commission under applicable provisions of and rules under the 1940 Act if actively-managed ETFs operating in reliance on specified orders VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 that other actively-managed, broad market fixed-income ETFs have been previously approved by the SEC prior to the adoption of ‘‘generic’’ listing standards for actively-managed ETFs.6 The Trust is registered with the Commission as an investment company under the 1940 Act and has filed a registration statement on Form N–1A (‘‘Registration Statement’’) with the Commission with respect to the Fund.7 The Fund will be a series of the Trust. The Fund intends to qualify each year as a regulated investment company (‘‘RIC’’) under Subchapter M of the Internal Revenue Code of 1986, as amended. Legg Mason Partners Fund Advisor, LLC will be the investment manager (‘‘Manager’’) to the Fund. Western Asset Management Company will serve as the sub-adviser to the Fund (the ‘‘SubAdviser’’) 8 and Western Asset Management Company Limited in London (‘‘Western Asset London’’), Western Asset Management Company Pte. Ltd. in Singapore (‘‘Western Asset Singapore’’) and Western Asset Management Company Ltd in Japan (‘‘Western Asset Japan’’) will each serve as the sub-sub-advisers to the Fund (collectively, the ‘‘Sub-Sub-Advisers’’ and each, a ‘‘Sub-Sub-Adviser’’).9 (which include the Exemptive Relief) invest in options contracts, futures contracts or swap agreements provided that they comply with certain representations stated in the No-Action Letter. 6 See, e.g., Securities Exchange Act Release Nos. 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR–NYSEArca–2015–73) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR–NYSEArca– 2011–95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund (now known as the PIMCO Active Bond ExchangeTraded Fund)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR–NYSEArca–2013–122) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund); see also infra note 60. 7 See Post-Effective Amendment No. 27 to the Registration Statement on Form N–1A for the Trust (File Nos. 333–206784 and 811–23096) as filed on August 8, 2017. The Trust will file an amendment to the Registration Statement as necessary to conform to the representations in this filing. The descriptions of the Fund and the Shares contained herein are based, in part, on information in the Registration Statement. 8 The Sub-Adviser is responsible for the day-today management of the Fund and, as such, typically makes all decisions with respect to portfolio holdings. The Manager has ongoing oversight responsibility. 9 Each of the Sub-Sub-Advisers provides advisory services to the Fund relating to the Fund’s investments. Sub-Sub-Advisers advise primarily on instruments traded in the region in which the SubSub-Adviser is located, but they may advise on portfolio instruments held by the Fund that are traded in other regions. Western Asset London generally advises on the Fund’s portfolio holdings in non-U.S. and non-Asian investment instruments and currencies (including through ETFs and derivative instruments that provide exposure to PO 00000 Frm 00051 Fmt 4703 Sfmt 4703 1063 Hereinafter, references to ‘‘Sub-Adviser’’ or ‘‘Sub-Advisers’’ include the SubAdviser and each applicable Sub-SubAdviser. Legg Mason Investor Services, LLC (the ‘‘Distributor’’) will be the distributor of the Fund’s Shares. The Manager, each of the Sub-Advisers and the Distributor are wholly-owned subsidiaries of Legg Mason, Inc. (‘‘Legg Mason’’). An entity that is not affiliated with Legg Mason, and which is named in the Registration Statement, will act as the administrator, accounting agent, custodian, and transfer agent to the Fund. Paragraph (g) of Rule 5735 provides that if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a brokerdealer, such investment adviser shall erect and maintain a ‘‘fire wall’’ between the investment adviser and the broker-dealer with respect to access to information concerning the composition and/or changes to such investment company portfolio.10 In addition, paragraph (g) further requires that personnel who make decisions on the investment company’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material, nonthose instruments and currencies); Western Asset Japan generally advises on the Fund’s portfolio holdings in Japanese investment instruments and currencies (including through ETFs and derivative instruments that provide exposure to those instruments and currencies); and Western Asset Singapore generally advises on the Fund’s portfolio holdings in non-Japan, Asian investment instruments and currencies (including through ETFs and derivative instruments that provide exposure to those instruments and currencies). 10 An investment adviser to an investment company is required to be registered under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). As a result, the Manager and the SubAdvisers and their related personnel are subject to the provisions of Rule 204A–1 under the Advisers Act relating to codes of ethics. Rule 204A–1 requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A–1 under the Advisers Act. In addition, Rule 206(4)–7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. E:\FR\FM\09JAN1.SGM 09JAN1 1064 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices public information regarding the investment company’s portfolio. Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with the establishment and maintenance of a ‘‘fire wall’’ between the investment adviser and the broker-dealer reflects the applicable investment company’s portfolio, not an underlying benchmark index, as is the case with index-based funds. None of the Manager or any of the Sub-Advisers is a broker-dealer, but each is affiliated with the Distributor, a broker-dealer, and has implemented and will maintain a fire wall with respect to its brokerdealer affiliate regarding access to information concerning proposed changes to the composition and/or changes to the portfolio prior to implementation. In addition, personnel who make decisions on the Fund’s portfolio composition will be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the Fund’s portfolio. In the event (a) the Manager or any of the Sub-Advisers registers as a broker-dealer or becomes newly affiliated with a broker-dealer, or (b) any new manager or sub-adviser to the Fund is a registered broker-dealer or becomes affiliated with another broker-dealer, it will implement and maintain a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning proposed changes to the composition and/or changes to the Fund’s portfolio prior to implementation and will be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding such portfolio. Western Asset Total Return ETF sradovich on DSK3GMQ082PROD with NOTICES Principal Investments The investment objective of the Fund will be to seek to maximize total return, consistent with prudent investment management and liquidity needs. Although the Fund may invest in securities and Debt (as defined below) of any maturity, the Fund will normally maintain an average effective duration within 35% of the average duration of the U.S. bond market as a whole (generally, this bond market range is 2.5 to 7 years) as estimated by the SubAdviser.11 Effective duration seeks to 11 The average effective duration of the Fund may fall outside of its expected range due to market movements. If this happens, the Sub-Advisers will take action to bring the Fund’s average effective duration back within its expected range within a reasonable period of time. VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 measure the expected sensitivity of market price to changes in interest rates, taking into account the anticipated effects of structural complexities (for example, some bonds can be prepaid by the issuer). Under Normal Market Conditions,12 the Fund will seek to achieve its investment objective by investing at least 80% of its net assets in a portfolio comprised of U.S. or foreign fixed income securities; U.S. or foreign Debt (as defined below); 13 ETFs 14 that provide exposure to such U.S. or foreign fixed income securities, Debt or other Principal Investments (defined below); derivatives 15 that (i) provide exposure 12 The term ‘‘Normal Market Conditions’’ has the meaning set forth in Nasdaq Rule 5735(c)(5). The Fund may vary from ordinary parameters on a temporary basis, including for defensive purposes, during the initial invest-up period (i.e., the six-week period following the commencement of trading of Shares on the Exchange) and during periods of high cash inflows or outflows (i.e., rolling periods of seven calendar days during which inflows or outflows of cash, in the aggregate, exceed 10% of the Fund’s net assets as of the opening of business on the first day of such periods). In those situations, the Fund may depart from its principal investment strategies and may, for example, hold a higher than normal proportion of its assets in cash and cash equivalents. During such periods, the Fund may not be able to achieve its investment objective. The Fund may also adopt a defensive strategy and hold a significant portion of its assets in cash and cash equivalents when the Manager or any Sub-Adviser believes securities, Debt and other instruments in which the Fund normally invests have elevated risks due to political or economic factors, heightened market volatility or in other extraordinary circumstances that do not constitute ‘‘Normal Market Conditions’’. The Fund’s investments in cash equivalents are described in greater detail in note 22 infra. 13 As noted below, the Fund will not invest more than 30% of its total assets in fixed income or equity securities or Debt of non-U.S. issuers or more than 25% of its total assets directly in non-U.S. dollar denominated fixed income or equity securities or Debt. As a result, although the Fund does intend to invest in foreign instruments described above, the size of such investments will be limited. See infra ‘‘Investment Restrictions’’. 14 The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705(b)), Portfolio Depositary Receipts (as described in Nasdaq Rule 5705(a)), and Managed Fund Shares (as described in Nasdaq Rule 5735). The Fund will not invest in ETFs that are not registered as investment companies under the 1940 Act. The ETFs held by the Fund will invest in fixed income securities, Debt and money-market instruments to which the Fund seeks exposure. All such ETFs will trade in markets that are members of the ISG or exchanges that are parties to a comprehensive surveillance sharing agreement with the Exchange. The Fund will not invest in leveraged ETFs, inverse ETFs, or inverse leveraged ETFs. Other fixed-income funds have been approved to include ETFs in their 80% principal investment category. See, e.g., Securities Exchange Act Release No. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) (SR–NASDAQ–2017–039) (approving fund seeking to meet its investment objective of having at least 80% of net assets invested in a portfolio of debt instruments in part through investments in ETFs that invest substantially all of their assets in such debt instruments). 15 Derivatives will include: (i) Swaps and security-based swaps, futures, options, options on PO 00000 Frm 00052 Fmt 4703 Sfmt 4703 to such U.S. or foreign fixed income securities, Debt and other Principal Investments, (ii) are used to risk manage the Fund’s holdings, or (iii) are used to enhance returns, such as through covered call strategies; 16 U.S. or foreign equity securities of any type acquired in reorganizations of issuers of fixed income securities or Debt held by the Fund (‘‘Work Out Securities’’); 17 U.S. or foreign non-convertible preferred securities (other than trust preferred securities, which the Fund may invest in but which are treated as fixed income securities 18) (‘‘Non-Convertible futures, and swaptions that are traded on an exchange, trading facility, swap execution facility or alternative trading system (A) that is a member of the Intermarket Surveillance Group (‘‘ISG’’), which includes all U.S. national securities exchanges and most futures exchanges, (B) that is subject to a comprehensive surveillance sharing agreement with the Exchange, or (C) that is not an ISG member and with which the Exchange does not have a comprehensive surveillance sharing agreement (‘‘Exchange-Traded Derivatives’’); and (ii) swaps and security-based swaps, options, options on futures, swaptions, forwards and similar instruments that are traded in the over-the-counter market and are either centrally cleared or cleared bilaterally (‘‘OTC Derivatives’’), as further described below. For the purposes of describing the scope of the Fund’s potential investments in derivatives, the terms ‘‘swaps’’ and ‘‘security-based swaps’’ shall have the meanings set forth in the Commodity Exchange Act (‘‘CEA’’), as amended by The DoddFrank Wall Street Reform and Consumer Protection Act, Public Law No. 111–203, 124 Stat. 1376 (2010) (‘‘Dodd-Frank’’), and regulations thereunder, and references to swaps and forwards on foreign exchange or currencies shall include ‘‘foreign exchange forwards’’ and ‘‘foreign exchange swaps’’, as such terms are defined in Sections 1a(24)–(25) of the CEA. The terms ‘‘exchange-traded’’ and ‘‘exchange-listed’’, when used with respect to swaps or security-based swaps, shall include swaps and security-based swaps that are executed on swap execution facilities and security-based swap execution facilities and cleared through regulated, central clearing facilities. For purposes of the 80% principal investments measure, the Fund will value derivatives based on the mark-to-market value or exposure of such derivatives. This approach is consistent with the valuation methodology for asset coverage purposes in Rule 18f–4 under the 1940 Act proposed by the Commission. See Investment Company Act Release No. 31933 (December 11, 2015); 80 FR 80884 (December 28, 2015) (the ‘‘Derivatives Rule Proposing Release’’); see also infra note 75. Not more than 10% of the net assets of the Fund will be invested in Exchange-Traded Derivatives whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. 16 See also ‘‘The Fund’s Use of Derivatives,’’ infra. 17 Work Out Securities will generally be traded in the OTC market or may be listed on an exchange that may or may not be an ISG member. 18 See Nasdaq Rule 5735(b)(1)(B). E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES Preferred Securities’’); 19 warrants 20 on U.S. or foreign fixed income securities; warrants on U.S. or foreign equity securities that are attached to, accompany or are purchased alongside investments in U.S. or foreign fixed income securities issued by the issuer of the warrants (‘‘Equity-Related Warrants’’); 21 cash and cash equivalents; 22 and foreign currencies (together, the ‘‘Principal Investments’’ and the equity elements of the Principal Investments, which consist of Work Out Securities, ETFs that provide exposure to fixed income securities, Debt or other Principal Investments, Equity-Related Warrants and Non-Convertible Preferred 19 Non-convertible preferred stock, such as that comprising the Non-Convertible Preferred Securities, provide holders with a fixed or variable distribution and a status upon bankruptcy of the issuer that is subordinated to debt holders but preferred over common shareholders. NonConvertible Preferred Securities may be listed on either an ISG member exchange (or an exchange with which the Exchange has a comprehensive surveillance sharing agreement) or a non-ISG member exchange or be unlisted and trade in the over-the-counter market. 20 Warrants are securities that provide the holder with the right to purchase specified securities of the issuer of the warrants at a specified exercise price until the expiration date of the warrant. The Fund may hold warrants that provide the right to purchase fixed income securities or equity securities, and such warrants may be traded in the OTC market or may be listed on an exchange, including an exchange that is not an ISG member. The Fund expects that most of the warrants it holds will be attached to related fixed income securities. 21 The Fund’s interests in Equity-Related Warrants are similar to the Fund’s interest in Work Out Securities in that they reflect interests in equity securities that are held solely in connection with investments in fixed income securities. 22 Cash equivalents consist of the following, all of which have maturities of less than three months: U.S. government securities; certificates of deposit issued against funds deposited in a bank or savings and loan association; bankers’ acceptances (which are short-term credit instruments used to finance commercial transactions); repurchase agreements and reverse repurchase agreements; and bank time deposits (which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest). Cash equivalents also consist of money market funds registered under the 1940 Act and money market funds that are not registered under the 1940 Act but that comply with Rule 2a–7 under the 1940 Act (together, ‘‘Money Market Funds’’), money market ETFs and commercial paper, which are short-term unsecured promissory notes, having maturities of 360 days or less. The Exchange notes that, while the Fund treats commercial paper with maturities of three months or greater as cash equivalents for the purposes of the 80% principal investments measure, the Fund will apply the definition of cash equivalents in Nasdaq Rule 5735(b)(1)(C) (which is limited to instruments with maturities of less than three months) for purposes of compliance with Nasdaq Rule 5735(b)(1) and will comply with the applicable requirements of Nasdaq Rule 5735(b)(1) with respect to all commercial paper held by the Fund. Investments in cash equivalents that are Money Market Funds will be made in accordance with Rule 12d1–1 under the 1940 Act. VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 Securities, are referred to as the ‘‘Principal Investment Equities’’).23 The Manager or Sub-Advisers (as applicable) may select from any of the following types of fixed income securities: (i) U.S. or foreign corporate debt securities, including notes, bonds, debentures, trust preferred securities, and commercial paper issued by corporations, trusts, limited partnerships, limited liability companies and other types of nongovernmental legal entities; (ii) U.S. government securities, including obligations of, or guaranteed by, the U.S. government, its agencies or governmentsponsored entities; (iii) sovereign debt securities, which include fixed income securities issued by governments, agencies or instrumentalities and their political subdivisions, securities issued by government-owned, controlled or sponsored entities, interests in entities organized and operated for the purpose of restructuring the investment instruments issued by such entities, Brady Bonds,24 and fixed income securities issued by supranational entities such as the World Bank; 25 (iv) U.S. or foreign mortgage-backed securities (‘‘MBS’’), which are securities that represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property and which may be issued by private issuers, by government-sponsored entities such as Fannie Mae (formally known as the Federal National Mortgage Association) or Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation) or by agencies of the U.S. government, such as the Government National Mortgage Association (‘‘Ginnie Mae’’); 26 (v) U.S. or foreign asset-backed 23 The Manager and Sub-Advisers will manage the Fund to ensure that the weight of NonConvertible Preferred Securities, Equity-Related Warrants and Work Out Securities (which are generally traded solely in the over-the-counter market) together do not exceed 30% of the Fund’s net assets. 24 Brady Bonds are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness. 25 A supranational entity is a bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development. 26 MBS include collateralized mortgage obligations (‘‘CMOs’’), which are debt obligations collateralized by mortgage loans or mortgage passthrough securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but may also be collateralized by whole loans or pass-through securities issued by private issuers (i.e., issuers other than government agencies or governmentsponsored entities) (referred to as ‘‘Mortgage Assets’’). Payments of principal and of interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on PO 00000 Frm 00053 Fmt 4703 Sfmt 4703 1065 securities (‘‘ABS’’), which represent participations in, or are secured by and payable from, assets such as installment sales or loan contracts, leases, credit card receivables and other categories of receivables other than real estate; 27 (vi) municipal securities, which include general obligation bonds, revenue bonds, housing authority bonds, private activity bonds, industrial development bonds, residual interest bonds, tender option bonds, tax and revenue anticipation notes, bond anticipation notes, tax-exempt commercial paper, municipal leases, participation certificates and custodial receipts; (vii) zero coupon securities, which are securities that pay no interest during the life of the obligation but are issued at prices below their stated maturity value; (viii) pay-in-kind securities, which have a stated coupon, but the interest is generally paid in the form of obligations of the same type as the underlying payin-kind securities (e.g., bonds) rather than in cash; (ix) deferred interest securities, which are obligations that generally provide for a period of delay before the regular payment of interest begins and are issued at a significant discount from face value; (x) U.S. or foreign structured notes and indexed securities, including securities that have demand, tender or put features, or interest rate reset features; and (xi) U.S. or foreign inflation-indexed or inflationprotected securities, which are fixed income securities that are structured to provide protection against inflation and whose principal value or coupon is periodically adjusted according to the rate of inflation and which include, among others, U.S. Treasury Inflation Protected Securities. The securities may pay fixed, variable or floating rates of interest or, in the case of instruments such as zero coupon bonds, do not pay the CMOs. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a ‘‘tranche’’ of securities, is issued at a specified fixed or floating coupon rate and has a stated maturity or final distribution date. 27 ABS include collateralized debt obligations (‘‘CDOs’’). CDOs include collateralized bond obligations (‘‘CBOs’’), collateralized loan obligations (‘‘CLOs’’) and other similarly structured securities. A CBO is a trust or other special purpose entity that is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities). A CLO is a trust or other special purpose entity that is typically collateralized by a pool of loans, which may also include, among others, domestic and nonU.S. senior secured loans, senior unsecured loans, and subordinated corporate loans, including loans that may be rated below investment grade or equivalent unrated loans, as well as loans that rank senior to the borrower’s traditional debt obligations. Like CMOs, CDOs generally issue separate series or ‘‘tranches’’ of securities, which vary with respect to risk and yield. E:\FR\FM\09JAN1.SGM 09JAN1 sradovich on DSK3GMQ082PROD with NOTICES 1066 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices current interest but are issued at a discount from their face values. MBS and ABS in which the Fund will invest make periodic payments of interest and/ or principal on underlying pools of mortgages, government securities or, in the case of ABS, loans, leases and receivables other than real estate. The Fund may also invest in stripped ABS or MBS, which represent the right to receive either payments of principal or payments of interest on real estate receivables, in the case of MBS, or nonreal estate receivables, in the case of ABS. Investments by the Fund in debt instruments (‘‘Debt’’) that may be deemed not to be ‘‘securities’’, as defined in the Act, are comprised primarily of the following: (i) U.S. or foreign bank loans and participations in bank loans; (ii) U.S. or foreign loans by non-bank lenders and participations in such loans; (iii) U.S. or foreign loans on real estate secured by mortgages and participations (without guarantees by a government-sponsored entity (‘‘GSE’’)); and (iv) participations in U.S. or foreign loans and/or other extensions of credit, such as guarantees, made by governmental entities or financial institutions. Debt may be partially or fully secured by collateral supporting the payment of interest and principal, or unsecured and/or subordinated to other instruments. Debt may relate to financings for highly-leveraged borrowers. The Fund may acquire an interest in Debt by purchasing participations in and/or assignments of portions of loans from third parties or by investing in pools of loans, such as collateralized debt obligations. With respect to fixed income securities and Debt, the Fund may invest in restricted instruments, such as Rule 144A and Regulation S securities, which are subject to resale restrictions that limit purchasers to qualified institutional buyers, as defined in Rule 144A under the Securities Act of 1933, as amended (the ‘‘Securities Act’’) or non-U.S. persons, within the meaning of Regulation S under the Securities Act. The Fund will use derivatives to (i) provide exposure to U.S. or foreign fixed income securities, Debt and other Principal Investments, (ii) risk manage the Fund’s holdings,28 and (iii) enhance returns, such as through covered call strategies.29 The Fund will not use 28 The risk management uses of derivatives will include managing (i) investment-related risks, (ii) risks due to fluctuations in securities prices, interest rates, or currency exchanges rates, (iii) risks due to the credit-worthiness of an issuer, and (iv) the effective duration of the Fund’s portfolio. 29 See also ‘‘The Fund’s Use of Derivatives,’’ infra. VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 derivatives for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark. Derivatives that the Fund may enter into include: Over-thecounter deliverable and non-deliverable foreign exchange forward contracts; exchange-listed futures contracts on securities (including Treasury Securities and foreign government securities), commodities, indices, interest rates, financial rates and currencies; exchange-listed or over-the-counter options or swaptions (i.e., options to enter into a swap) on securities, commodities, indices, interest rates, financial rates, currencies and futures contracts; and exchange-listed or overthe-counter swaps (including total return swaps) on securities, commodities, indices, interest rates, financial rates, currencies and debt and credit default swaps on single names, baskets and indices (both as protection seller and as protection buyer). As a result of the Fund’s use of derivatives and to serve as collateral, the Fund may also hold significant amounts of Treasury Securities, cash and cash equivalents and, in the case of derivatives that are payable in a foreign currency, the foreign currency in which the derivatives are payable. The Fund may, without limitation, enter into repurchase arrangements and borrowing and reverse repurchase arrangements, purchase and sale contracts, buybacks and dollar rolls 30 and spot currency transactions. The Fund may also, subject to required margin and without limitation, purchase securities and other instruments under when-issued, delayed delivery, to be announced or forward commitment transactions, where the securities or instruments will not be delivered or paid for immediately. To the extent required under applicable federal securities laws (including the 1940 Act), rules, and interpretations thereof, the Fund will ‘‘set aside’’ liquid assets or engage in other measures to ‘‘cover’’ open positions held in connection with 30 In a forward roll transaction (also referred to as a mortgage dollar roll), the Fund sells a MBS while simultaneously agreeing to purchase a similar security from the same party (the counterparty) on a specified future date at a lower fixed price. During the roll period, the Fund forgoes principal and interest paid on the securities. The Fund is compensated by the difference between the current sales price and the forward price for the future purchase, as well as by the interest earned on the cash proceeds of the initial sale. The Fund may enter into a forward roll transaction with the intention of entering into an offsetting transaction whereby, rather than accepting delivery of the security on the specified date, the Fund sells the security and agrees to repurchase a similar security at a later time. PO 00000 Frm 00054 Fmt 4703 Sfmt 4703 the foregoing types of transactions, as well as derivative transactions. Other Investments Under Normal Market Conditions, the Fund will seek its investment objective by investing at least 80% of its net assets in a portfolio of the Principal Investments. The Fund may invest its remaining assets exclusively in: (i) U.S. or foreign exchange-listed or over-the counter convertible fixed income securities; and (ii) OTC Derivatives (as defined below) and Exchange-Traded Derivatives (as defined below) that do not satisfy the Fund’s primary uses for derivatives, which are to (A) provide exposure to such U.S. or foreign fixed income securities, Debt and other Principal Investments, (B) risk manage the Fund’s holdings, and (C) enhance returns.31 The Fund’s Use of Derivatives The Fund proposes to invest in the types of derivatives described in the ‘‘Principal Investments’’ and ‘‘Other Investments’’ sections above. ExchangeTraded Derivatives will primarily be traded on exchanges that are ISG members or exchanges with which the Exchange has a comprehensive surveillance sharing agreement. The Fund may, however, invest up to 10% of the net assets of the Fund in Exchange-Traded Derivatives whose principal market is not a member of ISG or a market with which the Exchange has a comprehensive surveillance sharing agreement. For purposes of this 10% limit, the weight of such ExchangeTraded Derivatives will be calculated based on the mark-to-market value or exposure of such Exchange-Traded Derivatives. The Fund will limit the weight of its investments in OTC Derivatives to 10% of the net assets of the Fund, with the exception of Interest Rate Derivatives 32 and Currency Derivatives 33 (together, 31 Investments in OTC Derivatives and ExchangeTraded Derivatives will also be subject to the limitations described in the ‘‘The Fund’s Use of Derivatives’’ section below. 32 ‘‘Interest Rate Derivatives’’ are comprised of interest rate swaps, swaptions (i.e., options on interest rate swaps), rate options and other similar derivatives, and may be Exchange-Traded Derivatives or OTC Derivatives. As reflected in statistics compiled by the Bank for International Settlements, as of June 30, 2017 there were approximately $416 trillion (notional amount) of total interest rate contracts outstanding in the overthe-counter markets alone. Interest Rate Derivatives also trade on trading platforms that are not ISG members. As reflected by the statistics, the market is wide, deep and liquid. See https://www.bis.org/ statistics/d7.pdf (accessed November 2017). 33 ‘‘Currency Derivatives’’ are comprised of deliverable forwards, which are agreements between the contracting parties to exchange a specified amount of currency at a specified future E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES ‘‘Interest Rate and Currency Derivatives’’) entered into with brokerdealers, banks and other financial intermediaries. Investments in Interest Rate and Currency Derivatives (whether the instruments are Exchange-Traded Derivatives or OTC Derivatives) will not be subject to a limit. For purposes of this 10% limit on OTC Derivatives, the weight of such OTC Derivatives will be calculated based on the mark-to-market value or exposure of such OTC Derivatives. The mark-to-market methodology is consistent with the methodology proposed by the SEC in proposed Rule 18f–4 for the purposes of asset coverage requirements 34 and in keeping with disclosures regarding compliance with Section 18 of the 1940 Act made by other registered investment companies and reviewed by the SEC staff for a number of years.35 In that regard, the SEC expressly noted in the Derivatives Rule Proposing Release that reliance on a mark-to-market valuation of a derivatives position for purposes of calculating the required coverage amount ‘‘would generally correspond to the amount of the fund’s liability with respect to the derivatives transaction’’ and, therefore, be consistent with the appropriate valuation of the derivatives transaction.36 The mark-to-market value is also the measure of ‘‘exposure’’ on which collateral posting is based under the Master Agreement published by the International Swaps and Derivatives Association, Inc. (‘‘ISDA’’), which is the predominant agreement used to trade derivatives.37 This value measures gain time at a specified rate, non-deliverable forwards, which are agreements to pay the difference between the exchange rates specified for two currencies at a future date, swaps and options on currencies, and similar currency or foreign exchange derivatives. As reflected in statistics compiled by the Bank for International Settlements, as of June 30, 2017 there were approximately $77 trillion (notional amount) of Currency Derivatives outstanding in the over-thecounter markets alone. Currency Derivatives also trade on trading platforms that are not ISG members. As reflected by the statistics, the market is wide, deep and liquid. See https://www.bis.org/ statistics/d6.pdf (accessed November 2017). 34 See Derivatives Rule Proposing Release at 157– 158; see also infra note 75. 35 See Derivatives Rule Proposing Release at n.58, citing Comment Letter on SEC Concept Release (November 11, 2011) (File No. S7–33–11), Davis Polk & Wardwell LLP, available at https:// www.sec.gov/comments/s7-33-11/s73311-49.pdf (‘‘[F]und registration statements indicate that, in recent years, the Staff has not objected to the adoption by funds of policies that require segregation of the mark-to-market value, rather than the notional amount . . . [for asset segregation purposes].’’). 36 See Derivatives Rule Proposing Release at 157– 158. 37 The Credit Support Annex to the ISDA Master Agreement bases the collateral amount owed by a party to a derivatives contract, or that party’s ‘‘exposure’’, by reference to the replacement value of the party’s net positions. Replacement value, VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 and loss to the Fund of the Fund’s derivatives position on a daily basis, as well as on a net basis across all transactions covered by a master netting agreement and, as a result, accurately reflects the actual economic exposure of the Fund to the counterparty on the derivative (as compared to notional amount, which may overstate or understate economic risk). The Fund may choose not to make use of derivatives. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes. As described above, the Fund will use derivatives to (i) provide exposure to U.S. or foreign fixed income securities, Debt and other Principal Investments, (ii) risk manage the Fund’s holdings,38 and (iii) enhance returns, such as through covered call strategies. The Fund will not use derivatives for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark. The Fund will enter into derivatives only with counterparties that the Fund reasonably believes are financially and operationally able to perform the contract or instrument, and the Fund will collect collateral from the counterparty in accordance with credit considerations and margining requirements under applicable law.39 Investments in derivative instruments will be made in accordance with the 1940 Act and consistent with the Fund’s investment objective and policies. To limit the potential risk (including leveraging risk) associated with such transactions, the Fund will segregate or ‘‘earmark’’ assets determined to be liquid by the Manager and/or the Subwhich has the same meaning as ‘‘mark-to-market’’ value, is the amount owed by a party at a point in time determined based on the net termination payment due under the outstanding transaction. 38 The risk management uses of derivatives will include managing (i) investment-related risks, (ii) risks due to fluctuations in securities prices, interest rates, or currency exchanges rates, (iii) risks due to the credit-worthiness of an issuer, and (iv) the effective duration of the Fund’s portfolio. 39 The Fund will seek, where practicable, to trade with counterparties whose financial status is such that the risk of default is reduced. The Sub-Advisers will monitor the financial standing of counterparties on an ongoing basis. This monitoring may include reliance on information provided by credit agencies or of credit analysts employed by the Sub-Advisers. The analysis may include earnings updates, the counterparty’s reputation, past experience with the dealer, market levels for the counterparty’s debt and equity, credit default swap levels for the counterparty’s debt, the liquidity provided by the counterparty and its share of market participation. PO 00000 Frm 00055 Fmt 4703 Sfmt 4703 1067 Advisers in accordance with procedures established by the Trust’s Board of Trustees (the ‘‘Board’’) and in accordance with the 1940 Act (or, as permitted by applicable regulation, enter into offsetting positions) to cover its obligations under derivative instruments. These procedures have been adopted consistent with Section 18 of the 1940 Act and related Commission guidance. In addition, the Fund will include appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that transactions of the Fund, including the Fund’s use of derivatives, may give rise to additional leverage, causing the Fund to be more volatile than if it had not been leveraged. Because the markets for securities or Debt, or the securities themselves or Debt, may be unavailable, cost prohibitive or tax-inefficient as compared to derivative instruments, suitable derivative transactions may be an efficient alternative for the Fund to obtain the desired asset exposure. The Manager and the Sub-Advisers believe that derivatives can be an economically attractive substitute for an underlying physical security or Debt that the Fund would otherwise purchase. For example, the Fund could purchase futures contracts on Treasury Securities instead of investing directly in Treasury Securities or could sell credit default protection on a corporate bond instead of buying a physical bond. Economic benefits include potentially lower transactions costs, attractive relative valuation of a derivative versus a physical bond (e.g., differences in yields) or economic exposure without incurring transfer or similar taxes. The Manager and the Sub-Advisers further believe that derivatives can be used as a more liquid means of adjusting portfolio duration, as well as targeting specific areas of yield curve exposure, with potentially lower transaction costs than the underlying securities or Debt (e.g., interest rate swaps may have lower transaction costs than the physical bonds). Similarly, money market futures can be used to gain exposure to short-term interest rates in order to express views on anticipated changes in central bank policy rates. In addition, derivatives can be used to protect client assets through selectively hedging downside (or ‘‘tail risks’’) in the Fund. The Fund also can use derivatives to increase or decrease credit exposure. Index credit default swaps can be used to gain exposure to a basket of credit risk by ‘‘selling protection’’ against default or other credit events, or to hedge broad market credit risk by E:\FR\FM\09JAN1.SGM 09JAN1 1068 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES ‘‘buying protection.’’ Single name credit default swaps can be used to allow the Fund to increase or decrease exposure to specific issuers, saving investor capital through lower trading costs. The Fund can use total return swap contracts to obtain the total return of a reference asset or index in exchange for paying financing costs. A total return swap may be more efficient than buying underlying securities or Debt, potentially lowering transaction costs. The Fund expects to manage foreign currency exchange rate risk by entering into Currency Derivatives. The Sub-Advisers may use option strategies to meet the Fund’s investment objectives. Option purchases and sales can also be used to hedge specific exposures in the portfolio and can provide access to return streams available to long-term investors such as the persistent difference between implied and realized volatility. Option strategies can generate income or improve execution prices (e.g., covered calls). Investment Restrictions The Fund may invest up to 30% of its assets in Non-Convertible Preferred Securities, Equity-Related Warrants and Work Out Securities. The Fund will not invest in equity securities other than Principal Investment Equities. Principal Investment Equities consist of (i) NonConvertible Preferred Securities, EquityRelated Warrants and Work Out Securities, which are subject to the 30% limit noted above and (ii) shares of ETFs that provide exposure to fixed income securities, Debt or other Principal Investments, which are subject to no limits. While the Fund will invest principally in fixed income securities and Debt that are, at the time of purchase, investment grade, the Fund may invest up to 30% of its net assets in below investment grade fixed income securities and Debt. For these purposes, ‘‘investment grade’’ is defined as investments with a rating at the time of purchase in one of the four highest rating categories of at least one nationally recognized statistical ratings organization (‘‘NRSRO’’) (e.g., BBB- or higher by S&P Global Ratings (‘‘S&P’’), and/or Fitch Ratings (‘‘Fitch’’), or Baa3 or higher by Moody’s Investors Service, Inc. (‘‘Moody’s’’)).40 Unrated fixed income securities or Debt may be considered investment grade if, at the time of purchase, and under Normal 40 For the avoidance of doubt, if a security is rated by multiple NRSROs and receives different ratings, the Fund will treat the security as being rated in the highest rating category received from any one NRSRO. VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 Market Conditions, the applicable SubAdviser determines that such securities are of comparable quality based on a fundamental credit analysis of the unrated security or Debt instrument and comparable NRSRO-rated securities. The Fund may invest in fixed income or equity securities and Debt issued by both U.S. and non-U.S. issuers (including issuers in emerging markets), but the Fund will not invest more than 30% of its total assets directly in fixed income or equity securities or Debt of non-U.S. issuers or more than 25% of its total assets directly in non-U.S. dollar denominated fixed income or equity securities or Debt. For purposes of these 30% and 25% concentration limits only, derivatives, warrants and ETFs traded on U.S. exchanges that provide indirect exposure to fixed income or equity securities or Debt (as applicable) of nonU.S. issuers or to fixed income or equity securities or Debt (as applicable) denominated in currencies other than U.S. dollars will not be counted by the Fund in calculating its holdings in nonU.S. issuers or in non-U.S. dollar denominated securities or Debt. The Fund may invest a substantial portion of its net assets in ABS and MBS, but it will not invest more than 30% of the fixed income portion of the Fund’s portfolio 41 in non-agency, nonGSE and privately-issued mortgagerelated and other asset-backed securities (‘‘Private ABS/MBS’’).42 The Fund may not concentrate its investments (i.e., invest more than 25% of the value of its total assets) in securities of issuers in any one industry. This restriction will be interpreted to permit investment without limit in the following: Obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities; securities of state, territory, possession or municipal governments and their authorities, agencies, instrumentalities or political subdivisions; and repurchase agreements collateralized by any such obligations.43 The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of 41 The Exchange notes that the terms ‘‘fixed income weight of the portfolio’’ and ‘‘weight of the fixed income portion of the portfolio’’ are used synonymously in Nasdaq Rule 5735. 42 For purposes of this requirement, the weight of the Fund’s exposure to Private ABS/MBS referenced in derivatives held by the Fund shall be calculated based on the mark-to-market value or exposure of such derivatives. 43 See Form N–1A, Item 9. The Commission has taken the position that a fund is concentrated if it invests more than 25% of the value of its total assets in any one industry. See, e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 (November 21, 1975). PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 investment), including Rule 144A securities deemed illiquid by the Manager or the Sub-Advisers.44 The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of the Fund’s net assets are held in illiquid securities or other illiquid assets. Illiquid securities and other illiquid assets include those subject to contractual or other restrictions on resale and other instruments or assets that lack readily available markets as determined in accordance with Commission staff guidance.45 As noted in the Use of Derivatives section above, the Fund’s investments in derivatives, will be consistent with the Fund’s investment objective and will not be used for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark (although derivatives have embedded leverage). Although the Fund will be permitted to borrow as permitted under the 1940 Act, it will not be operated as a ‘‘leveraged ETF,’’ (i.e., it will not be operated in a manner designed to seek a multiple or inverse multiple of the performance of an underlying reference index). The Fund may engage in frequent and active trading of portfolio 44 In reaching liquidity decisions, the Manager or Sub-Advisers (as applicable) may consider the following factors: The frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). 45 Long-standing Commission guidelines have required investment companies to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), FN 34; see also Investment Company Act Release Nos. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ‘‘Restricted Securities’’); and 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N–1A). The Commission also recently adopted Rule 22e–4 under the 1940 Act, which requires that each registered open-end management investment company, including ETFs but not including money market mutual funds, to establish a liquidity risk management program that includes limitations on illiquid investments. See Investment Company Act Release No. 32315 (October 13, 2016), 81 FR 82142 (November 18, 2016). Under Rule 22e–4, a fund’s portfolio security is illiquid if it cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. See 17 CFR 270.22e–4(a)(8). E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices securities, Debt, and derivatives to achieve its investment objective. Under normal market conditions, the Fund will satisfy the following requirements, on a continuous basis measured at the time of purchase: (i) Component securities that in the aggregate account for at least 75% of the fixed income weight of the Fund’s portfolio each shall have a minimum original principal amount outstanding of $100 million or more; (ii) no fixed income security held in the portfolio (excluding U.S. Treasury Securities and GSE Securities) 46 will represent more than 30% of the fixed income weight of the Fund’s portfolio, and the five most heavily weighted portfolio securities (excluding Treasury Securities and GSE Securities) will not in the aggregate account for more than 65% of the fixed income weight of the Fund’s portfolio; (iii) the Fund’s portfolio (excluding exempted securities) will include a minimum of 13 non-affiliated issuers; (iv) at least 75% of the investments in securities issued by emerging market issuers shall have a minimum original principal amount outstanding of $200 million or more; and (v) at least 75% of investments in bank loans or corporate loan assets 47 shall be in senior loans with an initial deal size of $100 million or greater.48 In addition, the Fund will impose the limits described in the following section, which are alternative limits to the ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1). sradovich on DSK3GMQ082PROD with NOTICES Application of Generic Listing Requirements The Exchange is submitting this proposed rule change because the Fund will not meet all of the ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1). The Fund will meet all such requirements except the requirements described below,49 and the Exchange 46 The terms ‘‘Treasury Securities’’ and ‘‘GSE Securities’’ have the meanings set forth in Nasdaq Rule 5735(b)(1)(B). 47 These include senior loans, syndicated bank loans, junior loans, bridge loans, unfunded commitments, revolvers and participation interests. 48 The Exchange notes that Nasdaq Rule 5735(b)(1)(F) provides that to the extent that derivatives are used to gain exposure to individual fixed income securities or indexes of fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Nasdaq Rule 5735(b)(1)(B). The Exchange proposes, however, as further described below, that for the purposes of the requirements in this paragraph and any requirements under Nasdaq Rule 5735(b)(1), the Fund will use the mark-to-market value or exposure of its derivatives rather than gross notional value or exposure. 49 The Exchange notes that, while the Fund treats commercial paper with maturities of three months or greater as cash equivalents for the purposes of its 80% principal investments measure, the Fund VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 proposes that the Fund will comply with the alternative limits described below. (i) The Fund will not comply with the requirements in Nasdaq Rule 5735(b)(1) regarding the use of aggregate gross notional value or exposure of derivatives when calculating the weight of such derivatives or the exposure that such derivatives provide to underlying reference assets, including the requirements in Rules 5735(b)(1)(D)(i),50 5735(b)(1)(D)(ii),51 5735(b)(1)(E) 52 and 5735(b)(1)(F).53 Instead, the Exchange proposes that for the purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), and any alternative requirements proposed by the Exchange, the Fund will use the mark-to-market value or exposure of its derivatives in calculating the weight of such derivatives or the exposure that such derivatives provide to their reference assets.54 will comply with the applicable requirements of Nasdaq Rule 5735(b)(1) with respect to all commercial paper held by the Fund. Further, in accordance with Nasdaq Rule 5735(b)(1)(B), to the extent that the Fund holds securities that convert into fixed income securities, the fixed income securities into which any such securities are converted shall meet the criteria of Nasdaq Rule 5735(b)(1)(B) after converting. 50 Nasdaq Rule 5735(b)(1)(D)(i) provides that at least 90% of the weight of a portfolio’s holdings invested in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options and swaps for which the Exchange may obtain information via the ISG, from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement; for the purposes of calculating this limitation, a portfolio’s investment in such listed derivatives will be calculated as the aggregate gross notional value of the listed derivatives. 51 Nasdaq Rule 5735(b)(1)(D)(ii) provides that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the portfolio (including gross notional exposures). 52 Nasdaq Rule 5735(b)(1)(E) provides that on both an initial and continuing basis, no more than 20% of the assets in the portfolio may be invested in over-the-counter derivatives, including forwards, options, and swaps on commodities, currencies and financial instruments (e.g., stocks, fixed income, interest rates, and volatility) or a basket or index of any of the foregoing; for purposes of calculating this limitation, the Fund’s investment in OTC Derivatives will be calculated as the aggregate gross notional value of the OTC Derivatives. 53 Nasdaq Rule 5735(b)(1)(F) provides that to the extent that listed or over-the-counter derivatives are used to gain exposure to individual equities and/ or fixed income securities, or to indexes of equities and/or indexes of fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Nasdaq Rules 5735(b)(1)(A) and 5735(b)(1)(B), respectively. 54 Further, as described further below, the Exchange is proposing that the Fund will comply PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 1069 (ii) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(B)(v) that Private ABS/MBS in the Fund’s portfolio account, in the aggregate, for no more than 20% of the weight of the fixed income portion of the Fund’s portfolio. Instead, the Exchange proposes that the Fund will limit its holdings in Private ABS/MBS to no more than 30% of the weight of the fixed income portion of the Fund’s portfolio, in order to enable the portfolio to be more diversified and provide the Fund with an opportunity to earn higher returns. For purposes of this requirement, the weight of the Fund’s exposure to Private ABS/MBS referenced indirectly through investments in derivatives held by the Fund shall be calculated based on the mark-to-market value or exposure of such derivatives. (iii) The Fund will not comply with the requirement that at least 90% of the fixed income weight of the Fund’s portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv).55 Instead, the Exchange proposes that the fixed income portion of the portfolio other than Private ABS/MBS will comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv), and Private ABS/ MBS will not comply with such requirement. For purposes of this requirement, the weight of the Fund’s exposure to any fixed income securities referenced in derivatives held by the Fund shall be calculated based on the mark-to-market value or exposure of such derivatives. (iv) The Fund will not comply with the equity requirements in Nasdaq Rules 5735(b)(1)(A)(i) 56 and with alternative requirements rather than Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), and 5735(b)(1)(E). 55 Nasdaq Rule 5735(b)(1)(B)(iv) provides that component securities that in the aggregate account for at least 90% of the fixed income weight of the portfolio must be either: (a) From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Act; or (e) from issuers that are a government of a foreign country or a political subdivision of a foreign country. 56 Nasdaq Rule 5735(b)(1)(A)(i) provides that the components stocks of the equity portion of a portfolio that are U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the following criteria initially and on a continuing basis: (a) Component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) that in the aggregate account for at least 90% of the equity weight of the portfolio (excluding such Exchange E:\FR\FM\09JAN1.SGM Continued 09JAN1 1070 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES 5735(b)(1)(A)(ii) 57 with respect to the Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) each shall have a minimum market value of at least $75 million; (b) Component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) that in the aggregate account for at least 70% of the equity weight of the portfolio (excluding such Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) each shall have a minimum monthly trading volume of 250,000 shares, or minimum notional volume traded per month of $25,000,000, averaged over the last six months; (c) The most heavily weighted component stock (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 30% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 65% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio does not include Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 13 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, constitute, at least in part, components underlying a series of Managed Fund Shares (as defined in NASDAQ Rule 5735), or (ii) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rule 5735(c)(6) and 5710, respectively, account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; (e) except as otherwise provided, equity securities in the portfolio shall be U.S. Component Stocks listed on a national securities exchange and shall be NMS Stocks as defined in Rule 600 of Regulation NMS under the Act; and (f) American Depositary Receipts (‘‘ADRs’’) in a portfolio may be exchangetraded or non-exchange-traded; however, no more than 10% of the equity weight of a portfolio shall consist of non-exchange-traded ADRs. 57 Nasdaq Rule 5735(b)(1)(A)(ii) provides that the component stocks of the equity portion of a portfolio that are Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the following criteria initially and on a continuing basis: (a) Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) each shall have a minimum market value of at least $100 million; (b) Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) each shall have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; (c) The most heavily weighted NonU.S. Component Stock (as such term is defined in Nasdaq Rule 5705) shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall not exceed 60% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio includes Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705), the equity portion of the portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, constitute, at least in part, components VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 Fund’s investment in Non-Convertible Preferred Securities, Work Out Securities and Equity-Related Warrants. Instead, the Exchange proposes that (i) the Fund’s investments in equity securities other than Non-Convertible Preferred Securities, Work Out Securities and Equity-Related Warrants shall comply with the equity requirements in Nasdaq Rule 5735(b)(1)(A) 58 and (ii) the weight of Non-Convertible Preferred Securities, Work Out Securities and Equity-Related Warrants in the Fund’s portfolio shall together not exceed 30% of the Fund’s net assets. (v) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(E) that no more than 20% of the assets in the Fund’s portfolio may be invested in over-the-counter derivatives. Instead, the Exchange proposes that there shall be no limit on the Fund’s investment in Interest Rate and Currency Derivatives, and the weight of all OTC Derivatives other than Interest Rate and Currency Derivatives shall not exceed 10% of the Fund’s net assets. For purposes of this 10% limit on OTC Derivatives, the weight of such OTC Derivatives will be calculated based on the mark-to-market value or exposure of such OTC Derivatives. (vi) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(i) that at least 90% of the weight of the Fund’s holdings in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options and swaps for which the Exchange may obtain information via the ISG from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement. Instead, the Exchange proposes that no more than 10% of the net assets of the Fund will be invested in Exchange-Traded Derivatives whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. For purposes of this 10% underlying a series of Managed Fund Shares, or (ii) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; and (e) Each Non-U.S. Component Stock (as such term is defined in Nasdaq Rule 5705) shall be listed and traded on an exchange that has last-sale reporting. 58 These other equities will consist of ETFs (including money market ETFs) that provide exposure to fixed income securities, Debt and other Principal Investments. The weight of such ETFs in the Fund’s portfolio shall not be limited. PO 00000 Frm 00058 Fmt 4703 Sfmt 4703 limit, the weight of such ExchangeTraded Derivatives will be calculated based on the mark-to-market value or exposure of such Exchange-Traded Derivatives. (vii) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(ii) that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the Fund’s portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the Fund’s portfolio (including gross notional exposures). Instead, the Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund’s investment in futures and options (including options on futures) referencing Eurodollars and sovereign debt issued by the United States (i.e., Treasury Securities) and other ‘‘Group of Seven’’ countries 59 where such futures and options contracts are listed on an exchange that is an ISG member or an exchange with which the Exchange has a comprehensive surveillance sharing agreement (‘‘Eurodollar and G–7 Sovereign Futures and Options’’). The Fund’s investment in Eurodollar and G– 7 Sovereign Futures and Options will not be subject to the concentration limits provided in Nasdaq Rule 5735(b)(1)(D)(ii). For purposes of this requirement, the weight of the applicable Exchange-Traded Derivatives will be calculated based on the mark-tomarket value or exposure of such Exchange-Traded Derivatives. The Exchange believes that, notwithstanding that the Fund would not meet a limited number of ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1) in order to be able to satisfy its investment objective, the Exchange will be able to appropriately monitor and surveil trading in the underlying investments, including those that do not meet the ‘‘generic’’ listing requirements. The Exchange also notes that the parameters around the Fund’s portfolio holdings are generally consistent with the parameters approved by the Commission prior to adoption of ‘‘generic’’ listing requirements for actively-managed ETFs.60 In addition, 59 The ‘‘Group of Seven’’ or G–7 countries consist of the United States, Canada, France, Germany, Italy, Japan and the United Kingdom. 60 See, e.g., Securities Exchange Act Release Nos. 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR–NYSEArca–2015–73) (granting approval for the listing of shares of the Guggenheim E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES the Fund will be well diversified. For these reasons, the Exchange believes that it is appropriate and in the public interest to approve listing and trading of Shares of the Fund on the Exchange. As further described in the ‘‘Statutory Basis’’ section below, deviations from the generic requirements are necessary for the Fund to achieve its investment objective and efficiently manage the risks associated with its investments, and any possible risks have been fully mitigated and addressed through the alternative limits proposed by the Exchange. In addition, many of the changes requested are generally consistent with previous filings approved by the Commission.61 Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR–NYSEArca– 2011–95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund (now known as the PIMCO Active Bond ExchangeTraded Fund)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR–NYSEArca–2013–122) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund). The investments of the Guggenheim Total Return Bond ETF include a wide variety of U.S. and foreign fixed income instruments (including Private ABS/MBS), preferred securities, cash equivalents, other ETFs and listed and over-the-counter derivatives and are managed in a manner that appears to be generally consistent with that proposed for the Fund. Consistent with the requests made in this proposed rule change, the Commission’s approval of the listing of shares of the Guggenheim Total Return Bond ETF did not include many of the conditions imposed by the generic listing standards under Nasdaq Rule 5735; the Commission’s approval did not impose limits regarding the total notional size of the ETF’s investment in over-the-counter derivatives, did not impose concentration limits on the ETF’s investment in listed derivatives and did not require compliance with the same criteria as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B). The order approving investments in derivatives by the PIMCO Total Return Exchange Traded Fund described investments in both over-the-counter and listed derivatives, but did not impose limits regarding the total notional size of the ETF’s investments in over-the-counter derivatives, did not impose concentration limits on the ETF’s investments in listed derivatives, and did not impose limitations on investments in listed derivatives whose principal market is not a member of ISG or is a market with which its listing exchange does not have a comprehensive surveillance sharing agreement. 61 See, e.g., Securities Exchange Act Release Nos. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR–NYSEArca–2017–09) (approving up to 50% of the fund’s assets (calculated on the basis of aggregate gross notional value) to be invested in over-the-counter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund’s investments, including forwards, overthe-counter options, and over-the-counter swaps); 78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR–NASDAQ–2016–061) (approving investment of up to 20% of the fund’s net assets in, among other things, non-exchange-traded equity securities acquired in conjunction with the fund’s event-driven strategy, including securities acquired by the fund as a result of certain corporate events including reorganizations); 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR– NYSEArca–2015–73) (permitting (i) investments in over-the-counter and listed derivatives without imposing limits on the total notional size of the VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 Net Asset Value The Fund’s administrator will calculate the Fund’s net asset value (‘‘NAV’’) per Share as of the close of regular trading (normally 4:00 p.m., Eastern time (‘‘E.T.’’)) on each day the New York Stock Exchange is open for business. NAV per Share will be calculated for the Fund by taking the value of the Fund’s total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing such amount by the total number of Shares outstanding. The result, rounded to the nearest cent, will be the NAV per Share (although creations and redemptions will be processed using a price denominated to the fifth decimal point, meaning that rounding to the nearest cent may result in different prices in certain circumstances). Impact on Arbitrage Mechanism The Manager and the Sub-Advisers believe there will be minimal, if any, impact on the arbitrage mechanism for the Fund as a result of its use of derivatives. The Manager and the SubAdvisers understand that market makers and participants should be able to value derivatives as long as the positions are disclosed with relevant information. The Manager and the Sub-Advisers believe that the price at which Shares trade will continue to be disciplined by arbitrage opportunities created by the ability to purchase or redeem creation Shares at their NAV, which should ensure that Shares will not trade at a material discount or premium in relation to their NAV. The Manager and the Sub-Advisers do not believe that there will be any significant impact on the settlement or operational aspects of the Fund’s arbitrage mechanism due to the use of ETF’s investments in over-the-counter derivatives and without imposing concentration limits on the ETF’s investments in listed derivatives and (ii) permitting investments in a wide variety of fixed income instruments without compliance with the same criteria as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B)); 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR–NYSEArca–2013–122) (permitting investments in both over-the-counter and listed derivatives, but without imposing limits regarding the total notional size of the ETF’s investments in over-the-counter derivatives, without imposing concentration limits on the ETF’s investments in listed derivatives, and without imposing limitations on investments in listed derivatives whose principal market is not a member of ISG or is a market with which its listing exchange does not have a comprehensive surveillance sharing agreement); and 69061 (March 7, 2013), 78 FR 15990 (March 13, 2013) (SR–NYSEArca–2013–01) (approving investments in non-agency commercial MBS and non-agency residential MBS without a fixed limit but consistent with the fund’s objective of investing up to 80% of its assets in investment grade fixed-income securities). PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 1071 derivatives. Because derivatives generally are not eligible for in-kind transfer, they will typically be substituted with a ‘‘cash in lieu’’ amount when the Fund processes purchases or redemptions of creation units in-kind. Creation and Redemption of Shares The Fund will issue Shares of the Fund at NAV only with authorized participants (‘‘APs’’) and only in aggregations of at least 50,000 shares (each aggregation is called a ‘‘Creation Unit’’) or multiples thereof, on a continuous basis through the Distributor, without a sales load, at the NAV next determined after receipt, on any Business Day, of an order in proper form. A ‘‘Business Day’’ is defined as any day that the Trust is open for business, including as required by Section 22(e) of the Act. The consideration for purchase of Creation Units of the Fund consists of an ‘‘in-kind’’ deposit of a designated portfolio of securities and/or instruments that will conform pro rata to the holdings of the Fund (except in the circumstances described in the Fund’s Statement of Additional Information (the ‘‘SAI’’)) (the ‘‘Deposit Securities’’) and/or an amount of cash. If there is a difference between the NAV attributable to a Creation Unit and the aggregate market value of the Deposit Securities or Redemption Securities (defined below) exchanged for the Creation Unit, the party conveying the instruments with the lower value will pay to the other an amount in cash equal to that difference (the ‘‘Cash Component’’). Together, the Deposit Securities and the Cash Component will constitute the ‘‘Fund Deposit,’’ which will represent the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Deposit Securities and the securities and/or instruments that will be delivered in an in-kind transfer in a redemption (‘‘Redemption Securities’’) will be identical. Purchases and redemptions of Creation Units may be made in whole or in part on a cash basis, rather than inkind, only under the circumstances described in the Fund’s SAI. To be eligible to place orders with respect to creations and redemptions of Creation Units, an entity must have executed an agreement with the Distributor, subject to acceptance by the transfer agent, with respect to creations and redemptions of Creation Units. Each such entity (an AP) must be (i) a brokerdealer or other participant in the clearing process through the continuous net settlement system of the National Securities Clearing Corporation E:\FR\FM\09JAN1.SGM 09JAN1 1072 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES (‘‘NSCC’’) or (ii) a Depository Trust Company participant. When the Fund permits Creation Units to be issued principally or partially in-kind, the Fund will cause to be published, through the NSCC, on each Business Day, prior to the opening of trading on the Exchange (currently, 9:30 a.m. E.T.), the identity and the required number of each Deposit Security and the amount of the Cash Component (if any) to be included in the current Fund Deposit (based on information at the end of the previous Business Day). All orders to create Creation Units must be received by the Distributor within a one-hour window after the closing time of the regular trading session on the Exchange (‘‘Closing Time’’) (ordinarily between 4:00 p.m. E.T. and 5:00 p.m. E.T.) on the date such order is placed in order to receive the NAV on the next Business Day immediately following the date the order was placed. Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form on a Business Day and only through an AP. The Fund will not redeem Shares in amounts less than a Creation Unit (except the Fund may redeem shares in amounts less than a Creation Unit in the event the Fund is being liquidated). When the Fund permits Creation Units to be redeemed principally or partially in-kind, the Fund will cause to be published, through the NSCC, immediately prior to the opening of business on the Exchange (currently, 9:30 a.m., E.T.) on each Business Day, the identity of the Redemption Securities and/or an amount of cash that will be applicable to redemption requests received in proper form on that day. The Redemption Securities will be identical to the Deposit Securities. In order to redeem Creation Units of the Fund, an AP must submit an order to redeem for one or more Creation Units. All such orders must be received by the Distributor within a one-hour window after the Closing Time (ordinarily between 4:00 p.m. E.T. and 5:00 p.m. E.T.) in order to receive the NAV on the next Business Day immediately following the date the order was placed. Availability of Information The Fund’s website (www.leggmason.com), which will be publicly available prior to the public offering of Shares, will include a form of the prospectus for the Fund that may be downloaded. The website will include the Shares’ ticker, CUSIP and VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 exchange information, along with additional quantitative information updated on a daily basis, including, for the Fund: (1) Daily trading volume, the prior Business Day’s reported NAV and closing price, mid-point of the bid/ask spread at the time of calculation of such NAV (the ‘‘Bid/Ask Price’’),62 and a calculation of the premium and discount of the Bid/Ask Price against the NAV; and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters. On each Business Day, before commencement of trading in Shares in the Regular Market Session 63 on the Exchange, the Fund will disclose on its website the identities and quantities of the portfolio of securities and other assets (the ‘‘Disclosed Portfolio’’ as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form the basis for the Fund’s calculation of NAV at the end of the Business Day.64 The Fund’s disclosure of derivative positions in the Disclosed Portfolio will include sufficient information for market participants to use to value these positions intraday. On a daily basis, the Fund will disclose on the Fund’s website the following information regarding each portfolio holding, as applicable to the type of holding: Ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding), the identity of the security or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and percentage weighting of the holding in the Fund’s portfolio.65 The website information will be publicly available at no charge. 62 The Bid/Ask Price of the Fund will be determined using the midpoint of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fund’s NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. 63 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange: (1) PreMarket Session from 4 a.m. to 9:30 a.m., E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 4:15 p.m., E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 p.m. to 8 p.m., E.T.). 64 Under accounting procedures to be followed by the Fund, trades made on the prior Business Day (‘‘T’’) will be booked and reflected in NAV on the current Business Day (‘‘T+1’’). Accordingly, the Fund will be able to disclose at the beginning of the Business Day the portfolio that will form the basis for the NAV calculation at the end of the Business Day. 65 See Nasdaq Rule 5735(c)(2). PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 In addition, for the Fund, an estimated value, defined in Rule 5735(c)(3) as the ‘‘Intraday Indicative Value,’’ that reflects an estimated intraday value of the Fund’s Disclosed Portfolio, will be disseminated. Moreover, the Intraday Indicative Value, available on the Nasdaq Information LLC proprietary index data service,66 will be based upon the current value for the components of the Disclosed Portfolio and will be updated and widely disseminated by one or more major market data vendors and broadly displayed at least every 15 seconds during the Regular Market Session. The Intraday Indicative Value will be based on quotes and closing prices provided by a dealer who makes a market in those instruments. Premiums and discounts between the Intraday Indicative Value and the market price may occur. This should not be viewed as a ‘‘real time’’ update of the NAV per Share of the Fund, which is calculated only once a day. The dissemination of the Intraday Indicative Value, together with the Disclosed Portfolio, will allow investors to determine the value of the underlying portfolio of the Fund on a daily basis and will provide a close estimate of that value throughout the trading day. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the Consolidated Tape Association (‘‘CTA’’) plans for the Shares and for the following U.S. securities, to the extent that they are exchange-listed securities: Work Out Securities, Non-Convertible Preferred Securities, Equity-Related Warrants, convertible fixed income securities and ETFs. Price information for U.S. exchange-listed options will be available via the Options Price Reporting Authority and for other U.S. exchange-listed derivative instruments 66 Currently, the Nasdaq Global Index Data Service (‘‘GIDS’’) is the Nasdaq global index data feed service, offering real-time updates, daily summary messages, and access to widely followed indexes and Intraday Indicative Values for ETFs. GIDS provides investment professionals with the daily information needed to track or trade Nasdaq indexes, listed ETFs, or third-party partner indexes and ETFs. E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES will be available from the applicable listing exchange and from major market data vendors. Price information for restricted securities, including Regulation S and Rule 144A instruments, will be available from major market data vendors. Money Market Funds are typically priced once each Business Day and their prices will be available through the applicable fund’s website or from major market data vendors. For exchange-listed securities (including foreign exchange-listed securities), equities traded in the overthe-counter market (including Work Out Securities, Non-Convertible Preferred Securities and ETFs), Exchange-Traded Derivatives, OTC Derivatives, Debt and fixed income securities (including convertible fixed income securities), warrants on fixed income securities and Equity-Related Warrants, intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable). Price information will also be available from feeds from market data vendors, published or other public sources, or online information services for exchange-listed securities (including foreign exchange-listed securities), equities traded in the over-the-counter market (including Work Out Securities, Non-Convertible Preferred Securities and ETFs), Exchange-Traded Derivatives, Debt and fixed income securities, warrants on fixed income securities and Equity-Related Warrants. Additionally, the Trade Reporting and Compliance Engine (‘‘TRACE’’) of the Financial Industry Regulatory Authority (‘‘FINRA’’) will be a source of price information for corporate bonds, privately-issued securities, MBS and ABS, to the extent transactions in such securities are reported to TRACE.67 Intraday and other price information related to U.S. government securities, Money Market Funds, and other cash equivalents that are traded over-thecounter also will be available through subscription services, such as Bloomberg, Markit and Thomson Reuters, which can be accessed by APs and other investors. Electronic Municipal Market Access (‘‘EMMA’’) 67 Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules. Generally, such debt securities will have at issuance a maturity that exceeds one calendar year. For fixed income securities that are not reported to TRACE, (i) intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable) and (ii) price information will be available from feeds from market data vendors, published or other public sources, or online information services, as described above. VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 will be a source of price information for municipal bonds. Pricing for repurchase transactions and reverse repurchase agreements entered into by the Fund are not publicly reported. Prices are determined by negotiation at the time of entry with counterparty brokers, dealers and banks. Additional information regarding the Fund and the Shares, including investment strategies, risks, creation and redemption procedures, fees, Fund holdings’ disclosure policies, distributions and taxes will be included in the Registration Statement. Investors will also be able to obtain the SAI, the Fund’s annual and semi-annual reports (together, ‘‘Shareholder Reports’’), and its Form N–CSR and Form N–SAR, filed twice a year, except the SAI, which is filed at least annually. The Fund’s SAI and Shareholder Reports will be available free upon request from the Fund, and those documents and the Form N–CSR and Form N–SAR may be viewed on-screen or downloaded from the Commission’s website at www.sec.gov. Initial and Continued Listing The Shares will be subject to Nasdaq Rule 5735, which sets forth the initial and continued listing criteria applicable to Managed Fund Shares. The Exchange represents that, for initial and continued listing, the Fund must be in compliance with Rule 10A–3 68 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Nasdaq will halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121, including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the other assets constituting the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the 68 See PO 00000 maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. Trading Rules Nasdaq deems the Shares to be equity securities, thus rendering trading in the Shares subject to Nasdaq’s existing rules governing the trading of equity securities. Nasdaq will allow trading in the Shares from 4:00 a.m. until 8:00 p.m., E.T. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum price variation for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $0.01. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both Nasdaq and also FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.69 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchangelisted securities and instruments held by the Fund (including ETFs, exchangelisted equities, exchange-listed options, futures contracts and exchange-listed swaps) with other markets and other entities that are members of ISG and with which the Exchange has comprehensive surveillance sharing agreements,70 and FINRA and the 69 FINRA surveils trading on the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. 70 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the 17 CFR 240.10A–3. Frm 00061 Fmt 4703 Sfmt 4703 1073 Continued E:\FR\FM\09JAN1.SGM 09JAN1 1074 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES Exchange both may obtain information regarding trading in the Shares, the exchange-listed securities, derivatives and other instruments held by the Fund from markets and other entities that are members of ISG, which include securities and futures exchanges and swap execution facilities, or with which the Exchange has in place a comprehensive surveillance sharing agreement.71 Moreover, FINRA, on behalf of the Exchange, will be able to access, as needed, trade information for certain fixed income securities held by the Fund reported to FINRA’s TRACE and, with respect to municipal securities, EMMA. All of the Fund’s net assets that are invested in equity securities other than Work Out Securities that are exchangelisted (which consist of NonConvertible-Preferred Securities and Equity-Related Warrants that are exchange-listed, and ETFs) will be invested in securities that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq members with respect to recommending transactions in the Shares to customers; (3) how information regarding the Intraday Indicative Value and the Disclosed Portfolio is disseminated; (4) the risks involved in trading the Shares during the Pre-Market and Post-Market Sessions when an updated Intraday Indicative Value will not be calculated or publicly disseminated; (5) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a Exchange has in place a comprehensive surveillance sharing agreement. 71 As noted above, no more than 10% of the net assets of the Fund may be invested in ExchangeTraded Derivatives whose principal market is not a member of ISG or a market with which the Exchange has a comprehensive surveillance sharing agreement. VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 transaction; and (6) trading information. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Fund. Members purchasing Shares from the Fund for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. Additionally, the Information Circular will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Circular will also disclose the trading hours of the Shares of the Fund and the applicable NAV Calculation Time for the Shares. The Information Circular will disclose that information about the Shares of the Fund will be publicly available on the Fund’s website. Continued Listing Representations All statements and representations made in this filing regarding (a) the description of the portfolio or reference assets, (b) limitations on portfolio holdings or reference assets, (c) dissemination and availability of the reference asset or intraday indicative values, or (d) the applicability of Exchange listing rules shall constitute continued listing requirements for listing the Shares on the Exchange. In addition, the issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the Nasdaq 5800 Series. 2. Statutory Basis Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in general and Section 6(b)(5) of the Act in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 impediments to and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule 5735. The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both the Exchange and FINRA, on behalf of the Exchange, which are designed to deter and detect violations of Exchange rules and applicable federal securities laws and are adequate to properly monitor trading in the Shares in all trading sessions. The Manager and the Sub-Advisers are affiliated with a broker-dealer and have implemented, and will maintain, a fire wall with respect to its broker-dealer affiliate regarding access to information concerning proposed changes to the composition and/or changes to the Fund’s portfolio prior to implementation. In addition, paragraph (g) of Nasdaq Rule 5735 further requires that personnel who make decisions on an investment company’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material, nonpublic information regarding the investment company’s portfolio. The Fund’s investments, including derivatives, will be consistent with the Fund’s investment objectives, applicable legal requirements 72 and will not be used for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark (although derivatives may have embedded leverage). Although the Fund will be permitted to borrow as permitted under the 1940 Act, it will not be operated as a ‘‘leveraged ETF,’’ i.e., it will not be operated in a manner designed to seek leveraged returns or a multiple or inverse multiple of the performance of an underlying reference index.73 The Fund may engage in frequent and active trading of portfolio investments to achieve its investment objective. The Exchange believes that, notwithstanding that the Fund would not meet all of the ‘‘generic’’ listing 72 As noted above, the Fund will limit its investments in illiquid securities or other illiquid assets to an aggregate amount of 15% of its net assets (calculated at the time of investment), as required by the Commission. 73 As noted above, the Fund will not invest in leveraged, inverse or inverse leveraged ETFs. E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES requirements of Nasdaq Rule 5735(b)(1), the Fund will not be subject to manipulation, the investments of the Fund will be able to be monitored and surveilled by the Exchange and risks will be mitigated by alternative limits imposed by the Exchange. As a result, it is in the public interest to approve listing and trading of Shares of the Fund on the Exchange pursuant to the requirements set forth herein. Deviations from the generic requirements are necessary for the Fund to achieve its investment objective in a cost-effective manner that maximizes investors’ returns and to manage the risks associated with its investments, and the Exchange proposes that the Fund will be required to comply with alternative requirements that are customized to address the objectives of Section 6(b)(5) of the Act, as described herein. Further, the strategy and investments of the Fund are substantially similar to those of other ETFs previously approved by the Commission, which have operated safely and without disrupting the market for several years.74 The Fund will not comply with the requirements in Nasdaq Rule 5735(b)(1) regarding the use of aggregate gross notional value or exposure of derivatives when calculating the weight of such derivatives or the exposure that such derivatives provide to underlying reference assets, including the requirements in Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), 5735(b)(1)(E) and 5735(b)(1)(F). Instead, the Exchange proposes that for the purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), and any alternative requirements proposed by the Exchange, the Fund will use the mark-to-market value or exposure of its derivatives in calculating the weight of such derivatives or the exposure that such derivatives provide to their reference assets. The Exchange believes that this alternative requirement is appropriate because the mark-to-market value or exposure is a more accurate measurement of the actual exposure incurred by the Fund in connection with a derivatives position.75 74 See, e.g., Securities Exchange Act Release Nos. 66321 (February 3, 2012) 77 FR 6850 (February 9, 2012) (SR–NYSEArca–2011–95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund); 72666 (July 24, 2014) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund); and 76719 (December 21, 2015) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF). 75 As previously noted, the mark-to-market approach is consistent with the valuation methodology for derivatives for asset coverage purposes advocated by the Commission in proposed VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 The Fund will not meet the requirement in Nasdaq Rule 5735(b)(1)(B)(v) that Private ABS/MBS in the Fund’s portfolio account, in the aggregate, for no more than 20% of the weight of the fixed income portion of the Fund’s portfolio. However, the Fund will limit the holdings in Private ABS/ MBS to 30% of the weight of the fixed income portion of the Fund’s portfolio.76 The Exchange believes that this limitation on the Fund’s investment in Private ABS/MBS, which is consistent with a similar limitation in a previous filing for the listing of an ETF approved by the Commission,77 is appropriate to provide the Fund with sufficient flexibility to invest in Private ABS/MBS, while still imposing a reasonable limit on such investments, consistent with the mandate in Section 6(b) of the Act to facilitate transactions in securities while protecting investors and the public interest. Private ABS/ MBS held by the Fund are expected to provide investors with: (i) Diversification as compared to a portfolio more heavily weighted towards agency and GSE ABS and MBS (‘‘Government ABS/MBS’’), municipal securities and investment grade corporate debt; (ii) the potential for higher returns; and (iii) reasonable liquidity. Although the higher threshold will include a broader spectrum of credit quality among the issuers, this moderately increased risk can be appropriately addressed through disclosure and substantially mitigated through the careful credit monitoring Rule 18f–4 under the 1940 Act. See Derivatives Rule Proposing Release. In a white paper published by staff of the Division of Economic and Risk Analysis of the SEC (‘‘DERA’’) in connection with the proposal of Rule 18f–4 under the 1940 Act, the staff of DERA noted that a derivative’s notional amount does not accurately reflect the risk of the derivative. See Daniel Deli, Paul Hanouna, Christof Stahel, Yue Tang and William Yost, Use of Derivatives by Registered Investment Companies (December 2015) at 10 (‘‘On the other hand, there are drawbacks to using notional amounts. First, because of differences in expected volatilities of the underlying assets, notional amounts of derivatives across different underlying asset generally do not represent the same unit of risk. For example, the level of risk associated with a $100 million notional of a S&P500 index futures is not equivalent to the level of risk of a $100 million notional of interest rate swaps, currency forwards or commodity futures.’’). 76 For purposes of this requirement, the weight of the Fund’s exposure to Private ABS/MBS referenced in derivatives shall be calculated based on the mark-to-market value or exposure of such derivatives. 77 See Securities Exchange Act Release No. 69061 (March 7, 2013), 78 FR 15990 (March 13, 2013) (SR– NYSEArca-2013–01) (approving investments in non-agency commercial MBS and non-agency residential MBS without a fixed limit but consistent with the fund’s objective of investing up to 80% of its assets in investment grade fixed-income securities). PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 1075 performed by the Sub-Adviser. In addition, current economic conditions, which include robust growth and economic strength, are significant mitigants to the risk of credit deterioration. The Sub-Adviser seeks to maximize the Fund’s investments in Private ABS/MBS during economic periods, such as that currently experienced in the U.S., of robust growth. To the extent that the economy were to weaken, the Sub-Adviser would re-evaluate the level at which the Fund seeks to invest in Private ABS/MBS. Given the benefits provided, including, most importantly, the opportunity for a fixed income investor to diversify the portfolio across fixed income classes and earn marginally greater returns, together with the protections of credit monitoring and liquidity management provided by the Sub-Adviser, the Exchange believes that a 30% limit, rather than the 20% limit used by the generic listing standard, is appropriate. Private ABS/MBS include a number of different types of securitized debt products, including credit card debt, student loans, auto debt and residential and commercial mortgage debt. Investment in a variety of sectors, rather than simply residential mortgages comprising Government ABS/MBS, reduces concentration and diversifies sources of risk. Private ABS/MBS held by the Fund will be generally liquid instruments.78 The Sub-Adviser will be able to trade out of the instruments that do not satisfy Fund credit and other criteria. U.S. Private ABS/MBS are trade-reported through TRACE,79 and 78 The Sub-Adviser, using data from TRACE, compiled weekly trading data for Private ABS/MBS over a period of three years. A chart summarizing this data, which is available at https:// www.leggmason.com/content/dam/legg-mason/ documents/en/regulatory-documents/letters-andnotices/abs-mbs-trading-activity.pdf, shows that Private ABS/MBS experienced regular and reasonable liquidity over the prior three-year period. During that time period the weekly trading activity for non-agency, non-GSE residential MBS ranged from approximately $16 billion to $48 billion (including both investment grade and noninvestment grade), the weekly trading activity for non-agency, non-GSE commercial MBS has ranged from approximately $21 billion to $57 billion (including both investment grade and noninvestment grade), and the weekly trading activity for non-agency, non-GSE ABS (other than MBS) ranged from approximately $17 billion to $35 billion (including both investment grade and noninvestment grade). 79 Although foreign Private ABS/MBS are not trade-reported through TRACE, foreign Private ABS/MBS, as of the date of this application, are expected to constitute a very small percentage of the Fund’s net assets. Based on the Fund’s strategy and current market conditions, foreign Private ABS/ MBS, as of the date of this application, are expected to constitute approximately 1% of the Fund’s net assets, but that percentage could change in the future. E:\FR\FM\09JAN1.SGM 09JAN1 1076 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES the Sub-Adviser and the Fund will maintain liquidity policies and procedures pursuant to which the SubAdviser will monitor the liquidity of the Fund’s Private ABS/MBS investments and continuously manage any associated risks.80 The instruments are cleared through The Depository Trust Company. The Fund carries out its own credit analysis of Private ABS/MBS issuers 81 and conducts an extensive analysis of the features of the proposed investments. The features that the Fund looks for in selecting Private ABS/MBS include good credit quality, liquidity, bankruptcy remoteness, lower prepayment risk, overcollateralization, excess spread, amortization, professional servicing for and reporting to investors, and diversity of payers within each underlying pool. The SubAdviser regularly monitors the credit quality of the issuers of Private ABS/ MBS for compliance with the credit quality, liquidity and other investment requirements. The Fund will not meet the requirement that at least 90% of the fixed income weight of the Fund’s portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) 82 because some Private ABS/MBS cannot satisfy the criteria in Nasdaq Rule 5735(b)(1)(B)(iv).83 The Exchange 80 As part of these policies and procedures, the Sub-Adviser rates the liquidity of the Fund’s investments (including Private ABS/MBS) using data on bid-ask spreads on the investments and haircut requirements for the investment when they are delivered in connection with repurchase agreements. 81 The Sub-Adviser has a fixed-income investment team that maintains and updates credit opinions on all Private ABS/MBS investments made by the team on an ongoing basis. This research allows the investment team to form a comprehensive view of the collateral pool associated with an investment. The team works with legal professionals as well to understand and track the legal documents associated with each distinct deal structure. 82 Nasdaq Rule 5735(b)(1)(B)(iv) provides that component securities that in the aggregate account for at least 90% of the fixed income weight of the Fund’s portfolio must be either: (a) From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Act; or (e) from issuers that are a government of a foreign country or a political subdivision of a foreign country. 83 Private ABS/MBS are generally issued by special purpose vehicles, so the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) regarding an issuer’s market capitalization and the remaining principal amount of an issuer’s securities are typically unavailable with respect to Private ABS/MBS, even though such Private ABS/MBS may own significant assets. VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 proposes, in the alternative, to require the Fund to ensure that the investments in the fixed income portion of the Fund’s portfolio other than Private ABS/ MBS comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv).84 The Exchange believes that this alternative limitation is appropriate because Nasdaq Rule 5735(b)(1)(B)(iv) does not appear to be designed for structured finance vehicles such as Private ABS/ MBS, and the overall weight of Private ABS/MBS held by the Fund will be limited to 30% of the fixed income portion of the Fund’s portfolio, as described above. As discussed above, although Private ABS/MBS will be excluded for the purposes of compliance with Nasdaq Rule 5735(b)(1)(B)(iv), the Fund’s portfolio is consistent with the statutory standard as a result of the diversification provided by the investments, the benefits related to the opportunity for higher returns, and the Sub-Adviser’s selection process, which closely monitors investments to ensure maintenance of credit and liquidity standards and relies on the higher investment levels in these instruments during periods of U.S. economic strength. The Fund will not meet the equity requirements in Nasdaq Rule 5735(b)(1)(A) with respect to NonConvertible Preferred Securities, Work Out Securities and Equity-Related Warrants, but will satisfy these requirements with respect to the ETFs in which the Fund will invest.85 In order to reflect this deviation, the Exchange proposes that (i) the Fund’s investments in equity securities other than Non-Convertible Preferred Securities, Work Out Securities and Equity-Related Warrants shall comply with the equity requirements in Nasdaq Rule 5735(b)(1)(A) 86 and (ii) the weight of Non-Convertible Preferred Securities, Equity-Related Warrants and Work Out Securities in the Fund’s portfolio shall together not exceed 30% of the Fund’s net assets. The Exchange believes that 84 For purposes of this requirement, the weight of the Fund’s exposure to any fixed income securities referenced in derivatives shall be calculated based on the mark-to-market value or exposure of such derivatives. 85 Nasdaq Rule 5735(b)(1)(A)(i)(e) generally requires the U.S. equity securities to be listed on a national securities exchange. The Exchange notes that shares of Money Market Funds are not considered equity securities for the purposes of Nasdaq Rule 5735(b)(1)(A), and that there is no limitation on the percentage of the Fund’s portfolio invested in shares of Money Market Funds, in accordance with Nasdaq Rule 5735(b)(1)(C)(i). 86 These other equities will consist of ETFs (including money market ETFs) that provide exposure to fixed income securities and Debt. The weight of such ETFs in the Fund’s portfolio shall not be limited. PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 these alternative limitations are appropriate in light of the fact that the Non-Convertible Preferred Securities, Equity-Related Warrants and Work Out Securities are providing debt-oriented exposures or are received in connection with the Fund’s previous investment in Debt or fixed income securities, and all of the other equity securities held by the Fund will comply with the requirements of Nasdaq Rule 5735(b)(1)(A). The Fund will not meet the requirement in Nasdaq Rule 5735(b)(1)(E) that no more than 20% of the assets in the Fund’s portfolio may be invested in over-the-counter derivatives. The Fund proposes that no limit be placed on Interest Rate and Currency Derivatives, which are necessary and appropriate to allow the Manager and Sub-Advisers to risk manage the Fund, but that the weight of all other OTC Derivatives (e.g., credit default swaps) be limited to 10% of the net assets in the Fund’s portfolio. For purposes of this 10% limit on OTC Derivatives, the weight of such OTC Derivatives will be calculated based on the mark-to-market value or exposure of such OTC Derivatives. The Exchange believes that this alternative requirement, which is generally consistent with the requirement in a previous filing for the listing of an ETF approved by the Commission,87 is appropriate in light of the fact that Interest Rate and Currency Derivatives are among the most liquid investment instruments (including not only derivatives but also securities) in the market 88 (and are even more liquid than most non-government or government-guaranteed securities). Based on the data compiled by the SubAdviser in respect to its liquidity policy, these derivatives are among the most liquid investments traded. In addition, 87 See Securities Exchange Act Release No. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR– NYSEArca–2017–09) (approving up to 50% of the fund’s assets (calculated on the basis of aggregate gross notional value) to be invested in over-thecounter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund’s investments, including forwards, overthe-counter options, and over-the-counter swaps). 88 Trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, and 67% of this trading activity was in derivatives contracts such as currency or foreign exchange forwards, options and swaps (with the other 33% consisting of spot transactions). See Bank for International Settlements, Triennal Central Bank Survey, Foreign Exchange Turnover in April 2016, available at https://www.bis.org/publ/rpfx16fx.pdf (accessed November 2017). Trading in OTC interest rate derivatives averaged $2.7 trillion per day in April 2016. See Bank for International Settlements, Triennal Central Bank Survey, OTC Interest Rate Derivatives Turnover in April 2016, available at https://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017). E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices sradovich on DSK3GMQ082PROD with NOTICES most Interest Rate Derivatives traded by the Fund are centrally cleared by regulated clearing firms, and Interest Rate and Currency Derivatives are subject to trade reporting,89 and other robust regulation.90 Given the size of the trading market and the regulatory oversight of the markets, the Exchange believes that Interest Rate and Currency Derivatives are not readily subject to manipulation. The Exchange also believes that allowing the Fund to risk manage its portfolio through the use of Interest Rate and Currency Derivatives without limit is necessary to allow the Fund to achieve its investment objective and protect investors. The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(i) that at least 90% of the weight of the Fund’s holdings in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options, and swaps for which the Exchange may obtain information via the ISG from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement. Instead, the Exchange proposes that no more than 10% of the net assets of the Fund will be invested in Exchange-Traded 89 Transactions in Interest Rate and Currency Derivatives are required to be reported to a swap data repository, and transactions in Interest Rate Derivatives and certain Currency Derivatives (i.e., Currency Derivatives that are not excluded from the definition of a ‘‘swap’’, as described below) are also publicly reported pursuant to rules issued by the Commodity Futures Trading Commission (‘‘CFTC’’). See 17 CFR parts 43, 45 and 46. Pursuant to Section 1(a)(47)(E) of the CEA and a related determination by the Department of the Treasury, physicallysettled Currency Derivatives that meet the definition of ‘‘foreign exchange forwards’’ or ‘‘foreign exchange swaps’’ under Sections 1a(24)– (25) of the CEA that are entered into between eligible contract participants (as defined in the CEA) (‘‘Excluded Currency Derivatives’’) are excluded from the definition of a ‘‘swap’’ under the CEA. See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). However, as noted above, transactions in such Excluded Currency Derivatives are required to be reported to a swap data repository, but they are not subject to the public reporting requirements. 90 Interest Rate Derivatives and Currency Derivatives other than Excluded Currency Derivatives are comprehensively regulated as swaps under the CEA and regulations issued thereunder by the CFTC and other federal financial regulators. See, e.g., 17 CFR part 23 (capital and margin requirements for swap dealers, business conduct standards for swap dealers, and swap documentation requirements); 17 CFR part 50 (clearing requirements for swaps). While Excluded Currency Derivatives are not subject to all swap regulations, they are subject to the ‘‘business conduct standards’’ adopted by the CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 Derivatives whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement.91 The Exchange believes that this alternative limitation is appropriate because the overall limit on ExchangeTraded Derivatives whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement will still be low relative to the overall size of the Fund. The Fund will not meet the requirement in Nasdaq Rule 5735(b)(1)(D)(ii) that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the Fund’s portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the Fund’s portfolio (including gross notional exposures) because the Fund may maintain significant positions in Eurodollar and G–7 Sovereign Futures and Options. The Manager has indicated that obtaining exposure to these investments through futures contracts is often the most cost efficient method to achieve such exposure. The Exchange notes that Eurodollar and G–7 Sovereign Futures and Options are highly liquid investments 92 and are not subject to the 91 For purposes of this 10% limit, the weight of such Exchange-Traded Derivatives will be calculated based on the mark-to-market value or exposure of such Exchange-Traded Derivatives. 92 See CME Group, Interest Rate Futures Liquidity Metrics Reach New Highs (October 6, 2017), available at https://www.cmegroup.com/education/ interest-rates-liquidity-metrics-reach-newhighs.html (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on Eurodollars and Treasury Securities, including that during the first three quarters of 2017, Eurodollar futures and options traded through CME Group had an average daily open interest of approximately 53 million contracts and futures and options on Treasury Securities had an average daily open interest of approximately 15 million contracts); The Montreal Exchange, Statistics for Interest Rate Derivatives, Index Derivatives and Equity Derivatives (September 2017), available at https://www.m-x.ca/f_stat_en/ 1709_stats_en.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on Canadian sovereign debt, including that, as of September 2017, the open interest in futures and options on Canadian sovereign debt traded on The Montreal Exchange was approximately 560,000 contracts); Eurex Exchange, Benchmark Fixed Income Derivatives, available at https:// www.eurexchange.com/blob/115654/4c51e4b8 bc77355475b3b6f46afc0ef1/data/factsheet_eurex_ benchmark_fixed_income_derivatives.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on German sovereign debt, including that, as of July 2015, the open interest in futures on German sovereign debt traded on Eurex was approximately PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 1077 same concentration risks as ExchangeTraded Derivatives referencing other assets because of such liquidity. Further, the Exchange notes that the significantly diminished risk of Treasury Securities is reflected in their exclusion from the concentration requirements applicable to fixed income securities in Nasdaq Rule 5735(b)(1)(B)(ii). The Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund’s investment in Eurodollar and G–7 Sovereign Futures and Options.93 The Exchange believes that this alternative limitation is appropriate to provide the Fund with sufficient flexibility and because of the highly liquid and transparent nature of 3,000,000 contracts and the open interest in options on German sovereign debt futures traded on Eurex was approximately 3,000,000 contracts); Eurex Exchange, Eurex Exchange Euro-BTP Futures, Italian Government Bond Futures, available at https://www.eurexchange.com/blob/115624/ 6a1281939d15ddbab960af40da6f11dc/data/ factsheet_eurex_euro_btp_futures_on_italian_ government_bonds.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on Italian sovereign debt, including that the open interest peaks in 2017 for futures on long-term and short-term Italian sovereign debt traded on Eurex was approximately 450,000 and 270,000 contracts, respectively); Eurex Exchange, Euro-OAT Derivatives, French Government Bond Futures and Options, available at https://www.eurexchange.com/blob/115652/48198ec 577f7b3b0ac44d4c5a39ed0de/data/factsheet_ eurex_euro_oat_futures_on_french_government_ bonds.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on French sovereign debt, including that, as of July 2017, the open interest in futures on longterm French sovereign debt traded on Eurex was approximately 600,000 contracts); Intercontinental Exchange, Gilt Futures Overview, available at https://www.theice.com/publicdocs/futures/Gilt_ Futures_Overview.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on British sovereign debt, including that, as of the third quarter of 2014, the open interest in futures on long-term British sovereign debt traded on the Intercontinental Exchange was approximately 400,000 contracts); Osaka Exchange, Japanese Government Bond Futures & Options, available at https:// www.jpx.co.jp/english/derivatives/products/jgb/jgbfutures/tvdivq0000003n94-att/JGB_FUT_OP_E.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on Japanese sovereign debt, including that as of July 2016, the open interest in futures on 10year Japanese sovereign debt traded on the Osaka Exchange was approximately 80,000 contracts). The Exchange also notes that the Commission has previously granted exemptions under the Act to facilitate the trading of futures on sovereign debt issued by each of the Group of Seven countries (among other countries) and that such exemptions were based in part on the Commission’s assessment of the sufficiency of the credit ratings and liquidity of such sovereign debt. See 17 CFR 240.3a12–8; Securities Exchange Act Release No. 41453 (May 26, 1999), 64 FR 29550 (June 2, 1999). 93 For purposes of this requirement, the weight of the applicable derivatives will be calculated based on the mark-to-market value or exposure of such derivatives. E:\FR\FM\09JAN1.SGM 09JAN1 sradovich on DSK3GMQ082PROD with NOTICES 1078 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices Eurodollar and G–7 Sovereign Futures and Options. Further, as described above, the G–7 Sovereign Futures and Options in which the Fund invests will be listed on an exchange that is an ISG member or an exchange with which the Exchange has a comprehensive surveillance sharing agreement. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily every day that the Fund is traded, and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information will be publicly available regarding the Fund and the Shares, thereby promoting market transparency. Moreover, the Intraday Indicative Value, available on the Nasdaq Information LLC proprietary index data service, will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Exchange’s Regular Market Session. On each Business Day, before commencement of trading in the Shares in the Regular Market Session on the Exchange, the Fund will disclose on its website the Disclosed Portfolio of the Fund that will form the basis for the Fund’s calculation of NAV at the end of the Business Day. Information regarding market price and trading volume of the Shares will be conditionally available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares and for the following U.S. securities, to the extent they are exchange-listed: Work Out Securities, Non-Convertible Preferred Securities, Equity-Related Warrants, convertible fixed income securities and ETFs. Price information for U.S. exchange-listed options will be available via the Options Price Reporting Authority and for other U.S. exchange-listed derivative instruments will be available from the applicable listing exchange and from major market data vendors. Price information for restricted securities, including Regulation S and Rule 144A instruments, will be available from major market data vendors, brokerdealers and trading platforms. Money Market Funds are typically priced once each Business Day and their prices will be available through the applicable VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 fund’s website or from major market data vendors. For exchange-listed securities (including foreign exchange-listed securities), equities traded in the overthe-counter market (including Work Out Securities, Non-Convertible Preferred Securities and ETFs), Exchange-Traded Derivatives, OTC Derivatives, Debt and fixed income securities (including convertible fixed income securities), warrants on fixed income securities and Equity-Related Warrants, intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable). Price information will also be available from feeds from market data vendors, published or other public sources, or online information services for exchange-listed securities (including foreign exchange-listed securities), equities traded in the over-the-counter market (including Work Out Securities, Non-Convertible Preferred Securities and ETFs), Exchange-Traded Derivatives, Debt and fixed income securities, warrants on fixed income securities and Equity-Related Warrants. Additionally, TRACE will be a source of price information for corporate bonds, privately-issued securities, MBS and ABS, to the extent transactions in such securities are reported to TRACE.94 Intraday and other price information related to U.S. government securities, Money Market Funds, and other cash equivalents that are traded over-thecounter also will be available through subscription services, such as Bloomberg, Markit and Thomson Reuters, which can be accessed by APs and other investors. EMMA will be a source of price information for municipal bonds. Pricing for repurchase transactions and reverse repurchase agreements entered into by the Fund are not publicly reported. Prices are determined by negotiation at the time of entry with counterparty brokers, dealers and banks. The Fund’s website will include a form of the prospectus for the Fund and additional data relating to NAV and other applicable quantitative information. Moreover, prior to the commencement of trading, the Exchange will inform its members in an 94 Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules. Generally, such debt securities will have at issuance a maturity that exceeds one calendar year. For fixed income securities that are not reported to TRACE, (i) intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable) and (ii) price information will be available from market data vendors, as described above. PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 Information Circular of the special characteristics and risks associated with trading the Shares. Trading in the Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120 and 4121 or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of activelymanaged ETF that will enhance competition among market participants, to the benefit of investors and the marketplace. For the above reasons, Nasdaq believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that the proposed rule change will facilitate the listing and trading of an additional type of activelymanaged ETF that will enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission shall: (a) By order approve or disapprove such proposed rule change, E:\FR\FM\09JAN1.SGM 09JAN1 Federal Register / Vol. 83, No. 6 / Tuesday, January 9, 2018 / Notices or (b) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: sradovich on DSK3GMQ082PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2017–128 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–2017–128. 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 website (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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASDAQ–2017–128 and should be submitted on or before January 30, 2018. 95 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 15:58 Jan 08, 2018 Jkt 244001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.95 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–00161 Filed 1–8–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 32960; File No. 812–14821] Guggenheim Credit Income Fund, et al.; Notice of Application January 3, 2018. Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice. AGENCY: Notice of application for an order under sections 17(d) and 57(i) of the Investment Company Act of 1940 (the ‘‘Act’’) and rule 17d–1 under the Act to permit certain joint transactions otherwise prohibited by sections 17(d) and 57(a)(4) of the Act and rule 17d–1 under the Act. SUMMARY OF APPLICATION: Applicants request an order to permit certain business development companies (‘‘BDC’’) and closed-end management investment companies to co-invest in portfolio companies with each other and with affiliated investment funds. APPLICANTS: Guggenheim Credit Income Fund (the ‘‘Fund’’) (f/k/a Carey Credit Income Fund); Guggenheim Partners Investment Management, LLC (‘‘Guggenheim’’); Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Security Investors, LLC (collectively, together with Guggenheim, the ‘‘Existing Guggenheim Advisers’’); Guggenheim European Credit Fund, Guggenheim Private Debt Fund Note Issuer, LLC, Guggenheim Private Debt Fund, LLC, Guggenheim Private Debt Fund, Ltd., Guggenheim Private Debt Master Fund, LLC, Guggenheim Private Debt Fund Note Issuer 2.0, LLC, Guggenheim Private Debt Fund 2.0, LLC, Guggenheim Private Debt Fund 2.0, Ltd., Guggenheim Private Debt Master Fund 2.0, LLC, Guggenheim Private Debt MFLTB 2.0, LLC, NZC Guggenheim Fund LLC, NZC Guggenheim Fund Limited, NZC Guggenheim Master Fund Limited, NZCG Funding Ltd., NZCG Funding 2 Limited, South Dock Funding Limited, NZCG Feeder I, L.P., NZCG Funding 2, LLC, NZCG Funding LLC, Guggenheim U.S. Loan Fund, Guggenheim U.S. Loan Fund II, Guggenheim U.S. Loan Fund PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 1079 III, Guggenheim Opportunistic U.S. Loan and Bond Fund IV, GFI Fund, and GHY Fund (collectively, the ‘‘Existing Affiliated Investors’’). FILING DATES: The application was filed on September 22, 2017, and amended on November 22, 2017. HEARING OR NOTIFICATION OF HEARING: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on January 29, 2018, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F St. NE, Washington, DC 20549–1090. Applicants: Guggenheim and the Fund: 330 Madison Avenue, New York, NY 10017; the Existing Guggenheim Advisers and the Existing Affiliated Investors: 100 Wilshire Boulevard, 5th Floor, Santa Monica, CA 90401. FOR FURTHER INFORMATION CONTACT: Hae-Sung Lee, Attorney-Adviser, at (202) 551–7345 or Robert H. Shapiro, Branch Chief, at (202) 551–6821 (Chief Counsel’s Office, Division of Investment Management). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained via the Commission’s website by searching for the file number, or for an applicant using the Company name box, at https:// www.sec.gov/search/search.htm or by calling (202) 551–8090. Applicants’ Representations 1. The Fund is a Delaware statutory trust organized as a closed-end management investment company that has elected to be regulated as a BDC under the Act.1 The Fund serves as the 1 Section 2(a)(48) of the Act defines a ‘‘BDC’’ to be any closed-end investment company that operates for the purpose of making investments in securities described in sections 55(a)(1) through 55(a)(3) of the Act and makes available significant managerial assistance with respect to the issuers of such securities. E:\FR\FM\09JAN1.SGM 09JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 6 (Tuesday, January 9, 2018)]
[Notices]
[Pages 1062-1079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00161]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82439; File No. SR-NASDAQ-2017-128]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To List and Trade the Shares 
of the Western Asset Total Return ETF

