Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating To Listing and Trading of Shares of the First Trust Short Duration Managed Municipal ETF Under NYSE Arca Rule 8.600-E, 51724-51730 [2018-22208]
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–22203 Filed 10–11–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84379; File No. SR–
NYSEArca–2018–73]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating To Listing and
Trading of Shares of the First Trust
Short Duration Managed Municipal ETF
Under NYSE Arca Rule 8.600–E
October 5, 2018.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on October
3, 2018, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. 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 shares of the First Trust Short
Duration Managed Municipal ETF
under NYSE Arca Rule 8.600–E
(‘‘Managed Fund Shares’’). The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
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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
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
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The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade shares (‘‘Shares’’) of the First Trust
Short Duration Managed Municipal ETF
(‘‘Fund’’) under NYSE Arca Rule 8.600–
E,4 which governs the listing and
trading of Managed Fund Shares.5 The
Shares will be offered by First Trust
Exchange-Traded Fund III (the ‘‘Trust’’),
which is registered with the
Commission as an open-end
management investment company.6 The
Fund is a series of the Trust.
4 The Securities and Exchange Commission
(‘‘Commission’’) has approved Exchange listing and
trading shares of actively managed funds that
principally hold municipal bonds. See, e.g.,
Securities Exchange Act Release Nos. 60981
(November 10, 2009), 74 FR 59594 (November 18,
2009) (SR–NYSEArca–2009–79) (order approving
listing and trading of shares of the PIMCO ShortTerm Municipal Bond Strategy Fund and PIMCO
Intermediate Municipal Bond Strategy Fund); 79293
(November 10, 2016), 81 FR 81189 (November 17,
2016) (SR–NYSEArca–2016–107) (order approving
listing and trading of shares of Cumberland
Municipal Bond ETF under Rule 8.600); 80865
(June 6, 2017), 82 FR 26970 (June 12, 2017) (order
approving listing and trading of shares of the
Franklin Liberty Intermediate Municipal
Opportunities ETF and Franklin Liberty Municipal
Bond ETF under NYSE Arca Equities Rule 8.600);
80885 (June 8, 2017), 82 FR 27302 (June 14, 2017)
(order approving listing and trading of shares of the
IQ Municipal Insured ETF, IQ Municipal Short
Duration ETF, and IQ Municipal Intermediate ETF
under NYSE Arca Equities Rule 8.600); 82166
(November 29, 2017), 82 FR 57497 (December 5,
2017) (SR–NYSEArca–2017–90) (order approving
listing and trading of shares of the Hartford
Municipal Opportunities ETF Under NYSE Arca
Rule 8.600–E). The Commission also has approved
listing and trading on the Exchange of shares of the
SPDR Nuveen S&P High Yield Municipal Bond
Fund under Commentary .02 of NYSE Arca Equities
Rule 5.2(j)(3). See Securities Exchange Act Release
No.63881 (February 9, 2011), 76 FR 9065 (February
16, 2011) (SR–NYSEArca–2010–120).
5 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Rule 5.2–E(j)(3),
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.
6 The Trust is registered under the 1940 Act. On
August 17, 2018, the Trust filed with the
Commission its registration statement on Form N–
1A under the Securities Act of 1933 (15 U.S.C. 77a)
(‘‘Securities Act’’), and under the 1940 Act relating
to the Fund (File Nos. 333–176976 and 811–22245)
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First Trust Advisors L.P. will be the
Fund’s investment adviser (‘‘Adviser’’).
First Trust Portfolios L.P. will be the
Fund’s distributor. Brown Brothers
Harriman & Co. will serve as custodian
(‘‘Custodian’’) and transfer agent
(‘‘Transfer Agent’’) for the Fund.
Commentary .06 to Rule 8.600–E
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.7 In addition,
Commentary .06 further requires that
personnel who make decisions on the
open-end fund’s portfolio composition
must be subject to procedures designed
to prevent the use and dissemination of
material nonpublic information
regarding the open-end fund’s portfolio.
The Adviser is not registered as a
broker-dealer but is affiliated with a
broker-dealer, and has implemented and
will maintain a ‘‘fire wall’’ with respect
to such broker-dealer affiliate regarding
access to information concerning the
composition of and/or changes to the
Fund’s portfolio. In addition, personnel
who make decisions on the Fund’s
portfolio composition must be subject to
procedures designed to prevent the use
and dissemination of material, non(‘‘Registration Statement’’). The description of the
operation of the Trust and the Fund herein is based,
in part, on the Registration Statement. In addition,
the Commission has issued an order granting
certain exemptive relief to the Trust under the 1940
Act. See Investment Company Act Release No.
30029 (April 10, 2012) (File No. 812–13795)
(‘‘Exemptive Order’’).
7 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and its related personnel are
subject to the provisions of Rule 204A–1 under the
Advisers Act relating to codes of ethics. This Rule
requires investment advisers to adopt a code of
ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
advice to clients unless such investment adviser has
(i) adopted and implemented written policies and
procedures reasonably designed to prevent
violation, by the investment adviser and its
supervised persons, of the Advisers Act and the
Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review
regarding the adequacy of the policies and
procedures established pursuant to subparagraph (i)
above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
public information regarding the Fund’s
portfolio. In the event (a) the Adviser
becomes registered as a broker-dealer or
newly affiliated with a broker-dealer, or
(b) any new adviser to the Fund is a
registered broker-dealer or becomes
affiliated with a broker-dealer, the
applicable adviser will implement and
maintain a fire wall with respect to its
relevant personnel or broker-dealer
affiliate regarding access to information
concerning the composition and/or
changes to the Fund’s portfolio, and will
be subject to procedures designed to
prevent the use and dissemination of
material non-public information
regarding such portfolio.
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First Trust Short Duration Managed
Municipal ETF
According to the Registration
Statement, the Fund will seek to
provide federally tax-exempt income
consistent with capital preservation.
Under normal market conditions 8, the
Fund will seek to achieve its investment
objective by investing at least 80% of its
net assets (including investment
borrowings) in municipal debt securities
that pay interest that is exempt from
regular federal income taxes
(collectively, ‘‘Municipal Securities’’).9
According to the Registration
Statement, the Fund may invest in the
following Municipal Securities:
• Municipal lease obligations (and
certificates of participation in such
obligations),
• municipal general obligation bonds,
• municipal revenue bonds,
• municipal notes,
• municipal cash equivalents,
• alternative minimum tax bonds,
• private activity bonds (including
without limitation industrial
development bonds),
8 The term ‘‘normal market conditions’’ is defined
in NYSE Arca Rule 8.600–E(c)(5). The Exchange
represents that, on a temporary basis, including for
defensive purposes, during the initial invest-up
period (for purposes of this filing, 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 (for purposes of this filing,
i.e. rolling periods of seven calendar days during
which inflows or outflows of cash, in the aggregate,
exceed 10% of the Fund’s net assets as of the
opening of business on the first day of such
periods), the Fund may depart from its principal
investment strategies; for example, it may hold a
higher than normal proportion of its assets in cash.
During such periods, the Fund may not be able to
achieve its investment objectives. According to the
Exchange, the Fund may adopt a defensive strategy
when the Adviser believes securities in which the
Fund normally invests have elevated risks due to
political or economic factors and in other
extraordinary circumstances.
9 Municipal Securities are generally issued by or
on behalf of states, territories or possessions of the
U.S. and the District of Columbia and their political
subdivisions, agencies, authorities and other
instrumentalities.
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• securities issued by custodial
receipt trusts,10 and
• pre-refunded and escrowed to
maturity bonds.
The Fund may purchase new issues of
Municipal Securities on a when-issued
or forward commitment basis.
The Municipal Securities in which
the Fund invests may be fixed, variable
or floating rate securities.
Other Investments
While the Fund, under normal market
conditions, will invest at least 80% of
its net assets in Municipal Securities as
described above, the Fund may, under
normal market conditions, invest up to
20% of its net assets in the aggregate in
the securities and financial instruments
described below.
The Fund may hold cash and cash
equivalents.11 In addition, the Fund
may hold the following fixed income
securities with maturities of three
months or more: Fixed rate and floating
rate U.S. government securities;
certificates of deposit; bankers’
acceptances; repurchase agreements;
bank time deposits; and commercial
paper.
