Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the BrandywineGLOBAL-Global Total Return ETF, a Series of Legg Mason ETF Investment Trust Under Nasdaq Rule 5735, 55416-55435 [2018-24068]

Download as PDF 55416 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices National will also provide FINRA with a current list of Dual Members and shall update the list no less frequently than once each quarter.15 The Commission believes that these provisions are designed to provide for continuing communication between the Parties to ensure the continued accuracy of the scope of the proposed allocation of regulatory responsibility. The Commission is hereby declaring effective an Amended Plan that, among other things, allocates regulatory responsibility to FINRA for the oversight and enforcement of all NYSE National rules that are substantially similar to the rules of FINRA for Dual Members of NYSE National and FINRA. Therefore, modifications to the Certification need not be filed with the Commission as an amendment to the Amended Plan, provided that the Parties are only adding to, deleting from, or confirming changes to NYSE National rules in the Certification in conformance with the definition of Common Rules provided in the Amended Plan. However, should the Parties decide to add an NYSE National rule to the Certification that is not substantially similar to a FINRA rule; delete an NYSE National rule from the Certification that is substantially similar to a FINRA rule; or leave on the Certification an NYSE National rule that is no longer substantially similar to a FINRA rule, then such a change would constitute an amendment to the Amended Plan, which must be filed with the Commission pursuant to Rule 17d–2 under the Act.16 Under paragraph (c) of Rule 17d–2, the Commission may, after appropriate notice and comment, declare a plan, or any part of a plan, effective. In this instance, the Commission believes that appropriate notice and comment can take place after the proposed amendment is effective. The primary purposes of the amendment are to (1) reflect the name change of National Stock Exchange, Inc. to NYSE National, Inc., (2) update the SRO rules that are covered by the agreement, and (3) to the extent that it becomes a member of NYSE National, allocate regulatory responsibility to FINRA for NYSE National’s affiliated routing brokerdealer, Archipelago Securities. By declaring it effective today, the Amended Plan can become effective and 15 See paragraph 3 of the Amended Plan. Commission also notes that the addition to or deletion from the Certification of any federal securities laws, rules, and regulations for which FINRA would bear responsibility under the Amended Plan for examining, and enforcing compliance by, Dual Members, also would constitute an amendment to the Amended Plan. 16 The VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 be implemented without undue delay. The Commission notes that the prior version of this plan immediately prior to this proposed amendment was published for comment and the Commission did not receive any comments thereon.17 Furthermore, the Commission does not believe that the amendment to the plan raises any new regulatory issues that the Commission has not previously considered. VI. Conclusion This order gives effect to the Amended Plan filed with the Commission in File No. 4–694. The Parties shall notify all members affected by the Amended Plan of their rights and obligations under the Amended Plan. It is therefore ordered, pursuant to Section 17(d) of the Act, that the Amended Plan in File No. 4–694, between the FINRA and NYSE National, filed pursuant to Rule 17d-2 under the Act, hereby is approved and declared effective. It is further ordered that NYSE National is relieved of those responsibilities allocated to FINRA under the Amended Plan in File No. 4– 694. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–24070 Filed 11–2–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–84505; File No. SR– NASDAQ–2018–080] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the BrandywineGLOBAL—Global Total Return ETF, a Series of Legg Mason ETF Investment Trust Under Nasdaq Rule 5735 October 30, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 17, 2018, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed 17 See supra note 11 (citing to Securities Exchange Act Release No. 77089). 18 17 CFR 200.30–3(a)(34). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade the shares of the BrandywineGLOBAL—Global Total Return ETF (the ‘‘Fund’’), a series of Legg Mason ETF Investment Trust (the ‘‘Trust’’) under Nasdaq Rule 5735 (‘‘Managed Fund Shares’’).3 The shares of the Fund are collectively referred to herein as the ‘‘Shares.’’ The text of the proposed rule change is available on the Exchange’s website at https://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for 3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 20, 2008) (SR– NASDAQ–2008–039). There are already multiple actively-managed funds listed on the Exchange. See, e.g., Securities Exchange Act Release Nos. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) (SR–NASDAQ–2017–039) (order approving listing and trading of Guggenheim Limited Duration ETF); 78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR–NASDAQ–2016–061) (order approving listing and trading of First Trust Equity Market Neutral ETF); 78443 (July 29, 2016), 81 FR 51517 (August 4, 2016) (SR–NASDAQ–2016–064) (order approving listing and trading of First Trust Strategic Mortgage REIT ETF); 71913 (April 9, 2014), 79 FR 21333 (April 15, 2014) (SR–NASDAQ–2014–019) (order approving listing and trading of First Trust Managed Municipal ETF); 69464 (April 26, 2013), 78 FR 25774 (May 2, 2013) (SR–NASDAQ–2013– 036) (order approving listing and trading of First Trust Senior Loan Fund); 66489 (February 29, 2012), 77 FR 13379 (March 6, 2012) (SR–NASDAQ– 2012–004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund); see also filings for similar ETFs listed on other national securities exchanges: Securities Exchange Act Release Nos. 80657 (May 11, 2017) 82 FR 22702 (May 17, 2017) (SR–NYSE Arca–2017– 09) (order approving listing and trading of Janus Short Duration Income ETF); 79683 (December 23, 2016), 81 FR 96539 (December 30, 2016) (SR– NYSEArca–2016–82) (order approving listing and trading of JPMorgan Diversified Event Driven ETF); 77904 (May 25, 2016), 81 FR 35101 (SR–NYSE Arca–2016–17) (order approving listing and trading of JPMorgan Diversified Alternative ETF); 68870 (February 8 2013), 78 FR 11245 (February 15, 2013) (SR–NYSEArca–2012–139) (order approving listing and trading of First Trust Preferred Securities and Income ETF). The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders. E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade the Shares of the Fund under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares 4 on the Exchange. The Fund will be an exchange-traded fund (‘‘ETF’’) that is actively-managed. The Shares will be offered by the Trust, which was established as a Maryland statutory trust on June 8, 2015.5 The Exchange notes that other actively-managed, broad market fixed-income ETFs have been previously approved by the SEC prior to the adoption of ‘‘generic’’ listing standards for actively-managed ETFs.6 4 A Managed Fund Share is a security that represents an interest in a company, which is registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1) (the ‘‘1940 Act’’) and organized as an open-end investment company or similar entity, that invests in a portfolio of securities selected by its investment adviser consistent with the company’s investment objective and policies. In contrast, an open-end investment company that issues Index Fund Shares, listed and traded on the Exchange under Nasdaq Rule 5705, seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. 5 The Commission has issued an order, upon which the Trust may rely, granting certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 32391 (December 13, 2016) (File No. 812–14547) (the ‘‘Exemptive Relief’’). In addition, on December 6, 2012, the staff of the Commission’s Division of Investment Management (‘‘Division’’) issued a noaction letter (‘‘No-Action Letter’’) relating to the use of derivatives by actively-managed ETFs. See NoAction Letter dated December 6, 2012 from Elizabeth G. Osterman, Associate Director, Office of Exemptive Applications, Division of Investment Management. The No-Action Letter stated that the Division would not recommend enforcement action to the Commission under applicable provisions of and rules under the 1940 Act if actively-managed ETFs operating in reliance on specified orders (which include the Exemptive Relief) invest in options contracts, futures contracts or swap agreements provided that they comply with certain representations stated in the No-Action Letter. 6 See, e.g., Securities Exchange Act Release Nos. 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR–NYSEArca–2015–73) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR–NYSEArca– 2011–95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund (now known as the PIMCO Active Bond Exchange- VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 55417 The Trust is registered with the Commission as an investment company under the 1940 Act and has filed a registration statement on Form N–1A (‘‘Registration Statement’’) with the Commission with respect to the Fund.7 The Fund will be a series of the Trust. The Fund intends to qualify each year as a regulated investment company (‘‘RIC’’) under Subchapter M of the Internal Revenue Code of 1986, as amended. Legg Mason Partners Fund Advisor, LLC will be the investment adviser to the Fund (the ‘‘Manager’’).8 Brandywine Global Investment Management, LLC will serve as the sub-adviser to the Fund (the ‘‘Sub-Adviser’’).9 Legg Mason Investor Services, LLC (the ‘‘Distributor’’) will be the distributor of the Fund’s Shares. The Investment Adviser, the Sub-Adviser and the Distributor are wholly-owned subsidiaries of Legg Mason, Inc. (‘‘Legg Mason’’). An entity that is not affiliated with Legg Mason, and which is named in the Registration Statement, will act as the administrator, accounting agent, custodian, and transfer agent to the Fund. Paragraph (g) of Rule 5735 provides that if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a brokerdealer, such investment adviser shall erect and maintain a ‘‘fire wall’’ between the investment adviser and the broker-dealer with respect to access to information concerning the composition and/or changes to such investment company’s portfolio.10 In addition, paragraph (g) further requires that personnel who make decisions on the investment company’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material, nonpublic information regarding the investment company’s portfolio. Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with the establishment and maintenance of a ‘‘fire wall’’ between the investment adviser and the broker-dealer reflects the applicable investment company’s portfolio, not an underlying benchmark index, as is the case with index-based funds. Neither the Manager nor the Sub-Adviser is a broker-dealer, but each is affiliated with the Distributor, a broker-dealer, and has implemented and will maintain a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio. In addition, personnel who make decisions on the Fund’s portfolio composition will be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the Fund’s portfolio. In the event (a) the Manager or the Sub-Adviser registers as a brokerdealer or becomes newly affiliated with a broker-dealer, or (b) any new investment adviser or any new subadviser to the Fund is a registered broker-dealer or becomes affiliated with another broker-dealer, it will implement Traded Fund)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR–NYSEArca–2013–122) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund); see also infra notes 86 and 104. 7 See Post-Effective Amendment No. 50 to the Registration Statement on Form N–1A for the Trust (File Nos. 333–206784 and 811–23096) as filed on June 5, 2018. The Trust will file additional amendments to the Registration Statement as necessary to conform to the representations in this filing. The descriptions of the Fund and the Shares contained herein are based, in part, on information in the Registration Statement. 8 Legg Mason Partners Fund Advisor, LLC describes its role as ‘‘investment manager,’’ rather than as ‘‘investment adviser’’ in applicable Fundrelated documents, including the Registration Statement, in its investment management agreement with the Fund and in connection with its annual approval process by the board of trustees for the Trust (the ‘‘Board’’). As a result, the defined term ‘‘Manager’’ is used in this filing with respect to a proposed rule change instead of the term ‘‘investment adviser,’’ which is the term used by certain other investment advisers to ETFs in their filings with respect to proposed rule changes under Rule 19b–4 of the Act. 9 The Sub-Adviser is responsible for the day-today management of the Fund and, as such, typically makes all decisions with respect to portfolio holdings regardless of where the instruments are traded. The Manager has ongoing oversight responsibility. 10 An investment adviser to an investment company is required to be registered under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). As a result, the Manager and the SubAdviser, as registered investment advisers, and their related personnel are subject to the provisions of Rule 204A–1 under the Advisers Act relating to codes of ethics. Rule 204A–1 requires investment advisers (such as the Manager and the Sub-Adviser) 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 the Manager and the Sub-Adviser must be consistent with the Advisers Act and Rule 204A–1 thereunder. In addition, Rule 206(4)–7 under the Advisers Act makes it unlawful for an investment adviser (such as the Manager and the Sub-Adviser) to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 E:\FR\FM\05NON1.SGM 05NON1 55418 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices and maintain a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning the composition and/or changes to the Fund’s portfolio and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. BrandywineGLOBAL—Global Total Return ETF Principal Investments The investment objective of the Fund will be to seek to maximize total return, consisting of income and capital appreciation. Although the Fund may invest in securities and Debt (as defined below) of any maturity, the Fund will normally maintain an effective duration as set forth in the prospectus.11 Effective duration seeks to measure the expected sensitivity of market price to changes in interest rates, taking into account the anticipated effects of structural complexities (for example, some bonds can be prepaid by the issuer). Under Normal Market Conditions,12 the Fund will seek to achieve its investment objective by investing at least 80% of its assets in a portfolio comprised of U.S. or foreign fixed income securities; U.S. or foreign Debt 11 The effective duration of the Fund may fall outside of its expected range due to market movements. If this happens, the Sub-Adviser will take action to bring the Fund’s effective duration back within its expected range within a reasonable period of time. 12 The term ‘‘Normal Market Conditions’’ has the meaning set forth in Nasdaq Rule 5735(c)(5). The Fund may vary from ordinary parameters on a temporary basis, including for defensive purposes, during the initial invest-up period (i.e., the six-week period following the commencement of trading of Shares on the Exchange) and during periods of high cash inflows or outflows (i.e., rolling periods of seven calendar days during which inflows or outflows of cash, in the aggregate, exceed 10% of the Fund’s assets as of the opening of business on the first day of such periods). In those situations, the Fund may depart from its principal investment strategies and may, for example, hold a higher than normal proportion of its assets in cash and cash equivalents. During such periods, the Fund may not be able to achieve its investment objective. The Fund may also adopt a defensive strategy and hold a significant portion of its assets in cash and cash equivalents when the Manager or the Sub-Adviser believes securities, Debt and other instruments in which the Fund normally invests have elevated risks due to political or economic factors, heightened market volatility or in other extraordinary circumstances that do not constitute ‘‘Normal Market Conditions’’. The Fund’s investments in cash equivalents are described in greater detail in note 22 infra. VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 (as defined below); 13 ETFs 14 that provide exposure to such U.S. or foreign fixed income securities, Debt or other Principal Investments (defined below); derivatives 15 that (i) provide exposure 13 As noted below, the Fund’s fixed income security and Debt investments will satisfy specific diversification requirements set forth in the Fund’s prospectus that are not included in Nasdaq Rule 5735, including, without limitation, that each issuer of securities or borrower in respect to Debt have economic exposure to at least three countries. See infra ‘‘Investment Restrictions. 14 The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705(b)), Portfolio Depositary Receipts (as described in Nasdaq Rule 5705(a)), and Managed Fund Shares (as described in Nasdaq Rule 5735). The Fund will not invest in ETFs that are not registered as investment companies under the 1940 Act. The ETFs held by the Fund will invest in fixed income securities, Debt, money-market instruments and other Principal Investments to which the Fund seeks exposure. All such ETFs will trade in markets that are members of the ISG or exchanges that are parties to a comprehensive surveillance sharing agreement with the Exchange. The Fund will not invest in leveraged ETFs, inverse ETFs, or inverse leveraged ETFs. Other fixed-income funds have been approved to include ETFs in their 80% principal investment category. See, e.g., Securities Exchange Act Release No. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) (SR–NASDAQ–2017–039) (approving fund seeking to meet its investment objective of having at least 80% of assets invested in a portfolio of debt instruments in part through investments in ETFs that invest substantially all of their assets in such debt instruments). 15 Derivatives will include: (i) Swaps and security-based swaps, futures, options, options on futures, and swaptions that are traded on an exchange, trading facility, swap execution facility or alternative trading system (‘‘Exchange-Traded Derivatives’’) (A) that is a member of the Intermarket Surveillance Group (‘‘ISG’’), which includes all U.S. national securities exchanges and most futures exchanges, (B) that is subject to a comprehensive surveillance sharing agreement with the Exchange, or (C) that is not an ISG member and with which the Exchange does not have a comprehensive surveillance sharing agreement; and (ii) swaps and security-based swaps, options, options on futures, swaptions, forwards and similar instruments that are traded in the over-the-counter market and are either centrally cleared or cleared bilaterally (‘‘OTC Derivatives’’), as further described below. For the purposes of describing the scope of the Fund’s potential investments in derivatives, the terms ‘‘swaps’’ and ‘‘security-based swaps’’ shall have the meanings set forth in the Commodity Exchange Act (‘‘CEA’’), as amended by The DoddFrank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010) (‘‘Dodd-Frank’’), and regulations thereunder, and references to swaps and forwards on foreign exchange or currencies shall include ‘‘foreign exchange forwards’’ and ‘‘foreign exchange swaps’’, as such terms are defined in Sections 1a(24)–(25) of the CEA. The terms ‘‘exchange-traded’’ and ‘‘exchange-listed’’, when used with respect to swaps and security-based swaps, shall include swaps and security-based swaps that are executed on swap execution facilities and security-based swap execution facilities and cleared through regulated, central clearing facilities. The types of derivatives in which the Fund may invest and the reference assets for such derivatives are described in greater detail below. Exchange-Traded Derivatives and OTC Derivatives may reference Principal Investments and other investments. Those Exchange-Traded Derivatives and OTC Derivatives that reference Principal Investments will be treated as Principal Investments and those that do not will PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 to such U.S. or foreign fixed income securities, Debt and other Principal Investments, (ii) are used to risk manage the Fund’s holdings, and/or (iii) are used to enhance returns, such as through covered call strategies;16 U.S. or foreign equity securities of any type acquired in reorganizations of issuers of fixed income securities or Debt held by the Fund (‘‘Work Out Securities’’); 17 U.S. or foreign non-convertible preferred securities (other than trust preferred securities, which the Fund may invest in, but which are treated as fixed income securities 18) (‘‘NonConvertible Preferred Securities’’); 19 warrants,20 comprised of: Warrants on not be treated as Principal Investments. For purposes of the 80% Principal Investments measure, the Fund will value Exchange-Traded Derivatives and OTC Derivatives based on the markto-market value of such derivatives. This approach is consistent with the valuation methodology for asset coverage purposes in Rule 18f–4 under the 1940 Act proposed by the Commission. See Investment Company Act Release No. 31933 (December 11, 2015); 80 FR 80884 (December 28, 2015) (the ‘‘Derivatives Rule Proposing Release’’); see also infra note 107. No more than 10% of the assets of the Fund will be invested in ExchangeTraded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. 16 See also infra ‘‘The Fund’s Use of Derivatives.’’ 17 Work Out Securities will generally be traded in the OTC market but may be listed on an exchange that may or may not be an ISG member. To the extent that the Work Out Securities are exchangelisted, they will be subject to the 10% limit on the Fund’s total assets that can be listed on a market that is not a member of ISG or a market with which the Exchange does not have a comprehensive surveillance sharing agreement. See infra ‘‘Investment Restrictions.’’ 18 See Nasdaq Rule 5735(b)(1)(B). 19 Non-convertible preferred stock, such as that comprising the Non-Convertible Preferred Securities, provides holders with a fixed or variable distribution and a status upon bankruptcy of the issuer that is subordinated to debt holders but preferred over common shareholders. NonConvertible Preferred Securities may be listed on either an ISG member exchange (or an exchange with which the Exchange has a comprehensive surveillance sharing agreement) or a non-ISG member exchange or be unlisted and trade in the over-the-counter market. Non-Convertible Preferred Securities that are listed and traded on a non-ISG member exchange or on an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, together with all other exchange-listed securities and ExchangeTraded Derivatives held by the Fund that are listed on a non-ISG member exchange or exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, are limited to 10% of the Fund’s total assets. See infra ‘‘Investment Restrictions.’’ 20 Warrants are equity securities that provide the holder with the right to purchase specified securities of the issuer of the warrants at a specified exercise price until the expiration date of the warrant. The Fund may hold warrants that provide the right to purchase fixed income securities or equity securities and expects that most of the warrants it holds will be attached to related fixed income securities. Warrants held by the Fund may be traded in the OTC market or may be listed on E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices U.S. or foreign fixed income securities (‘‘Fixed-Income Related Warrants’’) and warrants on U.S. or foreign equity securities (‘‘Equity-Related Warrants’’),21 both fixed income and equity securities of which are generally issued by the issuer of the warrants, and both types of warrants of which are generally attached to, accompany or are purchased alongside investments in U.S. or foreign fixed income securities; cash and cash equivalents; 22 and foreign currencies (together, the ‘‘Principal Investments’’ and the equity elements of the Principal Investments, which consist of Work Out Securities, ETFs that provide exposure to fixed income securities, Debt or other Principal Investments, Equity-Related Warrants 23 and Non-Convertible Preferred Securities, are referred to as the ‘‘Principal Investment Equities’’).24 an exchange. Warrants that are listed on a non-ISG member exchange or an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, together with all other exchange-listed securities and ExchangeTraded Derivatives held by the Fund that are listed on a non-ISG member exchange or exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, are limited to 10% of the Fund’s total assets. See infra ‘‘Investment Restrictions.’’ 21 The Fund’s interests in Equity-Related Warrants are similar to the Fund’s interest in Work Out Securities in that they reflect interests in equity securities that are held solely in connection with investments in fixed income securities. 22 Cash equivalents consist of the following, all of which have maturities of less than 360 days: U.S. government securities; certificates of deposit issued against funds deposited in a bank or savings and loan association; bankers’ acceptances (which are short-term credit instruments used to finance commercial transactions); repurchase agreements and reverse repurchase agreements; and bank time deposits (which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest). Cash equivalents also consist of money market funds registered under the 1940 Act and money market funds that are not registered under the 1940 Act but that comply with Rule 2a–7 under the 1940 Act (together, ‘‘Money Market Funds’’), money market ETFs and commercial paper, which are short-term unsecured promissory notes, having maturities of 360 days or less. The Exchange notes that, while the Fund treats commercial paper having maturities of 360 days or less as cash equivalents for the purposes of the 80% Principal Investments measure, the Fund will apply the definition of cash equivalents in Nasdaq Rule 5735(b)(1)(C) (which is limited to instruments with maturities of less than three months) for purposes of compliance with Nasdaq Rule 5735(b)(1) and will comply with the applicable requirements of Nasdaq Rule 5735(b)(1) with respect to all commercial paper held by the Fund. Investments in cash equivalents that are Money Market Funds will be made in accordance with Rule 12d1–1 under the 1940 Act. 23 For purposes of this proposed rule change, Fixed-Income Related Warrants are treated as fixed income securities and not as Principal Investment Equities. Fixed-Income Related Warrants will be subject to and comply with the generic listing requirements for fixed income securities rather than the requirements applicable to equity securities. 24 The Manager and Sub-Adviser will manage the Fund to ensure that the weight of Non-Convertible VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 The Manager or Sub-Adviser (as applicable) may select from any of the following types of fixed income securities: (i) U.S. or foreign corporate debt securities, including notes, bonds, debentures, trust preferred securities, and commercial paper issued by corporations, trusts, limited partnerships, limited liability companies and other types of nongovernmental legal entities; (ii) U.S. government securities, including obligations of, or guaranteed by, the U.S. government, its agencies or governmentsponsored entities (other than MBS described below); (iii) sovereign debt securities, which include fixed income securities issued by governments, agencies or instrumentalities and their political subdivisions, securities issued by government-owned, controlled or sponsored entities, interests in entities organized and operated for the purpose of restructuring the investment instruments issued by such entities, Brady Bonds,25 and fixed income securities issued by supranational entities such as the World Bank; 26 (iv) municipal securities, which include general obligation bonds, revenue bonds, housing authority bonds, private activity bonds, industrial development bonds, residual interest bonds, tender option bonds, tax and revenue anticipation notes, bond anticipation notes, tax-exempt commercial paper, municipal leases, participation certificates and custodial receipts; (v) zero coupon securities, which are securities that pay no interest during the life of the obligation but are issued at prices below their stated maturity value; (vi) pay-in-kind securities, which have a stated coupon, but the interest is generally paid in the form of obligations of the same type as the underlying payin-kind securities (e.g., bonds) rather than in cash; (vii) deferred interest securities, which are obligations that generally provide for a period of delay before the regular payment of interest begins and are issued at a significant discount from face value; (viii) U.S. or foreign structured notes and indexed securities, including securities that have demand, tender or put features, or interest rate reset features; (ix) U.S. or foreign inflation-indexed or inflationPreferred Securities, Equity-Related Warrants and Work Out Securities (which are generally traded solely in the over-the-counter market) together does not exceed 15% of the Fund’s assets. 25 Brady Bonds are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness. 26 A supranational entity is a bank, commission or company established or financially supported by the national government of one or more countries to promote reconstruction or development. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 55419 protected securities, which are fixed income securities that are structured to provide protection against inflation and whose principal value or coupon is periodically adjusted according to the rate of inflation and which include, among others, treasury inflation protected securities; and (x) fixed income securities issued by securitization vehicles (‘‘Securitized Products’’).27 Securitized Products include: (A) U.S. or foreign mortgagebacked securities (‘‘MBS’’), which are securities that represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property and which may be issued or guaranteed by government-sponsored entities (‘‘GSEs’’) 28 such as Fannie Mae (formally known as the Federal National Mortgage Association) or Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation) or issued or guaranteed by agencies of the U.S. government, such as the Government National Mortgage Association (‘‘Ginnie Mae’’); 29 (B) U.S. or foreign asset27 As defined in Rule 6710(m) of the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), the term Securitized Product means a security collateralized by any type of financial asset, such as a loan, a lease, a mortgage, or a secured or unsecured receivable, and includes but is not limited to an asset-backed security as defined in Section 3(a)(79)(A) of the Act, a synthetic assetbacked security, any residual tranche or interest of any security specified above, which tranche or interest is a fixed income security for purposes of FINRA Rule 6700 and paragraph (a) of FINRA Rule 6710. Consistent with the requirements applicable to other fixed income securities listed pursuant to this proposed rule change, Securitized Products are subject to limits set forth in Nasdaq Rule 5735(b)(1)(B)(i), (ii), (iii), (iv) and (v), except that, with respect to the Fund’s investments in ABS/ Private MBS (as defined below), the Fund will not comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv) and CDOs (as defined below) will not be subject to the limits set forth in Nasdaq Rule 5735(b)(1)(B)(v) but will be required to comply with the tests in Nasdaq Rule 5735(b)(1)(B)(i)–(iv), including, without limitation, the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv). Investments in CDOs will separately be subject to a limit of 10% of total assets of the Fund. In addition, the Fund’s total investments in Securitized Products (including CDOs) will be subject to the restrictions applicable to all fixed income securities and Debt holdings of the Fund, including that: No more than 30% of the Debt and fixed income securities held by the Fund will be below investment grade, and no more than 25% of the total assets of the Fund will be invested in Debt or fixed income or equity securities of issuers in any one industry. See infra ‘‘Investment Restrictions.’’ 28 A ‘‘GSE’’ is a type of financial services corporation created by the United States Congress. GSEs include Fannie Mae and Freddie Mac but not Sallie Mae, which is no longer a government entity. 29 MBS include collateralized mortgage obligations (‘‘CMOs’’), which are debt obligations collateralized by mortgage loans or mortgage passthrough securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but they may also be E:\FR\FM\05NON1.SGM Continued 05NON1 55420 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices backed securities (‘‘ABS’’) 30 and (C) U.S. or foreign collateralized debt obligations (‘‘CDOs’’).31 The securities in which the Fund invests may pay fixed, variable or floating rates of interest or, in the case of instruments such as zero coupon bonds, do not pay current interest but are issued at a discount from their face values. Securitized Products in which the Fund will invest make periodic payments of interest and/or principal on underlying pools of mortgages, in the case of MBS, loans, leases and receivables other than real estate, in the case of ABS, and government and corporate bonds or non-real estate related loans, in the case of CDOs. The Fund may also invest in stripped collateralized by whole loans or pass-through securities issued by private issuers (i.e., issuers other than U.S. government agencies or GSEs) (referred to as ‘‘Private MBS’’). Payments of principal and of interest on the mortgage-related instruments collateralizing the MBS, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a ‘‘tranche’’ of securities, is issued at a specified fixed or floating coupon rate and has a stated maturity or final distribution date. 30 As defined by FINRA Rule 6710(cc), ABS are Securitized Products in connection with which the securities issued, which may be issued by either a U.S. or a foreign entity, are collateralized by any type of financial asset, such as a consumer or student loan, a lease, or a secured or unsecured receivable. ABS exclude (per the FINRA definition, which is applicable for purposes of reporting and as used herein): (i) A Securitized Product that is backed by residential or commercial mortgage loans, mortgage-backed securities, or other financial assets derivative of mortgage-backed securities; (ii) a small business administration backed ABS traded ‘‘To Be Announced’’ or in a specified pool transaction as defined in FINRA Rule 6710(x) and (iii) CDOs (as defined in note 31 infra). Consistent with the requirements of Nasdaq Rule 5735(b)(1)(B)(v), the Fund will limit investments in ABS and Private MBS (together, ‘‘ABS/Private MBS’’) to 20% of the weight of the fixed income portion of the Fund’s portfolio. 31 For purposes of this proposed rule change, CDOs are excluded from the definition of ABS and, for purposes of this proposed rule change only, are comprised exclusively of collateralized loan obligations (‘‘CLOs’’) and collateralized bond obligations (‘‘CBOs’’). CLOs are securities issued by a trust or other special purpose entity that are collateralized by a pool of loans by U.S. banks and participations in loans by U.S. banks that are unsecured or secured by collateral other than real estate. CBOs are securities issued by a trust or other special purpose entity that are backed by a diversified pool of fixed income securities issued by U.S. or foreign governmental entities or fixed income securities issued by U.S. or corporate issuers. CDOs are distinguishable from ABS because they are collateralized by bank loans or by corporate or government fixed income securities and not by consumer, and other loans made by non-bank lenders, including student loans. For purposes of this proposed rule change, CDOs will not be subject to the 20% limit set forth in Nasdaq Rule 5735(b)(1)(B)(v). However, the Exchange believes that the 10% limit on the Fund’s holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. See infra ‘‘Investment Restrictions.’’ VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 Securitized Products, which represent the right to receive either payments of principal or payments of interest on real estate receivables. Interests in CDOs and ABS will not be stripped so as to provide the right to receive only payments of principal or payments of interest. Investments by the Fund in debt instruments that are not characterized as ‘‘securities’’ under applicable case law (‘‘Debt’’),32 are comprised primarily of the following: (i) U.S. or foreign loans made by banks and participations in such loans, loans made by commercial non-bank lenders and participations in such loans, loans made by governmental entities and participations in such loans and/or other extensions of credit, such as guarantees made by any of the foregoing lenders; and (ii) U.S. or foreign loans on real estate secured by mortgages and participations in such loans. Debt may be partially or fully secured by collateral supporting the payment of interest and principal, or unsecured and/or subordinated to other instruments.33 Debt may relate to 32 Although bank loans are included as ‘‘fixed income securities’’ for purposes of the ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1), the types of bank loans in which the Fund invests are not treated as ‘‘securities’’ under applicable case law and, as a result, the Fund intends to treat bank loans as Debt and not as fixed income securities. See, e.g., Banco Espanol de Credito et al. v. Security Pacific National Bank, 973 F.2d 51(2d Cir. 1992), cert. denied, 509 U.S. 903 (1993). Accordingly, the Fund will not seek to comply with the parameters on investments in fixed income securities under Nasdaq Rule 5735(b)(1)(B) with respect to the Fund’s holdings in bank loans, but instead will comply with the alternative limitations applicable to Debt with respect to such holdings, as set forth herein. See infra ‘‘Investment Restrictions.’’ 33 As discussed infra in ‘‘Investment Restrictions,’’ at least 75% of the Fund’s investments fixed income securities (including convertible fixed income and preferred securities) and Debt (together constituting the fixed income weight of the portfolio) shall have a minimum principal amount outstanding of $100 million or more. In addition, consistent with the Fund’s Registration Statement, the following diversification requirements will apply: During Normal Market Conditions, the Fund: (i) Will not invest more than 25% of its total assets in securities or Debt in any one foreign country, other than the United States, Canada, the United Kingdom, Japan, Australia and member countries of the European Union, or denominated in any one currency, other than the U.S. dollar, the Canadian dollar, the British pound, the yen, the Australian dollar, or the euro; and (ii) will have ‘‘economic exposure’’ to at least three countries. ‘‘Economic exposure’’ means that an issuer of a security or a borrower in respect to Debt: (A) Will have a class of securities whose principal securities market is in the country; (B) is organized under the laws of, or has a principal office in, the country; (iii) [sic] derives 50% or more of its total revenue or profit from goods produced, sales made or services provided in the country; or (D) maintains 50% of more of its assets in that country. In addition, no more than 30% of the Debt and fixed income securities held by the Fund, will be below investment grade (as defined infra in ‘‘Investment Restrictions’’); and (iii) [sic] no more PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 financings for highly-leveraged borrowers. With respect to fixed income securities, the Fund may invest in restricted instruments which are subject to resale restrictions that limit purchasers to qualified institutional buyers, as defined in Rule 144A under the Securities Act of 1933, as amended (the ‘‘Securities Act’’) or to non-U.S. persons, within the meaning of Regulation S under the Securities Act. The Fund will use derivatives to (i) provide exposure to U.S. or foreign fixed income securities, Debt and other Principal Investments, (ii) risk manage the Fund’s holdings,34 and/or (iii) enhance returns, such as through covered call strategies.35 The Fund will not use derivatives for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark. Derivatives that the Fund may enter into include: (i) Over-the-counter deliverable and non-deliverable foreign exchange forward contracts; (ii) exchange-listed futures contracts on securities (including Treasury Securities 36 and foreign government securities), Debt, commodities, securities-, commodities-, or combined-asset-class-related indices, interest rates, financial rates and currencies; (iii) exchange-listed or overthe-counter options or swaptions (i.e., options to enter into a swap) on securities, Debt, commodities, securities-, commodities-, or combinedasset-class-related indices, interest rates, financial rates, currencies and futures contracts; (iv) exchange-listed or overthe-counter swaps (including total return swaps) on securities, Debt, commodities, securities-, commodities-, or combined-asset-class-related indices, interest rates, financial rates, and currencies; and (v) credit default swaps on single names, baskets and indices (both as protection seller and as protection buyer). As a result of the Fund’s use of derivatives and to serve as collateral, the Fund may also hold significant amounts of Treasury Securities, cash and cash equivalents and, in the case of derivatives that are payable in a foreign currency, the than 25% of the total assets of the Fund will be invested in Debt or fixed income or equity securities of issuers in any one industry. 34 The risk management uses of derivatives will include managing (i) investment-related risks, (ii) risks due to fluctuations in securities prices, interest rates, or currency exchanges rates, (iii) risks due to the credit-worthiness of an issuer, and (iv) the effective duration of the Fund’s portfolio. 35 See also infra ‘‘The Fund’s Use of Derivatives.’’ 36 The term ‘‘Treasury Securities’’ has the meaning set forth in Nasdaq Rule 5735(b)(1)(B). E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices foreign currency in which the derivatives are payable. The Fund may, without limitation, enter into repurchase arrangements and borrowing and reverse repurchase arrangements, purchase and sale contracts, buybacks 37 and dollar rolls 38 and spot currency transactions. The Fund may also, subject to required margin and without limitation, purchase securities and other instruments under when-issued, delayed delivery, to be announced or forward commitment transactions, where the securities or instruments will not be delivered or paid for immediately.39 To the extent required under applicable federal securities laws (including the 1940 Act), rules, and interpretations thereof, the Fund will ‘‘set aside’’ liquid assets or engage in other measures to ‘‘cover’’ open positions held in connection with the foregoing types of transactions, as well as derivative transactions. Other Investments Under Normal Market Conditions, the Fund will seek its investment objective by investing at least 80% of its assets in a portfolio of the Principal Investments. The Fund may invest its remaining assets exclusively in: (i) U.S. or foreign exchange-listed 40 or over-the counter convertible fixed income and preferred securities; 41 and (ii) OTC Derivatives 37 A buyback refers to a TBA transaction that incorporates a special feature for addressing a failure by the seller to deliver the mortgages promised under the contract. A buyback feature typically provides that, in the event a TBA seller fails to deliver the MBS that is the subject of the transaction to the TBA buyer on the scheduled settlement date, the TBA buyer will be entitled to close-out its payment obligations by either (i) selling the deliverable MBS back to the seller at a price established under the buyback or (ii) accepting assignment from the seller of its right to receive the specified MBS from the third-party entity that failed to deliver the MBS to the TBA seller. 38 A dollar roll transaction is a simultaneous sale and purchase of an Agency Pass-Through MortgageBacked Security (as defined in FINRA Rule 6710(v), which is the only reference security for such transaction) for different settlement dates, where the initial seller agrees to take delivery, upon settlement of the re-purchase transaction, of the same or substantially similar securities. See FINRA Rule 6710(z). 39 FINRA Rule 4210 is scheduled to begin requiring broker-dealers to impose margin requirements on investors in TBAs and certain other delayed delivery transactions beginning March 25, 2019. 40 No more than 10% of the Fund’s total assets will be invested in exchange-listed securities or Exchange-Traded Derivatives that are listed on an exchange that is not an ISG-member or an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement. See infra ‘‘Investment Restrictions.’’ 41 The Fund’s investment in U.S. or foreign fixed income or preferred securities would include contingent convertible securities, which are also referred to as ‘‘CoCos.’’ CoCos are fixed income VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 and Exchange-Traded Derivatives for which the underlying reference asset is not a Principal Investment.42 The Fund’s Use of Derivatives The types of derivatives in which the Fund may invest and the reference assets for such derivatives are described in greater detail in ‘‘Principal Investments’’ and ‘‘Other Investments’’ above. Exchange-Traded Derivatives will primarily be traded on exchanges that are ISG members or exchanges with which the Exchange has a comprehensive surveillance sharing agreement. The Fund may, however, invest up to 10% of the assets of the Fund in Exchange-Traded Derivatives and exchange-listed, securities whose principal market is not a member of ISG or a market with which the Exchange has a comprehensive surveillance sharing agreement. For purposes of this 10% limit, the weight of such ExchangeTraded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Fund will limit the weight of its investments in OTC Derivatives to 10% of the assets of the Fund, with the exception of Interest Rate Derivatives 43 and Currency Derivatives 44 (together, instruments that are convertible into equity if a prespecified trigger event occurs. The type of event that causes a CoCo to be convertible occurs when capital of the issuer falls below a designated threshold. The Fund will limit investments in convertible securities to 20% of the Fund’s assets under Normal Market Conditions. 42 Investments in OTC Derivatives and ExchangeTraded Derivatives will also be subject to the limitations described in the ‘‘The Fund’s Use of Derivatives’’ section below. As is the case with respect to the Fund’s investments in OTC Derivatives and Exchange-Traded Derivatives for which the underlying reference asset is a Principal Investment, the Fund will invest in OTC Derivatives and Exchange-Traded Derivatives whose underlying reference asset is not a Principal Investment in order to (i) provide exposure to nonPrincipal Investments instruments; (ii) to risk manage the Fund’s holdings; and/or (iii) to enhance returns. 43 ‘‘Interest Rate Derivatives’’ are comprised of interest rate swaps, swaptions (i.e., options on interest rate swaps), rate options and other similar derivatives, and may be Exchange-Traded Derivatives or OTC Derivatives. As reflected in statistics compiled by the Bank for International Settlements, as of June 30, 2017 there were approximately $416 trillion (notional amount) of total interest rate contracts outstanding in the overthe-counter markets alone. As reflected by the statistics, the market is wide, deep and liquid. See https://www.bis.org/statistics/d7.pdf (accessed November 2017). Interest Rate Derivatives may trade on trading platforms that are not ISG members or that are not subject to a comprehensive surveillance sharing agreement with the Exchange. Holdings in Exchange-Traded Derivatives (together with exchange-listed securities) that are listed on an exchange that is not an ISG member or on a market with which the Exchange does not have a comprehensive surveillance sharing agreement are limited to 10% of the Fund’s assets. 44 ‘‘Currency Derivatives’’ are comprised of deliverable forwards, which are agreements PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 55421 ‘‘Interest Rate and Currency Derivatives’’) entered into with brokerdealers, banks and other financial intermediaries. Investments in Interest Rate and Currency Derivatives (whether the instruments are Exchange-Traded Derivatives or OTC Derivatives) will not be subject to a limit. The Exchange believes that this exception, which is generally consistent with the requirement in a previous filing for the listing of an ETF approved by the Commission,45 is appropriate in light of the fact that Interest Rate and Currency Derivatives are among the most liquid investment instruments (including not only derivatives but also securities) in the market 46 (and are even more liquid than most non-government or government-guaranteed securities). Based on the data compiled by the SubAdviser in respect to its liquidity policy, these derivatives are among the most liquid investments traded. In addition, most Interest Rate Derivatives traded by the Fund are centrally cleared by regulated clearing firms, and Interest Rate and Currency Derivatives are between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate, non-deliverable forwards, which are agreements to pay the difference between the exchange rates specified for two currencies at a future date, swaps and options on currencies, and similar currency or foreign exchange derivatives. As reflected in statistics compiled by the Bank for International Settlements, as of June 30, 2017 there were approximately $77 trillion (notional amount) of Currency Derivatives outstanding in the over-thecounter markets alone. As reflected by the statistics, the market is wide, deep and liquid. See https:// www.bis.org/statistics/d6.pdf (accessed November 2017). Currency Derivatives may trade on trading platforms that are not ISG members or that are not subject to a comprehensive surveillance sharing agreement with the Exchange. Holdings in Exchange-Traded Derivatives (together with exchange-listed securities) that are listed on an exchange that is not an ISG member or on a market with which the Exchange does not have a comprehensive surveillance sharing agreement are limited to 10% of the Fund’s assets. 45 See Securities Exchange Act Release No. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR– NYSEArca–2017–09) (approving up to 50% of the fund’s assets (calculated on the basis of aggregate gross notional value) to be invested in over-thecounter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund’s investments, including forwards, overthe-counter options, and over-the-counter swaps). 46 Trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, and 67% of this trading activity was in derivatives contracts such as currency or foreign exchange forwards, options and swaps (with the other 33% consisting of spot transactions). See Bank for International Settlements, Triennal [sic] Central Bank Survey, Foreign Exchange Turnover in April 2016, available at https://www.bis.org/publ/rpfx16fx.pdf (accessed November 2017). Trading in OTC interest rate derivatives averaged $2.7 trillion per day in April 2016. See Bank for International Settlements, Triennal [sic] Central Bank Survey, OTC Interest Rate Derivatives Turnover in April 2016, available at https://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017). E:\FR\FM\05NON1.SGM 05NON1 55422 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices subject to trade reporting,47 and other robust regulation.48 Given the size of the trading market and the regulatory oversight of the markets, the Exchange believes that Interest Rate and Currency Derivatives are not readily subject to manipulation. The Exchange also believes that allowing the Fund to risk manage its portfolio through the use of Interest Rate and Currency Derivatives without limit is necessary to allow the Fund to achieve its investment objective and protect investors. For purposes of the 10% limit applicable generally to OTC Derivatives (other than Interest Rate and Currency Derivatives), the weight of such OTC Derivatives will be calculated based on the mark-to-market value of such OTC Derivatives.49 The mark-to-market methodology is consistent with the methodology proposed by the SEC in proposed Rule 18f–4 for the purposes of asset coverage requirements 50 and in keeping with disclosures regarding 47 Transactions in Interest Rate and Currency Derivatives are required to be reported to a swap data repository, and transactions in Interest Rate Derivatives and certain Currency Derivatives (i.e., Currency Derivatives that are not excluded from the definition of a ‘‘swap’’, as described below) are also publicly reported pursuant to rules issued by the Commodity Futures Trading Commission (‘‘CFTC’’). See 17 CFR parts 43, 45 and 46. Pursuant to Section 1(a)(47)(E) of the CEA and a related determination by the Department of the Treasury, physicallysettled Currency Derivatives that meet the definition of ‘‘foreign exchange forwards’’ or ‘‘foreign exchange swaps’’ under Sections 1a(24)– (25) of the CEA that are entered into between eligible contract participants (as defined in the CEA) (‘‘Excluded Currency Derivatives’’) are excluded from the definition of a ‘‘swap’’ under the CEA. See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). Transactions in such Excluded Currency Derivatives are required to be reported to a swap data repository, but they are not subject to the public reporting requirements. 48 Interest Rate Derivatives and Currency Derivatives other than Excluded Currency Derivatives are comprehensively regulated as swaps under the CEA and regulations issued thereunder by the CFTC and other federal financial regulators. See, e.g., 17 CFR part 23 (capital and margin requirements for swap dealers, business conduct standards for swap dealers, and swap documentation requirements); 17 CFR part 50 (clearing requirements for swaps). While Excluded Currency Derivatives are not subject to all swap regulations, they are subject to the ‘‘business conduct standards’’ adopted by the CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). 49 The mark-to-market value reflects the Fund’s actual delivery or payment obligation under the derivative. This measure differs from that referenced in Nasdaq Rule 5735(b)(1)(E), which bases its 20% limit of assets in the portfolio applicable for funds issuing Managed Fund Shares on the aggregate gross national value of the overthe-counter derivatives rather than on the mark-tomarket value. 50 See Derivatives Rule Proposing Release at 157– 158; see also infra note 107. VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 compliance with Section 18 of the 1940 Act made by other registered investment companies and reviewed by the SEC staff for a number of years.51 In that regard, the SEC expressly noted in the Derivatives Rule Proposing Release that reliance on a mark-to-market valuation of a derivatives position for purposes of calculating the required coverage amount ‘‘would generally correspond to the amount of the fund’s liability with respect to the derivatives transaction’’ and, therefore, be consistent with the appropriate valuation of the derivatives transaction.52 The mark-to-market value is also the measure on which collateral posting is based under the Master Agreement published by the International Swaps and Derivatives Association, Inc. (‘‘ISDA’’), which is the predominant agreement used to trade derivatives.53 This value measures gain and loss to the Fund of the Fund’s derivatives positions on a daily basis, as well as on a net basis across all transactions covered by a master netting agreement and, as a result, accurately reflects the actual economic exposure of the Fund to the counterparty on each derivative (as compared to notional amount, which may overstate or understate economic risk). The Fund may choose not to make use of derivatives. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes. As described above, the Fund will use derivatives to (i) provide exposure to the Principal Investments, (ii) risk manage the Fund’s holdings,54 51 See Derivatives Rule Proposing Release at n.58, citing Comment Letter on SEC Concept Release (November 11, 2011) (File No. S7–33–11), Davis Polk & Wardwell LLP, available at https:// www.sec.gov/comments/s7-33-11/s73311-49.pdf (‘‘[F]und registration statements indicate that, in recent years, the Staff has not objected to the adoption by funds of policies that require segregation of the mark-to-market value, rather than the notional amount . . . [for asset segregation purposes].’’). 52 See Derivatives Rule Proposing Release at 157– 158. 53 The Credit Support Annex to the ISDA Master Agreement bases the collateral amount owed by a party to a derivatives contract, which is defined as a party’s ‘‘exposure,’’ by reference to the replacement value of the party’s net positions. Replacement value, which has the same meaning as ‘‘mark-to-market’’ value, is the amount owed by a party at a point in time determined based on the net termination payment due under the outstanding transaction. 54 The risk management uses of derivatives will include managing (i) investment-related risks, (ii) risks due to fluctuations in securities prices, interest rates, or currency exchanges rates, (iii) risks PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 and/or (iii) enhance returns, such as through covered call strategies. The Fund will not use derivatives for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark. The Fund will enter into derivatives only with counterparties that the Fund reasonably believes are financially and operationally able to perform the contract or instrument, and the Fund will collect collateral from the counterparty in accordance with credit considerations and margining requirements under applicable law.55 Investments in derivative instruments will be made in accordance with the 1940 Act and consistent with the Fund’s investment objective and policies. To limit the potential risk (including leveraging risk) associated with such transactions, the Fund will segregate or ‘‘earmark’’ assets determined to be liquid by the Manager and/or the SubAdviser in accordance with procedures established by the Board and in accordance with the 1940 Act (or, as permitted by applicable regulation, enter into offsetting positions) to cover its obligations under derivative instruments. These procedures have been adopted consistent with Section 18 of the 1940 Act and related Commission guidance. In addition, the Fund will include appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that transactions of the Fund, including the Fund’s use of derivatives, may give rise to additional leverage, causing the Fund to be more volatile than it would have if it had not been leveraged. Because the markets for securities or Debt, or the securities or Debt themselves, may be unavailable, cost prohibitive or tax-inefficient as compared to derivative instruments, suitable derivative transactions may be an efficient alternative for the Fund to obtain the desired asset exposure. The Manager and the Sub-Adviser believe that derivatives can be an economically attractive substitute for an underlying physical security or Debt that the Fund would otherwise due to the credit-worthiness of an issuer, and (iv) the effective duration of the Fund’s portfolio. 