January 3, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 20, 2017, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade the shares of the Western 
Asset Total Return ETF (the ``Fund''), a series of Legg Mason ETF 
Investment Trust (the ``Trust'') under Nasdaq Rule 5735 (``Managed Fund 
Shares'').\3\ The shares

[[Page 1063]]

of the Fund are collectively referred to herein as the ``Shares.''
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    \3\ The Commission approved Nasdaq Rule 5735 in Securities 
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 
20, 2008) (SR-NASDAQ-2008-039). There are already multiple actively-
managed funds listed on the Exchange. See, e.g., Securities Exchange 
Act Release Nos. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) 
(SR-NASDAQ-2017-039) (order approving listing and trading of 
Guggenheim Limited Duration ETF); 78592 (August 16, 2016), 81 FR 
56729 (August 22, 2016) (SR-NASDAQ-2016-061) (order approving 
listing and trading of First Trust Equity Market Neutral ETF); 78443 
(July 29, 2016), 81 FR 51517 (August 4, 2016) (SR-NASDAQ-2016-064) 
(order approving listing and trading of First Trust Strategic 
Mortgage REIT ETF); 71913 (April 9, 2014), 79 FR 21333 (April 15, 
2014) (SR-NASDAQ-2014-019) (order approving listing and trading of 
First Trust Managed Municipal ETF); 69464 (April 26, 2013), 78 FR 
25774 (May 2, 2013) (SR-NASDAQ-2013-036) (order approving listing 
and trading of First Trust Senior Loan Fund); 66489 (February 29, 
2012), 77 FR 13379 (March 6, 2012) (SR-NASDAQ-2012-004) (order 
approving listing and trading of WisdomTree Emerging Markets 
Corporate Bond Fund); see also filings for similar ETFs listed on 
other national securities exchanges: Securities Exchange Act Release 
Nos. 80657 (May 11, 2017) 82 FR 22702 (May 17, 2017) (SR-NYSE Arca-
2017-09) (order approving listing and trading of Janus Short 
Duration Income ETF); 79683 (December 23, 2016), 81 FR 96539 
(December 30, 2016) (SR-NYSEArca-2016-82) (order approving listing 
and trading of JPMorgan Diversified Event Driven ETF); 77904 (May 
25, 2016), 81 FR 35101 (SR-NYSE Arca-2016-17) (order approving 
listing and trading of JPMorgan Diversified Alternative ETF); 68870 
(February 8 2013), 78 FR 11245 (February 15, 2013) (SR-NYSEArca-
2012-139) (order approving listing and trading of First Trust 
Preferred Securities and Income ETF). The Exchange believes the 
proposed rule change raises no significant issues not previously 
addressed in those prior Commission orders.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    The Exchange proposes to list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares \4\ on the Exchange. The Fund will be an exchange-
traded fund (``ETF'') that is actively managed. The Shares will be 
offered by the Trust, which was established as a Maryland statutory 
trust on June 8, 2015.\5\ The Exchange notes that other actively-
managed, broad market fixed-income ETFs have been previously approved 
by the SEC prior to the adoption of ``generic'' listing standards for 
actively-managed ETFs.\6\ The Trust is registered with the Commission 
as an investment company under the 1940 Act and has filed a 
registration statement on Form N-1A (``Registration Statement'') with 
the Commission with respect to the Fund.\7\ The Fund will be a series 
of the Trust. The Fund intends to qualify each year as a regulated 
investment company (``RIC'') under Subchapter M of the Internal Revenue 
Code of 1986, as amended.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered as an investment 
company under the Investment Company Act of 1940 (15 U.S.C. 80a-1) 
(the ``1940 Act'') organized as an open-end investment company or 
similar entity that invests in a portfolio of securities selected by 
its investment adviser consistent with its investment objective and 
policies. In contrast, an open-end investment company that issues 
Index Fund Shares, listed and traded on the Exchange under Nasdaq 
Rule 5705, seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \5\ The Commission has issued an order, upon which the Trust may 
rely, granting certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 32391 (December 13, 2016) (File 
No. 812-14547) (the ``Exemptive Relief''). In addition, on December 
6, 2012, the staff of the Commission's Division of Investment 
Management (``Division'') issued a no-action letter (``No-Action 
Letter'') relating to the use of derivatives by actively-managed 
ETFs. See No-Action Letter dated December 6, 2012 from Elizabeth G. 
Osterman, Associate Director, Office of Exemptive Applications, 
Division of Investment Management. The No-Action Letter stated that 
the Division would not recommend enforcement action to the 
Commission under applicable provisions of and rules under the 1940 
Act if actively-managed ETFs operating in reliance on specified 
orders (which include the Exemptive Relief) invest in options 
contracts, futures contracts or swap agreements provided that they 
comply with certain representations stated in the No-Action Letter.
    \6\ See, e.g., Securities Exchange Act Release Nos. 76719 
(December 21, 2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca-
2015-73) (granting approval for the listing of shares of the 
Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 
6850 (February 9, 2012) (SR-NYSEArca-2011-95) (granting approval for 
the listing of shares of the PIMCO Total Return Exchange Traded Fund 
(now known as the PIMCO Active Bond Exchange-Traded Fund)); and 
72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-
2013-122) (granting approval to the use of derivatives by the PIMCO 
Total Return Exchange Traded Fund); see also infra note 60.
    \7\ See Post-Effective Amendment No. 27 to the Registration 
Statement on Form N-1A for the Trust (File Nos. 333-206784 and 811-
23096) as filed on August 8, 2017. The Trust will file an amendment 
to the Registration Statement as necessary to conform to the 
representations in this filing. The descriptions of the Fund and the 
Shares contained herein are based, in part, on information in the 
Registration Statement.
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    Legg Mason Partners Fund Advisor, LLC will be the investment 
manager (``Manager'') to the Fund. Western Asset Management Company 
will serve as the sub-adviser to the Fund (the ``Sub-Adviser'') \8\ and 
Western Asset Management Company Limited in London (``Western Asset 
London''), Western Asset Management Company Pte. Ltd. in Singapore 
(``Western Asset Singapore'') and Western Asset Management Company Ltd 
in Japan (``Western Asset Japan'') will each serve as the sub-sub-
advisers to the Fund (collectively, the ``Sub-Sub-Advisers'' and each, 
a ``Sub-Sub-Adviser'').\9\ Hereinafter, references to ``Sub-Adviser'' 
or ``Sub-Advisers'' include the Sub-Adviser and each applicable Sub-
Sub-Adviser. Legg Mason Investor Services, LLC (the ``Distributor'') 
will be the distributor of the Fund's Shares. The Manager, each of the 
Sub-Advisers and the Distributor are wholly-owned subsidiaries of Legg 
Mason, Inc. (``Legg Mason''). An entity that is not affiliated with 
Legg Mason, and which is named in the Registration Statement, will act 
as the administrator, accounting agent, custodian, and transfer agent 
to the Fund.
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    \8\ The Sub-Adviser is responsible for the day-to-day management 
of the Fund and, as such, typically makes all decisions with respect 
to portfolio holdings. The Manager has ongoing oversight 
responsibility.
    \9\ Each of the Sub-Sub-Advisers provides advisory services to 
the Fund relating to the Fund's investments. Sub-Sub-Advisers advise 
primarily on instruments traded in the region in which the Sub-Sub-
Adviser is located, but they may advise on portfolio instruments 
held by the Fund that are traded in other regions. Western Asset 
London generally advises on the Fund's portfolio holdings in non-
U.S. and non-Asian investment instruments and currencies (including 
through ETFs and derivative instruments that provide exposure to 
those instruments and currencies); Western Asset Japan generally 
advises on the Fund's portfolio holdings in Japanese investment 
instruments and currencies (including through ETFs and derivative 
instruments that provide exposure to those instruments and 
currencies); and Western Asset Singapore generally advises on the 
Fund's portfolio holdings in non-Japan, Asian investment instruments 
and currencies (including through ETFs and derivative instruments 
that provide exposure to those instruments and currencies).
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    Paragraph (g) of Rule 5735 provides that if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect and maintain 
a ``fire wall'' between the investment adviser and the broker-dealer 
with respect to access to information concerning the composition and/or 
changes to such investment company portfolio.\10\ In addition, 
paragraph (g) further requires that personnel who make decisions on the 
investment company's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of material, 
non-