The Fund may hold the following
derivative instruments: U.S. Treasury
futures contracts; interest rate futures;
futures on fixed income securities or
fixed income securities indexes; and
exchange-traded and over-the-counter
(‘‘OTC’’) credit default swaps, interest
rate swaps, swaps on fixed income
securities and swaps on fixed income
securities indexes.
The Fund may invest in exchangetraded funds (‘‘ETFs’’), or acquire short
positions in such ETFs.12
The Fund will not invest in securities
or other financial instruments that have
not been described in this proposed rule
change.
Creation and Redemption of Shares
The Fund will issue and redeem
Shares on a continuous basis at NAV 13
10 According to the Registration Statement,
custodial receipts are financial instruments that are
underwritten by securities dealers or banks and
evidence ownership of future interest payments,
principal payments or both on certain municipal
securities.
11 For purposes of this filing, the term ‘‘cash
equivalents’’ has the meaning specified in
Commentary .01(c) to NYSE Arca Rule 8.600–E.
12 For purposes of this filing, the term ‘‘ETFs’’
includes Investment Company Units (as described
in NYSE Arca Rule 5.2–E(j)(3)); Portfolio Depositary
Receipts (as described in NYSE Arca Rule 8.100–
E); and Managed Fund Shares (as described in
NYSE Arca Rule 8.600–E). All ETFs will be listed
and traded in the U.S. on a national securities
exchange. While the Fund may invest in inverse
ETFs, the Fund will not invest in leveraged (e.g.,
2X, -2X, 3X or -3X) ETFs.
13 The NAV of the Fund’s Shares generally will
be calculated once daily Monday through Friday as
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51725
only in large blocks of Shares (‘‘Creation
Units’’) in transactions with authorized
participants, generally including brokerdealers and large institutional investors
(‘‘Authorized Participants’’). Creation
Units generally will consist of 50,000
Shares. The size of a Creation Unit is
subject to change. As described in the
Registration Statement, the Fund will
issue and redeem Creation Units in
exchange for an in-kind portfolio of
instruments and/or cash in lieu of such
instruments (the ‘‘Creation Basket’’).14
In addition, if there is a difference
between the NAV attributable to a
Creation Unit and the market value of
the Creation Basket exchanged for the
Creation Unit, the party conveying
instruments (which may include cashin-lieu amounts) with the lower value
will pay to the other an amount in cash
equal to the difference (referred to as the
‘‘Cash Component’’).
Creations and redemptions must be
made by or through an Authorized
Participant that has executed an
agreement that has been agreed to by the
Distributor and the Transfer Agent with
respect to creations and redemptions of
Creation Units. All standard orders to
create Creation Units must be received
by the Transfer Agent no later than the
closing time of the regular trading
session on the NYSE (ordinarily 4:00
p.m., E.T.) (the ‘‘Closing Time’’) in each
case on the date such order is placed in
order for the creation of Creation Units
to be effected based on the NAV of
Shares as next determined on such date
after receipt of the order in proper form.
Shares may be redeemed only in
Creation Units at their NAV next
determined after receipt not later than
the Closing Time of a redemption
request in proper form by the Fund
through the Transfer Agent and only on
a business day. The Custodian, through
the National Securities Clearing
Corporation (‘‘NSCC’’), will make
available on each business day, prior to
the opening of business of the Exchange,
the list of the names and quantities of
the instruments comprising the Creation
Basket, as well as the estimated Cash
Component (if any), for that day. The
published Creation Basket will apply
until a new Creation Basket is
announced on the following business
of the close of regular trading on the New York
Stock Exchange (‘‘NYSE’’), generally 4:00 p.m.,
Eastern Time (‘‘E.T.’’). NAV per Share will be
calculated by dividing the Fund’s net assets by the
number of Fund Shares outstanding.
14 It is expected that the Fund will typically issue
and redeem Creation Units on a cash basis;
however, at times, the Fund may issue and redeem
Creation Units on an in-kind (or partially in-kind)
(or partially cash) basis.
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
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day prior to commencement of trading
in the Shares.
Availability of Information
The Fund will disclose on the Fund’s
website (www.ftportfolios.com) at the
start of each business day the identities
and quantities of the securities and
other assets held by the Fund that will
form the basis of the Fund’s calculation
of its NAV on that business day. The
portfolio holdings so disclosed will be
based on information as of the close of
business on the prior business day and/
or trades that have been completed prior
to the opening of business on that
business day and that are expected to
settle on the business day.
The website for the Fund will contain
the following information, on a perShare basis, for the Fund: (1) The prior
business day’s NAV; (2) the market
closing price or midpoint of the bid-ask
spread at the time of NAV calculation
(the ‘‘Bid-Ask Price’’); and (3) a
calculation of the premium or discount
of the Bid-Ask Price against such NAV.
The Fund’s portfolio holdings will be
disclosed on the Fund’s website daily
after the close of trading on the
Exchange and prior to the opening of
trading on the Exchange the following
day. On a daily basis, the Fund will
disclose the information required under
NYSE Arca Rule 8.600–E (c)(2) to the
extent applicable. The website
information will be publicly available at
no charge.
The approximate value of the Fund’s
investments on a per-Share basis, the
indicative optimized portfolio value
(‘‘IOPV’’), will be disseminated every 15
seconds during the Exchange Core
Trading Session (ordinarily 9:30 a.m. to
4:00 p.m., E.T.).
Investors can also obtain the Fund’s
Statement of Additional Information
(‘‘SAI’’) and shareholder reports. The
Fund’s SAI and shareholder reports will
be available free upon request from the
Trust, and those documents and Form
N–CSR may be viewed on-screen or
downloaded from the Commission’s
website at www.sec.gov. Information
regarding market price and trading
volume of the Shares will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers.
Quotation and last sale information
for the Shares will be available via the
Consolidated Tape Association (‘‘CTA’’)
high-speed line, and from the Exchange.
Quotation information from brokers and
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dealers or pricing services will be
available for Municipal Securities. Price
information for money market funds is
available from the applicable
investment company’s website and from
market data vendors. Price information
for ETFs and exchange-traded futures
and swaps held by the Fund is available
from the applicable exchange. Price
information for certain fixed income
securities held by the Fund is available
through the Financial Industry
Regulatory Authority’s (FINRA) Trade
Reporting and Compliance Engine
(‘‘TRACE’’). Price information for
certain Municipal Securities held by the
Fund is available through the Electronic
Municipal Market Access (‘‘EMMA’’) of
the Municipal Securities Rulemaking
Board (‘‘MSRB’’). Price information for
cash equivalents; fixed income
securities with maturities of three
months or more (as described above),
and OTC swaps will be available from
one or more major market data vendors.
Pricing information regarding each asset
class in which the Fund will invest will
generally be available through
nationally recognized data service
providers through subscription
agreements. In addition, the IOPV
(which is the Portfolio Indicative Value,
as defined in NYSE Arca Rule 8.600–
E(c)(3)), will be widely disseminated at
least every 15 seconds during the Core
Trading Session by one or more major
market data vendors or other
information providers.15
Investment Restrictions
The Fund’s investments will be
consistent with its investment goal and
will not be used to provide multiple
returns of a benchmark or to produce
leveraged returns.
Under normal market conditions,
except for periods of high cash inflows
or outflows,16 the Fund will satisfy the
following criteria:
i. The Fund will have a minimum of
20 non-affiliated issuers 17;
ii. No single Municipal Securities
issuer will account for more than 10%
of the weight of the Fund’s portfolio 18;
15 Currently, it is the Exchange’s understanding
that several major market data vendors display and/
or make widely available Portfolio Indicative
Values taken from CTA or other data feeds.
16 See note 8, supra.
17 For the avoidance of doubt, in the case of
Municipal Securities that are issued by entities
whose underlying assets are municipal bonds, the
underlying municipal bonds will be taken into
account. Additionally, for purposes of this
restriction, each state and each separate political
subdivision, agency, authority, or instrumentality of
such state, each multi-state agency or authority, and
each guarantor, if any, would be treated as separate,
non-affiliated issuers of Municipal Securities.