55 The Fund will seek, where practicable, to trade with counterparties whose financial status is such that the risk of default is reduced. The Sub-Adviser will monitor the financial standing of counterparties on an ongoing basis. This monitoring may include reliance on information provided by credit agencies or of credit analysts employed by the Sub-Adviser. The analysis may include earnings updates, the counterparty’s reputation, past experience with the dealer, market levels for the counterparty’s debt and equity, credit default swap levels for the counterparty’s debt, the liquidity provided by the counterparty and its share of market participation. E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices purchase. For example, the Fund could purchase futures contracts on Treasury Securities instead of investing directly in Treasury Securities or could sell credit default protection on a corporate bond instead of buying a physical bond. Economic benefits include potentially lower transactions costs, attractive relative valuation of a derivative versus a physical bond (e.g., differences in yields) or economic exposure without incurring transfer or similar taxes. The Manager and the Sub-Adviser further believe that derivatives can be used as a more liquid means of adjusting portfolio duration, as well as targeting specific areas of yield curve exposure, with potentially lower transaction costs than the underlying securities or Debt (e.g., interest rate swaps may have lower transaction costs than the physical bonds). Similarly, money market futures can be used to gain exposure to short-term interest rates in order to express views on anticipated changes in central bank policy rates. In addition, derivatives can be used to protect client assets through selectively hedging downside (or ‘‘tail risks’’) in the Fund. The Fund also can use derivatives to increase or decrease credit exposure. Index credit default swaps can be used to gain exposure to a basket of credit risk by ‘‘selling protection’’ against default or other credit events, or to hedge broad market credit risk by ‘‘buying protection.’’ Single name credit default swaps can be used to allow the Fund to increase or decrease exposure to specific issuers, saving investor capital through lower trading costs. The Fund can use total return swap contracts to obtain the total return of a reference asset or index in exchange for paying financing costs. A total return swap may be more efficient than buying underlying securities or Debt, potentially lowering transaction costs. The Fund expects to manage foreign currency exchange rate risk by entering into Currency Derivatives. The Sub-Adviser may use options strategies to meet the Fund’s investment objectives. Option purchases and sales can also be used to hedge specific exposures in the portfolio and can provide access to return streams available to long-term investors such as the persistent difference between implied and realized volatility. Options strategies can generate income or improve execution prices (e.g., covered calls). Investment Restrictions At least 75% of the Fund’s investments in Debt and fixed income securities shall have a minimum VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 principal amount outstanding of $100 million or more. In addition, consistent with the Fund’s Registration Statement, the following diversification requirements will apply: During Normal Market Conditions, the Fund: (i) Will not invest more than 25% of its total assets in securities or Debt in any one foreign country, other than the United States, Canada, the United Kingdom, Japan, Australia and member countries of the European Union, or denominated in any one currency, other than the U.S. dollar, the Canadian dollar, the British pound, the yen, the Australian dollar, or the euro; and (ii) will have ‘‘economic exposure’’ to at least three countries. ‘‘Economic exposure’’ means an issuer of a security or a borrower in respect to Debt: (A) Will have a class of securities whose principal securities market is in the country; (B) is organized under the laws of, or has a principal office in, the country; (iii) [sic] derives 50% or more of its total revenue or profit from goods produced, sales made or services provided in the country; or (D) maintains 50% of more of its assets in that country. The Fund may invest up to 15% of its assets in Non-Convertible Preferred Securities, Equity-Related Warrants and Work Out Securities. The Fund will not invest in equity securities other than Principal Investment Equities.56 Principal Investment Equities consist of (i) Non-Convertible Preferred Securities, Equity-Related Warrants and Work Out Securities, which are subject to the 15% limit noted above and (ii) shares of ETFs that provide exposure to fixed income securities, Debt or other Principal Investments, which are subject to no limits. While the Fund will invest principally in fixed income securities and Debt that are, at the time of purchase, investment grade, the Fund may invest up to 30% of its assets in below investment grade fixed income securities and Debt. For these purposes, ‘‘investment grade’’ is defined as investments with a rating at the time of purchase in one of the four highest rating categories of at least one nationally recognized statistical ratings organization (‘‘NRSRO’’) (e.g., BBB- or 56 The convertible fixed income securities (including CoCos) and convertible preferred securities will comply with the tests set forth in Nasdaq Rule 5735(b)(1)(B) and will be limited to 20% of the total assets of the Fund. In addition, no more than 10% of such convertible fixed income and convertible preferred securities or Exchange Traded Derivatives on such securities, together with all other listed securities and Exchange Traded Derivatives in which the Fund will invest, will be traded on an exchange that is not an ISG member or an exchange with which the Exchange has comprehensive surveillance sharing agreement. PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 55423 higher by S&P Global Ratings (‘‘S&P’’), and/or Fitch Ratings (‘‘Fitch’’), or Baa3 or higher by Moody’s Investors Service, Inc. (‘‘Moody’s’’)).57 Unrated fixed income securities or Debt may be considered investment grade if, at the time of purchase, and under Normal Market Conditions, the applicable SubAdviser determines that such securities are of comparable quality based on a fundamental credit analysis of the unrated security or Debt instrument and comparable NRSRO-rated securities. The Fund may invest in fixed income or equity securities and Debt issued by both U.S. and non-U.S. issuers (including issuers in emerging markets [sic]. Consistent with the Fund’s Registration Statement, the following diversification requirements will apply: During Normal Market Conditions, the Fund: (i) Will not invest more than 25% of its total assets in securities or Debt in any one foreign country, other than the United States, Canada, the United Kingdom, Japan, Australia and member countries of the European Union, or denominated in any one currency, other than the U.S. dollar, the Canadian dollar, the British pound, the yen, the Australian dollar, or the euro; and (ii) will have ‘‘economic exposure’’ to at least three countries. ‘‘Economic exposure’’ means that an issuer of a security or a borrower in respect to Debt: (A) Will have a class of securities whose principal securities market is in the country; (B) is organized under the laws of, or has a principal office in, the country, (iii) [sic] derives 50% or more of its total revenue or profit from goods produced, sales made or services provided in the country, or (D) maintains 50% of more of its assets in that country. See infra ‘‘Investment Restrictions.’’ [sic] The Fund will not invest more than 20% of the fixed income portion of the Fund’s portfolio 58 in ABS/Private MBS or more than 10% of the Fund’s total 57 For the avoidance of doubt, if a security or Debt is rated by multiple NRSROs and receives different ratings, the Fund will treat the security or Debt as being rated in the highest rating category received from any one NRSRO. If a security or Debt is not rated, the Fund may determine its rating by reference to other securities issued by the issuer or comparable NRSRO-rated securities. 58 The Exchange notes that the terms ‘‘fixed income weight of the portfolio’’ and ‘‘weight of the fixed income portion of the portfolio’’ are used synonymously in Nasdaq Rule 5735. For purposes of this proposed rule change, the ‘‘fixed income weight of the Fund’s portfolio’’ includes all fixed income securities (including convertible fixed income and preferred securities, even though such instruments are not Principal Investments) and Debt held by the Fund and excludes equity securities (including ETFs), derivatives and cash and cash equivalents. E:\FR\FM\05NON1.SGM 05NON1 55424 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices assets in CDOs.59 The Fund will also not invest more than 20% of its total assets in Debt that is unsecured and subordinated. The Fund may not concentrate its investments (i.e., invest more than 25% of the value of its total assets) in Debt of borrowers in any one industry or in fixed income or equity securities of issuers in any one industry as provided in the Registration Statement.60 The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment),61 including Rule 144A securities deemed illiquid by the Manager or the Sub-Adviser.62 The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of the Fund’s net assets are held in illiquid securities or other illiquid assets. Illiquid securities and other illiquid assets include those subject to contractual or other restrictions on resale and other instruments or assets that lack readily available markets as determined in accordance with Commission staff guidance.63 59 As discussed above, CDOs would be excluded from the 20% limit on ABS/Private MBS but would be subject to a separate limit of 10%, measured with respect to the total assets of the Fund. See supra note 31. The Exchange believes that the 10% limit on the Fund’s holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. 60 See Form N–1A, Item 9. The Commission has taken the position that a fund is concentrated if it invests more than 25% of the value of its total assets in any one industry. See, e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 (November 21, 1975). For these purposes and as described above, Debt is comprised of loans that do not constitute securities (consistent with applicable case law) whereas fixed income securities would include loans and other fixed income instruments that are characterized as securities under applicable case law. See supra note 32. 61 See Rule 22e–4(b)(1)(iv). ‘‘No fund or In-Kind ETF may acquire any illiquid investment if, immediately after the acquisition, the fund or InKind ETF would have invested more than 15% of its net assets in illiquid investments that are assets.’’ (emphasis added) 62 In reaching liquidity decisions, the Manager or Sub-Adviser (as applicable) may consider the following factors: The frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). 63 Long-standing Commission guidelines have required investment companies to hold no more VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 As noted in ‘‘The Fund’s Use of Derivatives,’’ the Fund’s investments in derivatives will be consistent with the Fund’s investment objective and will not be used for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark (although derivatives have embedded leverage). Although the Fund will be permitted to borrow as permitted under the 1940 Act, it will not be operated as a ‘‘leveraged ETF,’’ (i.e., it will not be operated in a manner designed to seek a multiple or inverse multiple of the performance of an underlying reference index). The Fund may engage in frequent and active trading of portfolio securities, Debt, and derivatives to achieve its investment objective. Under Normal Market Conditions, the Fund will satisfy the following requirements, on a continuous basis measured at the time of purchase: (i) Component fixed income securities and Debt that in the aggregate account for at least 75% of the fixed income weight of the Fund’s portfolio each shall have a minimum original principal amount outstanding of $100 million or more; (ii) no fixed income security held in the portfolio (excluding Treasury Securities and GSE-sponsored securities) will represent more than 30% of the fixed income weight of the Fund’s portfolio, and the five most heavily weighted portfolio securities (excluding Treasury Securities and GSE-sponsored securities) will not in the aggregate account for more than 65% of the fixed income weight of the Fund’s portfolio; and (iii) the Fund’s portfolio of fixed income securities (excluding exempted securities) will include a minimum of 13 non-affiliated issuers.64 Under than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), FN 34; see also Investment Company Act Release Nos. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ‘‘Restricted Securities’’); and 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N–1A). The Commission also recently adopted Rule 22e–4 under the 1940 Act, which requires that each registered open-end management investment company, including ETFs but not including money market mutual funds, to establish a liquidity risk management program that includes limitations on illiquid investments. See Investment Company Act Release No. 32315 (October 13, 2016), 81 FR 82142 (November 18, 2016). Under Rule 22e–4, a fund’s portfolio security is illiquid if it cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. See 17 CFR 270.22e–4(a)(8). 64 These requirements are consistent with the ‘‘generic’’ listing requirements under Nasdaq Rule 5735(b)(1)(B)(i)–(iii), which require: (i) For fixed income securities, that components that in the aggregate account for at least 75% of the fixed PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 Normal Market Conditions, the Fund will also satisfy the following requirements, on a continuous basis measured at the time of purchase: (x) At least 75% of the Fund’s investments in fixed income securities issued by emerging market issuers shall have a minimum original principal amount outstanding of $200 million or more; and (y) at least 75% of the Fund’s investments in Debt shall be in senior loans with an initial deal size of $100 million or greater.65 Those exchange-listed securities and Exchange-Traded Derivatives held by the Fund that are listed and traded on a non-ISG member exchange or an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement are limited to 10% of the Fund’s assets. In addition, the Fund will impose the limits described in the following section, which describes differences between the ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1) and those applicable to the Fund. income weight of the portfolio each have a minimum principal amount outstanding of $100 million or more (see Nasdaq Rule 5735(b)(1)(B)(i)); (ii) for component fixed-income securities (excluding Treasury Securities and GSE-sponsored securities) that no component represent more than 30% of the fixed income weight of the portfolio (see Nasdaq Rule 5735(b)(1)(B)(ii)); (iii) that the five most heavily weighted component fixed income securities in the portfolio (excluding Treasury Securities and GSE-sponsored securities) not in the aggregate account for more than 65% of the fixed income weight of the portfolio) (see Rule 5735(b)(1)(B)(ii)); and (iv) that an underlying portfolio (excluding exempted securities) that includes fixed income securities include a minimum of 13 non-affiliated issuers (see Nasdaq Rule 5735(b)(1)(B)(iii)). Nasdaq Rule 5735(b)(1)(B)(iv) includes the following requirement: Component securities that in aggregate account for at least 90% of the fixed income weight of the portfolio must be either: (a) From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds, debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Act; or (e) from issuers that are a government of a foreign country or a political subdivision of a foreign country. Nasdaq Rule 5735(b)(1)(B)(v) requires: non-agency, non-GSE and privately-issued mortgage-related and other asset-backed securities components of a portfolio shall not account, in the aggregate, for more than 20% of the weight of the fixed income portion of the portfolio. 65 The Exchange notes that Nasdaq Rule 5735(b)(1)(F) provides that, to the extent that derivatives are used to gain exposure to individual fixed income securities or indexes of fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Nasdaq Rule 5735(b)(1)(B). The Exchange proposes, however, as further described below, that for the purposes of the requirements in this paragraph and any requirements under Nasdaq Rule 5735(b)(1), the Fund will use the mark-to-market value of its derivatives rather than gross notional value. E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices Application of Generic Listing Requirements The Exchange is submitting this proposed rule change because the Fund will not meet all of the ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1). The Fund will meet all such requirements except the requirements described below,66 and the Exchange proposes that the Fund will comply with the alternative limits described below. (i) The Fund will not comply with the requirements in Nasdaq Rule 5735(b)(1) regarding the use of aggregate gross notional value of derivatives when calculating the weight of such derivatives or the exposure that such derivatives provide to underlying reference assets, including the requirements in Rules 5735(b)(1)(D)(i),67 5735(b)(1)(D)(ii),68 5735(b)(1)(E) 69 and 5735(b)(1)(F).70 Instead, the Exchange 66 The Exchange notes that, while the Fund treats commercial paper having maturities of 360 days or less as cash equivalents for the purposes of its 80% Principal Investments measure, the Fund will comply with the applicable requirements of Nasdaq Rule 5735(b)(1) with respect to all commercial paper held by the Fund. Further, in accordance with Nasdaq Rule 5735(b)(1)(B), to the extent that the Fund holds securities that are convertible into fixed income securities, the fixed income securities into which any such securities are converted shall meet the criteria of Nasdaq Rule 5735(b)(1)(B) after converting. 67 Nasdaq Rule 5735(b)(1)(D)(i) provides that, at least 90% of the weight of a portfolio’s holdings invested in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options and swaps for which the Exchange may obtain information via the ISG, from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement; for the purposes of calculating this limitation, a portfolio’s investment in such listed derivatives will be calculated as the aggregate gross notional value of the listed derivatives. 68 Nasdaq Rule 5735(b)(1)(D)(ii) provides that, the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the portfolio (including gross notional exposures). 69 Nasdaq Rule 5735(b)(1)(E) provides that, on both an initial and continuing basis, no more than 20% of the assets in the portfolio may be invested in over-the-counter derivatives, including forwards, options, and swaps on commodities, currencies and financial instruments (e.g., stocks, fixed income, interest rates, and volatility) or a basket or index of any of the foregoing; for purposes of calculating this limitation, the Fund’s investment in OTC Derivatives will be calculated as the aggregate gross notional value of the OTC Derivatives. 70 Nasdaq Rule 5735(b)(1)(F) provides that, to the extent that listed or over-the-counter derivatives are used to gain exposure to individual equities and/ or fixed income securities, or to indexes of equities and/or indexes of fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Nasdaq Rules 5735(b)(1)(A) and 5735(b)(1)(B), respectively. VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 proposes that, except as otherwise provided herein, for the purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), and any alternative requirements proposed by the Exchange, the Fund will use the mark-to-market value of its derivatives in calculating the weight of such derivatives or the exposure that such derivatives provide to their reference assets.71 The Exchange believes that this alternative requirement is appropriate because the mark-to-market value is a more accurate measurement of the actual exposure incurred by the Fund in connection with a derivatives position.72 (ii) The Fund will not comply with the requirement that securities comprising at least 90% of the fixed income weight of the Fund’s portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) in respect to its investments in ABS/Private MBS.73 Instead, ABS/Private MBS will be limited to 20% of the weight of the fixed income portion of the Fund’s portfolio.74 Other than ABS/Private MBS, which will not meet the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) but will be subject to the 20% limit on aggregate holdings in ABS/Private MBS, all fixed income securities held by the Fund (which, for purposes of this proposed rule change, include convertible fixed income and preferred securities (including CoCos)) will satisfy this 90% requirement. As a result, other than ABS/Private MBS, which will not satisfy the 90% requirement, and CDOs, which will be excluded from the requirement in Nasdaq Rule 5735(b)(1)(B)(v) and, instead, be limited to 10% of the total assets of the Fund, all fixed income securities held by the Fund will comply with all of the 71 Further, as described further below, the Exchange is proposing that the Fund will comply with alternative requirements rather than Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), and 5735(b)(1)(E). 72 See infra note 107. 73 Nasdaq Rule 5735(b)(1)(B)(iv) provides that, component securities that in the aggregate account for at least 90% of the fixed income weight of the portfolio must be either: (a) From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Act; or (e) from issuers that are a government of a foreign country or a political subdivision of a foreign country. 74 ABS/Private MBS are generally issued by special purpose vehicles, so the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) regarding an issuer’s market capitalization and the remaining principal amount of an issuer’s securities are typically unavailable with respect to ABS/Private MBS, even though such ABS/Private MBS may own significant assets. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 55425 requirements of Nasdaq Rule 5735(b)(1)(B)(i)–(v). The Exchange believes that this exception is appropriate for the reasons stated below in this proposed rule change.75 (iii) The Exchange has classified bank loans as Debt for purposes of this proposed rule change and not as ‘‘fixed income securities’’ as they are classified in Nasdaq Rule 5735(b)(1)(B). As a result, the Fund’s investments in bank loans will comply with the limitations or restrictions applicable to the Fund’s investments in Debt as set forth herein with respect to such holdings and not with the restrictions for fixed income securities set forth in Nasdaq Rule 5735(b)(1)(B)(i)–(v).76 The Exchange believes that this exception is appropriate for the reasons stated below in this proposed rule change.77 (iv) The Fund will not comply with the equity requirements in Nasdaq Rules 5735(b)(1)(A)(i) 78 and 75 See infra ‘‘Statutory Basis.’’ a listing of such restrictions, see supra ‘‘Investment Restrictions.’’ 77 See infra ‘‘Statutory Basis.’’ 78 Nasdaq Rule 5735(b)(1)(A)(i) provides that, the components stocks of the equity portion of a portfolio that are U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the following criteria initially and on a continuing basis: (a) Component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) that in the aggregate account for at least 90% of the equity weight of the portfolio (excluding such Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) each shall have a minimum market value of at least $75 million; (b) Component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) that in the aggregate account for at least 70% of the equity weight of the portfolio (excluding such Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) each shall have a minimum monthly trading volume of 250,000 shares, or minimum notional volume traded per month of $25,000,000, averaged over the last six months; (c) The most heavily weighted component stock (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 30% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 65% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio does not include Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 13 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, constitute, at least in part, components underlying a series of Managed Fund Shares (as defined in Nasdaq Rule 5735), or (ii) one 76 For E:\FR\FM\05NON1.SGM Continued 05NON1 55426 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices 5735(b)(1)(A)(ii) 79 with respect to the Fund’s investment in Non-Convertible Preferred Securities, Work Out Securities, and warrants.80 Instead, the Exchange proposes that (i) the Fund’s investments in convertible fixed income and preferred securities shall be limited to 20% of the Fund’s portfolio; and (ii) the weight of Non-Convertible Preferred Securities, Work Out Securities and Equity-Related Warrants in the Fund’s portfolio shall together not exceed 15% of the Fund’s assets. The Exchange believes that these alternative limitations are appropriate in light of the fact that the Non-Convertible Preferred Securities, Equity Related Warrants and Work Out Securities are providing debt-oriented exposures or or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rule 5735(c)(6) and 5710, respectively, account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; (e) except as otherwise provided, equity securities in the portfolio shall be U.S. Component Stocks listed on a national securities exchange and shall be NMS Stocks as defined in Rule 600 of Regulation NMS under the Act; and (f) American Depositary Receipts (‘‘ADRs’’) in a portfolio may be exchangetraded or non-exchange-traded; however, no more than 10% of the equity weight of a portfolio shall consist of non-exchange-traded ADRs. 79 Nasdaq Rule 5735(b)(1)(A)(ii) provides that, the component stocks of the equity portion of a portfolio that are Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the following criteria initially and on a continuing basis: (a) Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) each shall have a minimum market value of at least $100 million; (b) Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) each shall have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; (c) The most heavily weighted NonU.S. Component Stock (as such term is defined in Nasdaq Rule 5705) shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall not exceed 60% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio includes Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705), the equity portion of the portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, constitute, at least in part, components underlying a series of Managed Fund Shares, or (ii) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; and (e) Each Non-U.S. Component Stock (as such term is defined in Nasdaq Rule 5705) shall be listed and traded on an exchange that has last-sale reporting. 80 As noted above, convertible fixed income securities (including CoCos) and convertible preferred securities are treated as fixed income securities for purposes of this proposed rule change. See supra section (ii). VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 are received in connection with the Fund’s previous investment in Debt or fixed income securities, and all of the other equity securities held by the Fund will comply with the requirements of Nasdaq Rule 5735(b)(1)(A).81 (v) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(E) that no more than 20% of the assets in the Fund’s portfolio may be invested in over-the-counter derivatives. Instead, the Exchange proposes that there shall be no limit on the Fund’s investment in Interest Rate and Currency Derivatives, and the weight of all OTC Derivatives other than Interest Rate and Currency Derivatives shall not exceed 10% of the Fund’s assets. For purposes of this 10% limit on OTC Derivatives, the weight of such OTC Derivatives will be calculated based on the mark-to-market value of such OTC Derivatives. The Exchange believes that this exception for Interest Rate and Currency Derivatives is appropriate for the reasons stated below in this proposed rule change.82 (vi) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(i) that at least 90% of the weight of the Fund’s holdings in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options and swaps for which the Exchange may obtain information via the ISG from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement. Instead, the Exchange proposes that no more than 10% of the assets of the Fund will be invested in Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. For purposes of this 10% limit, the weight of such ExchangeTraded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Exchange believes that this exception is 81 Other equities consist of ETFs (including money market ETFs) that provide exposure to fixed income securities, Debt and other Principal Investments. The weight of such ETFs in the Fund’s portfolio shall not be limited. As noted above, Fixed-Income Related Warrants are treated as fixed income securities for purposes of this proposed rule change and will be subject to and comply with the generic listing requirements for fixed-income securities, rather than the generic listing requirements for equity securities. See supra note 23. 82 See infra notes 114–117 and accompanying text. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 appropriate for the reasons stated below in this proposed rule change.83 (vii) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(ii) that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the Fund’s portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the Fund’s portfolio (including gross notional exposures). Instead, the Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund’s investment in futures and options (including options on futures) referencing eurodollars and sovereign debt issued by the United States (i.e., Treasury Securities) and other ‘‘Group of Seven’’ countries 84 where such futures and options contracts are listed on an exchange that is an ISG member or an exchange with which the Exchange has a comprehensive surveillance sharing agreement (‘‘Eurodollar and G–7 Sovereign Futures and Options’’). The Fund may maintain significant positions in Eurodollar and G–7 Sovereign Futures and Options, and such investments will not be subject to the concentration limits provided in Nasdaq Rule 5735(b)(1)(D)(ii). For purposes of this requirement, the weight of the applicable Exchange-Traded Derivatives will be calculated based on the mark-tomarket value of such Exchange-Traded Derivatives. The Exchange believes that this exception is appropriate for the reasons stated below in this proposed rule change.85 The Exchange believes that, notwithstanding that the Fund would not meet a limited number of ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1) in order to be able to satisfy its investment objective, the Exchange will be able to appropriately monitor and surveil trading in the underlying investments, including those that do not meet the ‘‘generic’’ listing requirements. The Exchange also notes that the parameters around the Fund’s portfolio holdings are generally consistent with the parameters approved by the Commission prior to adoption of ‘‘generic’’ listing requirements for 83 See infra ‘‘Statutory Basis.’’ ‘‘Group of Seven’’ or G–7 countries consist of the United States, Canada, France, Germany, Italy, Japan and the United Kingdom. 85 See infra note 118 and accompanying text. 84 The E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices actively-managed ETFs.86 In addition, the Fund will be well diversified. For these reasons, the Exchange believes that it is appropriate and in the public interest to approve listing and trading of Shares of the Fund on the Exchange. As further described in ‘‘Statutory Basis,’’ deviations from the generic requirements are necessary for the Fund to achieve its investment objective and efficiently manage the risks associated with its investments, and any possible risks have been fully mitigated and addressed through the alternative limits proposed by the Exchange. In addition, many of the changes requested are generally consistent with previous filings approved by the Commission.87 86 See, e.g., Securities Exchange Act Release Nos. 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR–NYSEArca–2015–73) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR–NYSEArca– 2011–95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund (now known as the PIMCO Active Bond ExchangeTraded Fund)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR–NYSEArca–2013–122) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund). The investments of the Guggenheim Total Return Bond ETF include a wide variety of U.S. and foreign fixed income instruments (including Private ABS/MBS), preferred securities, cash equivalents, other ETFs and listed and over-the-counter derivatives and are managed in a manner that appears to be generally consistent with that proposed for the Fund. Consistent with the requests made in this proposed rule change, the Commission’s approval of the listing of shares of the Guggenheim Total Return Bond ETF did not include many of the conditions imposed by the generic listing standards under Nasdaq Rule 5735; the Commission’s approval did not impose limits regarding the total notional size of the ETF’s investment in over-the-counter derivatives, did not impose concentration limits on the ETF’s investment in listed derivatives and did not require compliance with the same criteria as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B). The order approving investments in derivatives by the PIMCO Total Return Exchange Traded Fund described investments in both over-the-counter and listed derivatives, but did not impose limits regarding the total notional size of the ETF’s investments in over-the-counter derivatives, did not impose concentration limits on the ETF’s investments in listed derivatives, and did not impose limitations on investments in listed derivatives whose principal market is not a member of ISG or is a market with which its listing exchange does not have a comprehensive surveillance sharing agreement. 87 See, e.g., Securities Exchange Act Release Nos. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR–NYSEArca–2017–09) (approving up to 50% of the fund’s assets (calculated on the basis of aggregate gross notional value) to be invested in over-the-counter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund’s investments, including forwards, overthe-counter options, and over-the-counter swaps); 78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR–NASDAQ–2016–061) (approving investment of up to 20% of the fund’s assets in, among other things, non-exchange-traded equity securities acquired in conjunction with the fund’s event-driven strategy, including securities acquired by the fund as a result of certain corporate events including reorganizations); 76719 (December 21, VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 Net Asset Value The Fund’s administrator will calculate the Fund’s net asset value (‘‘NAV’’) per Share as of the close of regular trading (normally 4:00 p.m., Eastern time (‘‘E.T.’’)) on each day the New York Stock Exchange is open for business. NAV per Share will be calculated for the Fund by taking the value of the Fund’s total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing such amount by the total number of Shares outstanding. The result, rounded to the nearest cent, will be the NAV per Share (although creations and redemptions will be processed using a price denominated to the fifth decimal point, meaning that rounding to the nearest cent may result in different prices in certain circumstances). Impact on Arbitrage Mechanism The Manager and the Sub-Adviser believe there will be minimal, if any, impact on the arbitrage mechanism for the Fund as a result of its use of derivatives. The Manager and the SubAdviser understand that market makers and other market participants should be able to value derivatives held by the Fund as long as the Fund’s positions are disclosed. The Manager and the SubAdviser believe that the price at which Shares trade will continue to be disciplined by arbitrage opportunities created by the ability for authorized participants (‘‘APs’’) to purchase or redeem creation Shares at their NAV, which should ensure that Shares will not trade at a material discount or premium in relation to their NAV. 2015), 80 FR 80859 (December 28, 2015) (SR– NYSEArca–2015–73) (permitting (i) investments in over-the-counter and listed derivatives without imposing limits on the total notional size of the ETF’s investments in over-the-counter derivatives and without imposing concentration limits on the ETF’s investments in listed derivatives and (ii) permitting investments in a wide variety of fixed income instruments without compliance with the same criteria as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR–NYSEArca–2013–122) (permitting investments in both over-the-counter and listed derivatives, but without imposing limits regarding the total notional size of the ETF’s investments in over-the-counter derivatives, without imposing concentration limits on the ETF’s investments in listed derivatives, and without imposing limitations on investments in listed derivatives whose principal market is not a member of ISG or is a market with which its listing exchange does not have a comprehensive surveillance sharing agreement); and 69061 (March 7, 2013), 78 FR 15990 (March 13, 2013) (SR–NYSEArca–2013–01) (approving investments in non-agency commercial MBS and non-agency residential MBS without a fixed limit but consistent with the fund’s objective of investing up to 80% of its assets in investment grade fixed-income securities). PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 55427 The Manager and the Sub-Adviser do not believe that there will be any significant impact on the settlement or operational aspects of the Fund’s arbitrage mechanism due to the use of derivatives. Because derivatives generally are not eligible for in-kind transfer, they will typically be substituted with a ‘‘cash in lieu’’ amount when the Fund processes purchases or redemptions of creation units in-kind. Creation and Redemption of Shares The Fund will issue Shares of the Fund at NAV only to APs and only in aggregations of at least 50,000 shares (each aggregation is called a ‘‘Creation Unit’’) or multiples thereof, on a continuous basis through the Distributor, without a sales load, at the NAV next determined after receipt, on any Business Day, of an order in proper form. A ‘‘Business Day’’ is defined as any day that the Trust is open for business, including as required by Section 22(e) of the 1940 Act. Although the Fund reserves the right to issue Creation Units on a partial or fully ‘‘in kind’’ basis, the Fund expects that it will primarily issue Creation Units solely for cash. As a result, APs seeking to purchase Creation Units will generally be required to transfer to the Fund cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable transaction fee. To the extent that the Fund elects to issue Creation Units on an ‘‘in-kind’’ basis, the applicable AP will be required to deposit with the Fund a designated portfolio of securities and/or instruments (the ‘‘Deposit Securities’’) that will conform pro rata to the holdings of the Fund (except in the circumstances described in the Fund’s Statement of Additional Information (the ‘‘SAI’’)) and/or an amount of cash. If there is a difference between the NAV attributable to a Creation Unit and the aggregate market value of the Deposit Securities or Redemption Securities (defined below) exchanged for the Creation Unit, the party conveying the instruments with the lower value will pay to the other an amount in cash equal to that difference (the ‘‘Cash Component’’). Together, the Deposit Securities and the Cash Component will constitute the ‘‘Fund Deposit,’’ which will represent the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Fund also expects to effect redemptions of Creation Units primarily on a cash basis, although it reserves the right to effect redemption on a partial or wholly ‘‘in-kind’’ basis. In connection with a cash redemption, the AP will be E:\FR\FM\05NON1.SGM 05NON1 55428 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices required to transfer to the Fund, Creation Units and cash equal to the transaction fee. To the extent that the Fund elects to utilize an ‘‘in-kind’’ redemption, it will deliver to the redeeming AP, in exchange for a Creation Unit, securities and/or instruments that will conform pro rata to the holdings of the Fund (‘‘Redemption Securities’’) plus the Cash Component. To be eligible to place orders with respect to creations and redemptions of Creation Units, an entity must have executed an agreement with the Distributor, subject to acceptance by the transfer agent, with respect to creations and redemptions of Creation Units. Each such entity (an AP) must be (i) a brokerdealer or other participant in the clearing process through the continuous net settlement system of the National Securities Clearing Corporation (‘‘NSCC’’) or (ii) a Depository Trust Company participant. When the Fund permits Creation Units to be issued principally or partially in-kind, the Fund will cause to be published, through the NSCC, on each Business Day, at or before 9:00 a.m. E.T., the identity and the required principal amount or number of each Deposit Security and the amount of the Cash Component (if any) to be included in the current Fund Deposit (based on information at the end of the previous Business Day). All orders to create Creation Units must be received by the Distributor within a one-hour window from 9:00 a.m. E.T. to 10:00 a.m. E.T. on a given Business Day in order to receive the NAV determined on the Business Day on which the order was placed. Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form on a Business Day and only through an AP. The Fund will not redeem Shares in amounts less than a Creation Unit unless the Fund is being liquidated. When the Fund permits Creation Units to be redeemed principally or partially in-kind, the Fund will cause to be published, through the NSCC, at or before 9:00 a.m. E.T. on each Business Day, the identity of the Redemption Securities and/or an amount of cash that will be applicable to redemption requests received in proper form on that day. The Redemption Securities will be identical to the Deposit Securities. In order to redeem Creation Units of the Fund, an AP must submit an order to redeem for one or more Creation Units. All such orders must be received by the Distributor within a one-hour window from 9:00 a.m. E.T. to 10:00 VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 a.m. E.T. on a given Business Day in order to receive the NAV determined on the Business Day on which the order was placed. Availability of Information The Fund’s website (www.leggmason.com), which will be publicly available prior to the public offering of Shares, will include a form of the prospectus for the Fund that may be downloaded. The website will include the Shares’ ticker, CUSIP and exchange information, along with additional quantitative information updated on a daily basis, including, for the Fund: (1) The prior Business Day’s NAV per share and the market closing price or mid-point of the bid/ask spread at the time of calculation of such NAV per share (the ‘‘Bid/Ask Price’’),88 and a calculation of the premium or discount of the market closing price or Bid/Ask Price against such NAV per share; and (2) a table showing the number of days of such premium or discount for the most recently completed calendar year, and the most recently completed calendar quarters since that year (or the life of Fund, if shorter). On each Business Day, before commencement of trading in Shares in the Regular Market Session 89 on the Exchange, the Fund will disclose on its website the identities and quantities of the portfolio of securities and other assets (the ‘‘Disclosed Portfolio’’ as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form the basis for the Fund’s calculation of NAV at the end of the Business Day.90 The Fund’s disclosure of derivative positions in the Disclosed Portfolio will include sufficient information for market participants to use to value these positions intraday. On a daily basis, the Fund will disclose on the Fund’s website the following information regarding each portfolio holding, as applicable to the type of holding: Ticker symbol, CUSIP number or other 88 The Bid/Ask Price of the Fund will be determined using the midpoint of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fund’s NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. 89 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange: (1) PreMarket Session from 4 a.m. to 9:30 a.m., E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 4:15 p.m., E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 p.m. to 8 p.m., E.T.). 90 Under accounting procedures to be followed by the Fund, trades made on the prior Business Day (‘‘T’’) will be booked and reflected in NAV on the current Business Day (‘‘T+1’’). Accordingly, the Fund will be able to disclose at the beginning of the Business Day the portfolio that will form the basis for the NAV calculation at the end of the Business Day. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 identifier, if any; a description of the holding (including the type of holding), the identity of the security or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and percentage weighting of the holding in the Fund’s portfolio.91 The website information will be publicly available at no charge. In addition, for the Fund, an estimated value, defined in Rule 5735(c)(3) as the ‘‘Intraday Indicative Value,’’ that reflects an estimated intraday value of the Fund’s Disclosed Portfolio, will be disseminated. Moreover, the Intraday Indicative Value, available on the Nasdaq Information LLC proprietary index data service,92 will be based upon the current value for the components of the Disclosed Portfolio and will be updated and widely disseminated by one or more major market data vendor and broadly displayed at least every 15 seconds during the Regular Market Session. The Intraday Indicative Value will be based on quotes and closing prices provided by a dealer who makes a market in those instruments. Premiums and discounts between the Intraday Indicative Value and the market price may occur. This should not be viewed as a ‘‘real time’’ update of the NAV per Share of the Fund, which is calculated only once a day. The dissemination of the Intraday Indicative Value, together with the Disclosed Portfolio, will allow investors to determine the value of the underlying portfolio of the Fund on a daily basis and will provide a close estimate of that value throughout the Business Day. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the Business Day on brokers’ computer screens and other electronic services. Quotation and last sale information for the Shares will be available via Nasdaq 91 See Nasdaq Rule 5735(c)(2). the Nasdaq Global Index Data Service (‘‘GIDS’’) is the Nasdaq global index data feed service, offering real-time updates, daily summary messages, and access to widely followed indexes and Intraday Indicative Values for ETFs. GIDS provides investment professionals with the daily information needed to track or trade Nasdaq indexes, listed ETFs, or third-party partner indexes and ETFs. 92 Currently, E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the Consolidated Tape Association (‘‘CTA’’) plans for the Shares and for the following U.S. securities, to the extent that they are exchange-listed securities: Work Out Securities, Non-Convertible Preferred Securities, warrants, convertible fixed income and preferred securities and ETFs. Price information for U.S. exchange-listed options will be available via the Options Price Reporting Authority and for other U.S. Exchange-Traded Derivatives will be available from the applicable listing exchange and from major market data vendors. Price information for TRACEEligible Securities 93 sold in transactions under Rule 144A under the Securities Act will generally be available through FINRA’s Trade Reporting and Compliance Engine (‘‘TRACE’’) and information regarding transactions in non-TRACE-Eligible Securities or transactions not otherwise subject to TRACE reporting is generally available from major market data vendors and broker-dealers. For most of the U.S. dollar denominated corporate bonds, GSE-sponsored securities, Securitized Products and other U.S. dollar denominated fixed income securities in which the Fund invests, price information will be available from TRACE and EMMA (as defined below).94 For those instruments for which FINRA does not disseminate price information from TRACE, such as CDOs and fixed income securities denominated in foreign currencies, pricing information will generally be available from major market data vendors and broker-dealers. Money Market Funds are typically priced once each Business Day and their prices will be available through the applicable 93 For the definition of ‘‘TRACE-Eligible Security,’’ see FINRA Rule 6710(a). 94 FINRA generally disseminates information on all transactions in TRACE-Eligible Securities, including those effected pursuant to Rule 144A of the Securities Act, immediately upon receipt of the transaction reports. Exceptions to this dissemination schedule are: (i) In respect to CMOs transacted pursuant to Rule 144A under the Securities Act, where the transaction value is $1 million or more and there have been five or more transactions of $1 million or more in the period reported by at least two different market participant identifiers (where FINRA will disseminate information weekly and monthly); (ii) certain transactions with affiliates, certain transfers in connection with mergers and not in furtherance of a trading strategy; and certain primary offerings; (iii) transactions in CDOs, collateralized mortgage backed securities and CMOs, if the transaction value is $1 million or more and does not qualify for periodic dissemination; and (iv) Treasury Securities. See FINRA Rule 6750. VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 fund’s website or from major market data vendors. For other exchange-listed securities (to be comprised primarily of ETFs, warrants and structured notes and which may include exchange-listed securities of both U.S. and non-U.S. issuers), equities traded in the over-thecounter market (including Work Out Securities, and Non-Convertible Preferred Securities), Exchange-Traded Derivatives (including U.S. or foreign), OTC Derivatives, Debt and fixed income securities (including convertible fixed income and convertible preferred securities), and the small number of Securitized Products that are not reported to TRACE,95 intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable). Price information for such securities and instruments will also be available from feeds from major market data vendors, published or other public sources, or online information services. As noted above, TRACE will be a source of price information for most of the U.S. dollar denominated corporate bonds, GSEsponsored securities, Securitized Products and other U.S. dollar denominated fixed income securities in which the Fund invests. Intraday and other price information related to foreign government securities, Money Market Funds, and other cash equivalents that are traded over-thecounter and other Non-TRACE Eligible Securities as well as prices for Treasury Securities, CDOs, commercial mortgagebacked securities, or CMOs purchased through transactions that do not qualify for periodic dissemination by FINRA 96 will be available through major market data vendors, such as Bloomberg, Markit, IDC and Thomson Reuters, which can be accessed by APs and other investors. Electronic Municipal Market Access (‘‘EMMA’’) will be a source of price information for municipal bonds. Pricing for repurchase transactions and reverse repurchase agreements entered into by the Fund are not publicly reported. Prices are determined by negotiation at the time of entry with counterparty brokers, dealers and banks. Additional information regarding the Fund and the Shares, including investment strategies, risks, creation and redemption procedures, fees, Fund 95 Non-TRACE Eligible Securities, which are Securitized Products, in which the Fund may invest will primarily consist of fixed income securities issued by foreign entities and denominated in foreign currencies. For such securities that are not TRACE-eligible, pricing information will generally be available from major market data vendors and broker-dealers. 96 See supra note 94. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 55429 holdings’ disclosure policies, distributions and taxes will be included in the Registration Statement. Investors will also be able to obtain the SAI, the Fund’s annual and semi-annual reports (together, ‘‘Shareholder Reports’’), and its Form N–CSR and Form N–SAR, filed twice a year, except the SAI, which is filed at least annually. The Fund’s SAI and Shareholder Reports will be available free upon request from the Fund, and those documents and the Form N–CSR and Form N–SAR may be viewed on-screen or downloaded from the Commission’s website at www.sec.gov. Initial and Continued Listing The Shares will be subject to Nasdaq Rule 5735, which sets forth the initial and continued listing criteria applicable to Managed Fund Shares. The Exchange represents that, for initial and continued listing, the Fund must be in compliance with Rule 10A–3 97 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Nasdaq will halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121, including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the other assets constituting the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. Trading Rules Nasdaq deems the Shares to be equity securities, thus rendering trading in the Shares subject to Nasdaq’s existing rules governing the trading of equity 97 See E:\FR\FM\05NON1.SGM 17 CFR 240.10A–3. 05NON1 55430 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices securities. Nasdaq will allow trading in the Shares from 4:00 a.m. until 8:00 p.m., E.T. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum price variation for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $0.01. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both Nasdaq and also FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.98 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchangelisted securities and instruments held by the Fund (including exchange-listed equities and Exchange-Traded Derivatives) with other markets and other entities that are members of ISG 99 and with which the Exchange has comprehensive surveillance sharing agreements,100 and FINRA and the Exchange both may obtain information regarding trading in the Shares, the exchange-listed securities, derivatives and other instruments held by the Fund from markets and other entities that are members of ISG, which include securities and futures exchanges and 98 FINRA surveils trading on the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. 99 Exchange-listed securities and ExchangeTraded Derivatives held by the Fund that are listed and traded on a non-ISG member exchange or on an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement together are limited to 10% of the assets of the Fund. 100 For a list of the current members of ISG, see https://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. VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 swap execution facilities, or with which the Exchange has in place a comprehensive surveillance sharing agreement.101 Moreover, FINRA, on behalf of the Exchange, will be able to access, as needed, trade information for most of the fixed income securities held by the Fund through reporting on FINRA’s TRACE and, with respect to municipal securities, EMMA. The majority of the Fund’s investments in exchange-listed, equity securities (i.e., Non-ConvertiblePreferred Securities, Equity-Related Warrants and ETFs) will constitute securities that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. Up to 10% of the Fund’s assets may be held in exchange-listed securities and Exchange-Traded Derivatives that are listed and traded on markets that are not members of ISG or a market with which the Exchange does not have a comprehensive surveillance sharing agreement. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq members with respect to recommending transactions in the Shares to customers; (3) how information regarding the Intraday Indicative Value and the Disclosed Portfolio is disseminated; (4) the risks involved in trading the Shares during the Pre-Market and Post-Market Sessions when an updated Intraday Indicative Value will not be calculated or publicly disseminated; (5) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. The Information Circular will also discuss any exemptive, no-action and 101 As noted above, no more than 10% of the assets of the Fund may be invested in ExchangeTraded Derivatives and exchange-listed securities whose principal market is not a member of ISG or a market with which the Exchange has a comprehensive surveillance sharing agreement. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 interpretive relief granted by the Commission from any rules under the Act. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Fund. Members purchasing Shares from the Fund for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. Additionally, the Information Circular will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Circular will also disclose the trading hours of the Shares of the Fund and the applicable NAV calculation time for the Shares. The Information Circular will disclose that information about the Shares of the Fund will be publicly available on the Fund’s website. Continued Listing Representations All statements and representations made in this filing regarding (a) the description of the portfolio or reference assets, (b) limitations on portfolio holdings or reference assets, (c) dissemination and availability of the reference asset or intraday indicative values, or (d) the applicability of Exchange listing rules shall constitute continued listing requirements for listing the Shares on the Exchange. In addition, the issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the Nasdaq 5800 Series. 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act in general and Section 6(b)(5) of the Act in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule 5735. The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both the Exchange and FINRA, on behalf of the Exchange, which are designed to deter and detect violations of Exchange rules and applicable federal securities laws and are adequate to properly monitor trading in the Shares in all trading sessions. Paragraph (g) of Rule 5735 provides that if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a brokerdealer, such investment adviser shall erect and maintain a ‘‘fire wall’’ between the investment adviser and the broker-dealer with respect to access to information concerning the composition and/or changes to such investment company’s portfolio. In addition, paragraph (g) further requires that personnel who make decisions on the investment company’s portfolio composition must be subject to procedures designed to prevent the use and dissemination of material, nonpublic information regarding the investment company’s portfolio. Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with the establishment and maintenance of a ‘‘fire wall’’ between the investment adviser and the broker-dealer reflects the applicable investment company’s portfolio, not an underlying benchmark index, as is the case with index-based funds. Neither the Manager nor any of the SubAdvisers is a broker-dealer, but each is affiliated with the Distributor, a brokerdealer, and has implemented and will maintain a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio. In addition, personnel who make decisions on the Fund’s portfolio composition will be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the Fund’s portfolio. In the event (a) the Manager or any of the Sub-Advisers registers as a broker-dealer or becomes newly affiliated with a broker-dealer, or (b) any new investment adviser or any new subadviser to the Fund is a registered broker-dealer or becomes affiliated with VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 another broker-dealer, it will implement and maintain a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning 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. The Fund’s investments, including derivatives, will be consistent with the Fund’s investment objectives, applicable legal requirements 102 and will not be used for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark (although derivatives may have embedded leverage). Although the Fund will be permitted to borrow as permitted under the 1940 Act, it will not be operated as a ‘‘leveraged ETF,’’ i.e., it will not be operated in a manner designed to seek leveraged returns or a multiple or inverse multiple of the performance of an underlying reference index.103 The Fund may engage in frequent and active trading of portfolio investments to achieve its investment objective. The Exchange believes that, notwithstanding that the Fund would not meet all of the ‘‘generic’’ listing requirements of Nasdaq Rule 5735(b)(1), the Fund will not be subject to manipulation, the investments of the Fund will be able to be monitored and surveilled by the Exchange and risks will be mitigated by alternative limits imposed by the Exchange and by the voluntary limits imposed by the Fund (see supra ‘‘Investment Restrictions’’). As a result, it is in the public interest to approve listing and trading of Shares of the Fund on the Exchange pursuant to the requirements set forth herein. Deviations from the generic requirements are necessary for the Fund to achieve its investment objective in a cost-effective manner that maximizes investors’ returns and to manage the risks associated with its investments, and the Exchange proposes that the Fund will be required to comply with alternative requirements that are customized to address the objectives of Section 6(b)(5) of the Act, as described herein. Further, the strategy and investments of the Fund are substantially similar to those of other 102 As noted above, the Fund will limit its investments in illiquid securities or other illiquid assets to an aggregate amount of 15% of its net assets (calculated at the time of investment), as required by the Commission. 103 As noted above, the Fund will not invest in leveraged, inverse or inverse leveraged ETFs. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 55431 ETFs previously approved by the Commission, which have operated safely and without disrupting the market for several years.104 The Fund will not comply with the requirements in Nasdaq Rule 5735(b)(1) regarding the use of aggregate gross notional value of derivatives when calculating the weight of such derivatives or the exposure that such derivatives provide to underlying reference assets, including the requirements in Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), 5735(b)(1)(E) and 5735(b)(1)(F).105 Instead, the Exchange proposes that, except as otherwise provided herein, for the purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), and any alternative requirements proposed by the Exchange, the Fund will use the mark-to-market value of its derivatives in calculating the weight of such derivatives or the exposure that such derivatives provide to their reference assets.106 The Exchange believes that this alternative requirement is appropriate because the mark-to-market value is a more accurate measurement of the actual exposure incurred by the Fund in connection with a derivatives position.107 The Fund will not comply with the requirement that securities comprising at least 90% of the fixed income weight of the Fund’s portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) in respect to its investments in ABS/ 104 See, e.g., Securities Exchange Act Release Nos. 66321 (February 3, 2012) 77 FR 6850 (February 9, 2012) (SR–NYSEArca–2011–95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund); 72666 (July 24, 2014) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund); and 76719 (December 21, 2015) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF). 105 See supra notes 67–70. 106 See supra note 71. 107 As previously noted, the mark-to-market approach is consistent with the valuation methodology for derivatives for asset coverage purposes advocated by the Commission in proposed Rule 18f–4 under the 1940 Act. See Derivatives Rule Proposing Release. In a white paper published by staff of the Division of Economic and Risk Analysis of the SEC (‘‘DERA’’) in connection with the proposal of Rule 18f–4 under the 1940 Act, the staff of DERA noted that a derivative’s notional amount does not accurately reflect the risk of the derivative. See Daniel Deli, Paul Hanouna, Christof Stahel, Yue Tang and William Yost, Use of Derivatives by Registered Investment Companies (December 2015) at 10 (‘‘On the other hand, there are drawbacks to using notional amounts. First, because of differences in expected volatilities of the underlying assets, notional amounts of derivatives across different underlying asset generally do not represent the same unit of risk. For example, the level of risk associated with a $100 million notional of a S&P500 index futures is not equivalent to the level of risk of a $100 million notional of interest rate swaps, currency forwards or commodity futures.’’). E:\FR\FM\05NON1.SGM 05NON1 55432 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices Private MBS.108 Instead, ABS/Private MBS will be limited to 20% of the weight of the fixed income portion of the Fund’s portfolio.109 The Exchange proposes, in the alternative, to require the Fund to ensure that all of the investments in the fixed income portion of the Fund’s portfolio, other than ABS/ Private MBS, comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv).110 The Exchange believes that this alternative limitation is appropriate because Nasdaq Rule 5735(b)(1)(B)(iv) does not appear to be designed for structured finance vehicles such as ABS/Private MBS, and the overall weight of ABS/Private MBS held by the Fund will be limited to 20% of the fixed income portion of the Fund’s portfolio, as described above. As discussed above, although ABS/Private MBS will be excluded for the purposes of compliance with Nasdaq Rule 5735(b)(1)(B)(iv), the Fund’s portfolio is consistent with the statutory standard as a result of the diversification provided by the investments and the SubAdviser’s selection process, which closely monitors investments to ensure maintenance of credit and liquidity standards and relies on the higher investment levels in these instruments during periods of U.S. economic strength. As discussed above, the Exchange has determined to make an exception solely in respect of the Fund such that CDOs will not be deemed to be included in the definition of ABS for purposes of the limitation in Nasdaq Rule 5735(b)(1)(B)(v) and, as a result, will not be subject to the restriction on aggregate holdings of ABS/Private MBS contained in such Rule, which limits such holdings to no more than 20% of the weight of the fixed income portion of the Fund’s portfolio. However, the Fund’s holdings in CDOs will be limited such that they do not account, in the aggregate, for more than 10% of the total assets of the Fund. The Exchange believes that the 10% limit on the Fund’s holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. 108 See supra note 73. supra note 74. 110 For purposes of this requirement, the weight of the Fund’s exposure to any fixed income securities referenced in derivatives shall be calculated based on the mark-to-market value of such derivatives. CDOs, in which the Fund invests, would comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv) but would be limited in amount to 10% of the Fund’s total assets. The Exchange believes that the 10% limit on the Fund’s holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. 109 See VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 The Exchange has classified bank loans as Debt for purposes of this proposed rule change and not as ‘‘fixed income securities’’ as they are classified in Nasdaq Rule 5735(b)(1)(B). As a result, the Fund’s investments in bank loans will comply with the limitations or restrictions applicable to the Fund’s investments in Debt as set forth herein with respect to such holdings and not with the restrictions for fixed income securities set forth in Nasdaq Rule 5735(b)(1)(B)(i)–(v).111 The Exchange believes that this approach is appropriate given that the ‘‘generic’’ listing requirements in Nasdaq Rule 5735(b)(1)(B) generally appear to be tailored to fixed income instruments that are ‘‘securities’’, as defined in the Act, rather than loans and other debt instruments that are not characterized as ‘‘securities’’ under applicable case law. The Fund will not meet the equity requirements in Nasdaq Rule 5735(b)(1)(A) with respect to NonConvertible Preferred Securities, Work Out Securities and warrants.112 Instead, the Exchange proposes that (i) the Fund’s investment in convertible fixed income and preferred securities shall be limited to 20% of the Fund’s portfolio; and (ii) the weight of Non-Convertible Preferred Securities, Work Out Securities and Equity-Related Warrants in the Fund’s portfolio shall together not exceed 15% of the Fund’s assets. The Exchange believes that these alternative limitations are appropriate in light of the fact that the Non-Convertible Preferred Securities, Equity Related Warrants and Work Out Securities are providing debt-oriented exposures or are received in connection with the Fund’s previous investment in Debt or fixed income securities, and all of the other equity securities held by the Fund will comply with the requirements of Nasdaq Rule 5735(b)(1)(A).113 The Fund will not meet the requirement in Nasdaq Rule 5735(b)(1)(E) that no more than 20% of 111 For a listing of such restrictions, see supra ‘‘Investment Restrictions.’’ 112 As noted above, convertible fixed income securities (including CoCos) and convertible preferred securities are treated as fixed income securities for purposes of this proposed rule change. See supra ‘‘Application of Generic Listing Requirements’’ section (ii) and note 80. 113 Other equities consist of ETFs (including money market ETFs) that provide exposure to fixed income securities, Debt and other Principal Investments. The weight of such ETFs in the Fund’s portfolio shall not be limited. As noted above, Fixed-Income Related Warrants are treated as fixed income securities for purposes of this proposed rule change and will be subject to and comply with the generic listing requirements for fixed-income securities, rather than the generic listing requirements for equity securities. See supra note 23. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 the assets in the Fund’s portfolio may be invested in over-the-counter derivatives. Instead, the Exchange proposes that there shall be no limit on the Fund’s investment in Interest Rate and Currency Derivatives, and the weight of all OTC Derivatives other than Interest Rate and Currency Derivatives shall not exceed 10% of the Fund’s Assets. For purposes of this 10% limit on OTC Derivatives, the weight of such OTC Derivatives will be calculated based on the mark-to-market value of such OTC Derivatives. The Exchange believes that this exception for Interest Rate and Currency Derivatives, which is generally consistent with the requirement in a previous filing for the listing of an ETF approved by the Commission,114 is appropriate in light of the fact that Interest Rate and Currency Derivatives are among the most liquid investment instruments (including not only derivatives but also securities) in the market 115 (and the instruments are even more liquid than most non-government or government-guaranteed securities). Based on the data compiled by the SubAdviser in respect to its liquidity policy, these derivatives are among the most liquid investment instruments traded. In addition, most Interest Rate Derivatives traded by the Fund are centrally cleared by regulated clearing firms, and Interest Rate and Currency Derivatives are subject to trade reporting,116 and other 114 See Securities Exchange Act Release No. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR–NYSEArca–2017–09) (approving up to 50% of the fund’s assets (calculated on the basis of aggregate gross notional value) to be invested in over-the-counter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund’s investments, including forwards, overthe-counter options, and over-the-counter swaps). 115 Trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, and 67% of this trading activity was in derivatives contracts such as currency or foreign exchange forwards, options and swaps (with the other 33% consisting of spot transactions). See Bank for International Settlements, Triennal [sic] Central Bank Survey, Foreign Exchange Turnover in April 2016, available at https://www.bis.org/publ/rpfx16fx.pdf (accessed November 2017). Trading in OTC interest rate derivatives averaged $2.7 trillion per day in April 2016. See Bank for International Settlements, Triennal [sic] Central Bank Survey, OTC Interest Rate Derivatives Turnover in April 2016, available at https://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017). 116 Transactions in Interest Rate and Currency Derivatives are required to be reported to a swap data repository, and transactions in Interest Rate Derivatives and certain Currency Derivatives (i.e., Currency Derivatives that are not excluded from the definition of a ‘‘swap’’, as described below) are also publicly reported pursuant to rules issued by the CFTC. See 17 CFR parts 43, 45 and 46. Pursuant to Section 1(a)(47)(E) of the CEA and a related determination by the Department of the Treasury, Excluded Currency Derivatives are excluded from the definition of a ‘‘swap’’ under the CEA. See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices robust regulation.117 Given the size of the trading market and the regulatory oversight of the markets, the Exchange believes that Interest Rate and Currency Derivatives are not readily subject to manipulation. The Exchange also believes that allowing the Fund to risk manage its portfolio through the use of Interest Rate and Currency Derivatives without limit is necessary to allow the Fund to achieve its investment objective and protect investors. The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(i) that at least 90% of the weight of the Fund’s holdings in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options, and swaps for which the Exchange may obtain information via the ISG from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement. Instead, the Exchange proposes that no more than 10% of the assets of the Fund will be invested in Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is not a market with which the Exchange has a comprehensive surveillance sharing agreement. For purposes of this 10% limit, the weight of such ExchangeTraded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Exchange believes that this alternative limitation is appropriate because the overall limit on Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement will still be low relative to the overall size of the Fund. Exchange Act, 77 FR 69694 (Nov. 20, 2012). However, as noted above, transactions in such Excluded Currency Derivatives are required to be reported to a swap data repository, but they are not subject to the public reporting requirements. 117 Interest Rate Derivatives and Currency Derivatives other than Excluded Currency Derivatives are comprehensively regulated as swaps under the CEA and regulations issued thereunder by the CFTC and other federal financial regulators. See, e.g., 17 CFR part 23 (capital and margin requirements for swap dealers, business conduct standards for swap dealers, and swap documentation requirements); 17 CFR part 50 (clearing requirements for swaps). While Excluded Currency Derivatives are not subject to all swap regulations, they are subject to the ‘‘business conduct standards’’ adopted by the CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(ii) that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the Fund’s portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the Fund’s portfolio (including gross notional exposures). Instead, the Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund’s investment in Eurodollar and G–7 Sovereign Futures and Options. The Fund may maintain significant positions in Eurodollar and G–7 Sovereign Futures and Options, and such investments will not be subject to the concentration limits provided in Nasdaq Rule 5735(b)(1)(D)(ii). For purposes of this [sic] requirements, the weight of the applicable ExchangeTraded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Manager has indicated that obtaining exposure to these investments through futures contracts is often the most cost efficient method to achieve such exposure. The Exchange notes that Eurodollar and G–7 Sovereign Futures and Options are highly liquid investments 118 and are not subject to 118 See CME Group, Interest Rate Futures Liquidity Metrics Reach New Highs (October 6, 2017), available at https://www.cmegroup.com/ education/interest-rates-liquidity-metrics-reachnew-highs.html (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on eurodollars and Treasury Securities, including that during the first three quarters of 2017, eurodollar futures and options traded through CME Group had an average daily open interest of approximately 53 million contracts and futures and options on Treasury Securities had an average daily open interest of approximately 15 million contracts); The Montreal Exchange, Statistics for Interest Rate Derivatives, Index Derivatives and Equity Derivatives (September 2017), available at https://www.m-x.ca/ f_stat_en/1709_stats_en.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on Canadian sovereign debt, including that, as of September 2017, the open interest in futures and options on Canadian sovereign debt traded on The Montreal Exchange was approximately 560,000 contracts); Eurex Exchange, Benchmark Fixed Income Derivatives, available at https:// www.eurexchange.com/blob/115654/ 4c51e4b8bc77355475b3b6f46afc0ef1/data/ factsheet_eurex_benchmark_fixed_income_ derivatives.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on German sovereign debt, including that, as of July 2015, the open interest in futures on German sovereign debt traded on Eurex was approximately 3,000,000 contracts and the open interest in options on German sovereign debt futures traded on Eurex was PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 55433 the same concentration risks as Exchange-Traded Derivatives referencing other assets because of such liquidity. Further, the Exchange notes that the significantly diminished risk of Treasury Securities is reflected in their exclusion from the concentration requirements applicable to fixed income securities in Nasdaq Rule 5735(b)(1)(B)(ii). The Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund’s investment in Eurodollar and G–7 Sovereign Futures and Options. The Exchange believes that this alternative limitation is appropriate to provide the Fund with sufficient flexibility and because of the highly liquid and transparent nature of Eurodollar and G–7 Sovereign Futures and Options. Further, as described above, the G–7 Sovereign Futures and Options in which the Fund invests will be listed on an exchange that is an ISG approximately 3,000,000 contracts); Eurex Exchange, Eurex Exchange Euro-BTP Futures, Italian Government Bond Futures, available at https://www.eurexchange.com/blob/115624/ 6a1281939d15ddbab960af40da6f11dc/data/ factsheet_eurex_euro_btp_futures_on_italian_ government_bonds.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on Italian sovereign debt, including that the open interest peaks in 2017 for futures on long-term and short-term Italian sovereign debt traded on Eurex was approximately 450,000 and 270,000 contracts, respectively); Eurex Exchange, Euro-OAT Derivatives, French Government Bond Futures and Options, available at https://www.eurexchange.com/blob/115652/ 48198ec577f7b3b0ac44d4c5a39ed0de/data/ factsheet_eurex_euro_oat_futures_on_french_ government_bonds.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on French sovereign debt, including that, as of July 2017, the open interest in futures on long-term French sovereign debt traded on Eurex was approximately 600,000 contracts); Intercontinental Exchange, Gilt Futures Overview, available at https://www.theice.com/publicdocs/ futures/Gilt_Futures_Overview.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on British sovereign debt, including that, as of the third quarter of 2014, the open interest in futures on longterm British sovereign debt traded on the Intercontinental Exchange was approximately 400,000 contracts); Osaka Exchange, Japanese Government Bond Futures & Options, available at https://www.jpx.co.jp/english/derivatives/products/ jgb/jgb-futures/tvdivq0000003n94-att/JGB_FUT_ OP_E.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on Japanese sovereign debt, including that as of July 2016, the open interest in futures on 10-year Japanese sovereign debt traded on the Osaka Exchange was approximately 80,000 contracts). The Exchange also notes that the Commission has previously granted exemptions under the Act to facilitate the trading of futures on sovereign debt issued by each of the Group of Seven countries (among other countries) and that such exemptions were based in part on the Commission’s assessment of the sufficiency of the credit ratings and liquidity of such sovereign debt. See 17 CFR 240.3a12–8; Securities Exchange Act Release No. 41453 (May 26, 1999), 64 FR 29550 (June 2, 1999). E:\FR\FM\05NON1.SGM 05NON1 55434 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices member or an exchange with which the Exchange has a comprehensive surveillance sharing agreement. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily every Business Day that the Fund is traded, and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information will be publicly available regarding the Fund and the Shares, thereby promoting market transparency. Moreover, the Intraday Indicative Value, available on the Nasdaq Information LLC proprietary index data service, will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Exchange’s Regular Market Session. On each Business Day, before commencement of trading in the Shares in the Regular Market Session on the Exchange, the Fund will disclose on its website the Disclosed Portfolio of the Fund that will form the basis for the Fund’s calculation of NAV at the end of the Business Day. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the Business Day on brokers’ computer screens and other electronic services. Quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares and for the following U.S. securities, to the extent they are exchange-listed: Work Out Securities, Non-Convertible Preferred Securities, warrants, convertible fixed income and convertible preferred securities and ETFs. Price information for U.S. exchange-listed options will be available via the Options Price Reporting Authority and for other U.S. Exchange-Traded Derivatives will be available from the applicable listing exchange and from major market data vendors. Price information for restricted securities will be available from major market data vendors, broker-dealers and trading platforms, as well as for most fixed income securities sold in transactions under Rule 144A under the Securities Act, from TRACE and EMMA. Money Market Funds are typically VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 priced once each Business Day and their prices will be available through the applicable fund’s website or from major market data vendors. For other exchange-listed securities (to be comprised primarily of ETFs, warrants and structured notes and which may include exchange-listed securities of both U.S. and non-U.S. issuers), equities traded in the over-thecounter market (including Work Out Securities and Non-Convertible Preferred Securities), Exchange-Traded Derivatives (including U.S. or foreign), OTC Derivatives, Debt and fixed income securities (including convertible fixed income and convertible preferred securities), and the small number of Securitized Products that are not reported to TRACE, intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable). TRACE will be a source of price information for most of the U.S. dollar denominated corporate bonds,119 GSE-sponsored securities, Securitized Products and other U.S. dollar denominated fixed income securities in which the Fund invests.120 Intraday and other price information related to foreign government securities, Money Market Funds, and other cash equivalents that are traded over-the-counter and other Non-TRACE Eligible Securities as well as prices for Treasury Securities, CDOs, commercial mortgage-backed securities, or CMOs purchased through transactions that do not qualify for periodic dissemination by FINRA 121 will be available through major market data vendors, such as Bloomberg, Markit, IDC and Thomson Reuters, which can be accessed by APs and other investors. EMMA will be a source of price information for municipal bonds. Pricing for repurchase transactions and reverse repurchase agreements entered into by the Fund are not publicly reported. Prices are determined by 119 Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules. Generally, such debt securities will have at issuance a maturity that exceeds one calendar year. For fixed income securities that are not reported to TRACE, (i) intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable) and (ii) price information will be available from feeds from market data vendors, published or other public sources, or online information services, as described above. 120 Broker-dealers that are FINRA member firms have an obligation to report transactions in TRACEEligible Securities to TRACE. For the definition of ‘‘TRACE-Eligible Security,’’ see FINRA Rule 6710(a). 121 See supra note 94. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 negotiation at the time of entry with counterparty brokers, dealers and banks. The Fund’s website will include a form of the prospectus for the Fund and additional data relating to NAV and other applicable quantitative information. Moreover, prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Trading in the Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120 and 4121 or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund’s holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of activelymanaged ETF that will enhance competition among market participants, to the benefit of investors and the marketplace. For the above reasons, the Exchange believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that the proposed rule change will facilitate the listing and trading of an additional type of activelymanaged ETF that will enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. E:\FR\FM\05NON1.SGM 05NON1 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASDAQ–2018–080, and should be submitted on or before November 26, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.122 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–24068 Filed 11–2–18; 8:45 am] Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–84507; File No. SR– CboeBZX–2018–079] • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2018–080 on the subject line. Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1, To Establish How the BZX Official Closing Price Would Be Determined for BZX-Listed Securities Paper Comments October 30, 2018. • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2018–080. 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 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 18, 2018, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange.3 The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons. VerDate Sep<11>2014 18:38 Nov 02, 2018 Jkt 247001 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes a rule change to establish how the BZX Official Closing Price would be determined for BZX-listed securities. The text of the proposed rule change is also available on the Exchange’s 122 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 On October 29, 2018, the Exchange filed Amendment No. 1 to the proposed rule change to specify the date upon which the Exchange’s President (or designee) approved the proposed rule change, pursuant to delegated authority. 1 15 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 55435 website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend BZX Rule 11.23, Auctions, to amend how the BZX Official Closing Price 4 would be determined for any BZX-listed security that is not a corporate security (a ‘‘Derivative Securities Product’’) 5 if the Exchange does not conduct a Closing Auction or if a Closing Auction trade is less than a round lot (collectively, an ‘‘Illiquid Auction’’). Rule 11.23(c)(2)(B) currently provides how the Exchange determines the price of the Closing Auction and the BZX Official Closing Price. This proposed functionality is very similar to functionality that has already been approved by the Commission and is operational on NYSE Arca, Inc. (‘‘Arca’’) (the ‘‘Arca Rule’’) 6 and the Exchange believes that it raises no new 4 As defined in Rule 11.23(a)(3), the term ‘‘BZX Official Closing Price’’ shall mean the price disseminated to the consolidated tape as the market center closing trade. 5 With respect to equities traded on the Exchange, the term ‘‘new derivative securities product’’ means a security that meets the definition of ‘‘new derivative securities product’’ in Rule 19b–4(e) under the Securities Exchange Act of 1934. See BZX Rule 14.11(j). For purposes of Rule 19b–4(e), a ‘‘new derivative securities product’’ means any type of option, warrant, hybrid securities product or any other security, other than a single equity option or a security futures product, whose value is based, in whole or in part, upon the performance of, or interest, in, an underlying instrument. 17 CFR 240.19b–4(e). 6 See Securities Exchange Act Release No. 82907 (March 20, 2018), 83 FR 12980 (March 26, 2018) (SR–NYSEArca–2018–08) (order approving proposed changes to Arca Rule 1.1(ll) related to determining an Official Closing Price). E:\FR\FM\05NON1.SGM 05NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 214 (Monday, November 5, 2018)]
[Notices]
[Pages 55416-55435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24068]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84505; File No. SR-NASDAQ-2018-080]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of a Proposed Rule Change To List and Trade Shares of 
the BrandywineGLOBAL--Global Total Return ETF, a Series of Legg Mason 
ETF Investment Trust Under Nasdaq Rule 5735