[[Page 1064]]

public information regarding the investment company's portfolio.
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    \10\ An investment adviser to an investment company is required 
to be registered under the Investment Advisers Act of 1940 (the 
``Advisers Act''). As a result, the Manager and the Sub-Advisers and 
their related personnel are subject to the provisions of Rule 204A-1 
under the Advisers Act relating to codes of ethics. Rule 204A-1 
requires investment advisers to adopt a code of ethics that reflects 
the fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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    Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, 
paragraph (g) in connection with the establishment and maintenance of a 
``fire wall'' between the investment adviser and the broker-dealer 
reflects the applicable investment company's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. None 
of the Manager or any of the Sub-Advisers is a broker-dealer, but each 
is affiliated with the Distributor, a broker-dealer, and has 
implemented and will maintain a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning proposed 
changes to the composition and/or changes to the portfolio prior to 
implementation.
    In addition, personnel who make decisions on the Fund's portfolio 
composition will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
Fund's portfolio. In the event (a) the Manager or any of the Sub-
Advisers registers as a broker-dealer or becomes newly affiliated with 
a broker-dealer, or (b) any new manager or sub-adviser to the Fund is a 
registered broker-dealer or becomes affiliated with another broker-
dealer, it will implement and maintain a fire wall with respect to its 
relevant personnel and/or such broker-dealer affiliate, as applicable, 
regarding access to information concerning proposed changes to the 
composition and/or changes to the Fund's portfolio prior to 
implementation and will be subject to procedures designed to prevent 
the use and dissemination of material non-public information regarding 
such portfolio.
Western Asset Total Return ETF
Principal Investments
    The investment objective of the Fund will be to seek to maximize 
total return, consistent with prudent investment management and 
liquidity needs. Although the Fund may invest in securities and Debt 
(as defined below) of any maturity, the Fund will normally maintain an 
average effective duration within 35% of the average duration of the 
U.S. bond market as a whole (generally, this bond market range is 2.5 
to 7 years) as estimated by the Sub-Adviser.\11\ Effective duration 
seeks to measure the expected sensitivity of market price to changes in 
interest rates, taking into account the anticipated effects of 
structural complexities (for example, some bonds can be prepaid by the 
issuer).
---------------------------------------------------------------------------

    \11\ The average effective duration of the Fund may fall outside 
of its expected range due to market movements. If this happens, the 
Sub-Advisers will take action to bring the Fund's average effective 
duration back within its expected range within a reasonable period 
of time.
---------------------------------------------------------------------------

    Under Normal Market Conditions,\12\ the Fund will seek to achieve 
its investment objective by investing at least 80% of its net assets in 
a portfolio comprised of U.S. or foreign fixed income securities; U.S. 
or foreign Debt (as defined below); \13\ ETFs \14\ that provide 
exposure to such U.S. or foreign fixed income securities, Debt or other 
Principal Investments (defined below); derivatives \15\ that (i) 
provide exposure to such U.S. or foreign fixed income securities, Debt 
and other Principal Investments, (ii) are used to risk manage the 
Fund's holdings, or (iii) are used to enhance returns, such as through 
covered call strategies; \16\ U.S. or foreign equity securities of any 
type acquired in reorganizations of issuers of fixed income securities 
or Debt held by the Fund (``Work Out Securities''); \17\ U.S. or 
foreign non-convertible preferred securities (other than trust 
preferred securities, which the Fund may invest in but which are 
treated as fixed income securities \18\) (``Non-Convertible

[[Page 1065]]

Preferred Securities''); \19\ warrants \20\ on U.S. or foreign fixed 
income securities; warrants on U.S. or foreign equity securities that 
are attached to, accompany or are purchased alongside investments in 
U.S. or foreign fixed income securities issued by the issuer of the 
warrants (``Equity-Related Warrants''); \21\ cash and cash equivalents; 
\22\ and foreign currencies (together, the ``Principal Investments'' 
and the equity elements of the Principal Investments, which consist of 
Work Out Securities, ETFs that provide exposure to fixed income 
securities, Debt or other Principal Investments, Equity-Related 
Warrants and Non-Convertible Preferred Securities, are referred to as 
the ``Principal Investment Equities'').\23\
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    \12\ The term ``Normal Market Conditions'' has the meaning set 
forth in Nasdaq Rule 5735(c)(5). The Fund may vary from ordinary 
parameters on a temporary basis, including for defensive purposes, 
during the initial invest-up period (i.e., the six-week period 
following the commencement of trading of Shares on the Exchange) and 
during periods of high cash inflows or outflows (i.e., rolling 
periods of seven calendar days during which inflows or outflows of 
cash, in the aggregate, exceed 10% of the Fund's net assets as of 
the opening of business on the first day of such periods). In those 
situations, the Fund may depart from its principal investment 
strategies and may, for example, hold a higher than normal 
proportion of its assets in cash and cash equivalents. During such 
periods, the Fund may not be able to achieve its investment 
objective. The Fund may also adopt a defensive strategy and hold a 
significant portion of its assets in cash and cash equivalents when 
the Manager or any Sub-Adviser believes securities, Debt and other 
instruments in which the Fund normally invests have elevated risks 
due to political or economic factors, heightened market volatility 
or in other extraordinary circumstances that do not constitute 
``Normal Market Conditions''. The Fund's investments in cash 
equivalents are described in greater detail in note 22 infra.
    \13\ As noted below, the Fund will not invest more than 30% of 
its total assets in fixed income or equity securities or Debt of 
non-U.S. issuers or more than 25% of its total assets directly in 
non-U.S. dollar denominated fixed income or equity securities or 
Debt. As a result, although the Fund does intend to invest in 
foreign instruments described above, the size of such investments 
will be limited. See infra ``Investment Restrictions''.
    \14\ The ETFs in which the Fund may invest include Index Fund 
Shares (as described in Nasdaq Rule 5705(b)), Portfolio Depositary 
Receipts (as described in Nasdaq Rule 5705(a)), and Managed Fund 
Shares (as described in Nasdaq Rule 5735). The Fund will not invest 
in ETFs that are not registered as investment companies under the 
1940 Act. The ETFs held by the Fund will invest in fixed income 
securities, Debt and money-market instruments to which the Fund 
seeks exposure. All such ETFs will trade in markets that are members 
of the ISG or exchanges that are parties to a comprehensive 
surveillance sharing agreement with the Exchange. The Fund will not 
invest in leveraged ETFs, inverse ETFs, or inverse leveraged ETFs. 
Other fixed-income funds have been approved to include ETFs in their 
80% principal investment category. See, e.g., Securities Exchange 
Act Release No. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) 
(SR-NASDAQ-2017-039) (approving fund seeking to meet its investment 
objective of having at least 80% of net assets invested in a 
portfolio of debt instruments in part through investments in ETFs 
that invest substantially all of their assets in such debt 
instruments).
    \15\ Derivatives will include: (i) Swaps and security-based 
swaps, futures, options, options on futures, and swaptions that are 
traded on an exchange, trading facility, swap execution facility or 
alternative trading system (A) that is a member of the Intermarket 
Surveillance Group (``ISG''), which includes all U.S. national 
securities exchanges and most futures exchanges, (B) that is subject 
to a comprehensive surveillance sharing agreement with the Exchange, 
or (C) that is not an ISG member and with which the Exchange does 
not have a comprehensive surveillance sharing agreement (``Exchange-
Traded Derivatives''); and (ii) swaps and security-based swaps, 
options, options on futures, swaptions, forwards and similar 
instruments that are traded in the over-the-counter market and are 
either centrally cleared or cleared bilaterally (``OTC 
Derivatives''), as further described below. For the purposes of 
describing the scope of the Fund's potential investments in 
derivatives, the terms ``swaps'' and ``security-based swaps'' shall 
have the meanings set forth in the Commodity Exchange Act (``CEA''), 
as amended by The Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law No. 111-203, 124 Stat. 1376 (2010) 
(``Dodd-Frank''), and regulations thereunder, and references to 
swaps and forwards on foreign exchange or currencies shall include 
``foreign exchange forwards'' and ``foreign exchange swaps'', as 
such terms are defined in Sections 1a(24)-(25) of the CEA. The terms 
``exchange-traded'' and ``exchange-listed'', when used with respect 
to swaps or security-based swaps, shall include swaps and security-
based swaps that are executed on swap execution facilities and 
security-based swap execution facilities and cleared through 
regulated, central clearing facilities. For purposes of the 80% 
principal investments measure, the Fund will value derivatives based 
on the mark-to-market value or exposure of such derivatives. This 
approach is consistent with the valuation methodology for asset 
coverage purposes in Rule 18f-4 under the 1940 Act proposed by the 
Commission. See Investment Company Act Release No. 31933 (December 
11, 2015); 80 FR 80884 (December 28, 2015) (the ``Derivatives Rule 
Proposing Release''); see also infra note 75. Not more than 10% of 
the net assets of the Fund will be invested in Exchange-Traded 
Derivatives whose principal market is not a member of ISG or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement.
    \16\ See also ``The Fund's Use of Derivatives,'' infra.
    \17\ Work Out Securities will generally be traded in the OTC 
market or may be listed on an exchange that may or may not be an ISG 
member.
    \18\ See Nasdaq Rule 5735(b)(1)(B).
    \19\ Non-convertible preferred stock, such as that comprising 
the Non-Convertible Preferred Securities, provide holders with a 
fixed or variable distribution and a status upon bankruptcy of the 
issuer that is subordinated to debt holders but preferred over 
common shareholders. Non-Convertible Preferred Securities may be 
listed on either an ISG member exchange (or an exchange with which 
the Exchange has a comprehensive surveillance sharing agreement) or 
a non-ISG member exchange or be unlisted and trade in the over-the-
counter market.
    \20\ Warrants are securities that provide the holder with the 
right to purchase specified securities of the issuer of the warrants 
at a specified exercise price until the expiration date of the 
warrant. The Fund may hold warrants that provide the right to 
purchase fixed income securities or equity securities, and such 
warrants may be traded in the OTC market or may be listed on an 
exchange, including an exchange that is not an ISG member. The Fund 
expects that most of the warrants it holds will be attached to 
related fixed income securities.
    \21\ The Fund's interests in Equity-Related Warrants are similar 
to the Fund's interest in Work Out Securities in that they reflect 
interests in equity securities that are held solely in connection 
with investments in fixed income securities.
    \22\ Cash equivalents consist of the following, all of which 
have maturities of less than three months: U.S. government 
securities; certificates of deposit issued against funds deposited 
in a bank or savings and loan association; bankers' acceptances 
(which are short-term credit instruments used to finance commercial 
transactions); repurchase agreements and reverse repurchase 
agreements; and bank time deposits (which are monies kept on deposit 
with banks or savings and loan associations for a stated period of 
time at a fixed rate of interest). Cash equivalents also consist of 
money market funds registered under the 1940 Act and money market 
funds that are not registered under the 1940 Act but that comply 
with Rule 2a-7 under the 1940 Act (together, ``Money Market 
Funds''), money market ETFs and commercial paper, which are short-
term unsecured promissory notes, having maturities of 360 days or 
less. The Exchange notes that, while the Fund treats commercial 
paper with maturities of three months or greater as cash equivalents 
for the purposes of the 80% principal investments measure, the Fund 
will apply the definition of cash equivalents in Nasdaq Rule 
5735(b)(1)(C) (which is limited to instruments with maturities of 
less than three months) for purposes of compliance with Nasdaq Rule 
5735(b)(1) and will comply with the applicable requirements of 
Nasdaq Rule 5735(b)(1) with respect to all commercial paper held by 
the Fund. Investments in cash equivalents that are Money Market 
Funds will be made in accordance with Rule 12d1-1 under the 1940 
Act.
    \23\ The Manager and Sub-Advisers will manage the Fund to ensure 
that the weight of Non-Convertible Preferred Securities, Equity-
Related Warrants and Work Out Securities (which are generally traded 
solely in the over-the-counter market) together do not exceed 30% of 
the Fund's net assets.
---------------------------------------------------------------------------

    The Manager or Sub-Advisers (as applicable) may select from any of 
the following types of fixed income securities: (i) U.S. or foreign 
corporate debt securities, including notes, bonds, debentures, trust 
preferred securities, and commercial paper issued by corporations, 
trusts, limited partnerships, limited liability companies and other 
types of non-governmental legal entities; (ii) U.S. government 
securities, including obligations of, or guaranteed by, the U.S. 
government, its agencies or government-sponsored entities; (iii) 
sovereign debt securities, which include fixed income securities issued 
by governments, agencies or instrumentalities and their political 
subdivisions, securities issued by government-owned, controlled or 
sponsored entities, interests in entities organized and operated for 
the purpose of restructuring the investment instruments issued by such 
entities, Brady Bonds,\24\ and fixed income securities issued by 
supranational entities such as the World Bank; \25\ (iv) U.S. or 
foreign mortgage-backed securities (``MBS''), which are securities that 
represent direct or indirect participations in, or are collateralized 
by and payable from, mortgage loans secured by real property and which 
may be issued by private issuers, by government-sponsored entities such 
as Fannie Mae (formally known as the Federal National Mortgage 
Association) or Freddie Mac (formally known as the Federal Home Loan 
Mortgage Corporation) or by agencies of the U.S. government, such as 
the Government National Mortgage Association (``Ginnie Mae''); \26\ (v) 
U.S. or foreign asset-backed securities (``ABS''), which represent 
participations in, or are secured by and payable from, assets such as 
installment sales or loan contracts, leases, credit card receivables 
and other categories of receivables other than real estate; \27\ (vi) 
municipal securities, which include general obligation bonds, revenue 
bonds, housing authority bonds, private activity bonds, industrial 
development bonds, residual interest bonds, tender option bonds, tax 
and revenue anticipation notes, bond anticipation notes, tax-exempt 
commercial paper, municipal leases, participation certificates and 
custodial receipts; (vii) zero coupon securities, which are securities 
that pay no interest during the life of the obligation but are issued 
at prices below their stated maturity value; (viii) pay-in-kind 
securities, which have a stated coupon, but the interest is generally 
paid in the form of obligations of the same type as the underlying pay-
in-kind securities (e.g., bonds) rather than in cash; (ix) deferred 
interest securities, which are obligations that generally provide for a 
period of delay before the regular payment of interest begins and are 
issued at a significant discount from face value; (x) U.S. or foreign 
structured notes and indexed securities, including securities that have 
demand, tender or put features, or interest rate reset features; and 
(xi) U.S. or foreign inflation-indexed or inflation-protected 
securities, which are fixed income securities that are structured to 
provide protection against inflation and whose principal value or 
coupon is periodically adjusted according to the rate of inflation and 
which include, among others, U.S. Treasury Inflation Protected 
Securities. The securities may pay fixed, variable or floating rates of 
interest or, in the case of instruments such as zero coupon bonds, do 
not pay

[[Page 1066]]

current interest but are issued at a discount from their face values. 
MBS and ABS in which the Fund will invest make periodic payments of 
interest and/or principal on underlying pools of mortgages, government 
securities or, in the case of ABS, loans, leases and receivables other 
than real estate. The Fund may also invest in stripped ABS or MBS, 
which represent the right to receive either payments of principal or 
payments of interest on real estate receivables, in the case of MBS, or 
non-real estate receivables, in the case of ABS.
---------------------------------------------------------------------------

    \24\ Brady Bonds are debt securities issued under the framework 
of the Brady Plan as a means for debtor nations to restructure their 
outstanding external indebtedness.
    \25\ A supranational entity is a bank, commission or company 
established or financially supported by the national governments of 
one or more countries to promote reconstruction or development.
    \26\ MBS include collateralized mortgage obligations (``CMOs''), 
which are debt obligations collateralized by mortgage loans or 
mortgage pass-through securities. Typically, CMOs are collateralized 
by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but may also 
be collateralized by whole loans or pass-through securities issued 
by private issuers (i.e., issuers other than government agencies or 
government-sponsored entities) (referred to as ``Mortgage Assets''). 
Payments of principal and of interest on the Mortgage Assets, and 
any reinvestment income thereon, provide the funds to pay debt 
service on the CMOs. In a CMO, a series of bonds or certificates is 
issued in multiple classes. Each class of CMOs, often referred to as 
a ``tranche'' of securities, is issued at a specified fixed or 
floating coupon rate and has a stated maturity or final distribution 
date.
    \27\ ABS include collateralized debt obligations (``CDOs''). 
CDOs include collateralized bond obligations (``CBOs''), 
collateralized loan obligations (``CLOs'') and other similarly 
structured securities. A CBO is a trust or other special purpose 
entity that is typically backed by a diversified pool of fixed 
income securities (which may include high risk, below investment 
grade securities). A CLO is a trust or other special purpose entity 
that is typically collateralized by a pool of loans, which may also 
include, among others, domestic and non-U.S. senior secured loans, 
senior unsecured loans, and subordinated corporate loans, including 
loans that may be rated below investment grade or equivalent unrated 
loans, as well as loans that rank senior to the borrower's 
traditional debt obligations. Like CMOs, CDOs generally issue 
separate series or ``tranches'' of securities, which vary with 
respect to risk and yield.
---------------------------------------------------------------------------

    Investments by the Fund in debt instruments (``Debt'') that may be 
deemed not to be ``securities'', as defined in the Act, are comprised 
primarily of the following: (i) U.S. or foreign bank loans and 
participations in bank loans; (ii) U.S. or foreign loans by non-bank 
lenders and participations in such loans; (iii) U.S. or foreign loans 
on real estate secured by mortgages and participations (without 
guarantees by a government-sponsored entity (``GSE'')); and (iv) 
participations in U.S. or foreign loans and/or other extensions of 
credit, such as guarantees, made by governmental entities or financial 
institutions. Debt may be partially or fully secured by collateral 
supporting the payment of interest and principal, or unsecured and/or 
subordinated to other instruments. Debt may relate to financings for 
highly-leveraged borrowers. The Fund may acquire an interest in Debt by 
purchasing participations in and/or assignments of portions of loans 
from third parties or by investing in pools of loans, such as 
collateralized debt obligations.
    With respect to fixed income securities and Debt, the Fund may 
invest in restricted instruments, such as Rule 144A and Regulation S 
securities, which are subject to resale restrictions that limit 
purchasers to qualified institutional buyers, as defined in Rule 144A 
under the Securities Act of 1933, as amended (the ``Securities Act'') 
or non-U.S. persons, within the meaning of Regulation S under the 
Securities Act.
    The Fund will use derivatives to (i) provide exposure to U.S. or 
foreign fixed income securities, Debt and other Principal Investments, 
(ii) risk manage the Fund's holdings,\28\ and (iii) enhance returns, 
such as through covered call strategies.\29\ The Fund will not use 
derivatives for the purpose of seeking leveraged returns or performance 
that is the multiple or inverse multiple of a benchmark. Derivatives 
that the Fund may enter into include: Over-the-counter deliverable and 
non-deliverable foreign exchange forward contracts; exchange-listed 
futures contracts on securities (including Treasury Securities and 
foreign government securities), commodities, indices, interest rates, 
financial rates and currencies; exchange-listed or over-the-counter 
options or swaptions (i.e., options to enter into a swap) on 
securities, commodities, indices, interest rates, financial rates, 
currencies and futures contracts; and exchange-listed or over-the-
counter swaps (including total return swaps) on securities, 
commodities, indices, interest rates, financial rates, currencies and 
debt and credit default swaps on single names, baskets and indices 
(both as protection seller and as protection buyer). As a result of the 
Fund's use of derivatives and to serve as collateral, the Fund may also 
hold significant amounts of Treasury Securities, cash and cash 
equivalents and, in the case of derivatives that are payable in a 
foreign currency, the foreign currency in which the derivatives are 
payable.
---------------------------------------------------------------------------

    \28\ The risk management uses of derivatives will include 
managing (i) investment-related risks, (ii) risks due to 
fluctuations in securities prices, interest rates, or currency 
exchanges rates, (iii) risks due to the credit-worthiness of an 
issuer, and (iv) the effective duration of the Fund's portfolio.
    \29\ See also ``The Fund's Use of Derivatives,'' infra.
---------------------------------------------------------------------------

    The Fund may, without limitation, enter into repurchase 
arrangements and borrowing and reverse repurchase arrangements, 
purchase and sale contracts, buybacks and dollar rolls \30\ and spot 
currency transactions. The Fund may also, subject to required margin 
and without limitation, purchase securities and other instruments under 
when-issued, delayed delivery, to be announced or forward commitment 
transactions, where the securities or instruments will not be delivered 
or paid for immediately. To the extent required under applicable 
federal securities laws (including the 1940 Act), rules, and 
interpretations thereof, the Fund will ``set aside'' liquid assets or 
engage in other measures to ``cover'' open positions held in connection 
with the foregoing types of transactions, as well as derivative 
transactions.
---------------------------------------------------------------------------

    \30\ In a forward roll transaction (also referred to as a 
mortgage dollar roll), the Fund sells a MBS while simultaneously 
agreeing to purchase a similar security from the same party (the 
counterparty) on a specified future date at a lower fixed price. 
During the roll period, the Fund forgoes principal and interest paid 
on the securities. The Fund is compensated by the difference between 
the current sales price and the forward price for the future 
purchase, as well as by the interest earned on the cash proceeds of 
the initial sale. The Fund may enter into a forward roll transaction 
with the intention of entering into an offsetting transaction 
whereby, rather than accepting delivery of the security on the 
specified date, the Fund sells the security and agrees to repurchase 
a similar security at a later time.
---------------------------------------------------------------------------

Other Investments
    Under Normal Market Conditions, the Fund will seek its investment 
objective by investing at least 80% of its net assets in a portfolio of 
the Principal Investments. The Fund may invest its remaining assets 
exclusively in: (i) U.S. or foreign exchange-listed or over-the counter 
convertible fixed income securities; and (ii) OTC Derivatives (as 
defined below) and Exchange-Traded Derivatives (as defined below) that 
do not satisfy the Fund's primary uses for derivatives, which are to 
(A) provide exposure to such U.S. or foreign fixed income securities, 
Debt and other Principal Investments, (B) risk manage the Fund's 
holdings, and (C) enhance returns.\31\
---------------------------------------------------------------------------

    \31\ Investments in OTC Derivatives and Exchange-Traded 
Derivatives will also be subject to the limitations described in the 
``The Fund's Use of Derivatives'' section below.
---------------------------------------------------------------------------

The Fund's Use of Derivatives
    The Fund proposes to invest in the types of derivatives described 
in the ``Principal Investments'' and ``Other Investments'' sections 
above. Exchange-Traded Derivatives will primarily be traded on 
exchanges that are ISG members or exchanges with which the Exchange has 
a comprehensive surveillance sharing agreement. The Fund may, however, 
invest up to 10% of the net assets of the Fund in Exchange-Traded 
Derivatives whose principal market is not a member of ISG or a market 
with which the Exchange has a comprehensive surveillance sharing 
agreement. For purposes of this 10% limit, the weight of such Exchange-
Traded Derivatives will be calculated based on the mark-to-market value 
or exposure of such Exchange-Traded Derivatives.
    The Fund will limit the weight of its investments in OTC 
Derivatives to 10% of the net assets of the Fund, with the exception of 
Interest Rate Derivatives \32\ and Currency Derivatives \33\ (together,

[[Page 1067]]

``Interest Rate and Currency Derivatives'') entered into with broker-
dealers, banks and other financial intermediaries. Investments in 
Interest Rate and Currency Derivatives (whether the instruments are 
Exchange-Traded Derivatives or OTC Derivatives) will not be subject to 
a limit. For purposes of this 10% limit on OTC Derivatives, the weight 
of such OTC Derivatives will be calculated based on the mark-to-market 
value or exposure of such OTC Derivatives. The mark-to-market 
methodology is consistent with the methodology proposed by the SEC in 
proposed Rule 18f-4 for the purposes of asset coverage requirements 
\34\ and in keeping with disclosures regarding compliance with Section 
18 of the 1940 Act made by other registered investment companies and 
reviewed by the SEC staff for a number of years.\35\ In that regard, 
the SEC expressly noted in the Derivatives Rule Proposing Release that 
reliance on a mark-to-market valuation of a derivatives position for 
purposes of calculating the required coverage amount ``would generally 
correspond to the amount of the fund's liability with respect to the 
derivatives transaction'' and, therefore, be consistent with the 
appropriate valuation of the derivatives transaction.\36\ The mark-to-
market value is also the measure of ``exposure'' on which collateral 
posting is based under the Master Agreement published by the 
International Swaps and Derivatives Association, Inc. (``ISDA''), which 
is the predominant agreement used to trade derivatives.\37\ This value 
measures gain and loss to the Fund of the Fund's derivatives position 
on a daily basis, as well as on a net basis across all transactions 
covered by a master netting agreement and, as a result, accurately 
reflects the actual economic exposure of the Fund to the counterparty 
on the derivative (as compared to notional amount, which may overstate 
or understate economic risk).
---------------------------------------------------------------------------

    \32\ ``Interest Rate Derivatives'' are comprised of interest 
rate swaps, swaptions (i.e., options on interest rate swaps), rate 
options and other similar derivatives, and may be Exchange-Traded 
Derivatives or OTC Derivatives. As reflected in statistics compiled 
by the Bank for International Settlements, as of June 30, 2017 there 
were approximately $416 trillion (notional amount) of total interest 
rate contracts outstanding in the over-the-counter markets alone. 
Interest Rate Derivatives also trade on trading platforms that are 
not ISG members. As reflected by the statistics, the market is wide, 
deep and liquid. See https://www.bis.org/statistics/d7.pdf (accessed 
November 2017).
    \33\ ``Currency Derivatives'' are comprised of deliverable 
forwards, which are agreements between the contracting parties to 
exchange a specified amount of currency at a specified future time 
at a specified rate, non-deliverable forwards, which are agreements 
to pay the difference between the exchange rates specified for two 
currencies at a future date, swaps and options on currencies, and 
similar currency or foreign exchange derivatives. As reflected in 
statistics compiled by the Bank for International Settlements, as of 
June 30, 2017 there were approximately $77 trillion (notional 
amount) of Currency Derivatives outstanding in the over-the-counter 
markets alone. Currency Derivatives also trade on trading platforms 
that are not ISG members. As reflected by the statistics, the market 
is wide, deep and liquid. See https://www.bis.org/statistics/d6.pdf 
(accessed November 2017).
    \34\ See Derivatives Rule Proposing Release at 157-158; see also 
infra note 75.
    \35\ See Derivatives Rule Proposing Release at n.58, citing 
Comment Letter on SEC Concept Release (November 11, 2011) (File No. 
S7-33-11), Davis Polk & Wardwell LLP, available at https://www.sec.gov/comments/s7-33-11/s73311-49.pdf (``[F]und registration 
statements indicate that, in recent years, the Staff has not 
objected to the adoption by funds of policies that require 
segregation of the mark-to-market value, rather than the notional 
amount . . . [for asset segregation purposes].'').
    \36\ See Derivatives Rule Proposing Release at 157-158.
    \37\ The Credit Support Annex to the ISDA Master Agreement bases 
the collateral amount owed by a party to a derivatives contract, or 
that party's ``exposure'', by reference to the replacement value of 
the party's net positions. Replacement value, which has the same 
meaning as ``mark-to-market'' value, is the amount owed by a party 
at a point in time determined based on the net termination payment 
due under the outstanding transaction.
---------------------------------------------------------------------------