18 See note 17, supra.
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iii. No individual bond will account
for more than 5% of the weight of the
Fund’s portfolio;
iv. The Fund will limit its
investments in Municipal Securities of
any one state to 20% of the Fund’s total
assets and will be diversified among
issuers in at least 10 states;
v. The Fund will be diversified among
a minimum of five different sectors of
the municipal bond market.19
Pre-refunded bonds will be excluded
from the above limits. The Adviser
represents that, with respect to prerefunded bonds (also known as
refunded or escrow-secured bonds, the
issuer ‘‘prerefunds’’ the bond by setting
aside in advance all or a portion of the
amount to be paid to the bondholders
when the bond is called. Generally, an
issuer uses the proceeds from a new
bond issue to buy high grade, interest
bearing debt securities, including direct
obligations of the U.S. government,
which are then deposited in an
irrevocable escrow account held by a
trustee bank to secure all future
payments of principal and interest on
the pre-refunded bonds. The escrow
would be sufficient to satisfy principal
and interest on the call or maturity date
and one would not look to the issuer for
repayment. Because pre-refunded
bonds’ pricing would be valued based
on the applicable escrow (generally U.S.
government securities), such prerefunded securities would not be readily
susceptible to market manipulation and
it would be unnecessary to apply the
diversification and weighting criteria set
forth above.
Application of Generic Listing
Requirements
The Exchange is submitting this
proposed rule change because the
portfolio for the Fund will not meet all
of the ‘‘generic’’ listing requirements of
Commentary .01 to NYSE Arca Rule
8.600–E applicable to the listing of
Managed Fund Shares. The Fund’s
portfolio will meet all such
requirements except for those set forth
in Commentary .01(b)(1).20
The Exchange believes that it is
appropriate and in the public interest to
19 The Fund’s investments in Municipal
Securities will include investments in state and
local (e.g., county, city, town) Municipal Securities
relating to such industries or sectors as the
following: Airports; bridges and highways;
hospitals; housing; jails; mass transportation;
nursing homes; parks; public buildings; recreational
facilities; school facilities; streets; and water and
sewer works.
20 Commentary .01(b)(1) to NYSE Arca Rule
8.600–E provides that components that in the
aggregate account for at least 75% of the fixed
income weight of the portfolio each shall have a
minimum original principal amount outstanding of
$100 million or more.
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approve listing and trading of Shares of
the Fund on the Exchange
notwithstanding that the Fund would
not meet the requirements of
Commentary .01(b)(1) to Rule 8.600–E
in that the Fund’s investments in
municipal securities will be welldiversified.
The Exchange believes that permitting
Fund Shares to be listed and traded on
the Exchange notwithstanding that less
than 75% of the weight of the Fund’s
portfolio may consist of components
with $100 million minimum original
principal amount outstanding would
provide the Fund with greater ability to
select from a broad range of Municipal
Securities, as described above, that
would support the Fund’s investment
goal.
The Exchange believes that,
notwithstanding that the Fund’s
portfolio may not satisfy Commentary
.01(b)(1) to Rule 8.600–E, the Fund’s
portfolio will not be susceptible to
manipulation. As noted above, the
Fund’s investments, excluding prerefunded bonds, as described above,
will be diversified among a minimum of
20 non-affiliated municipal issuers; no
single Municipal Securities issuer will
account for more than 10% of the
weight of the Fund’s portfolio; no
individual bond will account for more
than 5% of the weight of the Fund’s
portfolio; the Fund will limit its
investments in Municipal Securities of
any one state to 20% of the Fund’s total
assets and will be diversified among
municipal issuers in at least 10 states;
and the Fund will be diversified among
a minimum of five different sectors of
the municipal bond market.
The Exchange notes that the
Commission has previously approved
an exception from requirements set
forth in Commentary .01(b) relating to
municipal securities similar to those
proposed with respect to the Fund.21
The Exchange notes that, other than
Commentary .01(b)(1) to Rule 8.600–E,
21 See Securities Exchange Act Release Nos.
82974 (March 30, 2018), 83 FR 14698 (April 5,
2018) (SR–NYSEArca–2017–99) (Notice of Filing of
Amendment No. 3 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified
by Amendment No. 3, to List and Trade Shares of
the Hartford Schroders Tax-Aware Bond ETF Under
NYSE Arca Rule 8.600–E); 82166 (November 29,
2017), 82 FR 57497 (December 5, 2017) (SR–
NYSEArca–2017–90) (Order Approving a Proposed
Rule Change, as Modified by Amendment No. 2, to
List and Trade Shares of the Hartford Municipal
Opportunities ETF Under NYSE Arca Rule 8.600–
E). See also, Securities Exchange Act Release 83982
(August 29, 2018) (SR–NYSEArca–2018–62) (Notice
of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to Listing and Trading of
Shares of the American Century Diversified
Municipal Bond ETF under NYSE Arca Rule 8.600–
E).
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the Fund’s portfolio will meet all other
requirements of Rule 8.600–E.
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.22 Trading in Shares of the
Fund will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached. Trading also may be
halted because of market conditions or
for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Shares will trade on
NYSE Arca from 4 a.m. to 8 p.m., E.T.
in accordance with NYSE Arca Rule
7.34–E (Early, Core, and Late Trading
Sessions). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Rule 7.6–E, the minimum price
variation (‘‘MPV’’) for quoting and entry
of orders in equity securities traded on
NYSE Arca is $0.01, with the exception
of securities that are priced less than
$1.00 for which the MPV for order entry
is $0.0001.
The Shares of the Fund will conform
to the initial and continued listing
criteria under NYSE Arca Rule 8.600–E.
Consistent with NYSE Arca Rule 8.600–
E(d)(2)(B)(ii), the Adviser will
implement and maintain, or be subject
to, procedures designed to prevent the
use and dissemination of material nonpublic information regarding the actual
components of the Fund’s portfolio. The
Exchange represents that, for initial
and/or continued listing, the Fund will
be in compliance with Rule 10A–323
under the Act, as provided by NYSE
Arca Rule 5.3–E. 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. The Fund’s investments
will be consistent with the Fund’s
investment goal and will not be used to
enhance leverage.
22 See
23 17
PO 00000
NYSE Arca Rule 7.12–E.
CFR 240.10A–3.
Frm 00068
Fmt 4703
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51727
Surveillance
The Exchange represents that trading
in the Shares will be subject to the
existing trading surveillances,
administered by FINRA on behalf of the
Exchange, or by regulatory staff of the
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws. 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
federal securities laws applicable to
trading on the Exchange.24
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.
The Exchange or FINRA, on behalf of
the Exchange, or both, will
communicate as needed regarding
trading in the Shares, ETFs and certain
futures with other markets and other
entities that are members of the
Intermarket Surveillance Group (‘‘ISG’’),
and the Exchange or FINRA, on behalf
of the Exchange, or both, may obtain
trading information regarding trading in
the Shares, ETFs and certain futures
from such markets and other entities.25
In addition, the Exchange may obtain
information regarding trading in the
Shares, ETFs and certain futures from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. In
addition, FINRA, on behalf of the
Exchange, is able to access, as needed,
trade information for certain fixed
income securities held by the Fund
reported to FINRA’s TRACE. FINRA
also can access data obtained from the
MSRB relating to municipal bond
trading activity for surveillance
purposes in connection with trading in
the Shares.
In addition, the Exchange also has a
general policy prohibiting the
24 FINRA conducts cross-market surveillances on
behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for
FINRA’s performance under this regulatory services
agreement.
25 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.
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
distribution of material, non-public
information by its employees.
All statements and representations
made in this filing regarding (a) the
description of the portfolio, (b)
limitations on portfolio holdings or
reference assets, or (c) the applicability
of Exchange listing rules specified in
this rule filing shall constitute
continued listing requirements for
listing the Shares of the Fund on the
Exchange.
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
NYSE Arca Rule 5.5–E(m).
khammond on DSK30JT082PROD with NOTICES
Information Bulletin
Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit Holders in an
Information Bulletin (‘‘Bulletin’’) of the
special characteristics and risks
associated with trading the Shares.