October 30, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 17, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

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

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for

[[Page 55417]]

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

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

1. Purpose
    The Exchange proposes to list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares \4\ on the Exchange. The Fund will be an exchange-
traded fund (``ETF'') that is actively-managed. The Shares will be 
offered by the Trust, which was established as a Maryland statutory 
trust on June 8, 2015.\5\ The Exchange notes that other actively-
managed, broad market fixed-income ETFs have been previously approved 
by the SEC prior to the adoption of ``generic'' listing standards for 
actively-managed ETFs.\6\ The Trust is registered with the Commission 
as an investment company under the 1940 Act and has filed a 
registration statement on Form N-1A (``Registration Statement'') with 
the Commission with respect to the Fund.\7\ The Fund will be a series 
of the Trust. The Fund intends to qualify each year as a regulated 
investment company (``RIC'') under Subchapter M of the Internal Revenue 
Code of 1986, as amended.
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    \4\ A Managed Fund Share is a security that represents an 
interest in a company, which is registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') and 
organized as an open-end investment company or similar entity, that 
invests in a portfolio of securities selected by its investment 
adviser consistent with the company's investment objective and 
policies. In contrast, an open-end investment company that issues 
Index Fund Shares, listed and traded on the Exchange under Nasdaq 
Rule 5705, seeks to provide investment results that correspond 
generally to the price and yield performance of a specific foreign 
or domestic stock index, fixed income securities index or 
combination thereof.
    \5\ The Commission has issued an order, upon which the Trust may 
rely, granting certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 32391 (December 13, 2016) (File 
No. 812-14547) (the ``Exemptive Relief''). In addition, on December 
6, 2012, the staff of the Commission's Division of Investment 
Management (``Division'') issued a no-action letter (``No-Action 
Letter'') relating to the use of derivatives by actively-managed 
ETFs. See No-Action Letter dated December 6, 2012 from Elizabeth G. 
Osterman, Associate Director, Office of Exemptive Applications, 
Division of Investment Management. The No-Action Letter stated that 
the Division would not recommend enforcement action to the 
Commission under applicable provisions of and rules under the 1940 
Act if actively-managed ETFs operating in reliance on specified 
orders (which include the Exemptive Relief) invest in options 
contracts, futures contracts or swap agreements provided that they 
comply with certain representations stated in the No-Action Letter.
    \6\ See, e.g., Securities Exchange Act Release Nos. 76719 
(December 21, 2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca-
2015-73) (granting approval for the listing of shares of the 
Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 
6850 (February 9, 2012) (SR-NYSEArca-2011-95) (granting approval for 
the listing of shares of the PIMCO Total Return Exchange Traded Fund 
(now known as the PIMCO Active Bond Exchange-Traded Fund)); and 
72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-
2013-122) (granting approval to the use of derivatives by the PIMCO 
Total Return Exchange Traded Fund); see also infra notes 86 and 104.
    \7\ See Post-Effective Amendment No. 50 to the Registration 
Statement on Form N-1A for the Trust (File Nos. 333-206784 and 811-
23096) as filed on June 5, 2018. The Trust will file additional 
amendments to the Registration Statement as necessary to conform to 
the representations in this filing. The descriptions of the Fund and 
the Shares contained herein are based, in part, on information in 
the Registration Statement.
---------------------------------------------------------------------------

    Legg Mason Partners Fund Advisor, LLC will be the investment 
adviser to the Fund (the ``Manager'').\8\ Brandywine Global Investment 
Management, LLC will serve as the sub-adviser to the Fund (the ``Sub-
Adviser'').\9\ Legg Mason Investor Services, LLC (the ``Distributor'') 
will be the distributor of the Fund's Shares. The Investment Adviser, 
the Sub-Adviser and the Distributor are wholly-owned subsidiaries of 
Legg Mason, Inc. (``Legg Mason''). An entity that is not affiliated 
with Legg Mason, and which is named in the Registration Statement, will 
act as the administrator, accounting agent, custodian, and transfer 
agent to the Fund.
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    \8\ Legg Mason Partners Fund Advisor, LLC describes its role as 
``investment manager,'' rather than as ``investment adviser'' in 
applicable Fund-related documents, including the Registration 
Statement, in its investment management agreement with the Fund and 
in connection with its annual approval process by the board of 
trustees for the Trust (the ``Board''). As a result, the defined 
term ``Manager'' is used in this filing with respect to a proposed 
rule change instead of the term ``investment adviser,'' which is the 
term used by certain other investment advisers to ETFs in their 
filings with respect to proposed rule changes under Rule 19b-4 of 
the Act.
    \9\ The Sub-Adviser is responsible for the day-to-day management 
of the Fund and, as such, typically makes all decisions with respect 
to portfolio holdings regardless of where the instruments are 
traded. The Manager has ongoing oversight responsibility.
---------------------------------------------------------------------------

    Paragraph (g) of Rule 5735 provides that if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect and maintain 
a ``fire wall'' between the investment adviser and the broker-dealer 
with respect to access to information concerning the composition and/or 
changes to such investment company's portfolio.\10\ In addition, 
paragraph (g) further requires that personnel who make decisions on the 
investment company's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the investment company's portfolio.
---------------------------------------------------------------------------

    \10\ An investment adviser to an investment company is required 
to be registered under the Investment Advisers Act of 1940 (the 
``Advisers Act''). As a result, the Manager and the Sub-Adviser, as 
registered investment advisers, and their related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. Rule 204A-1 requires investment 
advisers (such as the Manager and the Sub-Adviser) 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 the Manager and the Sub-Adviser 
must be consistent with the Advisers Act and Rule 204A-1 thereunder. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser (such as the Manager and the Sub-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.
---------------------------------------------------------------------------

    Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, 
paragraph (g) in connection with the establishment and maintenance of a 
``fire wall'' between the investment adviser and the broker-dealer 
reflects the applicable investment company's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. 
Neither the Manager nor the Sub-Adviser is a broker-dealer, but each is 
affiliated with the Distributor, a broker-dealer, and has implemented 
and will maintain a fire wall with respect to its broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to the portfolio.
    In addition, personnel who make decisions on the Fund's portfolio 
composition will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
Fund's portfolio. In the event (a) the Manager or the Sub-Adviser 
registers as a broker-dealer or becomes newly affiliated with a broker-
dealer, or (b) any new investment adviser or any new sub-adviser to the 
Fund is a registered broker-dealer or becomes affiliated with another 
broker-dealer, it will implement

[[Page 55418]]

and maintain a fire wall with respect to its relevant personnel and/or 
such broker-dealer affiliate, as applicable, regarding access to 
information concerning the composition and/or changes to the Fund's 
portfolio and will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding such 
portfolio.
BrandywineGLOBAL--Global Total Return ETF
Principal Investments
    The investment objective of the Fund will be to seek to maximize 
total return, consisting of income and capital appreciation. Although 
the Fund may invest in securities and Debt (as defined below) of any 
maturity, the Fund will normally maintain an effective duration as set 
forth in the prospectus.\11\ Effective duration seeks to measure the 
expected sensitivity of market price to changes in interest rates, 
taking into account the anticipated effects of structural complexities 
(for example, some bonds can be prepaid by the issuer).
---------------------------------------------------------------------------

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

    Under Normal Market Conditions,\12\ the Fund will seek to achieve 
its investment objective by investing at least 80% of its assets in a 
portfolio comprised of U.S. or foreign fixed income securities; U.S. or 
foreign Debt (as defined below); \13\ ETFs \14\ that provide exposure 
to such U.S. or foreign fixed income securities, Debt or other 
Principal Investments (defined below); derivatives \15\ that (i) 
provide exposure to such U.S. or foreign fixed income securities, Debt 
and other Principal Investments, (ii) are used to risk manage the 
Fund's holdings, and/or (iii) are used to enhance returns, such as 
through covered call strategies;\16\ U.S. or foreign equity securities 
of any type acquired in reorganizations of issuers of fixed income 
securities or Debt held by the Fund (``Work Out Securities''); \17\ 
U.S. or foreign non-convertible preferred securities (other than trust 
preferred securities, which the Fund may invest in, but which are 
treated as fixed income securities \18\) (``Non-Convertible Preferred 
Securities''); \19\ warrants,\20\ comprised of: Warrants on

[[Page 55419]]