    The Fund may choose not to make use of derivatives.
    Generally, derivatives are financial contracts whose value depends 
upon, or is derived from, the value of an underlying asset, reference 
rate or index, and may relate to stocks, bonds, interest rates, 
currencies or currency exchange rates, commodities, and related 
indexes. As described above, the Fund will use derivatives to (i) 
provide exposure to U.S. or foreign fixed income securities, Debt and 
other Principal Investments, (ii) risk manage the Fund's holdings,\38\ 
and (iii) enhance returns, such as through covered call strategies. The 
Fund will not use derivatives for the purpose of seeking leveraged 
returns or performance that is the multiple or inverse multiple of a 
benchmark. The Fund will enter into derivatives only with 
counterparties that the Fund reasonably believes are financially and 
operationally able to perform the contract or instrument, and the Fund 
will collect collateral from the counterparty in accordance with credit 
considerations and margining requirements under applicable law.\39\
---------------------------------------------------------------------------

    \38\ The risk management uses of derivatives will include 
managing (i) investment-related risks, (ii) risks due to 
fluctuations in securities prices, interest rates, or currency 
exchanges rates, (iii) risks due to the credit-worthiness of an 
issuer, and (iv) the effective duration of the Fund's portfolio.
    \39\ The Fund will seek, where practicable, to trade with 
counterparties whose financial status is such that the risk of 
default is reduced. The Sub-Advisers will monitor the financial 
standing of counterparties on an ongoing basis. This monitoring may 
include reliance on information provided by credit agencies or of 
credit analysts employed by the Sub-Advisers. The analysis may 
include earnings updates, the counterparty's reputation, past 
experience with the dealer, market levels for the counterparty's 
debt and equity, credit default swap levels for the counterparty's 
debt, the liquidity provided by the counterparty and its share of 
market participation.
---------------------------------------------------------------------------

    Investments in derivative instruments will be made in accordance 
with the 1940 Act and consistent with the Fund's investment objective 
and policies. To limit the potential risk (including leveraging risk) 
associated with such transactions, the Fund will segregate or 
``earmark'' assets determined to be liquid by the Manager and/or the 
Sub-Advisers in accordance with procedures established by the Trust's 
Board of Trustees (the ``Board'') and in accordance with the 1940 Act 
(or, as permitted by applicable regulation, enter into offsetting 
positions) to cover its obligations under derivative instruments. These 
procedures have been adopted consistent with Section 18 of the 1940 Act 
and related Commission guidance. In addition, the Fund will include 
appropriate risk disclosure in its offering documents, including 
leveraging risk. Leveraging risk is the risk that transactions of the 
Fund, including the Fund's use of derivatives, may give rise to 
additional leverage, causing the Fund to be more volatile than if it 
had not been leveraged. Because the markets for securities or Debt, or 
the securities themselves or Debt, may be unavailable, cost prohibitive 
or tax-inefficient as compared to derivative instruments, suitable 
derivative transactions may be an efficient alternative for the Fund to 
obtain the desired asset exposure.
    The Manager and the Sub-Advisers believe that derivatives can be an 
economically attractive substitute for an underlying physical security 
or Debt that the Fund would otherwise purchase. For example, the Fund 
could purchase futures contracts on Treasury Securities instead of 
investing directly in Treasury Securities or could sell credit default 
protection on a corporate bond instead of buying a physical bond. 
Economic benefits include potentially lower transactions costs, 
attractive relative valuation of a derivative versus a physical bond 
(e.g., differences in yields) or economic exposure without incurring 
transfer or similar taxes.
    The Manager and the Sub-Advisers further believe that derivatives 
can be used as a more liquid means of adjusting portfolio duration, as 
well as targeting specific areas of yield curve exposure, with 
potentially lower transaction costs than the underlying securities or 
Debt (e.g., interest rate swaps may have lower transaction costs than 
the physical bonds). Similarly, money market futures can be used to 
gain exposure to short-term interest rates in order to express views on 
anticipated changes in central bank policy rates. In addition, 
derivatives can be used to protect client assets through selectively 
hedging downside (or ``tail risks'') in the Fund.
    The Fund also can use derivatives to increase or decrease credit 
exposure. Index credit default swaps can be used to gain exposure to a 
basket of credit risk by ``selling protection'' against default or 
other credit events, or to hedge broad market credit risk by

[[Page 1068]]

``buying protection.'' Single name credit default swaps can be used to 
allow the Fund to increase or decrease exposure to specific issuers, 
saving investor capital through lower trading costs. The Fund can use 
total return swap contracts to obtain the total return of a reference 
asset or index in exchange for paying financing costs. A total return 
swap may be more efficient than buying underlying securities or Debt, 
potentially lowering transaction costs.
    The Fund expects to manage foreign currency exchange rate risk by 
entering into Currency Derivatives.
    The Sub-Advisers may use option strategies to meet the Fund's 
investment objectives. Option purchases and sales can also be used to 
hedge specific exposures in the portfolio and can provide access to 
return streams available to long-term investors such as the persistent 
difference between implied and realized volatility. Option strategies 
can generate income or improve execution prices (e.g., covered calls).
Investment Restrictions
    The Fund may invest up to 30% of its assets in Non-Convertible 
Preferred Securities, Equity-Related Warrants and Work Out Securities. 
The Fund will not invest in equity securities other than Principal 
Investment Equities. Principal Investment Equities consist of (i) Non-
Convertible Preferred Securities, Equity-Related Warrants and Work Out 
Securities, which are subject to the 30% limit noted above and (ii) 
shares of ETFs that provide exposure to fixed income securities, Debt 
or other Principal Investments, which are subject to no limits.
    While the Fund will invest principally in fixed income securities 
and Debt that are, at the time of purchase, investment grade, the Fund 
may invest up to 30% of its net assets in below investment grade fixed 
income securities and Debt. For these purposes, ``investment grade'' is 
defined as investments with a rating at the time of purchase in one of 
the four highest rating categories of at least one nationally 
recognized statistical ratings organization (``NRSRO'') (e.g., BBB- or 
higher by S&P Global Ratings (``S&P''), and/or Fitch Ratings 
(``Fitch''), or Baa3 or higher by Moody's Investors Service, Inc. 
(``Moody's'')).\40\ Unrated fixed income securities or Debt may be 
considered investment grade if, at the time of purchase, and under 
Normal Market Conditions, the applicable Sub-Adviser determines that 
such securities are of comparable quality based on a fundamental credit 
analysis of the unrated security or Debt instrument and comparable 
NRSRO-rated securities.
---------------------------------------------------------------------------

    \40\ For the avoidance of doubt, if a security is rated by 
multiple NRSROs and receives different ratings, the Fund will treat 
the security as being rated in the highest rating category received 
from any one NRSRO.
---------------------------------------------------------------------------

    The Fund may invest in fixed income or equity securities and Debt 
issued by both U.S. and non-U.S. issuers (including issuers in emerging 
markets), but the Fund will not invest more than 30% of its total 
assets directly in fixed income or equity securities or Debt of non-
U.S. issuers or more than 25% of its total assets directly in non-U.S. 
dollar denominated fixed income or equity securities or Debt. For 
purposes of these 30% and 25% concentration limits only, derivatives, 
warrants and ETFs traded on U.S. exchanges that provide indirect 
exposure to fixed income or equity securities or Debt (as applicable) 
of non-U.S. issuers or to fixed income or equity securities or Debt (as 
applicable) denominated in currencies other than U.S. dollars will not 
be counted by the Fund in calculating its holdings in non-U.S. issuers 
or in non-U.S. dollar denominated securities or Debt.
    The Fund may invest a substantial portion of its net assets in ABS 
and MBS, but it will not invest more than 30% of the fixed income 
portion of the Fund's portfolio \41\ in non-agency, non-GSE and 
privately-issued mortgage-related and other asset-backed securities 
(``Private ABS/MBS'').\42\
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    \41\ The Exchange notes that the terms ``fixed income weight of 
the portfolio'' and ``weight of the fixed income portion of the 
portfolio'' are used synonymously in Nasdaq Rule 5735.
    \42\ For purposes of this requirement, the weight of the Fund's 
exposure to Private ABS/MBS referenced in derivatives held by the 
Fund shall be calculated based on the mark-to-market value or 
exposure of such derivatives.
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    The Fund may not concentrate its investments (i.e., invest more 
than 25% of the value of its total assets) in securities of issuers in 
any one industry. This restriction will be interpreted to permit 
investment without limit in the following: Obligations issued or 
guaranteed by the U.S. government, its agencies or instrumentalities; 
securities of state, territory, possession or municipal governments and 
their authorities, agencies, instrumentalities or political 
subdivisions; and repurchase agreements collateralized by any such 
obligations.\43\
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    \43\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Manager or the 
Sub-Advisers.\44\ The Fund will monitor its portfolio liquidity on an 
ongoing basis to determine whether, in light of current circumstances, 
an adequate level of liquidity is being maintained and will consider 
taking appropriate steps in order to maintain adequate liquidity if, 
through a change in values, net assets, or other circumstances, more 
than 15% of the Fund's net assets are held in illiquid securities or 
other illiquid assets. Illiquid securities and other illiquid assets 
include those subject to contractual or other restrictions on resale 
and other instruments or assets that lack readily available markets as 
determined in accordance with Commission staff guidance.\45\
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    \44\ In reaching liquidity decisions, the Manager or Sub-
Advisers (as applicable) may consider the following factors: The 
frequency of trades and quotes for the security; the number of 
dealers wishing to purchase or sell the security and the number of 
other potential purchasers; dealer undertakings to make a market in 
the security; and the nature of the security and the nature of the 
marketplace in which it trades (e.g., the time needed to dispose of 
the security, the method of soliciting offers and the mechanics of 
transfer).
    \45\ Long-standing Commission guidelines have required 
investment companies to hold no more than 15% of their net assets in 
illiquid securities and other illiquid assets. See Investment 
Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 
18, 2008), FN 34; see also Investment Company Act Release Nos. 5847 
(October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement 
Regarding ``Restricted Securities''); and 18612 (March 12, 1992), 57 
FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N-1A). The 
Commission also recently adopted Rule 22e-4 under the 1940 Act, 
which requires that each registered open-end management investment 
company, including ETFs but not including money market mutual funds, 
to establish a liquidity risk management program that includes 
limitations on illiquid investments. See Investment Company Act 
Release No. 32315 (October 13, 2016), 81 FR 82142 (November 18, 
2016). Under Rule 22e-4, a fund's portfolio security is illiquid if 
it cannot be sold or disposed of in current market conditions in 
seven calendar days or less without the sale or disposition 
significantly changing the market value of the investment. See 17 
CFR 270.22e-4(a)(8).
---------------------------------------------------------------------------

    As noted in the Use of Derivatives section above, the Fund's 
investments in derivatives, will be consistent with the Fund's 
investment objective and will not be used for the purpose of seeking 
leveraged returns or performance that is the multiple or inverse 
multiple of a benchmark (although derivatives have embedded leverage). 
Although the Fund will be permitted to borrow as permitted under the 
1940 Act, it will not be operated as a ``leveraged ETF,'' (i.e., it 
will not be operated in a manner designed to seek a multiple or inverse 
multiple of the performance of an underlying reference index). The Fund 
may engage in frequent and active trading of portfolio

[[Page 1069]]

securities, Debt, and derivatives to achieve its investment objective.
    Under normal market conditions, the Fund will satisfy the following 
requirements, on a continuous basis measured at the time of purchase: 
(i) Component securities that in the aggregate account for at least 75% 
of the fixed income weight of the Fund's portfolio each shall have a 
minimum original principal amount outstanding of $100 million or more; 
(ii) no fixed income security held in the portfolio (excluding U.S. 
Treasury Securities and GSE Securities) \46\ will represent more than 
30% of the fixed income weight of the Fund's portfolio, and the five 
most heavily weighted portfolio securities (excluding Treasury 
Securities and GSE Securities) will not in the aggregate account for 
more than 65% of the fixed income weight of the Fund's portfolio; (iii) 
the Fund's portfolio (excluding exempted securities) will include a 
minimum of 13 non-affiliated issuers; (iv) at least 75% of the 
investments in securities issued by emerging market issuers shall have 
a minimum original principal amount outstanding of $200 million or 
more; and (v) at least 75% of investments in bank loans or corporate 
loan assets \47\ shall be in senior loans with an initial deal size of 
$100 million or greater.\48\
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    \46\ The terms ``Treasury Securities'' and ``GSE Securities'' 
have the meanings set forth in Nasdaq Rule 5735(b)(1)(B).
    \47\ These include senior loans, syndicated bank loans, junior 
loans, bridge loans, unfunded commitments, revolvers and 
participation interests.
    \48\ The Exchange notes that Nasdaq Rule 5735(b)(1)(F) provides 
that to the extent that derivatives are used to gain exposure to 
individual fixed income securities or indexes of fixed income 
securities, the aggregate gross notional value of such exposure 
shall meet the criteria set forth in Nasdaq Rule 5735(b)(1)(B). The 
Exchange proposes, however, as further described below, that for the 
purposes of the requirements in this paragraph and any requirements 
under Nasdaq Rule 5735(b)(1), the Fund will use the mark-to-market 
value or exposure of its derivatives rather than gross notional 
value or exposure.
---------------------------------------------------------------------------

    In addition, the Fund will impose the limits described in the 
following section, which are alternative limits to the ``generic'' 
listing requirements of Nasdaq Rule 5735(b)(1).
Application of Generic Listing Requirements
    The Exchange is submitting this proposed rule change because the 
Fund will not meet all of the ``generic'' listing requirements of 
Nasdaq Rule 5735(b)(1). The Fund will meet all such requirements except 
the requirements described below,\49\ and the Exchange proposes that 
the Fund will comply with the alternative limits described below.
---------------------------------------------------------------------------

    \49\ The Exchange notes that, while the Fund treats commercial 
paper with maturities of three months or greater as cash equivalents 
for the purposes of its 80% principal investments measure, the Fund 
will comply with the applicable requirements of Nasdaq Rule 
5735(b)(1) with respect to all commercial paper held by the Fund. 
Further, in accordance with Nasdaq Rule 5735(b)(1)(B), to the extent 
that the Fund holds securities that convert into fixed income 
securities, the fixed income securities into which any such 
securities are converted shall meet the criteria of Nasdaq Rule 
5735(b)(1)(B) after converting.
---------------------------------------------------------------------------

    (i) The Fund will not comply with the requirements in Nasdaq Rule 
5735(b)(1) regarding the use of aggregate gross notional value or 
exposure of derivatives when calculating the weight of such derivatives 
or the exposure that such derivatives provide to underlying reference 
assets, including the requirements in Rules 5735(b)(1)(D)(i),\50\ 
5735(b)(1)(D)(ii),\51\ 5735(b)(1)(E) \52\ and 5735(b)(1)(F).\53\ 
Instead, the Exchange proposes that for the purposes of any applicable 
requirements under Nasdaq Rule 5735(b)(1), and any alternative 
requirements proposed by the Exchange, the Fund will use the mark-to-
market value or exposure of its derivatives in calculating the weight 
of such derivatives or the exposure that such derivatives provide to 
their reference assets.\54\
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    \50\ Nasdaq Rule 5735(b)(1)(D)(i) provides that at least 90% of 
the weight of a portfolio's holdings invested in futures, exchange-
traded options, and listed swaps shall, on both an initial and 
continuing basis, consist of futures, options and swaps for which 
the Exchange may obtain information via the ISG, from other members 
or affiliates of the ISG, or for which the principal market is a 
market with which the Exchange has a comprehensive surveillance 
sharing agreement; for the purposes of calculating this limitation, 
a portfolio's investment in such listed derivatives will be 
calculated as the aggregate gross notional value of the listed 
derivatives.
    \51\ Nasdaq Rule 5735(b)(1)(D)(ii) provides that the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets shall not exceed 65% of the weight 
of the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset shall not exceed 30% of the weight 
of the portfolio (including gross notional exposures).
    \52\ Nasdaq Rule 5735(b)(1)(E) provides that on both an initial 
and continuing basis, no more than 20% of the assets in the 
portfolio may be invested in over-the-counter derivatives, including 
forwards, options, and swaps on commodities, currencies and 
financial instruments (e.g., stocks, fixed income, interest rates, 
and volatility) or a basket or index of any of the foregoing; for 
purposes of calculating this limitation, the Fund's investment in 
OTC Derivatives will be calculated as the aggregate gross notional 
value of the OTC Derivatives.
    \53\ Nasdaq Rule 5735(b)(1)(F) provides that to the extent that 
listed or over-the-counter derivatives are used to gain exposure to 
individual equities and/or fixed income securities, or to indexes of 
equities and/or indexes of fixed income securities, the aggregate 
gross notional value of such exposure shall meet the criteria set 
forth in Nasdaq Rules 5735(b)(1)(A) and 5735(b)(1)(B), respectively.
    \54\ Further, as described further below, the Exchange is 
proposing that the Fund will comply with alternative requirements 
rather than Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), and 
5735(b)(1)(E).
---------------------------------------------------------------------------

    (ii) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(B)(v) that Private ABS/MBS in the Fund's portfolio account, 
in the aggregate, for no more than 20% of the weight of the fixed 
income portion of the Fund's portfolio. Instead, the Exchange proposes 
that the Fund will limit its holdings in Private ABS/MBS to no more 
than 30% of the weight of the fixed income portion of the Fund's 
portfolio, in order to enable the portfolio to be more diversified and 
provide the Fund with an opportunity to earn higher returns. For 
purposes of this requirement, the weight of the Fund's exposure to 
Private ABS/MBS referenced indirectly through investments in 
derivatives held by the Fund shall be calculated based on the mark-to-
market value or exposure of such derivatives.
    (iii) The Fund will not comply with the requirement that at least 
90% of the fixed income weight of the Fund's portfolio meet one of the 
criteria in Nasdaq Rule 5735(b)(1)(B)(iv).\55\ Instead, the Exchange 
proposes that the fixed income portion of the portfolio other than 
Private ABS/MBS will comply with the 90% requirement in Nasdaq Rule 
5735(b)(1)(B)(iv), and Private ABS/MBS will not comply with such 
requirement. For purposes of this requirement, the weight of the Fund's 
exposure to any fixed income securities referenced in derivatives held 
by the Fund shall be calculated based on the mark-to-market value or 
exposure of such derivatives.
---------------------------------------------------------------------------

    \55\ Nasdaq Rule 5735(b)(1)(B)(iv) provides that component 
securities that in the aggregate account for at least 90% of the 
fixed income weight of the portfolio must be either: (a) From 
issuers that are required to file reports pursuant to Sections 13 
and 15(d) of the Act; (b) from issuers that have a worldwide market 
value of its outstanding common equity held by non-affiliates of 
$700 million or more; (c) from issuers that have outstanding 
securities that are notes, bonds debentures, or evidence of 
indebtedness having a total remaining principal amount of at least 
$1 billion; (d) exempted securities as defined in Section 3(a)(12) 
of the Act; or (e) from issuers that are a government of a foreign 
country or a political subdivision of a foreign country.
---------------------------------------------------------------------------

    (iv) The Fund will not comply with the equity requirements in 
Nasdaq Rules 5735(b)(1)(A)(i) \56\ and

[[Page 1070]]

5735(b)(1)(A)(ii) \57\ with respect to the Fund's investment in Non-
Convertible Preferred Securities, Work Out Securities and Equity-
Related Warrants. Instead, the Exchange proposes that (i) the Fund's 
investments in equity securities other than Non-Convertible Preferred 
Securities, Work Out Securities and Equity-Related Warrants shall 
comply with the equity requirements in Nasdaq Rule 5735(b)(1)(A) \58\ 
and (ii) the weight of Non-Convertible Preferred Securities, Work Out 
Securities and Equity-Related Warrants in the Fund's portfolio shall 
together not exceed 30% of the Fund's net assets.
---------------------------------------------------------------------------

    \56\ Nasdaq Rule 5735(b)(1)(A)(i) provides that the components 
stocks of the equity portion of a portfolio that are U.S. Component 
Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the 
following criteria initially and on a continuing basis: (a) 
Component stocks (excluding Exchange Traded Derivative Securities 
and Linked Securities, as such terms are defined in Nasdaq Rules 
5735(c)(6) and 5710, respectively) that in the aggregate account for 
at least 90% of the equity weight of the portfolio (excluding such 
Exchange Traded Derivative Securities and Linked Securities, as such 
terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) 
each shall have a minimum market value of at least $75 million; (b) 
Component stocks (excluding Exchange Traded Derivative Securities 
and Linked Securities, as such terms are defined in Nasdaq Rules 
5735(c)(6) and 5710, respectively) that in the aggregate account for 
at least 70% of the equity weight of the portfolio (excluding such 
Exchange Traded Derivative Securities and Linked Securities, as such 
terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) 
each shall have a minimum monthly trading volume of 250,000 shares, 
or minimum notional volume traded per month of $25,000,000, averaged 
over the last six months; (c) The most heavily weighted component 
stock (excluding Exchange Traded Derivative Securities and Linked 
Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 
5710, respectively) shall not exceed 30% of the equity weight of the 
portfolio, and, to the extent applicable, the five most heavily 
weighted component stocks (excluding Exchange Traded Derivative 
Securities and Linked Securities, as such terms are defined in 
Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 65% 
of the equity weight of the portfolio; (d) Where the equity portion 
of the portfolio does not include Non-U.S. Component Stocks, the 
equity portion of the portfolio shall include a minimum of 13 
component stocks; provided, however, that there shall be no minimum 
number of component stocks if (i) one or more series of Exchange 
Traded Derivative Securities or Linked Securities, as such terms are 
defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, 
constitute, at least in part, components underlying a series of 
Managed Fund Shares (as defined in NASDAQ Rule 5735), or (ii) one or 
more series of Exchange Traded Derivative Securities or Linked 
Securities, as such terms are defined in Nasdaq Rule 5735(c)(6) and 
5710, respectively, account for 100% of the equity weight of the 
portfolio of a series of Managed Fund Shares; (e) except as 
otherwise provided, equity securities in the portfolio shall be U.S. 
Component Stocks listed on a national securities exchange and shall 
be NMS Stocks as defined in Rule 600 of Regulation NMS under the 
Act; and (f) American Depositary Receipts (``ADRs'') in a portfolio 
may be exchange-traded or non-exchange-traded; however, no more than 
10% of the equity weight of a portfolio shall consist of non-
exchange-traded ADRs.
    \57\ Nasdaq Rule 5735(b)(1)(A)(ii) provides that the component 
stocks of the equity portion of a portfolio that are Non-U.S. 
Component Stocks (as such term is defined in Nasdaq Rule 5705) shall 
meet the following criteria initially and on a continuing basis: (a) 
Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 
5705) each shall have a minimum market value of at least $100 
million; (b) Non-U.S. Component Stocks (as such term is defined in 
Nasdaq Rule 5705) each shall have a minimum global monthly trading 
volume of 250,000 shares, or minimum global notional volume traded 
per month of $25,000,000, averaged over the last six months; (c) The 
most heavily weighted Non-U.S. Component Stock (as such term is 
defined in Nasdaq Rule 5705) shall not exceed 25% of the equity 
weight of the portfolio, and, to the extent applicable, the five 
most heavily weighted Non-U.S. Component Stocks (as such term is 
defined in Nasdaq Rule 5705) shall not exceed 60% of the equity 
weight of the portfolio; (d) Where the equity portion of the 
portfolio includes Non-U.S. Component Stocks (as such term is 
defined in Nasdaq Rule 5705), the equity portion of the portfolio 
shall include a minimum of 20 component stocks; provided, however, 
that there shall be no minimum number of component stocks if (i) one 
or more series of Exchange Traded Derivative Securities or Linked 
Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 
5710, respectively, constitute, at least in part, components 
underlying a series of Managed Fund Shares, or (ii) one or more 
series of Exchange Traded Derivative Securities or Linked 
Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 
5710, respectively, account for 100% of the equity weight of the 
portfolio of a series of Managed Fund Shares; and (e) Each Non-U.S. 
Component Stock (as such term is defined in Nasdaq Rule 5705) shall 
be listed and traded on an exchange that has last-sale reporting.
    \58\ These other equities will consist of ETFs (including money 
market ETFs) that provide exposure to fixed income securities, Debt 
and other Principal Investments. The weight of such ETFs in the 
Fund's portfolio shall not be limited.
---------------------------------------------------------------------------

    (v) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(E) that no more than 20% of the assets in the Fund's 
portfolio may be invested in over-the-counter derivatives. Instead, the 
Exchange proposes that there shall be no limit on the Fund's investment 
in Interest Rate and Currency Derivatives, and the weight of all OTC 
Derivatives other than Interest Rate and Currency Derivatives shall not 
exceed 10% of the Fund's net assets. For purposes of this 10% limit on 
OTC Derivatives, the weight of such OTC Derivatives will be calculated 
based on the mark-to-market value or exposure of such OTC Derivatives.
    (vi) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(i) that at least 90% of the weight of the Fund's holdings 
in futures, exchange-traded options, and listed swaps shall, on both an 
initial and continuing basis, consist of futures, options and swaps for 
which the Exchange may obtain information via the ISG from other 
members or affiliates of the ISG, or for which the principal market is 
a market with which the Exchange has a comprehensive surveillance 
sharing agreement. Instead, the Exchange proposes that no more than 10% 
of the net assets of the Fund will be invested in Exchange-Traded 
Derivatives whose principal market is not a member of ISG or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement. For purposes of this 10% limit, the 
weight of such Exchange-Traded Derivatives will be calculated based on 
the mark-to-market value or exposure of such Exchange-Traded 
Derivatives.
    (vii) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(ii) that the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets 
shall not exceed 65% of the weight of the Fund's portfolio (including 
gross notional exposures), and the aggregate gross notional value of 
listed derivatives based on any single underlying reference asset shall 
not exceed 30% of the weight of the Fund's portfolio (including gross 
notional exposures). Instead, the Exchange proposes that the Fund will 
comply with the concentration requirements in Nasdaq Rule 
5735(b)(1)(D)(ii) except with respect to the Fund's investment in 
futures and options (including options on futures) referencing 
Eurodollars and sovereign debt issued by the United States (i.e., 
Treasury Securities) and other ``Group of Seven'' countries \59\ where 
such futures and options contracts are listed on an exchange that is an 
ISG member or an exchange with which the Exchange has a comprehensive 
surveillance sharing agreement (``Eurodollar and G-7 Sovereign Futures 
and Options''). The Fund's investment in Eurodollar and G-7 Sovereign 
Futures and Options will not be subject to the concentration limits 
provided in Nasdaq Rule 5735(b)(1)(D)(ii). For purposes of this 
requirement, the weight of the applicable Exchange-Traded Derivatives 
will be calculated based on the mark-to-market value or exposure of 
such Exchange-Traded Derivatives.
---------------------------------------------------------------------------