Specifically, the Bulletin will discuss
the following: (1) The procedures for
purchases and redemptions of Shares in
Creation Unit aggregations (and that
Shares are not individually redeemable);
(2) NYSE Arca Rule 9.2–E(a), which
imposes a duty of due diligence on its
Equity Trading Permit Holders to learn
the essential facts relating to every
customer prior to trading the Shares; (3)
the risks involved in trading the Shares
during the Early and Late Trading
Sessions when an updated IOPV will
not be calculated or publicly
disseminated; (4) how information
regarding the IOPV and the Disclosed
Portfolio is disseminated; (5) the
requirement that Equity Trading Permit
Holders deliver a prospectus to
investors purchasing newly issued
Shares prior to or concurrently with the
confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will
reference that the Fund is subject to
various fees and expenses described in
the Registration Statement. The Bulletin
will discuss any exemptive, no-action,
and interpretive relief granted by the
Commission from any rules under the
Act. The Bulletin will also disclose that
the NAV for the Shares will be
calculated after 4:00 p.m., E.T. each
trading day.
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Jkt 247001
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 26 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of a free and open market
and, 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 NYSE Arca Rule
8.600–E. The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws. The Exchange or FINRA, on behalf
of the Exchange, or both, will
communicate as needed regarding
trading in the Shares, ETFs and certain
futures with other markets and other
entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading
information regarding trading in the
Shares, ETFs and certain futures from
such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares, ETFs and certain futures from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. In
addition, FINRA, on behalf of the
Exchange, is able to access, as needed,
trade information for certain fixed
income securities held by the Fund
reported to TRACE. FINRA also can
access data obtained from the MSRB
relating to municipal bond trading
activity for surveillance purposes in
connection with trading in the Shares.
The Adviser is not a registered brokerdealer but is affiliated with a brokerdealer. The Adviser has implemented
and will maintain a ‘‘fire wall’’ with
respect to such broker-dealer affiliate
regarding access to information
concerning the composition of and/or
changes to the Fund’s portfolio.
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
notwithstanding that the Fund would
not meet the requirements of
26 15
PO 00000
U.S.C. 78f(b)(5).
Frm 00069
Fmt 4703
Sfmt 4703
Commentary .01(b)(1) to Rule 8.600–E
in that the Fund’s investments in
municipal securities will be welldiversified. As noted above, the Fund’s
investments will be well-diversified in
that the Fund, excluding pre-refunded
bonds, as described above, will have a
minimum of 20 non-affiliated municipal
issuers; no single municipal issuer will
account for more than 10% of the
weight of the Fund’s portfolio; no
individual bond will account for more
than 5% of the weight of the Fund’s
portfolio; the Fund will limit its
investments in Municipal Securities of
any one state to 20% of the Fund’s total
assets and will be diversified among
municipal issuers in at least 10 states;
and the Fund will be diversified among
a minimum of five different industries
or sectors of the municipal bond market.
With respect to the proposed exclusion
for pre-refunded bonds described above,
generally, an issuer uses the proceeds
from a new bond issue to buy high
grade, interest bearing debt securities,
including direct obligations of the U.S.
government, which are then deposited
in an irrevocable escrow account held
by a trustee bank to secure all future
payments of principal and interest on
the pre-refunded bonds. The escrow
would be sufficient to satisfy principal
and interest on the call or maturity date
and one would not look to the issuer for
repayment. Because pre-refunded
bonds’ pricing would be valued based
on the applicable escrow (generally U.S.
government securities), such prerefunded securities would not be readily
susceptible to market manipulation and
it would be unnecessary to apply the
diversification and weighting criteria set
forth above in ‘‘Investment
Restrictions.’’
The Exchange believes that permitting
Fund Shares to be listed and traded on
the Exchange notwithstanding that less
than 75% of the weight of the Fund’s
portfolio may consist of components
with $100 million minimum original
principal amount outstanding would
provide the Fund with greater ability to
select from a broad range of municipal
securities, as described above, that
would support the Fund’s investment
objective.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. In
addition, a large amount of information
is publicly available regarding the Fund
E:\FR\FM\12OCN1.SGM
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
and the Shares, thereby promoting
market transparency. Quotation and last
sale information for the Shares will be
available via the CTA high-speed line,
and from the Exchange. Quotation
information from brokers and dealers or
pricing services will be available for
Municipal Securities. Price information
for money market funds is available
from the applicable investment
company’s website and from market
data vendors. Price information for ETFs
and exchange-traded futures and swaps
held by the Fund is available from the
applicable exchange. Price information
for certain fixed income securities held
by the Fund is available FINRA’s
TRACE. Price information for certain
Municipal Securities held by the Fund
is available through the EMMA of the
MSRB. Price information for cash
equivalents, fixed income securities
with maturities of three months or more
(as described above), and OTC swaps
will be available from one or more major
market data vendors. Pricing
information regarding each asset class in
which the Fund will invest will
generally be available through
nationally recognized data service
providers through subscription
agreements.
Prior to the commencement of
trading, the Exchange will inform its
Equity Trading Permit Holders in an
Information Bulletin of the special
characteristics and risks associated with
trading the Shares. Trading in Shares of
the Fund will be halted if the circuit
breaker parameters in NYSE Arca Rule
7.12–E have been reached or because of
market conditions or for reasons that, in
the view of the Exchange, make trading
in the Shares inadvisable. Trading in the
Shares will be subject to NYSE Arca
Rule 8.600–E(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 IOPV, the
Disclosed Portfolio, and quotation and
last sale information for the Shares.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of activelymanaged exchange-traded product that
principally holds municipal securities
and that will enhance competition
among market participants, to the
benefit of investors and the marketplace.
As noted above, the Exchange has in
place surveillance procedures relating to
trading in the Shares and may obtain
information via ISG from other
exchanges that are members of ISG or
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19:19 Oct 11, 2018
Jkt 247001
with which the Exchange has entered
into a comprehensive surveillance
sharing agreement. In addition, as noted
above, investors will have ready access
to information regarding the Fund’s
holdings, IOPV, Disclosed Portfolio, and
quotation and last sale information for
the Shares.
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 purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of an
additional type of actively-managed
exchange-traded product that
principally holds municipal securities
and 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 solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 27 and Rule
19b–4(f)(6) thereunder.28 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
prior to 30 days from the date on which
it was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.29
A proposed rule change filed under
Rule 19b–4(f)(6) 30 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
27 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
29 17 CFR 240.19b–4(f)(6)(iii). As required under
Rule 19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission.
30 17 CFR 240.19b–4(f)(6).
28 17
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
51729
to Rule 19b4(f)(6)(iii),31 the Commission
may 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
states that the waiver of the 30-day
delayed operative date is consistent
with the protection of investors and the
public interest because the Commission
has previously approved an exception
from requirements set forth in
Commentary .01(b) relating to
municipal securities similar to those
proposed with respect to the Fund.32
Additionally, the Exchange asserts that
waiver will permit the prompt listing
and trading of an additional issue of
Managed Fund Shares that principally
holds municipal securities, which will
enhance competition among issuers,
investment advisers and other market
participants with respect to listing and
trading of issues of Managed Fund
Shares that hold municipal securities.
The Commission believes that waiver of
the 30-day operative delay is consistent
with the protection of investors and the
public interest because the proposed
continuing listing standards for the
Shares are substantially similar to those
applicable to others approved by the
Commission for similar funds.
Accordingly, the Commission hereby
waives the 30-day operative delay and
designates the proposed rule change
operative upon filing.33
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 34 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
31 17
CFR 240.19b–4(f)(6)(iii).
note 21, supra.
33 For 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).
34 15 U.S.C. 78s(b)(2)(B).
32 See
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–84373; File No. SR–ISE–
2018–56]
• 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–
NYSEArca–2018–73 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.
khammond on DSK30JT082PROD with NOTICES
All submissions should refer to File
Number SR–NYSEArca–2018–73. 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–NYSEArca–2018–73, and
should be submitted on or before
November 2, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–22208 Filed 10–11–18; 8:45 am]
BILLING CODE 8011–01–P
35 17
CFR 200.30–3(a)(12).
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Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Amend Its Rules
Relating to Complex Orders
October 5, 2018.
I. Introduction
On June 22, 2018, Nasdaq ISE, LLC
(‘‘ISE’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
provide additional detail to its rules
governing the trading of Complex
Orders. The proposed rule change was
published for comment in the Federal
Register on July 9, 2018.3 The
Commission received no comments
regarding the proposal. On August 10,
2018, pursuant to Section 19(b)(2) of the
Act,4 the Commission extended the time
for Commission action on the proposal
until October 5, 2018.5 ISE filed
Amendment No. 1 to the proposal on
October 1, 2018.6 The Commission is
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 83576
(July 2, 2018), 83 FR 31783 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 83818
(August 10, 2018), 83 FR 40800 (August 16, 2018).