U.S. or foreign fixed income securities (``Fixed-Income Related 
Warrants'') and warrants on U.S. or foreign equity securities 
(``Equity-Related Warrants''),\21\ both fixed income and equity 
securities of which are generally issued by the issuer of the warrants, 
and both types of warrants of which are generally attached to, 
accompany or are purchased alongside investments in U.S. or foreign 
fixed income securities; cash and cash equivalents; \22\ and foreign 
currencies (together, the ``Principal Investments'' and the equity 
elements of the Principal Investments, which consist of Work Out 
Securities, ETFs that provide exposure to fixed income securities, Debt 
or other Principal Investments, Equity-Related Warrants \23\ and Non-
Convertible Preferred Securities, are referred to as the ``Principal 
Investment Equities'').\24\
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    \12\ The term ``Normal Market Conditions'' has the meaning set 
forth in Nasdaq Rule 5735(c)(5). The Fund may vary from ordinary 
parameters on a temporary basis, including for defensive purposes, 
during the initial invest-up period (i.e., the six-week period 
following the commencement of trading of Shares on the Exchange) and 
during periods of high cash inflows or outflows (i.e., rolling 
periods of seven calendar days during which inflows or outflows of 
cash, in the aggregate, exceed 10% of the Fund's assets as of the 
opening of business on the first day of such periods). In those 
situations, the Fund may depart from its principal investment 
strategies and may, for example, hold a higher than normal 
proportion of its assets in cash and cash equivalents. During such 
periods, the Fund may not be able to achieve its investment 
objective. The Fund may also adopt a defensive strategy and hold a 
significant portion of its assets in cash and cash equivalents when 
the Manager or the Sub-Adviser believes securities, Debt and other 
instruments in which the Fund normally invests have elevated risks 
due to political or economic factors, heightened market volatility 
or in other extraordinary circumstances that do not constitute 
``Normal Market Conditions''. The Fund's investments in cash 
equivalents are described in greater detail in note 22 infra.
    \13\ As noted below, the Fund's fixed income security and Debt 
investments will satisfy specific diversification requirements set 
forth in the Fund's prospectus that are not included in Nasdaq Rule 
5735, including, without limitation, that each issuer of securities 
or borrower in respect to Debt have economic exposure to at least 
three countries. See infra ``Investment Restrictions.
    \14\ The ETFs in which the Fund may invest include Index Fund 
Shares (as described in Nasdaq Rule 5705(b)), Portfolio Depositary 
Receipts (as described in Nasdaq Rule 5705(a)), and Managed Fund 
Shares (as described in Nasdaq Rule 5735). The Fund will not invest 
in ETFs that are not registered as investment companies under the 
1940 Act. The ETFs held by the Fund will invest in fixed income 
securities, Debt, money-market instruments and other Principal 
Investments to which the Fund seeks exposure. All such ETFs will 
trade in markets that are members of the ISG or exchanges that are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange. The Fund will not invest in leveraged ETFs, inverse ETFs, 
or inverse leveraged ETFs. Other fixed-income funds have been 
approved to include ETFs in their 80% principal investment category. 
See, e.g., Securities Exchange Act Release No. 80946 (June 15, 
2017), 82 FR 28126 (June 20, 2017) (SR-NASDAQ-2017-039) (approving 
fund seeking to meet its investment objective of having at least 80% 
of assets invested in a portfolio of debt instruments in part 
through investments in ETFs that invest substantially all of their 
assets in such debt instruments).
    \15\ Derivatives will include: (i) Swaps and security-based 
swaps, futures, options, options on futures, and swaptions that are 
traded on an exchange, trading facility, swap execution facility or 
alternative trading system (``Exchange-Traded Derivatives'') (A) 
that is a member of the Intermarket Surveillance Group (``ISG''), 
which includes all U.S. national securities exchanges and most 
futures exchanges, (B) that is subject to a comprehensive 
surveillance sharing agreement with the Exchange, or (C) that is not 
an ISG member and with which the Exchange does not have a 
comprehensive surveillance sharing agreement; and (ii) swaps and 
security-based swaps, options, options on futures, swaptions, 
forwards and similar instruments that are traded in the over-the-
counter market and are either centrally cleared or cleared 
bilaterally (``OTC Derivatives''), as further described below. For 
the purposes of describing the scope of the Fund's potential 
investments in derivatives, the terms ``swaps'' and ``security-based 
swaps'' shall have the meanings set forth in the Commodity Exchange 
Act (``CEA''), as amended by The Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) 
(``Dodd-Frank''), and regulations thereunder, and references to 
swaps and forwards on foreign exchange or currencies shall include 
``foreign exchange forwards'' and ``foreign exchange swaps'', as 
such terms are defined in Sections 1a(24)-(25) of the CEA. The terms 
``exchange-traded'' and ``exchange-listed'', when used with respect 
to swaps and security-based swaps, shall include swaps and security-
based swaps that are executed on swap execution facilities and 
security-based swap execution facilities and cleared through 
regulated, central clearing facilities. The types of derivatives in 
which the Fund may invest and the reference assets for such 
derivatives are described in greater detail below. Exchange-Traded 
Derivatives and OTC Derivatives may reference Principal Investments 
and other investments. Those Exchange-Traded Derivatives and OTC 
Derivatives that reference Principal Investments will be treated as 
Principal Investments and those that do not will not be treated as 
Principal Investments. For purposes of the 80% Principal Investments 
measure, the Fund will value Exchange-Traded Derivatives and OTC 
Derivatives based on the mark-to-market value of such derivatives. 
This approach is consistent with the valuation methodology for asset 
coverage purposes in Rule 18f-4 under the 1940 Act proposed by the 
Commission. See Investment Company Act Release No. 31933 (December 
11, 2015); 80 FR 80884 (December 28, 2015) (the ``Derivatives Rule 
Proposing Release''); see also infra note 107. No more than 10% of 
the assets of the Fund will be invested in Exchange-Traded 
Derivatives and exchange-listed securities whose principal market is 
not a member of ISG or is a market with which the Exchange does not 
have a comprehensive surveillance sharing agreement.
    \16\ See also infra ``The Fund's Use of Derivatives.''
    \17\ Work Out Securities will generally be traded in the OTC 
market but may be listed on an exchange that may or may not be an 
ISG member. To the extent that the Work Out Securities are exchange-
listed, they will be subject to the 10% limit on the Fund's total 
assets that can be listed on a market that is not a member of ISG or 
a market with which the Exchange does not have a comprehensive 
surveillance sharing agreement. See infra ``Investment 
Restrictions.''
    \18\ See Nasdaq Rule 5735(b)(1)(B).
    \19\ Non-convertible preferred stock, such as that comprising 
the Non-Convertible Preferred Securities, provides holders with a 
fixed or variable distribution and a status upon bankruptcy of the 
issuer that is subordinated to debt holders but preferred over 
common shareholders. Non-Convertible Preferred Securities may be 
listed on either an ISG member exchange (or an exchange with which 
the Exchange has a comprehensive surveillance sharing agreement) or 
a non-ISG member exchange or be unlisted and trade in the over-the-
counter market. Non-Convertible Preferred Securities that are listed 
and traded on a non-ISG member exchange or on an exchange with which 
the Exchange does not have a comprehensive surveillance sharing 
agreement, together with all other exchange-listed securities and 
Exchange-Traded Derivatives held by the Fund that are listed on a 
non-ISG member exchange or exchange with which the Exchange does not 
have a comprehensive surveillance sharing agreement, are limited to 
10% of the Fund's total assets. See infra ``Investment 
Restrictions.''
    \20\ Warrants are equity securities that provide the holder with 
the right to purchase specified securities of the issuer of the 
warrants at a specified exercise price until the expiration date of 
the warrant. The Fund may hold warrants that provide the right to 
purchase fixed income securities or equity securities and expects 
that most of the warrants it holds will be attached to related fixed 
income securities. Warrants held by the Fund may be traded in the 
OTC market or may be listed on an exchange. Warrants that are listed 
on a non-ISG member exchange or an exchange with which the Exchange 
does not have a comprehensive surveillance sharing agreement, 
together with all other exchange-listed securities and Exchange-
Traded Derivatives held by the Fund that are listed on a non-ISG 
member exchange or exchange with which the Exchange does not have a 
comprehensive surveillance sharing agreement, are limited to 10% of 
the Fund's total assets. See infra ``Investment Restrictions.''
    \21\ The Fund's interests in Equity-Related Warrants are similar 
to the Fund's interest in Work Out Securities in that they reflect 
interests in equity securities that are held solely in connection 
with investments in fixed income securities.
    \22\ Cash equivalents consist of the following, all of which 
have maturities of less than 360 days: U.S. government securities; 
certificates of deposit issued against funds deposited in a bank or 
savings and loan association; bankers' acceptances (which are short-
term credit instruments used to finance commercial transactions); 
repurchase agreements and reverse repurchase agreements; and bank 
time deposits (which are monies kept on deposit with banks or 
savings and loan associations for a stated period of time at a fixed 
rate of interest). Cash equivalents also consist of money market 
funds registered under the 1940 Act and money market funds that are 
not registered under the 1940 Act but that comply with Rule 2a-7 
under the 1940 Act (together, ``Money Market Funds''), money market 
ETFs and commercial paper, which are short-term unsecured promissory 
notes, having maturities of 360 days or less. The Exchange notes 
that, while the Fund treats commercial paper having maturities of 
360 days or less as cash equivalents for the purposes of the 80% 
Principal Investments measure, the Fund will apply the definition of 
cash equivalents in Nasdaq Rule 5735(b)(1)(C) (which is limited to 
instruments with maturities of less than three months) for purposes 
of compliance with Nasdaq Rule 5735(b)(1) and will comply with the 
applicable requirements of Nasdaq Rule 5735(b)(1) with respect to 
all commercial paper held by the Fund. Investments in cash 
equivalents that are Money Market Funds will be made in accordance 
with Rule 12d1-1 under the 1940 Act.
    \23\ For purposes of this proposed rule change, Fixed-Income 
Related Warrants are treated as fixed income securities and not as 
Principal Investment Equities. Fixed-Income Related Warrants will be 
subject to and comply with the generic listing requirements for 
fixed income securities rather than the requirements applicable to 
equity securities.
    \24\ The Manager and Sub-Adviser will manage the Fund to ensure 
that the weight of Non-Convertible Preferred Securities, Equity-
Related Warrants and Work Out Securities (which are generally traded 
solely in the over-the-counter market) together does not exceed 15% 
of the Fund's assets.
---------------------------------------------------------------------------

    The Manager or Sub-Adviser (as applicable) may select from any of 
the following types of fixed income securities: (i) U.S. or foreign 
corporate debt securities, including notes, bonds, debentures, trust 
preferred securities, and commercial paper issued by corporations, 
trusts, limited partnerships, limited liability companies and other 
types of non-governmental legal entities; (ii) U.S. government 
securities, including obligations of, or guaranteed by, the U.S. 
government, its agencies or government-sponsored entities (other than 
MBS described below); (iii) sovereign debt securities, which include 
fixed income securities issued by governments, agencies or 
instrumentalities and their political subdivisions, securities issued 
by government-owned, controlled or sponsored entities, interests in 
entities organized and operated for the purpose of restructuring the 
investment instruments issued by such entities, Brady Bonds,\25\ and 
fixed income securities issued by supranational entities such as the 
World Bank; \26\ (iv) municipal securities, which include general 
obligation bonds, revenue bonds, housing authority bonds, private 
activity bonds, industrial development bonds, residual interest bonds, 
tender option bonds, tax and revenue anticipation notes, bond 
anticipation notes, tax-exempt commercial paper, municipal leases, 
participation certificates and custodial receipts; (v) zero coupon 
securities, which are securities that pay no interest during the life 
of the obligation but are issued at prices below their stated maturity 
value; (vi) pay-in-kind securities, which have a stated coupon, but the 
interest is generally paid in the form of obligations of the same type 
as the underlying pay-in-kind securities (e.g., bonds) rather than in 
cash; (vii) deferred interest securities, which are obligations that 
generally provide for a period of delay before the regular payment of 
interest begins and are issued at a significant discount from face 
value; (viii) U.S. or foreign structured notes and indexed securities, 
including securities that have demand, tender or put features, or 
interest rate reset features; (ix) U.S. or foreign inflation-indexed or 
inflation-protected securities, which are fixed income securities that 
are structured to provide protection against inflation and whose 
principal value or coupon is periodically adjusted according to the 
rate of inflation and which include, among others, treasury inflation 
protected securities; and (x) fixed income securities issued by 
securitization vehicles (``Securitized Products'').\27\ Securitized 
Products include: (A) U.S. or foreign mortgage-backed securities 
(``MBS''), which are securities that represent direct or indirect 
participations in, or are collateralized by and payable from, mortgage 
loans secured by real property and which may be issued or guaranteed by 
government-sponsored entities (``GSEs'') \28\ such as Fannie Mae 
(formally known as the Federal National Mortgage Association) or 
Freddie Mac (formally known as the Federal Home Loan Mortgage 
Corporation) or issued or guaranteed by agencies of the U.S. 
government, such as the Government National Mortgage Association 
(``Ginnie Mae''); \29\ (B) U.S. or foreign asset-

[[Page 55420]]

backed securities (``ABS'') \30\ and (C) U.S. or foreign collateralized 
debt obligations (``CDOs'').\31\
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    \25\ Brady Bonds are debt securities issued under the framework 
of the Brady Plan as a means for debtor nations to restructure their 
outstanding external indebtedness.
    \26\ A supranational entity is a bank, commission or company 
established or financially supported by the national government of 
one or more countries to promote reconstruction or development.
    \27\ As defined in Rule 6710(m) of the Financial Industry 
Regulatory Authority, Inc. (``FINRA''), the term Securitized Product 
means a security collateralized by any type of financial asset, such 
as a loan, a lease, a mortgage, or a secured or unsecured 
receivable, and includes but is not limited to an asset-backed 
security as defined in Section 3(a)(79)(A) of the Act, a synthetic 
asset-backed security, any residual tranche or interest of any 
security specified above, which tranche or interest is a fixed 
income security for purposes of FINRA Rule 6700 and paragraph (a) of 
FINRA Rule 6710. Consistent with the requirements applicable to 
other fixed income securities listed pursuant to this proposed rule 
change, Securitized Products are subject to limits set forth in 
Nasdaq Rule 5735(b)(1)(B)(i), (ii), (iii), (iv) and (v), except 
that, with respect to the Fund's investments in ABS/Private MBS (as 
defined below), the Fund will not comply with the 90% requirement in 
Nasdaq Rule 5735(b)(1)(B)(iv) and CDOs (as defined below) will not 
be subject to the limits set forth in Nasdaq Rule 5735(b)(1)(B)(v) 
but will be required to comply with the tests in Nasdaq Rule 
5735(b)(1)(B)(i)-(iv), including, without limitation, the 90% 
requirement in Nasdaq Rule 5735(b)(1)(B)(iv). Investments in CDOs 
will separately be subject to a limit of 10% of total assets of the 
Fund. In addition, the Fund's total investments in Securitized 
Products (including CDOs) will be subject to the restrictions 
applicable to all fixed income securities and Debt holdings of the 
Fund, including that: No more than 30% of the Debt and fixed income 
securities held by the Fund will be below investment grade, and no 
more than 25% of the total assets of the Fund will be invested in 
Debt or fixed income or equity securities of issuers in any one 
industry. See infra ``Investment Restrictions.''
    \28\ A ``GSE'' is a type of financial services corporation 
created by the United States Congress. GSEs include Fannie Mae and 
Freddie Mac but not Sallie Mae, which is no longer a government 
entity.
    \29\ MBS include collateralized mortgage obligations (``CMOs''), 
which are debt obligations collateralized by mortgage loans or 
mortgage pass-through securities. Typically, CMOs are collateralized 
by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but they may 
also be collateralized by whole loans or pass-through securities 
issued by private issuers (i.e., issuers other than U.S. government 
agencies or GSEs) (referred to as ``Private MBS''). Payments of 
principal and of interest on the mortgage-related instruments 
collateralizing the MBS, and any reinvestment income thereon, 
provide the funds to pay debt service on the CMOs. In a CMO, a 
series of bonds or certificates is issued in multiple classes. Each 
class of CMOs, often referred to as a ``tranche'' of securities, is 
issued at a specified fixed or floating coupon rate and has a stated 
maturity or final distribution date.
    \30\ As defined by FINRA Rule 6710(cc), ABS are Securitized 
Products in connection with which the securities issued, which may 
be issued by either a U.S. or a foreign entity, are collateralized 
by any type of financial asset, such as a consumer or student loan, 
a lease, or a secured or unsecured receivable. ABS exclude (per the 
FINRA definition, which is applicable for purposes of reporting and 
as used herein): (i) A Securitized Product that is backed by 
residential or commercial mortgage loans, mortgage-backed 
securities, or other financial assets derivative of mortgage-backed 
securities; (ii) a small business administration backed ABS traded 
``To Be Announced'' or in a specified pool transaction as defined in 
FINRA Rule 6710(x) and (iii) CDOs (as defined in note 31 infra). 
Consistent with the requirements of Nasdaq Rule 5735(b)(1)(B)(v), 
the Fund will limit investments in ABS and Private MBS (together, 
``ABS/Private MBS'') to 20% of the weight of the fixed income 
portion of the Fund's portfolio.
    \31\ For purposes of this proposed rule change, CDOs are 
excluded from the definition of ABS and, for purposes of this 
proposed rule change only, are comprised exclusively of 
collateralized loan obligations (``CLOs'') and collateralized bond 
obligations (``CBOs''). CLOs are securities issued by a trust or 
other special purpose entity that are collateralized by a pool of 
loans by U.S. banks and participations in loans by U.S. banks that 
are unsecured or secured by collateral other than real estate. CBOs 
are securities issued by a trust or other special purpose entity 
that are backed by a diversified pool of fixed income securities 
issued by U.S. or foreign governmental entities or fixed income 
securities issued by U.S. or corporate issuers. CDOs are 
distinguishable from ABS because they are collateralized by bank 
loans or by corporate or government fixed income securities and not 
by consumer, and other loans made by non-bank lenders, including 
student loans. For purposes of this proposed rule change, CDOs will 
not be subject to the 20% limit set forth in Nasdaq Rule 
5735(b)(1)(B)(v). However, the Exchange believes that the 10% limit 
on the Fund's holdings in CDOs will help to ensure that the Fund 
maintains a diversified portfolio and will mitigate the risk of 
manipulation. See infra ``Investment Restrictions.''
---------------------------------------------------------------------------

    The securities in which the Fund invests may pay fixed, variable or 
floating rates of interest or, in the case of instruments such as zero 
coupon bonds, do not pay current interest but are issued at a discount 
from their face values. Securitized Products in which the Fund will 
invest make periodic payments of interest and/or principal on 
underlying pools of mortgages, in the case of MBS, loans, leases and 
receivables other than real estate, in the case of ABS, and government 
and corporate bonds or non-real estate related loans, in the case of 
CDOs. The Fund may also invest in stripped Securitized Products, which 
represent the right to receive either payments of principal or payments 
of interest on real estate receivables. Interests in CDOs and ABS will 
not be stripped so as to provide the right to receive only payments of 
principal or payments of interest.
    Investments by the Fund in debt instruments that are not 
characterized as ``securities'' under applicable case law 
(``Debt''),\32\ are comprised primarily of the following: (i) U.S. or 
foreign loans made by banks and participations in such loans, loans 
made by commercial non-bank lenders and participations in such loans, 
loans made by governmental entities and participations in such loans 
and/or other extensions of credit, such as guarantees made by any of 
the foregoing lenders; and (ii) U.S. or foreign loans on real estate 
secured by mortgages and participations in such loans. Debt may be 
partially or fully secured by collateral supporting the payment of 
interest and principal, or unsecured and/or subordinated to other 
instruments.\33\ Debt may relate to financings for highly-leveraged 
borrowers.
---------------------------------------------------------------------------

    \32\ Although bank loans are included as ``fixed income 
securities'' for purposes of the ``generic'' listing requirements of 
Nasdaq Rule 5735(b)(1), the types of bank loans in which the Fund 
invests are not treated as ``securities'' under applicable case law 
and, as a result, the Fund intends to treat bank loans as Debt and 
not as fixed income securities. See, e.g., Banco Espanol de Credito 
et al. v. Security Pacific National Bank, 973 F.2d 51(2d Cir. 1992), 
cert. denied, 509 U.S. 903 (1993). Accordingly, the Fund will not 
seek to comply with the parameters on investments in fixed income 
securities under Nasdaq Rule 5735(b)(1)(B) with respect to the 
Fund's holdings in bank loans, but instead will comply with the 
alternative limitations applicable to Debt with respect to such 
holdings, as set forth herein. See infra ``Investment 
Restrictions.''
    \33\ As discussed infra in ``Investment Restrictions,'' at least 
75% of the Fund's investments fixed income securities (including 
convertible fixed income and preferred securities) and Debt 
(together constituting the fixed income weight of the portfolio) 
shall have a minimum principal amount outstanding of $100 million or 
more. In addition, consistent with the Fund's Registration 
Statement, the following diversification requirements will apply: 
During Normal Market Conditions, the Fund: (i) Will not invest more 
than 25% of its total assets in securities or Debt in any one 
foreign country, other than the United States, Canada, the United 
Kingdom, Japan, Australia and member countries of the European 
Union, or denominated in any one currency, other than the U.S. 
dollar, the Canadian dollar, the British pound, the yen, the 
Australian dollar, or the euro; and (ii) will have ``economic 
exposure'' to at least three countries. ``Economic exposure'' means 
that an issuer of a security or a borrower in respect to Debt: (A) 
Will have a class of securities whose principal securities market is 
in the country; (B) is organized under the laws of, or has a 
principal office in, the country; (iii) [sic] derives 50% or more of 
its total revenue or profit from goods produced, sales made or 
services provided in the country; or (D) maintains 50% of more of 
its assets in that country. In addition, no more than 30% of the 
Debt and fixed income securities held by the Fund, will be below 
investment grade (as defined infra in ``Investment Restrictions''); 
and (iii) [sic] no more than 25% of the total assets of the Fund 
will be invested in Debt or fixed income or equity securities of 
issuers in any one industry.
---------------------------------------------------------------------------

    With respect to fixed income securities, the Fund may invest in 
restricted instruments which are subject to resale restrictions that 
limit purchasers to qualified institutional buyers, as defined in Rule 
144A under the Securities Act of 1933, as amended (the ``Securities 
Act'') or to non-U.S. persons, within the meaning of Regulation S under 
the Securities Act.
    The Fund will use derivatives to (i) provide exposure to U.S. or 
foreign fixed income securities, Debt and other Principal Investments, 
(ii) risk manage the Fund's holdings,\34\ and/or (iii) enhance returns, 
such as through covered call strategies.\35\ The Fund will not use 
derivatives for the purpose of seeking leveraged returns or performance 
that is the multiple or inverse multiple of a benchmark. Derivatives 
that the Fund may enter into include: (i) Over-the-counter deliverable 
and non-deliverable foreign exchange forward contracts; (ii) exchange-
listed futures contracts on securities (including Treasury Securities 
\36\ and foreign government securities), Debt, commodities, securities-
, commodities-, or combined-asset-class-related indices, interest 
rates, financial rates and currencies; (iii) exchange-listed or over-
the-counter options or swaptions (i.e., options to enter into a swap) 
on securities, Debt, commodities, securities-, commodities-, or 
combined-asset-class-related indices, interest rates, financial rates, 
currencies and futures contracts; (iv) exchange-listed or over-the-
counter swaps (including total return swaps) on securities, Debt, 
commodities, securities-, commodities-, or combined-asset-class-related 
indices, interest rates, financial rates, and currencies; and (v) 
credit default swaps on single names, baskets and indices (both as 
protection seller and as protection buyer). As a result of the Fund's 
use of derivatives and to serve as collateral, the Fund may also hold 
significant amounts of Treasury Securities, cash and cash equivalents 
and, in the case of derivatives that are payable in a foreign currency, 
the

[[Page 55421]]

foreign currency in which the derivatives are payable.
---------------------------------------------------------------------------

    \34\ The risk management uses of derivatives will include 
managing (i) investment-related risks, (ii) risks due to 
fluctuations in securities prices, interest rates, or currency 
exchanges rates, (iii) risks due to the credit-worthiness of an 
issuer, and (iv) the effective duration of the Fund's portfolio.
    \35\ See also infra ``The Fund's Use of Derivatives.''
    \36\ The term ``Treasury Securities'' has the meaning set forth 
in Nasdaq Rule 5735(b)(1)(B).
---------------------------------------------------------------------------