    \59\ The ``Group of Seven'' or G-7 countries consist of the 
United States, Canada, France, Germany, Italy, Japan and the United 
Kingdom.
---------------------------------------------------------------------------

    The Exchange believes that, notwithstanding that the Fund would not 
meet a limited number of ``generic'' listing requirements of Nasdaq 
Rule 5735(b)(1) in order to be able to satisfy its investment 
objective, the Exchange will be able to appropriately monitor and 
surveil trading in the underlying investments, including those that do 
not meet the ``generic'' listing requirements. The Exchange also notes 
that the parameters around the Fund's portfolio holdings are generally 
consistent with the parameters approved by the Commission prior to 
adoption of ``generic'' listing requirements for actively-managed 
ETFs.\60\ In addition,

[[Page 1071]]

the Fund will be well diversified. For these reasons, the Exchange 
believes that it is appropriate and in the public interest to approve 
listing and trading of Shares of the Fund on the Exchange.
---------------------------------------------------------------------------

    \60\ See, e.g., Securities Exchange Act Release Nos. 76719 
(December 21, 2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca-
2015-73) (granting approval for the listing of shares of the 
Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 
6850 (February 9, 2012) (SR-NYSEArca-2011-95) (granting approval for 
the listing of shares of the PIMCO Total Return Exchange Traded Fund 
(now known as the PIMCO Active Bond Exchange-Traded Fund)); and 
72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-
2013-122) (granting approval to the use of derivatives by the PIMCO 
Total Return Exchange Traded Fund). The investments of the 
Guggenheim Total Return Bond ETF include a wide variety of U.S. and 
foreign fixed income instruments (including Private ABS/MBS), 
preferred securities, cash equivalents, other ETFs and listed and 
over-the-counter derivatives and are managed in a manner that 
appears to be generally consistent with that proposed for the Fund. 
Consistent with the requests made in this proposed rule change, the 
Commission's approval of the listing of shares of the Guggenheim 
Total Return Bond ETF did not include many of the conditions imposed 
by the generic listing standards under Nasdaq Rule 5735; the 
Commission's approval did not impose limits regarding the total 
notional size of the ETF's investment in over-the-counter 
derivatives, did not impose concentration limits on the ETF's 
investment in listed derivatives and did not require compliance with 
the same criteria as the fixed income criteria in Nasdaq Rule 
5735(b)(1)(B). The order approving investments in derivatives by the 
PIMCO Total Return Exchange Traded Fund described investments in 
both over-the-counter and listed derivatives, but did not impose 
limits regarding the total notional size of the ETF's investments in 
over-the-counter derivatives, did not impose concentration limits on 
the ETF's investments in listed derivatives, and did not impose 
limitations on investments in listed derivatives whose principal 
market is not a member of ISG or is a market with which its listing 
exchange does not have a comprehensive surveillance sharing 
agreement.
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    As further described in the ``Statutory Basis'' section below, 
deviations from the generic requirements are necessary for the Fund to 
achieve its investment objective and efficiently manage the risks 
associated with its investments, and any possible risks have been fully 
mitigated and addressed through the alternative limits proposed by the 
Exchange. In addition, many of the changes requested are generally 
consistent with previous filings approved by the Commission.\61\
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    \61\ See, e.g., Securities Exchange Act Release Nos. 80657 (May 
11, 2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) 
(approving up to 50% of the fund's assets (calculated on the basis 
of aggregate gross notional value) to be invested in over-the-
counter derivatives that are used to reduce currency, interest rate, 
or credit risk arising from the fund's investments, including 
forwards, over-the-counter options, and over-the-counter swaps); 
78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR-NASDAQ-
2016-061) (approving investment of up to 20% of the fund's net 
assets in, among other things, non-exchange-traded equity securities 
acquired in conjunction with the fund's event-driven strategy, 
including securities acquired by the fund as a result of certain 
corporate events including reorganizations); 76719 (December 21, 
2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca-2015-73) 
(permitting (i) investments in over-the-counter and listed 
derivatives without imposing limits on the total notional size of 
the ETF's investments in over-the-counter derivatives and without 
imposing concentration limits on the ETF's investments in listed 
derivatives and (ii) permitting investments in a wide variety of 
fixed income instruments without compliance with the same criteria 
as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B)); 72666 
(July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-2013-122) 
(permitting investments in both over-the-counter and listed 
derivatives, but without imposing limits regarding the total 
notional size of the ETF's investments in over-the-counter 
derivatives, without imposing concentration limits on the ETF's 
investments in listed derivatives, and without imposing limitations 
on investments in listed derivatives whose principal market is not a 
member of ISG or is a market with which its listing exchange does 
not have a comprehensive surveillance sharing agreement); and 69061 
(March 7, 2013), 78 FR 15990 (March 13, 2013) (SR-NYSEArca-2013-01) 
(approving investments in non-agency commercial MBS and non-agency 
residential MBS without a fixed limit but consistent with the fund's 
objective of investing up to 80% of its assets in investment grade 
fixed-income securities).
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Net Asset Value
    The Fund's administrator will calculate the Fund's net asset value 
(``NAV'') per Share as of the close of regular trading (normally 4:00 
p.m., Eastern time (``E.T.'')) on each day the New York Stock Exchange 
is open for business. NAV per Share will be calculated for the Fund by 
taking the value of the Fund's total assets, including interest or 
dividends accrued but not yet collected, less all liabilities, and 
dividing such amount by the total number of Shares outstanding. The 
result, rounded to the nearest cent, will be the NAV per Share 
(although creations and redemptions will be processed using a price 
denominated to the fifth decimal point, meaning that rounding to the 
nearest cent may result in different prices in certain circumstances).
Impact on Arbitrage Mechanism
    The Manager and the Sub-Advisers believe there will be minimal, if 
any, impact on the arbitrage mechanism for the Fund as a result of its 
use of derivatives. The Manager and the Sub-Advisers understand that 
market makers and participants should be able to value derivatives as 
long as the positions are disclosed with relevant information. The 
Manager and the Sub-Advisers believe that the price at which Shares 
trade will continue to be disciplined by arbitrage opportunities 
created by the ability to purchase or redeem creation Shares at their 
NAV, which should ensure that Shares will not trade at a material 
discount or premium in relation to their NAV.
    The Manager and the Sub-Advisers do not believe that there will be 
any significant impact on the settlement or operational aspects of the 
Fund's arbitrage mechanism due to the use of derivatives. Because 
derivatives generally are not eligible for in-kind transfer, they will 
typically be substituted with a ``cash in lieu'' amount when the Fund 
processes purchases or redemptions of creation units in-kind.
Creation and Redemption of Shares
    The Fund will issue Shares of the Fund at NAV only with authorized 
participants (``APs'') and only in aggregations of at least 50,000 
shares (each aggregation is called a ``Creation Unit'') or multiples 
thereof, on a continuous basis through the Distributor, without a sales 
load, at the NAV next determined after receipt, on any Business Day, of 
an order in proper form. A ``Business Day'' is defined as any day that 
the Trust is open for business, including as required by Section 22(e) 
of the Act.
    The consideration for purchase of Creation Units of the Fund 
consists of an ``in-kind'' deposit of a designated portfolio of 
securities and/or instruments that will conform pro rata to the 
holdings of the Fund (except in the circumstances described in the 
Fund's Statement of Additional Information (the ``SAI'')) (the 
``Deposit Securities'') and/or an amount of cash. If there is a 
difference between the NAV attributable to a Creation Unit and the 
aggregate market value of the Deposit Securities or Redemption 
Securities (defined below) exchanged for the Creation Unit, the party 
conveying the instruments with the lower value will pay to the other an 
amount in cash equal to that difference (the ``Cash Component''). 
Together, the Deposit Securities and the Cash Component will constitute 
the ``Fund Deposit,'' which will represent the minimum initial and 
subsequent investment amount for a Creation Unit of the Fund. The 
Deposit Securities and the securities and/or instruments that will be 
delivered in an in-kind transfer in a redemption (``Redemption 
Securities'') will be identical. Purchases and redemptions of Creation 
Units may be made in whole or in part on a cash basis, rather than in-
kind, only under the circumstances described in the Fund's SAI.
    To be eligible to place orders with respect to creations and 
redemptions of Creation Units, an entity must have executed an 
agreement with the Distributor, subject to acceptance by the transfer 
agent, with respect to creations and redemptions of Creation Units. 
Each such entity (an AP) must be (i) a broker-dealer or other 
participant in the clearing process through the continuous net 
settlement system of the National Securities Clearing Corporation

[[Page 1072]]

(``NSCC'') or (ii) a Depository Trust Company participant.
    When the Fund permits Creation Units to be issued principally or 
partially in-kind, the Fund will cause to be published, through the 
NSCC, on each Business Day, prior to the opening of trading on the 
Exchange (currently, 9:30 a.m. E.T.), the identity and the required 
number of each Deposit Security and the amount of the Cash Component 
(if any) to be included in the current Fund Deposit (based on 
information at the end of the previous Business Day).
    All orders to create Creation Units must be received by the 
Distributor within a one-hour window after the closing time of the 
regular trading session on the Exchange (``Closing Time'') (ordinarily 
between 4:00 p.m. E.T. and 5:00 p.m. E.T.) on the date such order is 
placed in order to receive the NAV on the next Business Day immediately 
following the date the order was placed.
    Shares may be redeemed only in Creation Units at their NAV next 
determined after receipt of a redemption request in proper form on a 
Business Day and only through an AP. The Fund will not redeem Shares in 
amounts less than a Creation Unit (except the Fund may redeem shares in 
amounts less than a Creation Unit in the event the Fund is being 
liquidated).
    When the Fund permits Creation Units to be redeemed principally or 
partially in-kind, the Fund will cause to be published, through the 
NSCC, immediately prior to the opening of business on the Exchange 
(currently, 9:30 a.m., E.T.) on each Business Day, the identity of the 
Redemption Securities and/or an amount of cash that will be applicable 
to redemption requests received in proper form on that day. The 
Redemption Securities will be identical to the Deposit Securities.
    In order to redeem Creation Units of the Fund, an AP must submit an 
order to redeem for one or more Creation Units. All such orders must be 
received by the Distributor within a one-hour window after the Closing 
Time (ordinarily between 4:00 p.m. E.T. and 5:00 p.m. E.T.) in order to 
receive the NAV on the next Business Day immediately following the date 
the order was placed.
Availability of Information
    The Fund's website (www.leggmason.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The website will 
include the Shares' ticker, CUSIP and exchange information, along with 
additional quantitative information updated on a daily basis, 
including, for the Fund: (1) Daily trading volume, the prior Business 
Day's reported NAV and closing price, mid-point of the bid/ask spread 
at the time of calculation of such NAV (the ``Bid/Ask Price''),\62\ and 
a calculation of the premium and discount of the Bid/Ask Price against 
the NAV; and (2) data in chart format displaying the frequency 
distribution of discounts and premiums of the daily Bid/Ask Price 
against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters.
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    \62\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
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    On each Business Day, before commencement of trading in Shares in 
the Regular Market Session \63\ on the Exchange, the Fund will disclose 
on its website the identities and quantities of the portfolio of 
securities and other assets (the ``Disclosed Portfolio'' as defined in 
Nasdaq Rule 5735(c)(2)) held by the Fund that will form the basis for 
the Fund's calculation of NAV at the end of the Business Day.\64\ The 
Fund's disclosure of derivative positions in the Disclosed Portfolio 
will include sufficient information for market participants to use to 
value these positions intraday. On a daily basis, the Fund will 
disclose on the Fund's website the following information regarding each 
portfolio holding, as applicable to the type of holding: Ticker symbol, 
CUSIP number or other identifier, if any; a description of the holding 
(including the type of holding), the identity of the security or other 
asset or instrument underlying the holding, if any; for options, the 
option strike price; quantity held (as measured by, for example, par 
value, notional value or number of shares, contracts or units); 
maturity date, if any; coupon rate, if any; effective date, if any; 
market value of the holding; and percentage weighting of the holding in 
the Fund's portfolio.\65\ The website information will be publicly 
available at no charge.
---------------------------------------------------------------------------

    \63\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 
4:15 p.m., E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 
p.m. to 8 p.m., E.T.).
    \64\ Under accounting procedures to be followed by the Fund, 
trades made on the prior Business Day (``T'') will be booked and 
reflected in NAV on the current Business Day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the Business 
Day the portfolio that will form the basis for the NAV calculation 
at the end of the Business Day.
    \65\ See Nasdaq Rule 5735(c)(2).
---------------------------------------------------------------------------

    In addition, for the Fund, an estimated value, defined in Rule 
5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's Disclosed Portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value, available on the 
Nasdaq Information LLC proprietary index data service,\66\ will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated by one or more 
major market data vendors and broadly displayed at least every 15 
seconds during the Regular Market Session. The Intraday Indicative 
Value will be based on quotes and closing prices provided by a dealer 
who makes a market in those instruments. Premiums and discounts between 
the Intraday Indicative Value and the market price may occur. This 
should not be viewed as a ``real time'' update of the NAV per Share of 
the Fund, which is calculated only once a day.
---------------------------------------------------------------------------

    \66\ Currently, the Nasdaq Global Index Data Service (``GIDS'') 
is the Nasdaq global index data feed service, offering real-time 
updates, daily summary messages, and access to widely followed 
indexes and Intraday Indicative Values for ETFs. GIDS provides 
investment professionals with the daily information needed to track 
or trade Nasdaq indexes, listed ETFs, or third-party partner indexes 
and ETFs.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of the Fund on a daily basis and will provide 
a close estimate of that value throughout the trading day.
    Information regarding the previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers. Information regarding market price and 
trading volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other 
electronic services. Quotation and last sale information for the Shares 
will be available via Nasdaq proprietary quote and trade services, as 
well as in accordance with the Unlisted Trading Privileges and the 
Consolidated Tape Association (``CTA'') plans for the Shares and for 
the following U.S. securities, to the extent that they are exchange-
listed securities: Work Out Securities, Non-Convertible Preferred 
Securities, Equity-Related Warrants, convertible fixed income 
securities and ETFs. Price information for U.S. exchange-listed options 
will be available via the Options Price Reporting Authority and for 
other U.S. exchange-listed derivative instruments

[[Page 1073]]

will be available from the applicable listing exchange and from major 
market data vendors. Price information for restricted securities, 
including Regulation S and Rule 144A instruments, will be available 
from major market data vendors. Money Market Funds are typically priced 
once each Business Day and their prices will be available through the 
applicable fund's website or from major market data vendors.
    For exchange-listed securities (including foreign exchange-listed 
securities), equities traded in the over-the-counter market (including 
Work Out Securities, Non-Convertible Preferred Securities and ETFs), 
Exchange-Traded Derivatives, OTC Derivatives, Debt and fixed income 
securities (including convertible fixed income securities), warrants on 
fixed income securities and Equity-Related Warrants, intraday price 
quotations will generally be available from broker-dealers and trading 
platforms (as applicable). Price information will also be available 
from feeds from market data vendors, published or other public sources, 
or online information services for exchange-listed securities 
(including foreign exchange-listed securities), equities traded in the 
over-the-counter market (including Work Out Securities, Non-Convertible 
Preferred Securities and ETFs), Exchange-Traded Derivatives, Debt and 
fixed income securities, warrants on fixed income securities and 
Equity-Related Warrants. Additionally, the Trade Reporting and 
Compliance Engine (``TRACE'') of the Financial Industry Regulatory 
Authority (``FINRA'') will be a source of price information for 
corporate bonds, privately-issued securities, MBS and ABS, to the 
extent transactions in such securities are reported to TRACE.\67\ 
Intraday and other price information related to U.S. government 
securities, Money Market Funds, and other cash equivalents that are 
traded over-the-counter also will be available through subscription 
services, such as Bloomberg, Markit and Thomson Reuters, which can be 
accessed by APs and other investors. Electronic Municipal Market Access 
(``EMMA'') will be a source of price information for municipal bonds. 
Pricing for repurchase transactions and reverse repurchase agreements 
entered into by the Fund are not publicly reported. Prices are 
determined by negotiation at the time of entry with counterparty 
brokers, dealers and banks.
---------------------------------------------------------------------------

    \67\ Broker-dealers that are FINRA member firms have an 
obligation to report transactions in specified debt securities to 
TRACE to the extent required under applicable FINRA rules. 
Generally, such debt securities will have at issuance a maturity 
that exceeds one calendar year. For fixed income securities that are 
not reported to TRACE, (i) intraday price quotations will generally 
be available from broker-dealers and trading platforms (as 
applicable) and (ii) price information will be available from feeds 
from market data vendors, published or other public sources, or 
online information services, as described above.
---------------------------------------------------------------------------

    Additional information regarding the Fund and the Shares, including 
investment strategies, risks, creation and redemption procedures, fees, 
Fund holdings' disclosure policies, distributions and taxes will be 
included in the Registration Statement. Investors will also be able to 
obtain the SAI, the Fund's annual and semi-annual reports (together, 
``Shareholder Reports''), and its Form N-CSR and Form N-SAR, filed 
twice a year, except the SAI, which is filed at least annually. The 
Fund's SAI and Shareholder Reports will be available free upon request 
from the Fund, and those documents and the Form N-CSR and Form N-SAR 
may be viewed on-screen or downloaded from the Commission's website at 
www.sec.gov.
Initial and Continued Listing
    The Shares will be subject to Nasdaq Rule 5735, which sets forth 
the initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and continued 
listing, the Fund must be in compliance with Rule 10A-3 \68\ under the 
Act. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. The Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time.
---------------------------------------------------------------------------

    \68\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. Nasdaq will halt trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). 
Trading may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
These may include: (1) The extent to which trading is not occurring in 
the securities and/or the other assets constituting the Disclosed 
Portfolio of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to 
Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which 
Shares of the Fund may be halted.
Trading Rules
    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity securities. Nasdaq will allow trading in the Shares 
from 4:00 a.m. until 8:00 p.m., E.T. The Exchange has appropriate rules 
to facilitate transactions in the Shares during all trading sessions. 
As provided in Nasdaq Rule 5735(b)(3), the minimum price variation for 
quoting and entry of orders in Managed Fund Shares traded on the 
Exchange is $0.01.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both Nasdaq and 
also FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\69\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and applicable 
federal securities laws.
---------------------------------------------------------------------------

    \69\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-listed securities and 
instruments held by the Fund (including ETFs, exchange-listed equities, 
exchange-listed options, futures contracts and exchange-listed swaps) 
with other markets and other entities that are members of ISG and with 
which the Exchange has comprehensive surveillance sharing 
agreements,\70\ and FINRA and the

[[Page 1074]]

Exchange both may obtain information regarding trading in the Shares, 
the exchange-listed securities, derivatives and other instruments held 
by the Fund from markets and other entities that are members of ISG, 
which include securities and futures exchanges and swap execution 
facilities, or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.\71\ Moreover, FINRA, on behalf of the 
Exchange, will be able to access, as needed, trade information for 
certain fixed income securities held by the Fund reported to FINRA's 
TRACE and, with respect to municipal securities, EMMA.
---------------------------------------------------------------------------

    \70\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
    \71\ As noted above, no more than 10% of the net assets of the 
Fund may be invested in Exchange-Traded Derivatives whose principal 
market is not a member of ISG or a market with which the Exchange 
has a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    All of the Fund's net assets that are invested in equity securities 
other than Work Out Securities that are exchange-listed (which consist 
of Non-Convertible-Preferred Securities and Equity-Related Warrants 
that are exchange-listed, and ETFs) will be invested in securities that 
trade in markets that are members of ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Intraday Indicative Value and the Disclosed Portfolio is 
disseminated; (4) the risks involved in trading the Shares during the 
Pre-Market and Post-Market Sessions when an updated Intraday Indicative 
Value will not be calculated or publicly disseminated; (5) the 
requirement that members deliver a prospectus to investors purchasing 
newly issued Shares prior to or concurrently with the confirmation of a 
transaction; and (6) trading information. The Information Circular will 
also discuss any exemptive, no-action and interpretive relief granted 
by the Commission from any rules under the Act.
    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Fund. Members purchasing Shares from the Fund for 
resale to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV Calculation Time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the Fund's 
website.
Continued Listing Representations
    All statements and representations made in this filing regarding 
(a) the description of the portfolio or reference assets, (b) 
limitations on portfolio holdings or reference assets, (c) 
dissemination and availability of the reference asset or intraday 
indicative values, or (d) the applicability of Exchange listing rules 
shall constitute continued listing requirements for listing the Shares 
on the Exchange. In addition, the issuer has represented to the 
Exchange that it will advise the Exchange of any failure by the Fund to 
comply with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Act, the Exchange will 
monitor for compliance with the continued listing requirements. If the 
Fund is not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under the Nasdaq 5800 
Series.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act in general and Section 6(b)(5) of the Act in particular in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Nasdaq Rule 5735. The 
Exchange represents that trading in the Shares will be subject to the 
existing trading surveillances, administered by both the Exchange and 
FINRA, on behalf of the Exchange, which are designed to deter and 
detect violations of Exchange rules and applicable federal securities 
laws and are adequate to properly monitor trading in the Shares in all 
trading sessions. The Manager and the Sub-Advisers are affiliated with 
a broker-dealer and have implemented, and will maintain, a fire wall 
with respect to its broker-dealer affiliate regarding access to 
information concerning proposed changes to the composition and/or 
changes to the Fund's portfolio prior to implementation. In addition, 
paragraph (g) of Nasdaq Rule 5735 further requires that personnel who 
make decisions on an investment company's portfolio composition must be 
subject to procedures designed to prevent the use and dissemination of 
material, non-public information regarding the investment company's 
portfolio.
    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objectives, applicable legal requirements 
\72\ and will not be used for the purpose of seeking leveraged returns 
or performance that is the multiple or inverse multiple of a benchmark 
(although derivatives may have embedded leverage). Although the Fund 
will be permitted to borrow as permitted under the 1940 Act, it will 
not be operated as a ``leveraged ETF,'' i.e., it will not be operated 
in a manner designed to seek leveraged returns or a multiple or inverse 
multiple of the performance of an underlying reference index.\73\ The 
Fund may engage in frequent and active trading of portfolio investments 
to achieve its investment objective.
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    \72\ As noted above, the Fund will limit its investments in 
illiquid securities or other illiquid assets to an aggregate amount 
of 15% of its net assets (calculated at the time of investment), as 
required by the Commission.
    \73\ As noted above, the Fund will not invest in leveraged, 
inverse or inverse leveraged ETFs.
---------------------------------------------------------------------------

    The Exchange believes that, notwithstanding that the Fund would not 
meet all of the ``generic'' listing

[[Page 1075]]

requirements of Nasdaq Rule 5735(b)(1), the Fund will not be subject to 
manipulation, the investments of the Fund will be able to be monitored 
and surveilled by the Exchange and risks will be mitigated by 
alternative limits imposed by the Exchange. As a result, it is in the 
public interest to approve listing and trading of Shares of the Fund on 
the Exchange pursuant to the requirements set forth herein. Deviations 
from the generic requirements are necessary for the Fund to achieve its 
investment objective in a cost-effective manner that maximizes 
investors' returns and to manage the risks associated with its 
investments, and the Exchange proposes that the Fund will be required 
to comply with alternative requirements that are customized to address 
the objectives of Section 6(b)(5) of the Act, as described herein. 
Further, the strategy and investments of the Fund are substantially 
similar to those of other ETFs previously approved by the Commission, 
which have operated safely and without disrupting the market for 
several years.\74\
---------------------------------------------------------------------------

    \74\ See, e.g., Securities Exchange Act Release Nos. 66321 
(February 3, 2012) 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-
95) (granting approval for the listing of shares of the PIMCO Total 
Return Exchange Traded Fund); 72666 (July 24, 2014) (granting 
approval to the use of derivatives by the PIMCO Total Return 
Exchange Traded Fund); and 76719 (December 21, 2015) (granting 
approval for the listing of shares of the Guggenheim Total Return 
Bond ETF).
---------------------------------------------------------------------------

    The Fund will not comply with the requirements in Nasdaq Rule 
5735(b)(1) regarding the use of aggregate gross notional value or 
exposure of derivatives when calculating the weight of such derivatives 
or the exposure that such derivatives provide to underlying reference 
assets, including the requirements in Rules 5735(b)(1)(D)(i), 
5735(b)(1)(D)(ii), 5735(b)(1)(E) and 5735(b)(1)(F). Instead, the 
Exchange proposes that for the purposes of any applicable requirements 
under Nasdaq Rule 5735(b)(1), and any alternative requirements proposed 
by the Exchange, the Fund will use the mark-to-market value or exposure 
of its derivatives in calculating the weight of such derivatives or the 
exposure that such derivatives provide to their reference assets. The 
Exchange believes that this alternative requirement is appropriate 
because the mark-to-market value or exposure is a more accurate 
measurement of the actual exposure incurred by the Fund in connection 
with a derivatives position.\75\
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    \75\ As previously noted, the mark-to-market approach is 
consistent with the valuation methodology for derivatives for asset 
coverage purposes advocated by the Commission in proposed Rule 18f-4 
under the 1940 Act. See Derivatives Rule Proposing Release. In a 
white paper published by staff of the Division of Economic and Risk 
Analysis of the SEC (``DERA'') in connection with the proposal of 
Rule 18f-4 under the 1940 Act, the staff of DERA noted that a 
derivative's notional amount does not accurately reflect the risk of 
the derivative. See Daniel Deli, Paul Hanouna, Christof Stahel, Yue 
Tang and William Yost, Use of Derivatives by Registered Investment 
Companies (December 2015) at 10 (``On the other hand, there are 
drawbacks to using notional amounts. First, because of differences 
in expected volatilities of the underlying assets, notional amounts 
of derivatives across different underlying asset generally do not 
represent the same unit of risk. For example, the level of risk 
associated with a $100 million notional of a S&P500 index futures is 
not equivalent to the level of risk of a $100 million notional of 
interest rate swaps, currency forwards or commodity futures.'').
---------------------------------------------------------------------------