6 Amendment No. 1 revises the proposal to: (1)
Discontinue Reserve Complex Orders; (2) indicate
in proposed ISE Rule 722(c)(2) that complex
strategies will not be executed at prices inferior to
the best net price achievable from the best net price
on ISE for the individual legs of the strategy; (3)
indicate in proposed ISE Rule 722(d)(2) that
complex strategies will execute against Priority
Customer interest on the single leg book at the same
price before executing against interest on the
Complex Order Book; (4) indicate in proposed ISE
Rule 722, Supplementary Material .01(b)(ii) that an
exposure period will end immediately when a
Complex Order for the same complex strategy on
either side of the market becomes marketable
against interest on the Complex Order Book or bids
and offers in the leg market; (5) revise proposed ISE
Rules 722, Supplementary Material .01(b)(iii) and
.08(c)(4)(vi) to describe the sequence of executions
when an incoming Complex Order causes the early
termination of a complex exposure auction and an
auction for one of the component legs of the
complex strategy; (6) revise proposed ISE Rule 722,
Supplementary Material .01(c) to indicate that at
the end of the exposure period, the interest against
which the exposed order executes includes bids
and offers on the Complex Order Book and for the
individual legs that arrived during the exposure
period; (7) revise proposed ISE Rule 722,
Supplementary Material .01(d) to indicate that an
exposure process will terminate immediately
without an execution if a trading halt is initiated
2 17
PO 00000
Frm 00071
Fmt 4703
Sfmt 4703
publishing this notice to solicit
comment on Amendment No. 1 to the
proposed rule change from interested
persons and is approving the proposed
rule change, as modified by Amendment
No. 1, on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
No. 1
As described more fully in the Notice,
the proposal modifies ISE’s rules to
provide additional detail regarding the
trading of Complex Orders on ISE.
A. Definitions
The proposal revises ISE Rule 722(a)
to add new defined terms and modify
existing defined terms relating to
Complex Orders. The proposal defines
‘‘Complex Order’’ to include Complex
Options Orders, Stock-Option Orders,
and Stock-Complex Orders.7 Complex
Options Orders, Stock-Option Orders,
and Stock-Complex Orders refer to
orders for a Complex Options Strategy,8
in any series underlying the Complex Order being
exposed; (8) clarify the description of the execution
of Stock-Option and Stock Complex Orders in
proposed ISE Rule 722, Supplementary Material
.02; (9) revise proposed ISE Rule 722,
Supplementary Material .08(e) to indicate that
Complex QCC Orders may be entered in $0.01
increments; (10) delete provisions in ISE Rule 722
indicating that ISE will recommence the
functionality that permits concurrent auctions for
the same complex strategy by April 17, 2019, and
add proposed ISE Rule 722, Supplementary
Material .08(g) to indicate the auctions for the same
complex strategy will not operate concurrently; (11)
add proposed ISE Rule 722, Supplementary
Material .08(h) to indicate that an auction for a
complex strategy and an auction for a component
leg of the complex strategy may operate
concurrently; (12) indicate in proposed ISE Rule
722, Supplementary Material .13 to indicate that the
stock leg of a stock-option order must be marked
‘‘buy,’’ ‘‘sell,’’ ‘‘sell short,’’ or ‘‘sell short exempt,’’
in compliance with Regulation SHO under the Act;
(13) provide a new example illustrating customer
priority and the execution of a Complex Order; (14)
indicate that ISE does not manage and curtail its
functionality for executing a complex strategy
against leg market interest; (15) add references to
the NBBO and the underlying stock in proposed ISE
Rule 722, Supplementary Material .07(a); (16)
provide additional discussion of the rationale for
permitting a Trade Value Allowance of any amount
when a Complex Order executes in an auction and
does not trade solely with its contra-side order; and
(17) make several technical corrections to the
proposal. Amendment No. 1 is available at https://
www.sec.gov/comments/sr-ise-2018-56/srise2018564467038-175833.pdf.
7 See proposed ISE Rule 722(a)(5).
8 A Complex Options Strategy is the simultaneous
purchase and/or sale of two or more different
options series in the same underlying security, for
the same account, in a ratio that is equal to or
greater than one-to-three (.333) and less than or
equal to three-to-one (3.00) and for the purpose of
executing a particular investment strategy. Only
those Complex Options Strategies with no more
than the applicable number of legs, as determined
by the Exchange on a class-by-class basis, are
eligible for processing. See proposed ISE Rule
722(a)(1). ISE will determine the applicable number
of legs for Complex Options Strategies and Stock-
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]]>Agencies
[Federal Register Volume 83, Number 198 (Friday, October 12, 2018)]
[Notices]
[Pages 51724-51730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22208]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84379; File No. SR-NYSEArca-2018-73]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Relating To Listing
and Trading of Shares of the First Trust Short Duration Managed
Municipal ETF Under NYSE Arca Rule 8.600-E
October 5, 2018.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on October 3, 2018, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 shares of the First Trust
Short Duration Managed Municipal ETF under NYSE Arca Rule 8.600-E
(``Managed Fund Shares''). The proposed rule change is available on the
Exchange's website at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
First Trust Short Duration Managed Municipal ETF (``Fund'') under NYSE
Arca Rule 8.600-E,\4\ which governs the listing and trading of Managed
Fund Shares.\5\ The Shares will be offered by First Trust Exchange-
Traded Fund III (the ``Trust''), which is registered with the
Commission as an open-end management investment company.\6\ The Fund is
a series of the Trust.
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\4\ The Securities and Exchange Commission (``Commission'') has
approved Exchange listing and trading shares of actively managed
funds that principally hold municipal bonds. See, e.g., Securities
Exchange Act Release Nos. 60981 (November 10, 2009), 74 FR 59594
(November 18, 2009) (SR-NYSEArca-2009-79) (order approving listing
and trading of shares of the PIMCO Short-Term Municipal Bond
Strategy Fund and PIMCO Intermediate Municipal Bond Strategy Fund);
79293 (November 10, 2016), 81 FR 81189 (November 17, 2016) (SR-
NYSEArca-2016-107) (order approving listing and trading of shares of
Cumberland Municipal Bond ETF under Rule 8.600); 80865 (June 6,
2017), 82 FR 26970 (June 12, 2017) (order approving listing and
trading of shares of the Franklin Liberty Intermediate Municipal
Opportunities ETF and Franklin Liberty Municipal Bond ETF under NYSE
Arca Equities Rule 8.600); 80885 (June 8, 2017), 82 FR 27302 (June
14, 2017) (order approving listing and trading of shares of the IQ
Municipal Insured ETF, IQ Municipal Short Duration ETF, and IQ
Municipal Intermediate ETF under NYSE Arca Equities Rule 8.600);
82166 (November 29, 2017), 82 FR 57497 (December 5, 2017) (SR-
NYSEArca-2017-90) (order approving listing and trading of shares of
the Hartford Municipal Opportunities ETF Under NYSE Arca Rule 8.600-
E). The Commission also has approved listing and trading on the
Exchange of shares of the SPDR Nuveen S&P High Yield Municipal Bond
Fund under Commentary .02 of NYSE Arca Equities Rule 5.2(j)(3). See
Securities Exchange Act Release No.63881 (February 9, 2011), 76 FR
9065 (February 16, 2011) (SR-NYSEArca-2010-120).
\5\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Rule 5.2-E(j)(3),
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.
\6\ The Trust is registered under the 1940 Act. On August 17,
2018, the Trust filed with the Commission its registration statement
on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a)
(``Securities Act''), and under the 1940 Act relating to the Fund
(File Nos. 333-176976 and 811-22245) (``Registration Statement'').
The description of the operation of the Trust and the Fund herein is
based, in part, on the Registration Statement. In addition, the
Commission has issued an order granting certain exemptive relief to
the Trust under the 1940 Act. See Investment Company Act Release No.
30029 (April 10, 2012) (File No. 812-13795) (``Exemptive Order'').
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First Trust Advisors L.P. will be the Fund's investment adviser
(``Adviser''). First Trust Portfolios L.P. will be the Fund's
distributor. Brown Brothers Harriman & Co. will serve as custodian
(``Custodian'') and transfer agent (``Transfer Agent'') for the Fund.
Commentary .06 to Rule 8.600-E 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.\7\ In
addition, Commentary .06 further requires that personnel who make
decisions on the open-end fund's portfolio composition must be subject
to procedures designed to prevent the use and dissemination of material
nonpublic information regarding the open-end fund's portfolio. The
Adviser is not registered as a broker-dealer but is affiliated with a
broker-dealer, and has implemented and will maintain a ``fire wall''
with respect to such broker-dealer affiliate regarding access to
information concerning the composition of and/or changes to the Fund's
portfolio. In addition, personnel who make decisions on the Fund's
portfolio composition must be subject to procedures designed to prevent
the use and dissemination of material, non-
[[Page 51725]]
public information regarding the Fund's portfolio. In the event (a) the
Adviser becomes registered as a broker-dealer or newly affiliated with
a broker-dealer, or (b) any new adviser to the Fund is a registered
broker-dealer or becomes affiliated with a broker-dealer, the
applicable adviser will implement and maintain a fire wall with respect
to its relevant personnel or broker-dealer affiliate regarding access
to information concerning the composition and/or changes to the Fund's
portfolio, and will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding such
portfolio.
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\7\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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First Trust Short Duration Managed Municipal ETF
According to the Registration Statement, the Fund will seek to
provide federally tax-exempt income consistent with capital
preservation. Under normal market conditions \8\, the Fund will seek to
achieve its investment objective by investing at least 80% of its net
assets (including investment borrowings) in municipal debt securities
that pay interest that is exempt from regular federal income taxes
(collectively, ``Municipal Securities'').\9\
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\8\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5). The Exchange represents that, on a
temporary basis, including for defensive purposes, during the
initial invest-up period (for purposes of this filing, 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
(for purposes of this filing, i.e. rolling periods of seven calendar
days during which inflows or outflows of cash, in the aggregate,
exceed 10% of the Fund's net assets as of the opening of business on
the first day of such periods), the Fund may depart from its
principal investment strategies; for example, it may hold a higher
than normal proportion of its assets in cash. During such periods,
the Fund may not be able to achieve its investment objectives.
According to the Exchange, the Fund may adopt a defensive strategy
when the Adviser believes securities in which the Fund normally
invests have elevated risks due to political or economic factors and
in other extraordinary circumstances.
\9\ Municipal Securities are generally issued by or on behalf of
states, territories or possessions of the U.S. and the District of
Columbia and their political subdivisions, agencies, authorities and
other instrumentalities.
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According to the Registration Statement, the Fund may invest in the
following Municipal Securities:
Municipal lease obligations (and certificates of
participation in such obligations),
municipal general obligation bonds,
municipal revenue bonds,
municipal notes,
municipal cash equivalents,
alternative minimum tax bonds,
private activity bonds (including without limitation
industrial development bonds),
securities issued by custodial receipt trusts,\10\ and
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\10\ According to the Registration Statement, custodial receipts
are financial instruments that are underwritten by securities
dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities.
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pre-refunded and escrowed to maturity bonds.
The Fund may purchase new issues of Municipal Securities on a when-
issued or forward commitment basis.
The Municipal Securities in which the Fund invests may be fixed,
variable or floating rate securities.
Other Investments
While the Fund, under normal market conditions, will invest at
least 80% of its net assets in Municipal Securities as described above,
the Fund may, under normal market conditions, invest up to 20% of its
net assets in the aggregate in the securities and financial instruments
described below.
The Fund may hold cash and cash equivalents.\11\ In addition, the
Fund may hold the following fixed income securities with maturities of
three months or more: Fixed rate and floating rate U.S. government
securities; certificates of deposit; bankers' acceptances; repurchase
agreements; bank time deposits; and commercial paper.
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\11\ For purposes of this filing, the term ``cash equivalents''
has the meaning specified in Commentary .01(c) to NYSE Arca Rule
8.600-E.
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The Fund may hold the following derivative instruments: U.S.
Treasury futures contracts; interest rate futures; futures on fixed
income securities or fixed income securities indexes; and exchange-
traded and over-the-counter (``OTC'') credit default swaps, interest
rate swaps, swaps on fixed income securities and swaps on fixed income
securities indexes.
The Fund may invest in exchange-traded funds (``ETFs''), or acquire
short positions in such ETFs.\12\
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\12\ For purposes of this filing, the term ``ETFs'' includes
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a
national securities exchange. While the Fund may invest in inverse
ETFs, the Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -
3X) ETFs.
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The Fund will not invest in securities or other financial
instruments that have not been described in this proposed rule change.
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at NAV
\13\ only in large blocks of Shares (``Creation Units'') in
transactions with authorized participants, generally including broker-
dealers and large institutional investors (``Authorized
Participants''). Creation Units generally will consist of 50,000
Shares. The size of a Creation Unit is subject to change. As described
in the Registration Statement, the Fund will issue and redeem Creation
Units in exchange for an in-kind portfolio of instruments and/or cash
in lieu of such instruments (the ``Creation Basket'').\14\ In addition,
if there is a difference between the NAV attributable to a Creation
Unit and the market value of the Creation Basket exchanged for the
Creation Unit, the party conveying instruments (which may include cash-
in-lieu amounts) with the lower value will pay to the other an amount
in cash equal to the difference (referred to as the ``Cash
Component'').
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\13\ The NAV of the Fund's Shares generally will be calculated
once daily Monday through Friday as of the close of regular trading
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m.,
Eastern Time (``E.T.''). NAV per Share will be calculated by
dividing the Fund's net assets by the number of Fund Shares
outstanding.
\14\ It is expected that the Fund will typically issue and
redeem Creation Units on a cash basis; however, at times, the Fund
may issue and redeem Creation Units on an in-kind (or partially in-
kind) (or partially cash) basis.
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Creations and redemptions must be made by or through an Authorized
Participant that has executed an agreement that has been agreed to by
the Distributor and the Transfer Agent with respect to creations and
redemptions of Creation Units. All standard orders to create Creation
Units must be received by the Transfer Agent no later than the closing
time of the regular trading session on the NYSE (ordinarily 4:00 p.m.,
E.T.) (the ``Closing Time'') in each case on the date such order is
placed in order for the creation of Creation Units to be effected based
on the NAV of Shares as next determined on such date after receipt of
the order in proper form. Shares may be redeemed only in Creation Units
at their NAV next determined after receipt not later than the Closing
Time of a redemption request in proper form by the Fund through the
Transfer Agent and only on a business day. The Custodian, through the
National Securities Clearing Corporation (``NSCC''), will make
available on each business day, prior to the opening of business of the
Exchange, the list of the names and quantities of the instruments
comprising the Creation Basket, as well as the estimated Cash Component
(if any), for that day. The published Creation Basket will apply until
a new Creation Basket is announced on the following business
[[Page 51726]]
day prior to commencement of trading in the Shares.
Availability of Information
The Fund will disclose on the Fund's website (www.ftportfolios.com)
at the start of each business day the identities and quantities of the
securities and other assets held by the Fund that will form the basis
of the Fund's calculation of its NAV on that business day. The
portfolio holdings so disclosed will be based on information as of the
close of business on the prior business day and/or trades that have
been completed prior to the opening of business on that business day
and that are expected to settle on the business day.
The website for the Fund will contain the following information, on
a per-Share basis, for the Fund: (1) The prior business day's NAV; (2)
the market closing price or midpoint of the bid-ask spread at the time
of NAV calculation (the ``Bid-Ask Price''); and (3) a calculation of
the premium or discount of the Bid-Ask Price against such NAV.
The Fund's portfolio holdings will be disclosed on the Fund's
website daily after the close of trading on the Exchange and prior to
the opening of trading on the Exchange the following day. On a daily
basis, the Fund will disclose the information required under NYSE Arca
Rule 8.600-E (c)(2) to the extent applicable. The website information
will be publicly available at no charge.
The approximate value of the Fund's investments on a per-Share
basis, the indicative optimized portfolio value (``IOPV''), will be
disseminated every 15 seconds during the Exchange Core Trading Session
(ordinarily 9:30 a.m. to 4:00 p.m., E.T.).