    The Fund will not meet the requirement in Nasdaq Rule 
5735(b)(1)(B)(v) that Private ABS/MBS in the Fund's portfolio account, 
in the aggregate, for no more than 20% of the weight of the fixed 
income portion of the Fund's portfolio. However, the Fund will limit 
the holdings in Private ABS/MBS to 30% of the weight of the fixed 
income portion of the Fund's portfolio.\76\ The Exchange believes that 
this limitation on the Fund's investment in Private ABS/MBS, which is 
consistent with a similar limitation in a previous filing for the 
listing of an ETF approved by the Commission,\77\ is appropriate to 
provide the Fund with sufficient flexibility to invest in Private ABS/
MBS, while still imposing a reasonable limit on such investments, 
consistent with the mandate in Section 6(b) of the Act to facilitate 
transactions in securities while protecting investors and the public 
interest. Private ABS/MBS held by the Fund are expected to provide 
investors with: (i) Diversification as compared to a portfolio more 
heavily weighted towards agency and GSE ABS and MBS (``Government ABS/
MBS''), municipal securities and investment grade corporate debt; (ii) 
the potential for higher returns; and (iii) reasonable liquidity. 
Although the higher threshold will include a broader spectrum of credit 
quality among the issuers, this moderately increased risk can be 
appropriately addressed through disclosure and substantially mitigated 
through the careful credit monitoring performed by the Sub-Adviser. In 
addition, current economic conditions, which include robust growth and 
economic strength, are significant mitigants to the risk of credit 
deterioration. The Sub-Adviser seeks to maximize the Fund's investments 
in Private ABS/MBS during economic periods, such as that currently 
experienced in the U.S., of robust growth. To the extent that the 
economy were to weaken, the Sub-Adviser would re-evaluate the level at 
which the Fund seeks to invest in Private ABS/MBS. Given the benefits 
provided, including, most importantly, the opportunity for a fixed 
income investor to diversify the portfolio across fixed income classes 
and earn marginally greater returns, together with the protections of 
credit monitoring and liquidity management provided by the Sub-Adviser, 
the Exchange believes that a 30% limit, rather than the 20% limit used 
by the generic listing standard, is appropriate.
---------------------------------------------------------------------------

    \76\ For purposes of this requirement, the weight of the Fund's 
exposure to Private ABS/MBS referenced in derivatives shall be 
calculated based on the mark-to-market value or exposure of such 
derivatives.
    \77\ See Securities Exchange Act Release No. 69061 (March 7, 
2013), 78 FR 15990 (March 13, 2013) (SR-NYSEArca-2013-01) (approving 
investments in non-agency commercial MBS and non-agency residential 
MBS without a fixed limit but consistent with the fund's objective 
of investing up to 80% of its assets in investment grade fixed-
income securities).
---------------------------------------------------------------------------

    Private ABS/MBS include a number of different types of securitized 
debt products, including credit card debt, student loans, auto debt and 
residential and commercial mortgage debt. Investment in a variety of 
sectors, rather than simply residential mortgages comprising Government 
ABS/MBS, reduces concentration and diversifies sources of risk. Private 
ABS/MBS held by the Fund will be generally liquid instruments.\78\ The 
Sub-Adviser will be able to trade out of the instruments that do not 
satisfy Fund credit and other criteria. U.S. Private ABS/MBS are trade-
reported through TRACE,\79\ and

[[Page 1076]]

the Sub-Adviser and the Fund will maintain liquidity policies and 
procedures pursuant to which the Sub-Adviser will monitor the liquidity 
of the Fund's Private ABS/MBS investments and continuously manage any 
associated risks.\80\ The instruments are cleared through The 
Depository Trust Company.
---------------------------------------------------------------------------

    \78\ The Sub-Adviser, using data from TRACE, compiled weekly 
trading data for Private ABS/MBS over a period of three years. A 
chart summarizing this data, which is available at https://www.leggmason.com/content/dam/legg-mason/documents/en/regulatory-documents/letters-and-notices/abs-mbs-trading-activity.pdf, shows 
that Private ABS/MBS experienced regular and reasonable liquidity 
over the prior three-year period. During that time period the weekly 
trading activity for non-agency, non-GSE residential MBS ranged from 
approximately $16 billion to $48 billion (including both investment 
grade and non-investment grade), the weekly trading activity for 
non-agency, non-GSE commercial MBS has ranged from approximately $21 
billion to $57 billion (including both investment grade and non-
investment grade), and the weekly trading activity for non-agency, 
non-GSE ABS (other than MBS) ranged from approximately $17 billion 
to $35 billion (including both investment grade and non-investment 
grade).
    \79\ Although foreign Private ABS/MBS are not trade-reported 
through TRACE, foreign Private ABS/MBS, as of the date of this 
application, are expected to constitute a very small percentage of 
the Fund's net assets. Based on the Fund's strategy and current 
market conditions, foreign Private ABS/MBS, as of the date of this 
application, are expected to constitute approximately 1% of the 
Fund's net assets, but that percentage could change in the future.
    \80\ As part of these policies and procedures, the Sub-Adviser 
rates the liquidity of the Fund's investments (including Private 
ABS/MBS) using data on bid-ask spreads on the investments and 
haircut requirements for the investment when they are delivered in 
connection with repurchase agreements.
---------------------------------------------------------------------------

    The Fund carries out its own credit analysis of Private ABS/MBS 
issuers \81\ and conducts an extensive analysis of the features of the 
proposed investments. The features that the Fund looks for in selecting 
Private ABS/MBS include good credit quality, liquidity, bankruptcy 
remoteness, lower prepayment risk, overcollateralization, excess 
spread, amortization, professional servicing for and reporting to 
investors, and diversity of payers within each underlying pool. The 
Sub-Adviser regularly monitors the credit quality of the issuers of 
Private ABS/MBS for compliance with the credit quality, liquidity and 
other investment requirements.
---------------------------------------------------------------------------

    \81\ The Sub-Adviser has a fixed-income investment team that 
maintains and updates credit opinions on all Private ABS/MBS 
investments made by the team on an ongoing basis. This research 
allows the investment team to form a comprehensive view of the 
collateral pool associated with an investment. The team works with 
legal professionals as well to understand and track the legal 
documents associated with each distinct deal structure.
---------------------------------------------------------------------------

    The Fund will not meet the requirement that at least 90% of the 
fixed income weight of the Fund's portfolio meet one of the criteria in 
Nasdaq Rule 5735(b)(1)(B)(iv) \82\ because some Private ABS/MBS cannot 
satisfy the criteria in Nasdaq Rule 5735(b)(1)(B)(iv).\83\ The Exchange 
proposes, in the alternative, to require the Fund to ensure that the 
investments in the fixed income portion of the Fund's portfolio other 
than Private ABS/MBS comply with the 90% requirement in Nasdaq Rule 
5735(b)(1)(B)(iv).\84\ The Exchange believes that this alternative 
limitation is appropriate because Nasdaq Rule 5735(b)(1)(B)(iv) does 
not appear to be designed for structured finance vehicles such as 
Private ABS/MBS, and the overall weight of Private ABS/MBS held by the 
Fund will be limited to 30% of the fixed income portion of the Fund's 
portfolio, as described above. As discussed above, although Private 
ABS/MBS will be excluded for the purposes of compliance with Nasdaq 
Rule 5735(b)(1)(B)(iv), the Fund's portfolio is consistent with the 
statutory standard as a result of the diversification provided by the 
investments, the benefits related to the opportunity for higher 
returns, and the Sub-Adviser's selection process, which closely 
monitors investments to ensure maintenance of credit and liquidity 
standards and relies on the higher investment levels in these 
instruments during periods of U.S. economic strength.
---------------------------------------------------------------------------

    \82\ Nasdaq Rule 5735(b)(1)(B)(iv) provides that component 
securities that in the aggregate account for at least 90% of the 
fixed income weight of the Fund's portfolio must be either: (a) From 
issuers that are required to file reports pursuant to Sections 13 
and 15(d) of the Act; (b) from issuers that have a worldwide market 
value of its outstanding common equity held by non-affiliates of 
$700 million or more; (c) from issuers that have outstanding 
securities that are notes, bonds debentures, or evidence of 
indebtedness having a total remaining principal amount of at least 
$1 billion; (d) exempted securities as defined in Section 3(a)(12) 
of the Act; or (e) from issuers that are a government of a foreign 
country or a political subdivision of a foreign country.
    \83\ Private ABS/MBS are generally issued by special purpose 
vehicles, so the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) regarding 
an issuer's market capitalization and the remaining principal amount 
of an issuer's securities are typically unavailable with respect to 
Private ABS/MBS, even though such Private ABS/MBS may own 
significant assets.
    \84\ For purposes of this requirement, the weight of the Fund's 
exposure to any fixed income securities referenced in derivatives 
shall be calculated based on the mark-to-market value or exposure of 
such derivatives.
---------------------------------------------------------------------------

    The Fund will not meet the equity requirements in Nasdaq Rule 
5735(b)(1)(A) with respect to Non-Convertible Preferred Securities, 
Work Out Securities and Equity-Related Warrants, but will satisfy these 
requirements with respect to the ETFs in which the Fund will 
invest.\85\ In order to reflect this deviation, the Exchange proposes 
that (i) the Fund's investments in equity securities other than Non-
Convertible Preferred Securities, Work Out Securities and Equity-
Related Warrants shall comply with the equity requirements in Nasdaq 
Rule 5735(b)(1)(A) \86\ and (ii) the weight of Non-Convertible 
Preferred Securities, Equity-Related Warrants and Work Out Securities 
in the Fund's portfolio shall together not exceed 30% of the Fund's net 
assets. The Exchange believes that these alternative limitations are 
appropriate in light of the fact that the Non-Convertible Preferred 
Securities, Equity-Related Warrants and Work Out Securities are 
providing debt-oriented exposures or are received in connection with 
the Fund's previous investment in Debt or fixed income securities, and 
all of the other equity securities held by the Fund will comply with 
the requirements of Nasdaq Rule 5735(b)(1)(A).
---------------------------------------------------------------------------

    \85\ Nasdaq Rule 5735(b)(1)(A)(i)(e) generally requires the U.S. 
equity securities to be listed on a national securities exchange. 
The Exchange notes that shares of Money Market Funds are not 
considered equity securities for the purposes of Nasdaq Rule 
5735(b)(1)(A), and that there is no limitation on the percentage of 
the Fund's portfolio invested in shares of Money Market Funds, in 
accordance with Nasdaq Rule 5735(b)(1)(C)(i).
    \86\ These other equities will consist of ETFs (including money 
market ETFs) that provide exposure to fixed income securities and 
Debt. The weight of such ETFs in the Fund's portfolio shall not be 
limited.
---------------------------------------------------------------------------

    The Fund will not meet the requirement in Nasdaq Rule 5735(b)(1)(E) 
that no more than 20% of the assets in the Fund's portfolio may be 
invested in over-the-counter derivatives. The Fund proposes that no 
limit be placed on Interest Rate and Currency Derivatives, which are 
necessary and appropriate to allow the Manager and Sub-Advisers to risk 
manage the Fund, but that the weight of all other OTC Derivatives 
(e.g., credit default swaps) be limited to 10% of the net assets in the 
Fund's portfolio. For purposes of this 10% limit on OTC Derivatives, 
the weight of such OTC Derivatives will be calculated based on the 
mark-to-market value or exposure of such OTC Derivatives. The Exchange 
believes that this alternative requirement, which is generally 
consistent with the requirement in a previous filing for the listing of 
an ETF approved by the Commission,\87\ is appropriate in light of the 
fact that Interest Rate and Currency Derivatives are among the most 
liquid investment instruments (including not only derivatives but also 
securities) in the market \88\ (and are even more liquid than most non-
government or government-guaranteed securities). Based on the data 
compiled by the Sub-Adviser in respect to its liquidity policy, these 
derivatives are among the most liquid investments traded. In addition,

[[Page 1077]]

most Interest Rate Derivatives traded by the Fund are centrally cleared 
by regulated clearing firms, and Interest Rate and Currency Derivatives 
are subject to trade reporting,\89\ and other robust regulation.\90\ 
Given the size of the trading market and the regulatory oversight of 
the markets, the Exchange believes that Interest Rate and Currency 
Derivatives are not readily subject to manipulation. The Exchange also 
believes that allowing the Fund to risk manage its portfolio through 
the use of Interest Rate and Currency Derivatives without limit is 
necessary to allow the Fund to achieve its investment objective and 
protect investors.
---------------------------------------------------------------------------

    \87\ See Securities Exchange Act Release No. 80657 (May 11, 
2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (approving 
up to 50% of the fund's assets (calculated on the basis of aggregate 
gross notional value) to be invested in over-the-counter derivatives 
that are used to reduce currency, interest rate, or credit risk 
arising from the fund's investments, including forwards, over-the-
counter options, and over-the-counter swaps).
    \88\ Trading in foreign exchange markets averaged $5.1 trillion 
per day in April 2016, and 67% of this trading activity was in 
derivatives contracts such as currency or foreign exchange forwards, 
options and swaps (with the other 33% consisting of spot 
transactions). See Bank for International Settlements, Triennal 
Central Bank Survey, Foreign Exchange Turnover in April 2016, 
available at https://www.bis.org/publ/rpfx16fx.pdf (accessed November 
2017). Trading in OTC interest rate derivatives averaged $2.7 
trillion per day in April 2016. See Bank for International 
Settlements, Triennal Central Bank Survey, OTC Interest Rate 
Derivatives Turnover in April 2016, available at https://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017).
    \89\ Transactions in Interest Rate and Currency Derivatives are 
required to be reported to a swap data repository, and transactions 
in Interest Rate Derivatives and certain Currency Derivatives (i.e., 
Currency Derivatives that are not excluded from the definition of a 
``swap'', as described below) are also publicly reported pursuant to 
rules issued by the Commodity Futures Trading Commission (``CFTC''). 
See 17 CFR parts 43, 45 and 46. Pursuant to Section 1(a)(47)(E) of 
the CEA and a related determination by the Department of the 
Treasury, physically-settled Currency Derivatives that meet the 
definition of ``foreign exchange forwards'' or ``foreign exchange 
swaps'' under Sections 1a(24)-(25) of the CEA that are entered into 
between eligible contract participants (as defined in the CEA) 
(``Excluded Currency Derivatives'') are excluded from the definition 
of a ``swap'' under the CEA. See Determination of Foreign Exchange 
Swaps and Foreign Exchange Forwards Under the Commodity Exchange 
Act, 77 FR 69694 (Nov. 20, 2012). However, as noted above, 
transactions in such Excluded Currency Derivatives are required to 
be reported to a swap data repository, but they are not subject to 
the public reporting requirements.
    \90\ Interest Rate Derivatives and Currency Derivatives other 
than Excluded Currency Derivatives are comprehensively regulated as 
swaps under the CEA and regulations issued thereunder by the CFTC 
and other federal financial regulators. See, e.g., 17 CFR part 23 
(capital and margin requirements for swap dealers, business conduct 
standards for swap dealers, and swap documentation requirements); 17 
CFR part 50 (clearing requirements for swaps). While Excluded 
Currency Derivatives are not subject to all swap regulations, they 
are subject to the ``business conduct standards'' adopted by the 
CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; 
Determination of Foreign Exchange Swaps and Foreign Exchange 
Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 
2012).
---------------------------------------------------------------------------

    The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(i) that at least 90% of the weight of the Fund's holdings 
in futures, exchange-traded options, and listed swaps shall, on both an 
initial and continuing basis, consist of futures, options, and swaps 
for which the Exchange may obtain information via the ISG from other 
members or affiliates of the ISG, or for which the principal market is 
a market with which the Exchange has a comprehensive surveillance 
sharing agreement. Instead, the Exchange proposes that no more than 10% 
of the net assets of the Fund will be invested in Exchange-Traded 
Derivatives whose principal market is not a member of ISG or is a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement.\91\ The Exchange believes that this 
alternative limitation is appropriate because the overall limit on 
Exchange-Traded Derivatives whose principal market is not a member of 
ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement will still be low relative 
to the overall size of the Fund.
---------------------------------------------------------------------------

    \91\ For purposes of this 10% limit, the weight of such 
Exchange-Traded Derivatives will be calculated based on the mark-to-
market value or exposure of such Exchange-Traded Derivatives.
---------------------------------------------------------------------------

    The Fund will not meet the requirement in Nasdaq Rule 
5735(b)(1)(D)(ii) that the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets 
shall not exceed 65% of the weight of the Fund's portfolio (including 
gross notional exposures), and the aggregate gross notional value of 
listed derivatives based on any single underlying reference asset shall 
not exceed 30% of the weight of the Fund's portfolio (including gross 
notional exposures) because the Fund may maintain significant positions 
in Eurodollar and G-7 Sovereign Futures and Options. The Manager has 
indicated that obtaining exposure to these investments through futures 
contracts is often the most cost efficient method to achieve such 
exposure. The Exchange notes that Eurodollar and G-7 Sovereign Futures 
and Options are highly liquid investments \92\ and are not subject to 
the same concentration risks as Exchange-Traded Derivatives referencing 
other assets because of such liquidity. Further, the Exchange notes 
that the significantly diminished risk of Treasury Securities is 
reflected in their exclusion from the concentration requirements 
applicable to fixed income securities in Nasdaq Rule 5735(b)(1)(B)(ii). 
The Exchange proposes that the Fund will comply with the concentration 
requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to 
the Fund's investment in Eurodollar and G-7 Sovereign Futures and 
Options.\93\ The Exchange believes that this alternative limitation is 
appropriate to provide the Fund with sufficient flexibility and because 
of the highly liquid and transparent nature of

[[Page 1078]]

Eurodollar and G-7 Sovereign Futures and Options. Further, as described 
above, the G-7 Sovereign Futures and Options in which the Fund invests 
will be listed on an exchange that is an ISG member or an exchange with 
which the Exchange has a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    \92\ See CME Group, Interest Rate Futures Liquidity Metrics 
Reach New Highs (October 6, 2017), available at https://www.cmegroup.com/education/interest-rates-liquidity-metrics-reach-new-highs.html (accessed November 2017) (providing statistics 
regarding liquidity and open interest in futures and options on 
Eurodollars and Treasury Securities, including that during the first 
three quarters of 2017, Eurodollar futures and options traded 
through CME Group had an average daily open interest of 
approximately 53 million contracts and futures and options on 
Treasury Securities had an average daily open interest of 
approximately 15 million contracts); The Montreal Exchange, 
Statistics for Interest Rate Derivatives, Index Derivatives and 
Equity Derivatives (September 2017), available at https://www.m-x.ca/f_stat_en/1709_stats_en.pdf (accessed November 2017) (providing 
statistics regarding liquidity and open interest in futures and 
options on Canadian sovereign debt, including that, as of September 
2017, the open interest in futures and options on Canadian sovereign 
debt traded on The Montreal Exchange was approximately 560,000 
contracts); Eurex Exchange, Benchmark Fixed Income Derivatives, 
available at https://www.eurexchange.com/blob/115654/4c51e4b8bc77355475b3b6f46afc0ef1/data/factsheet_eurex_benchmark_fixed_income_derivatives.pdf (accessed 
November 2017) (providing statistics regarding liquidity and open 
interest in futures and options on German sovereign debt, including 
that, as of July 2015, the open interest in futures on German 
sovereign debt traded on Eurex was approximately 3,000,000 contracts 
and the open interest in options on German sovereign debt futures 
traded on Eurex was approximately 3,000,000 contracts); Eurex 
Exchange, Eurex Exchange Euro-BTP Futures, Italian Government Bond 
Futures, available at https://www.eurexchange.com/blob/115624/6a1281939d15ddbab960af40da6f11dc/data/factsheet_eurex_euro_btp_futures_on_italian_government_bonds.pdf 
(accessed November 2017) (providing statistics regarding liquidity 
and open interest in futures on Italian sovereign debt, including 
that the open interest peaks in 2017 for futures on long-term and 
short-term Italian sovereign debt traded on Eurex was approximately 
450,000 and 270,000 contracts, respectively); Eurex Exchange, Euro-
OAT Derivatives, French Government Bond Futures and Options, 
available at https://www.eurexchange.com/blob/115652/48198ec577f7b3b0ac44d4c5a39ed0de/data/factsheet_eurex_euro_oat_futures_on_french_government_bonds.pdf 
(accessed November 2017) (providing statistics regarding liquidity 
and open interest in futures on French sovereign debt, including 
that, as of July 2017, the open interest in futures on long-term 
French sovereign debt traded on Eurex was approximately 600,000 
contracts); Intercontinental Exchange, Gilt Futures Overview, 
available at https://www.theice.com/publicdocs/futures/Gilt_Futures_Overview.pdf (accessed November 2017) (providing 
statistics regarding liquidity and open interest in futures on 
British sovereign debt, including that, as of the third quarter of 
2014, the open interest in futures on long-term British sovereign 
debt traded on the Intercontinental Exchange was approximately 
400,000 contracts); Osaka Exchange, Japanese Government Bond Futures 
& Options, available at https://www.jpx.co.jp/english/derivatives/products/jgb/jgb-futures/tvdivq0000003n94-att/JGB_FUT_OP_E.pdf 
(accessed November 2017) (providing statistics regarding liquidity 
and open interest in futures and options on Japanese sovereign debt, 
including that as of July 2016, the open interest in futures on 10-
year Japanese sovereign debt traded on the Osaka Exchange was 
approximately 80,000 contracts). The Exchange also notes that the 
Commission has previously granted exemptions under the Act to 
facilitate the trading of futures on sovereign debt issued by each 
of the Group of Seven countries (among other countries) and that 
such exemptions were based in part on the Commission's assessment of 
the sufficiency of the credit ratings and liquidity of such 
sovereign debt. See 17 CFR 240.3a12-8; Securities Exchange Act 
Release No. 41453 (May 26, 1999), 64 FR 29550 (June 2, 1999).
    \93\ For purposes of this requirement, the weight of the 
applicable derivatives will be calculated based on the mark-to-
market value or exposure of such derivatives.
---------------------------------------------------------------------------

    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily every day that 
the Fund is traded, and that the NAV and the Disclosed Portfolio will 
be made available to all market participants at the same time. In 
addition, a large amount of information will be publicly available 
regarding the Fund and the Shares, thereby promoting market 
transparency.
    Moreover, the Intraday Indicative Value, available on the Nasdaq 
Information LLC proprietary index data service, will be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Exchange's Regular Market Session. On each Business 
Day, before commencement of trading in the Shares in the Regular Market 
Session on the Exchange, the Fund will disclose on its website the 
Disclosed Portfolio of the Fund that will form the basis for the Fund's 
calculation of NAV at the end of the Business Day. Information 
regarding market price and trading volume of the Shares will be 
conditionally available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. Quotation and 
last sale information for the Shares will be available via Nasdaq 
proprietary quote and trade services, as well as in accordance with the 
Unlisted Trading Privileges and the CTA plans for the Shares and for 
the following U.S. securities, to the extent they are exchange-listed: 
Work Out Securities, Non-Convertible Preferred Securities, Equity-
Related Warrants, convertible fixed income securities and ETFs. Price 
information for U.S. exchange-listed options will be available via the 
Options Price Reporting Authority and for other U.S. exchange-listed 
derivative instruments will be available from the applicable listing 
exchange and from major market data vendors. Price information for 
restricted securities, including Regulation S and Rule 144A 
instruments, will be available from major market data vendors, broker-
dealers and trading platforms. Money Market Funds are typically priced 
once each Business Day and their prices will be available through the 
applicable fund's website or from major market data vendors.
    For exchange-listed securities (including foreign exchange-listed 
securities), equities traded in the over-the-counter market (including 
Work Out Securities, Non-Convertible Preferred Securities and ETFs), 
Exchange-Traded Derivatives, OTC Derivatives, Debt and fixed income 
securities (including convertible fixed income securities), warrants on 
fixed income securities and Equity-Related Warrants, intraday price 
quotations will generally be available from broker-dealers and trading 
platforms (as applicable). Price information will also be available 
from feeds from market data vendors, published or other public sources, 
or online information services for exchange-listed securities 
(including foreign exchange-listed securities), equities traded in the 
over-the-counter market (including Work Out Securities, Non-Convertible 
Preferred Securities and ETFs), Exchange-Traded Derivatives, Debt and 
fixed income securities, warrants on fixed income securities and 
Equity-Related Warrants. Additionally, TRACE will be a source of price 
information for corporate bonds, privately-issued securities, MBS and 
ABS, to the extent transactions in such securities are reported to 
TRACE.\94\ Intraday and other price information related to U.S. 
government securities, Money Market Funds, and other cash equivalents 
that are traded over-the-counter also will be available through 
subscription services, such as Bloomberg, Markit and Thomson Reuters, 
which can be accessed by APs and other investors. EMMA will be a source 
of price information for municipal bonds. Pricing for repurchase 
transactions and reverse repurchase agreements entered into by the Fund 
are not publicly reported. Prices are determined by negotiation at the 
time of entry with counterparty brokers, dealers and banks.
---------------------------------------------------------------------------

    \94\ Broker-dealers that are FINRA member firms have an 
obligation to report transactions in specified debt securities to 
TRACE to the extent required under applicable FINRA rules. 
Generally, such debt securities will have at issuance a maturity 
that exceeds one calendar year. For fixed income securities that are 
not reported to TRACE, (i) intraday price quotations will generally 
be available from broker-dealers and trading platforms (as 
applicable) and (ii) price information will be available from market 
data vendors, as described above.
---------------------------------------------------------------------------

    The Fund's website will include a form of the prospectus for the 
Fund and additional data relating to NAV and other applicable 
quantitative information. Moreover, prior to the commencement of 
trading, the Exchange will inform its members in an Information 
Circular of the special characteristics and risks associated with 
trading the Shares. Trading in the Shares of the Fund will be halted 
under the conditions specified in Nasdaq Rules 4120 and 4121 or because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable, and trading in the Shares will 
be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances 
under which Shares of the Fund may be halted. In addition, as noted 
above, investors will have ready access to information regarding the 
Fund's holdings, the Intraday Indicative Value, the Disclosed 
Portfolio, and quotation and last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed ETF that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed ETF that will enhance competition 
among market participants, to the benefit of investors and the 
marketplace.

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change,

[[Page 1079]]

or (b) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2017-128 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-2017-128. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2017-128 and should be submitted 
on or before January 30, 2018.
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    \95\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\95\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00161 Filed 1-8-18; 8:45 am]
 BILLING CODE 8011-01-P

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