Investors can also obtain the Fund's Statement of Additional
Information (``SAI'') and shareholder reports. The Fund's SAI and
shareholder reports will be available free upon request from the Trust,
and those documents and Form N-CSR may be viewed on-screen or
downloaded from the Commission's website at www.sec.gov. Information
regarding market price and trading volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers.
Quotation and last sale information for the Shares will be
available via the Consolidated Tape Association (``CTA'') high-speed
line, and from the Exchange. Quotation information from brokers and
dealers or pricing services will be available for Municipal Securities.
Price information for money market funds is available from the
applicable investment company's website and from market data vendors.
Price information for ETFs and exchange-traded futures and swaps held
by the Fund is available from the applicable exchange. Price
information for certain fixed income securities held by the Fund is
available through the Financial Industry Regulatory Authority's (FINRA)
Trade Reporting and Compliance Engine (``TRACE''). Price information
for certain Municipal Securities held by the Fund is available through
the Electronic Municipal Market Access (``EMMA'') of the Municipal
Securities Rulemaking Board (``MSRB''). Price information for cash
equivalents; fixed income securities with maturities of three months or
more (as described above), and OTC swaps will be available from one or
more major market data vendors. Pricing information regarding each
asset class in which the Fund will invest will generally be available
through nationally recognized data service providers through
subscription agreements. In addition, the IOPV (which is the Portfolio
Indicative Value, as defined in NYSE Arca Rule 8.600-E(c)(3)), will be
widely disseminated at least every 15 seconds during the Core Trading
Session by one or more major market data vendors or other information
providers.\15\
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\15\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Portfolio Indicative Values taken from CTA or other data feeds.
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Investment Restrictions
The Fund's investments will be consistent with its investment goal
and will not be used to provide multiple returns of a benchmark or to
produce leveraged returns.
Under normal market conditions, except for periods of high cash
inflows or outflows,\16\ the Fund will satisfy the following criteria:
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\16\ See note 8, supra.
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i. The Fund will have a minimum of 20 non-affiliated issuers \17\;
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\17\ For the avoidance of doubt, in the case of Municipal
Securities that are issued by entities whose underlying assets are
municipal bonds, the underlying municipal bonds will be taken into
account. Additionally, for purposes of this restriction, each state
and each separate political subdivision, agency, authority, or
instrumentality of such state, each multi-state agency or authority,
and each guarantor, if any, would be treated as separate, non-
affiliated issuers of Municipal Securities.
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ii. No single Municipal Securities issuer will account for more
than 10% of the weight of the Fund's portfolio \18\;
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\18\ See note 17, supra.
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iii. No individual bond will account for more than 5% of the weight
of the Fund's portfolio;
iv. The Fund will limit its investments in Municipal Securities of
any one state to 20% of the Fund's total assets and will be diversified
among issuers in at least 10 states;
v. The Fund will be diversified among a minimum of five different
sectors of the municipal bond market.\19\
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\19\ The Fund's investments in Municipal Securities will include
investments in state and local (e.g., county, city, town) Municipal
Securities relating to such industries or sectors as the following:
Airports; bridges and highways; hospitals; housing; jails; mass
transportation; nursing homes; parks; public buildings; recreational
facilities; school facilities; streets; and water and sewer works.
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Pre-refunded bonds will be excluded from the above limits. The
Adviser represents that, with respect to pre-refunded bonds (also known
as refunded or escrow-secured bonds, the issuer ``prerefunds'' the bond
by setting aside in advance all or a portion of the amount to be paid
to the bondholders when the bond is called. Generally, an issuer uses
the proceeds from a new bond issue to buy high grade, interest bearing
debt securities, including direct obligations of the U.S. government,
which are then deposited in an irrevocable escrow account held by a
trustee bank to secure all future payments of principal and interest on
the pre-refunded bonds. The escrow would be sufficient to satisfy
principal and interest on the call or maturity date and one would not
look to the issuer for repayment. Because pre-refunded bonds' pricing
would be valued based on the applicable escrow (generally U.S.
government securities), such pre-refunded securities would not be
readily susceptible to market manipulation and it would be unnecessary
to apply the diversification and weighting criteria set forth above.
Application of Generic Listing Requirements
The Exchange is submitting this proposed rule change because the
portfolio for the Fund will not meet all of the ``generic'' listing
requirements of Commentary .01 to NYSE Arca Rule 8.600-E applicable to
the listing of Managed Fund Shares. The Fund's portfolio will meet all
such requirements except for those set forth in Commentary
.01(b)(1).\20\
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\20\ Commentary .01(b)(1) to NYSE Arca Rule 8.600-E provides
that components that in the aggregate account for at least 75% of
the fixed income weight of the portfolio each shall have a minimum
original principal amount outstanding of $100 million or more.
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The Exchange believes that it is appropriate and in the public
interest to
[[Page 51727]]
approve listing and trading of Shares of the Fund on the Exchange
notwithstanding that the Fund would not meet the requirements of
Commentary .01(b)(1) to Rule 8.600-E in that the Fund's investments in
municipal securities will be well-diversified.
The Exchange believes that permitting Fund Shares to be listed and
traded on the Exchange notwithstanding that less than 75% of the weight
of the Fund's portfolio may consist of components with $100 million
minimum original principal amount outstanding would provide the Fund
with greater ability to select from a broad range of Municipal
Securities, as described above, that would support the Fund's
investment goal.
The Exchange believes that, notwithstanding that the Fund's
portfolio may not satisfy Commentary .01(b)(1) to Rule 8.600-E, the
Fund's portfolio will not be susceptible to manipulation. As noted
above, the Fund's investments, excluding pre-refunded bonds, as
described above, will be diversified among a minimum of 20 non-
affiliated municipal issuers; no single Municipal Securities issuer
will account for more than 10% of the weight of the Fund's portfolio;
no individual bond will account for more than 5% of the weight of the
Fund's portfolio; the Fund will limit its investments in Municipal
Securities of any one state to 20% of the Fund's total assets and will
be diversified among municipal issuers in at least 10 states; and the
Fund will be diversified among a minimum of five different sectors of
the municipal bond market.
The Exchange notes that the Commission has previously approved an
exception from requirements set forth in Commentary .01(b) relating to
municipal securities similar to those proposed with respect to the
Fund.\21\
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\21\ See Securities Exchange Act Release Nos. 82974 (March 30,
2018), 83 FR 14698 (April 5, 2018) (SR-NYSEArca-2017-99) (Notice of
Filing of Amendment No. 3 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 3, to List and
Trade Shares of the Hartford Schroders Tax-Aware Bond ETF Under NYSE
Arca Rule 8.600-E); 82166 (November 29, 2017), 82 FR 57497 (December
5, 2017) (SR-NYSEArca-2017-90) (Order Approving a Proposed Rule
Change, as Modified by Amendment No. 2, to List and Trade Shares of
the Hartford Municipal Opportunities ETF Under NYSE Arca Rule 8.600-
E). See also, Securities Exchange Act Release 83982 (August 29,
2018) (SR-NYSEArca-2018-62) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change Relating to Listing and
Trading of Shares of the American Century Diversified Municipal Bond
ETF under NYSE Arca Rule 8.600-E).
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The Exchange notes that, other than Commentary .01(b)(1) to Rule
8.600-E, the Fund's portfolio will meet all other requirements of Rule
8.600-E.
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.\22\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
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\22\ See NYSE Arca Rule 7.12-E.
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Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
NYSE Arca from 4 a.m. to 8 p.m., E.T. in accordance with NYSE Arca Rule
7.34-E (Early, Core, and Late Trading Sessions). The Exchange has
appropriate rules to facilitate transactions in the Shares during all
trading sessions. As provided in NYSE Arca Rule 7.6-E, the minimum
price variation (``MPV'') for quoting and entry of orders in equity
securities traded on NYSE Arca is $0.01, with the exception of
securities that are priced less than $1.00 for which the MPV for order
entry is $0.0001.
The Shares of the Fund will conform to the initial and continued
listing criteria under NYSE Arca Rule 8.600-E. Consistent with NYSE
Arca Rule 8.600-E(d)(2)(B)(ii), the Adviser will implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Fund's portfolio. The Exchange represents that, for
initial and/or continued listing, the Fund will be in compliance with
Rule 10A-3\23\ under the Act, as provided by NYSE Arca Rule 5.3-E. 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. The Fund's
investments will be consistent with the Fund's investment goal and will
not be used to enhance leverage.
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\23\ 17 CFR 240.10A-3.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by FINRA on behalf
of the Exchange, or by regulatory staff of the Exchange, which are
designed to detect violations of Exchange rules and applicable federal
securities laws. 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 federal securities laws applicable to trading on the Exchange.\24\
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\24\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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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.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, ETFs and certain
futures with other markets and other entities that are members of the
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on
behalf of the Exchange, or both, may obtain trading information
regarding trading in the Shares, ETFs and certain futures from such
markets and other entities.\25\ In addition, the Exchange may obtain
information regarding trading in the Shares, ETFs and certain futures
from markets and other entities that are members of ISG or with which
the Exchange has in place a comprehensive surveillance sharing
agreement. In addition, FINRA, on behalf of the Exchange, is able to
access, as needed, trade information for certain fixed income
securities held by the Fund reported to FINRA's TRACE. FINRA also can
access data obtained from the MSRB relating to municipal bond trading
activity for surveillance purposes in connection with trading in the
Shares.
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\25\ 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.
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In addition, the Exchange also has a general policy prohibiting the
[[Page 51728]]
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolio, (b) limitations on portfolio
holdings or reference assets, or (c) the applicability of Exchange
listing rules specified in this rule filing shall constitute continued
listing requirements for listing the Shares of the Fund on the
Exchange.
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 NYSE Arca Rule 5.5-E(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit Holders in an Information Bulletin (``Bulletin'')
of the special characteristics and risks associated with trading the
Shares. Specifically, the Bulletin will discuss the following: (1) The
procedures for purchases and redemptions of Shares in Creation Unit
aggregations (and that Shares are not individually redeemable); (2)
NYSE Arca Rule 9.2-E(a), which imposes a duty of due diligence on its
Equity Trading Permit Holders to learn the essential facts relating to
every customer prior to trading the Shares; (3) the risks involved in
trading the Shares during the Early and Late Trading Sessions when an
updated IOPV will not be calculated or publicly disseminated; (4) how
information regarding the IOPV and the Disclosed Portfolio is
disseminated; (5) the requirement that Equity Trading Permit Holders
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \26\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\26\ 15 U.S.C. 78f(b)(5).
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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 NYSE Arca Rule 8.600-E. The
Exchange has in place surveillance procedures that are adequate to
properly monitor trading in the Shares in all trading sessions and to
deter and detect violations of Exchange rules and applicable federal
securities laws. The Exchange or FINRA, on behalf of the Exchange, or
both, will communicate as needed regarding trading in the Shares, ETFs
and certain futures with other markets and other entities that are
members of the ISG, and the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading information regarding trading in
the Shares, ETFs and certain futures from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares, ETFs and certain futures from markets and other
entities that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement. In addition,
FINRA, on behalf of the Exchange, is able to access, as needed, trade
information for certain fixed income securities held by the Fund
reported to TRACE. FINRA also can access data obtained from the MSRB
relating to municipal bond trading activity for surveillance purposes
in connection with trading in the Shares. The Adviser is not a
registered broker-dealer but is affiliated with a broker-dealer. The
Adviser has implemented and will maintain a ``fire wall'' with respect
to such broker-dealer affiliate regarding access to information
concerning the composition of and/or changes to the Fund's portfolio.
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 notwithstanding that the Fund would not meet the requirements
of Commentary .01(b)(1) to Rule 8.600-E in that the Fund's investments
in municipal securities will be well-diversified. As noted above, the
Fund's investments will be well-diversified in that the Fund, excluding
pre-refunded bonds, as described above, will have a minimum of 20 non-
affiliated municipal issuers; no single municipal issuer will account
for more than 10% of the weight of the Fund's portfolio; no individual
bond will account for more than 5% of the weight of the Fund's
portfolio; the Fund will limit its investments in Municipal Securities
of any one state to 20% of the Fund's total assets and will be
diversified among municipal issuers in at least 10 states; and the Fund
will be diversified among a minimum of five different industries or
sectors of the municipal bond market. With respect to the proposed
exclusion for pre-refunded bonds described above, generally, an issuer
uses the proceeds from a new bond issue to buy high grade, interest
bearing debt securities, including direct obligations of the U.S.
government, which are then deposited in an irrevocable escrow account
held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bonds. The escrow would be sufficient to
satisfy principal and interest on the call or maturity date and one
would not look to the issuer for repayment. Because pre-refunded bonds'
pricing would be valued based on the applicable escrow (generally U.S.
government securities), such pre-refunded securities would not be
readily susceptible to market manipulation and it would be unnecessary
to apply the diversification and weighting criteria set forth above in
``Investment Restrictions.''
The Exchange believes that permitting Fund Shares to be listed and
traded on the Exchange notwithstanding that less than 75% of the weight
of the Fund's portfolio may consist of components with $100 million
minimum original principal amount outstanding would provide the Fund
with greater ability to select from a broad range of municipal
securities, as described above, that would support the Fund's
investment objective.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund
[[Page 51729]]
and the Shares, thereby promoting market transparency. Quotation and
last sale information for the Shares will be available via the CTA
high-speed line, and from the Exchange. Quotation information from
brokers and dealers or pricing services will be available for Municipal
Securities. Price information for money market funds is available from
the applicable investment company's website and from market data
vendors. Price information for ETFs and exchange-traded futures and
swaps held by the Fund is available from the applicable exchange. Price
information for certain fixed income securities held by the Fund is
available FINRA's TRACE. Price information for certain Municipal
Securities held by the Fund is available through the EMMA of the MSRB.
Price information for cash equivalents, fixed income securities with
maturities of three months or more (as described above), and OTC swaps
will be available from one or more major market data vendors. Pricing
information regarding each asset class in which the Fund will invest
will generally be available through nationally recognized data service
providers through subscription agreements.
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares. Trading
in Shares of the Fund will be halted if the circuit breaker parameters
in NYSE Arca Rule 7.12-E have been reached or because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. Trading in the Shares will be
subject to NYSE Arca Rule 8.600-E(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 IOPV, the Disclosed
Portfolio, and quotation and last sale information for the Shares.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
principally holds municipal securities and that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a comprehensive surveillance sharing
agreement. In addition, as noted above, investors will have ready
access to information regarding the Fund's holdings, IOPV, Disclosed
Portfolio, and quotation and last sale information for the Shares.
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 purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of actively-managed exchange-traded product that
principally holds municipal securities and 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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \27\ and Rule 19b-4(f)(6) thereunder.\28\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\29\
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\27\ 15 U.S.C. 78s(b)(3)(A)(iii).
\28\ 17 CFR 240.19b-4(f)(6).
\29\ 17 CFR 240.19b-4(f)(6)(iii). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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A proposed rule change filed under Rule 19b-4(f)(6) \30\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\31\ the Commission
may 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 states that
the waiver of the 30-day delayed operative date is consistent with the
protection of investors and the public interest because the Commission
has previously approved an exception from requirements set forth in
Commentary .01(b) relating to municipal securities similar to those
proposed with respect to the Fund.\32\ Additionally, the Exchange
asserts that waiver will permit the prompt listing and trading of an
additional issue of Managed Fund Shares that principally holds
municipal securities, which will enhance competition among issuers,
investment advisers and other market participants with respect to
listing and trading of issues of Managed Fund Shares that hold
municipal securities. The Commission believes that waiver of the 30-day
operative delay is consistent with the protection of investors and the
public interest because the proposed continuing listing standards for
the Shares are substantially similar to those applicable to others
approved by the Commission for similar funds. Accordingly, the
Commission hereby waives the 30-day operative delay and designates the
proposed rule change operative upon filing.\33\
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\30\ 17 CFR 240.19b-4(f)(6).
\31\ 17 CFR 240.19b-4(f)(6)(iii).
\32\ See note 21, supra.
\33\ For 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).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \34\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\34\ 15 U.S.C. 78s(b)(2)(B).
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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.
[[Page 51730]]
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-NYSEArca-2018-73 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-NYSEArca-2018-73. 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-NYSEArca-2018-73, and should be
submitted on or before November 2, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22208 Filed 10-11-18; 8:45 am]
BILLING CODE 8011-01-P