    The Fund may, without limitation, enter into repurchase 
arrangements and borrowing and reverse repurchase arrangements, 
purchase and sale contracts, buybacks \37\ and dollar rolls \38\ and 
spot currency transactions. The Fund may also, subject to required 
margin and without limitation, purchase securities and other 
instruments under when-issued, delayed delivery, to be announced or 
forward commitment transactions, where the securities or instruments 
will not be delivered or paid for immediately.\39\ To the extent 
required under applicable federal securities laws (including the 1940 
Act), rules, and interpretations thereof, the Fund will ``set aside'' 
liquid assets or engage in other measures to ``cover'' open positions 
held in connection with the foregoing types of transactions, as well as 
derivative transactions.
---------------------------------------------------------------------------

    \37\ A buyback refers to a TBA transaction that incorporates a 
special feature for addressing a failure by the seller to deliver 
the mortgages promised under the contract. A buyback feature 
typically provides that, in the event a TBA seller fails to deliver 
the MBS that is the subject of the transaction to the TBA buyer on 
the scheduled settlement date, the TBA buyer will be entitled to 
close-out its payment obligations by either (i) selling the 
deliverable MBS back to the seller at a price established under the 
buyback or (ii) accepting assignment from the seller of its right to 
receive the specified MBS from the third-party entity that failed to 
deliver the MBS to the TBA seller.
    \38\ A dollar roll transaction is a simultaneous sale and 
purchase of an Agency Pass-Through Mortgage-Backed Security (as 
defined in FINRA Rule 6710(v), which is the only reference security 
for such transaction) for different settlement dates, where the 
initial seller agrees to take delivery, upon settlement of the re-
purchase transaction, of the same or substantially similar 
securities. See FINRA Rule 6710(z).
    \39\ FINRA Rule 4210 is scheduled to begin requiring broker-
dealers to impose margin requirements on investors in TBAs and 
certain other delayed delivery transactions beginning March 25, 
2019.
---------------------------------------------------------------------------

Other Investments
    Under Normal Market Conditions, the Fund will seek its investment 
objective by investing at least 80% of its assets in a portfolio of the 
Principal Investments. The Fund may invest its remaining assets 
exclusively in: (i) U.S. or foreign exchange-listed \40\ or over-the 
counter convertible fixed income and preferred securities; \41\ and 
(ii) OTC Derivatives and Exchange-Traded Derivatives for which the 
underlying reference asset is not a Principal Investment.\42\
---------------------------------------------------------------------------

    \40\ No more than 10% of the Fund's total assets will be 
invested in exchange-listed securities or Exchange-Traded 
Derivatives that are listed on an exchange that is not an ISG-member 
or an exchange with which the Exchange does not have a comprehensive 
surveillance sharing agreement. See infra ``Investment 
Restrictions.''
    \41\ The Fund's investment in U.S. or foreign fixed income or 
preferred securities would include contingent convertible 
securities, which are also referred to as ``CoCos.'' CoCos are fixed 
income instruments that are convertible into equity if a pre-
specified trigger event occurs. The type of event that causes a CoCo 
to be convertible occurs when capital of the issuer falls below a 
designated threshold. The Fund will limit investments in convertible 
securities to 20% of the Fund's assets under Normal Market 
Conditions.
    \42\ Investments in OTC Derivatives and Exchange-Traded 
Derivatives will also be subject to the limitations described in the 
``The Fund's Use of Derivatives'' section below. As is the case with 
respect to the Fund's investments in OTC Derivatives and Exchange-
Traded Derivatives for which the underlying reference asset is a 
Principal Investment, the Fund will invest in OTC Derivatives and 
Exchange-Traded Derivatives whose underlying reference asset is not 
a Principal Investment in order to (i) provide exposure to non-
Principal Investments instruments; (ii) to risk manage the Fund's 
holdings; and/or (iii) to enhance returns.
---------------------------------------------------------------------------

The Fund's Use of Derivatives
    The types of derivatives in which the Fund may invest and the 
reference assets for such derivatives are described in greater detail 
in ``Principal Investments'' and ``Other Investments'' above. Exchange-
Traded Derivatives will primarily be traded on exchanges that are ISG 
members or exchanges with which the Exchange has a comprehensive 
surveillance sharing agreement. The Fund may, however, invest up to 10% 
of the assets of the Fund in Exchange-Traded Derivatives and exchange-
listed, securities whose principal market is not a member of ISG or a 
market with which the Exchange has a comprehensive surveillance sharing 
agreement. For purposes of this 10% limit, the weight of such Exchange-
Traded Derivatives will be calculated based on the mark-to-market value 
of such Exchange-Traded Derivatives.
    The Fund will limit the weight of its investments in OTC 
Derivatives to 10% of the assets of the Fund, with the exception of 
Interest Rate Derivatives \43\ and Currency Derivatives \44\ (together, 
``Interest Rate and Currency Derivatives'') entered into with broker-
dealers, banks and other financial intermediaries. Investments in 
Interest Rate and Currency Derivatives (whether the instruments are 
Exchange-Traded Derivatives or OTC Derivatives) will not be subject to 
a limit. The Exchange believes that this exception, which is generally 
consistent with the requirement in a previous filing for the listing of 
an ETF approved by the Commission,\45\ is appropriate in light of the 
fact that Interest Rate and Currency Derivatives are among the most 
liquid investment instruments (including not only derivatives but also 
securities) in the market \46\ (and are even more liquid than most non-
government or government-guaranteed securities). Based on the data 
compiled by the Sub-Adviser in respect to its liquidity policy, these 
derivatives are among the most liquid investments traded. In addition, 
most Interest Rate Derivatives traded by the Fund are centrally cleared 
by regulated clearing firms, and Interest Rate and Currency Derivatives 
are

[[Page 55422]]

subject to trade reporting,\47\ and other robust regulation.\48\ Given 
the size of the trading market and the regulatory oversight of the 
markets, the Exchange believes that Interest Rate and Currency 
Derivatives are not readily subject to manipulation. The Exchange also 
believes that allowing the Fund to risk manage its portfolio through 
the use of Interest Rate and Currency Derivatives without limit is 
necessary to allow the Fund to achieve its investment objective and 
protect investors.
---------------------------------------------------------------------------

    \43\ ``Interest Rate Derivatives'' are comprised of interest 
rate swaps, swaptions (i.e., options on interest rate swaps), rate 
options and other similar derivatives, and may be Exchange-Traded 
Derivatives or OTC Derivatives. As reflected in statistics compiled 
by the Bank for International Settlements, as of June 30, 2017 there 
were approximately $416 trillion (notional amount) of total interest 
rate contracts outstanding in the over-the-counter markets alone. As 
reflected by the statistics, the market is wide, deep and liquid. 
See https://www.bis.org/statistics/d7.pdf (accessed November 2017). 
Interest Rate Derivatives may trade on trading platforms that are 
not ISG members or that are not subject to a comprehensive 
surveillance sharing agreement with the Exchange. Holdings in 
Exchange-Traded Derivatives (together with exchange-listed 
securities) that are listed on an exchange that is not an ISG member 
or on a market with which the Exchange does not have a comprehensive 
surveillance sharing agreement are limited to 10% of the Fund's 
assets.
    \44\ ``Currency Derivatives'' are comprised of deliverable 
forwards, which are agreements between the contracting parties to 
exchange a specified amount of currency at a specified future time 
at a specified rate, non-deliverable forwards, which are agreements 
to pay the difference between the exchange rates specified for two 
currencies at a future date, swaps and options on currencies, and 
similar currency or foreign exchange derivatives. As reflected in 
statistics compiled by the Bank for International Settlements, as of 
June 30, 2017 there were approximately $77 trillion (notional 
amount) of Currency Derivatives outstanding in the over-the-counter 
markets alone. As reflected by the statistics, the market is wide, 
deep and liquid. See https://www.bis.org/statistics/d6.pdf (accessed 
November 2017). Currency Derivatives may trade on trading platforms 
that are not ISG members or that are not subject to a comprehensive 
surveillance sharing agreement with the Exchange. Holdings in 
Exchange-Traded Derivatives (together with exchange-listed 
securities) that are listed on an exchange that is not an ISG member 
or on a market with which the Exchange does not have a comprehensive 
surveillance sharing agreement are limited to 10% of the Fund's 
assets.
    \45\ See Securities Exchange Act Release No. 80657 (May 11, 
2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (approving 
up to 50% of the fund's assets (calculated on the basis of aggregate 
gross notional value) to be invested in over-the-counter derivatives 
that are used to reduce currency, interest rate, or credit risk 
arising from the fund's investments, including forwards, over-the-
counter options, and over-the-counter swaps).
    \46\ Trading in foreign exchange markets averaged $5.1 trillion 
per day in April 2016, and 67% of this trading activity was in 
derivatives contracts such as currency or foreign exchange forwards, 
options and swaps (with the other 33% consisting of spot 
transactions). See Bank for International Settlements, Triennal 
[sic] Central Bank Survey, Foreign Exchange Turnover in April 2016, 
available at https://www.bis.org/publ/rpfx16fx.pdf (accessed November 
2017). Trading in OTC interest rate derivatives averaged $2.7 
trillion per day in April 2016. See Bank for International 
Settlements, Triennal [sic] Central Bank Survey, OTC Interest Rate 
Derivatives Turnover in April 2016, available at https://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017).
    \47\ Transactions in Interest Rate and Currency Derivatives are 
required to be reported to a swap data repository, and transactions 
in Interest Rate Derivatives and certain Currency Derivatives (i.e., 
Currency Derivatives that are not excluded from the definition of a 
``swap'', as described below) are also publicly reported pursuant to 
rules issued by the Commodity Futures Trading Commission (``CFTC''). 
See 17 CFR parts 43, 45 and 46. Pursuant to Section 1(a)(47)(E) of 
the CEA and a related determination by the Department of the 
Treasury, physically-settled Currency Derivatives that meet the 
definition of ``foreign exchange forwards'' or ``foreign exchange 
swaps'' under Sections 1a(24)-(25) of the CEA that are entered into 
between eligible contract participants (as defined in the CEA) 
(``Excluded Currency Derivatives'') are excluded from the definition 
of a ``swap'' under the CEA. See Determination of Foreign Exchange 
Swaps and Foreign Exchange Forwards Under the Commodity Exchange 
Act, 77 FR 69694 (Nov. 20, 2012). Transactions in such Excluded 
Currency Derivatives are required to be reported to a swap data 
repository, but they are not subject to the public reporting 
requirements.
    \48\ Interest Rate Derivatives and Currency Derivatives other 
than Excluded Currency Derivatives are comprehensively regulated as 
swaps under the CEA and regulations issued thereunder by the CFTC 
and other federal financial regulators. See, e.g., 17 CFR part 23 
(capital and margin requirements for swap dealers, business conduct 
standards for swap dealers, and swap documentation requirements); 17 
CFR part 50 (clearing requirements for swaps). While Excluded 
Currency Derivatives are not subject to all swap regulations, they 
are subject to the ``business conduct standards'' adopted by the 
CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; 
Determination of Foreign Exchange Swaps and Foreign Exchange 
Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 
2012).
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    For purposes of the 10% limit applicable generally to OTC 
Derivatives (other than Interest Rate and Currency Derivatives), the 
weight of such OTC Derivatives will be calculated based on the mark-to-
market value of such OTC Derivatives.\49\ The mark-to-market 
methodology is consistent with the methodology proposed by the SEC in 
proposed Rule 18f-4 for the purposes of asset coverage requirements 
\50\ and in keeping with disclosures regarding compliance with Section 
18 of the 1940 Act made by other registered investment companies and 
reviewed by the SEC staff for a number of years.\51\ In that regard, 
the SEC expressly noted in the Derivatives Rule Proposing Release that 
reliance on a mark-to-market valuation of a derivatives position for 
purposes of calculating the required coverage amount ``would generally 
correspond to the amount of the fund's liability with respect to the 
derivatives transaction'' and, therefore, be consistent with the 
appropriate valuation of the derivatives transaction.\52\ The mark-to-
market value is also the measure on which collateral posting is based 
under the Master Agreement published by the International Swaps and 
Derivatives Association, Inc. (``ISDA''), which is the predominant 
agreement used to trade derivatives.\53\ This value measures gain and 
loss to the Fund of the Fund's derivatives positions on a daily basis, 
as well as on a net basis across all transactions covered by a master 
netting agreement and, as a result, accurately reflects the actual 
economic exposure of the Fund to the counterparty on each derivative 
(as compared to notional amount, which may overstate or understate 
economic risk).
---------------------------------------------------------------------------

    \49\ The mark-to-market value reflects the Fund's actual 
delivery or payment obligation under the derivative. This measure 
differs from that referenced in Nasdaq Rule 5735(b)(1)(E), which 
bases its 20% limit of assets in the portfolio applicable for funds 
issuing Managed Fund Shares on the aggregate gross national value of 
the over-the-counter derivatives rather than on the mark-to-market 
value.
    \50\ See Derivatives Rule Proposing Release at 157-158; see also 
infra note 107.
    \51\ See Derivatives Rule Proposing Release at n.58, citing 
Comment Letter on SEC Concept Release (November 11, 2011) (File No. 
S7-33-11), Davis Polk & Wardwell LLP, available at https://www.sec.gov/comments/s7-33-11/s73311-49.pdf (``[F]und registration 
statements indicate that, in recent years, the Staff has not 
objected to the adoption by funds of policies that require 
segregation of the mark-to-market value, rather than the notional 
amount . . . [for asset segregation purposes].'').
    \52\ See Derivatives Rule Proposing Release at 157-158.
    \53\ The Credit Support Annex to the ISDA Master Agreement bases 
the collateral amount owed by a party to a derivatives contract, 
which is defined as a party's ``exposure,'' by reference to the 
replacement value of the party's net positions. Replacement value, 
which has the same meaning as ``mark-to-market'' value, is the 
amount owed by a party at a point in time determined based on the 
net termination payment due under the outstanding transaction.
---------------------------------------------------------------------------

    The Fund may choose not to make use of derivatives.
    Generally, derivatives are financial contracts whose value depends 
upon, or is derived from, the value of an underlying asset, reference 
rate or index, and may relate to stocks, bonds, interest rates, 
currencies or currency exchange rates, commodities, and related 
indexes. As described above, the Fund will use derivatives to (i) 
provide exposure to the Principal Investments, (ii) risk manage the 
Fund's holdings,\54\ and/or (iii) enhance returns, such as through 
covered call strategies. The Fund will not use derivatives for the 
purpose of seeking leveraged returns or performance that is the 
multiple or inverse multiple of a benchmark. The Fund will enter into 
derivatives only with counterparties that the Fund reasonably believes 
are financially and operationally able to perform the contract or 
instrument, and the Fund will collect collateral from the counterparty 
in accordance with credit considerations and margining requirements 
under applicable law.\55\
---------------------------------------------------------------------------

    \54\ The risk management uses of derivatives will include 
managing (i) investment-related risks, (ii) risks due to 
fluctuations in securities prices, interest rates, or currency 
exchanges rates, (iii) risks due to the credit-worthiness of an 
issuer, and (iv) the effective duration of the Fund's portfolio.
    \55\ The Fund will seek, where practicable, to trade with 
counterparties whose financial status is such that the risk of 
default is reduced. The Sub-Adviser will monitor the financial 
standing of counterparties on an ongoing basis. This monitoring may 
include reliance on information provided by credit agencies or of 
credit analysts employed by the Sub-Adviser. The analysis may 
include earnings updates, the counterparty's reputation, past 
experience with the dealer, market levels for the counterparty's 
debt and equity, credit default swap levels for the counterparty's 
debt, the liquidity provided by the counterparty and its share of 
market participation.
---------------------------------------------------------------------------

    Investments in derivative instruments will be made in accordance 
with the 1940 Act and consistent with the Fund's investment objective 
and policies. To limit the potential risk (including leveraging risk) 
associated with such transactions, the Fund will segregate or 
``earmark'' assets determined to be liquid by the Manager and/or the 
Sub-Adviser in accordance with procedures established by the Board and 
in accordance with the 1940 Act (or, as permitted by applicable 
regulation, enter into offsetting positions) to cover its obligations 
under derivative instruments. These procedures have been adopted 
consistent with Section 18 of the 1940 Act and related Commission 
guidance. In addition, the Fund will include appropriate risk 
disclosure in its offering documents, including leveraging risk. 
Leveraging risk is the risk that transactions of the Fund, including 
the Fund's use of derivatives, may give rise to additional leverage, 
causing the Fund to be more volatile than it would have if it had not 
been leveraged. Because the markets for securities or Debt, or the 
securities or Debt themselves, may be unavailable, cost prohibitive or 
tax-inefficient as compared to derivative instruments, suitable 
derivative transactions may be an efficient alternative for the Fund to 
obtain the desired asset exposure.
    The Manager and the Sub-Adviser believe that derivatives can be an 
economically attractive substitute for an underlying physical security 
or Debt that the Fund would otherwise

[[Page 55423]]

purchase. For example, the Fund could purchase futures contracts on 
Treasury Securities instead of investing directly in Treasury 
Securities or could sell credit default protection on a corporate bond 
instead of buying a physical bond. Economic benefits include 
potentially lower transactions costs, attractive relative valuation of 
a derivative versus a physical bond (e.g., differences in yields) or 
economic exposure without incurring transfer or similar taxes.
    The Manager and the Sub-Adviser further believe that derivatives 
can be used as a more liquid means of adjusting portfolio duration, as 
well as targeting specific areas of yield curve exposure, with 
potentially lower transaction costs than the underlying securities or 
Debt (e.g., interest rate swaps may have lower transaction costs than 
the physical bonds). Similarly, money market futures can be used to 
gain exposure to short-term interest rates in order to express views on 
anticipated changes in central bank policy rates. In addition, 
derivatives can be used to protect client assets through selectively 
hedging downside (or ``tail risks'') in the Fund.
    The Fund also can use derivatives to increase or decrease credit 
exposure. Index credit default swaps can be used to gain exposure to a 
basket of credit risk by ``selling protection'' against default or 
other credit events, or to hedge broad market credit risk by ``buying 
protection.'' Single name credit default swaps can be used to allow the 
Fund to increase or decrease exposure to specific issuers, saving 
investor capital through lower trading costs. The Fund can use total 
return swap contracts to obtain the total return of a reference asset 
or index in exchange for paying financing costs. A total return swap 
may be more efficient than buying underlying securities or Debt, 
potentially lowering transaction costs.
    The Fund expects to manage foreign currency exchange rate risk by 
entering into Currency Derivatives.
    The Sub-Adviser may use options strategies to meet the Fund's 
investment objectives. Option purchases and sales can also be used to 
hedge specific exposures in the portfolio and can provide access to 
return streams available to long-term investors such as the persistent 
difference between implied and realized volatility. Options strategies 
can generate income or improve execution prices (e.g., covered calls).
Investment Restrictions
    At least 75% of the Fund's investments in Debt and fixed income 
securities shall have a minimum principal amount outstanding of $100 
million or more. In addition, consistent with the Fund's Registration 
Statement, the following diversification requirements will apply: 
During Normal Market Conditions, the Fund: (i) Will not invest more 
than 25% of its total assets in securities or Debt in any one foreign 
country, other than the United States, Canada, the United Kingdom, 
Japan, Australia and member countries of the European Union, or 
denominated in any one currency, other than the U.S. dollar, the 
Canadian dollar, the British pound, the yen, the Australian dollar, or 
the euro; and (ii) will have ``economic exposure'' to at least three 
countries. ``Economic exposure'' means an issuer of a security or a 
borrower in respect to Debt: (A) Will have a class of securities whose 
principal securities market is in the country; (B) is organized under 
the laws of, or has a principal office in, the country; (iii) [sic] 
derives 50% or more of its total revenue or profit from goods produced, 
sales made or services provided in the country; or (D) maintains 50% of 
more of its assets in that country.
    The Fund may invest up to 15% of its assets in Non-Convertible 
Preferred Securities, Equity-Related Warrants and Work Out Securities. 
The Fund will not invest in equity securities other than Principal 
Investment Equities.\56\ Principal Investment Equities consist of (i) 
Non-Convertible Preferred Securities, Equity-Related Warrants and Work 
Out Securities, which are subject to the 15% limit noted above and (ii) 
shares of ETFs that provide exposure to fixed income securities, Debt 
or other Principal Investments, which are subject to no limits.
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    \56\ The convertible fixed income securities (including CoCos) 
and convertible preferred securities will comply with the tests set 
forth in Nasdaq Rule 5735(b)(1)(B) and will be limited to 20% of the 
total assets of the Fund. In addition, no more than 10% of such 
convertible fixed income and convertible preferred securities or 
Exchange Traded Derivatives on such securities, together with all 
other listed securities and Exchange Traded Derivatives in which the 
Fund will invest, will be traded on an exchange that is not an ISG 
member or an exchange with which the Exchange has comprehensive 
surveillance sharing agreement.
---------------------------------------------------------------------------

    While the Fund will invest principally in fixed income securities 
and Debt that are, at the time of purchase, investment grade, the Fund 
may invest up to 30% of its assets in below investment grade fixed 
income securities and Debt. For these purposes, ``investment grade'' is 
defined as investments with a rating at the time of purchase in one of 
the four highest rating categories of at least one nationally 
recognized statistical ratings organization (``NRSRO'') (e.g., BBB- or 
higher by S&P Global Ratings (``S&P''), and/or Fitch Ratings 
(``Fitch''), or Baa3 or higher by Moody's Investors Service, Inc. 
(``Moody's'')).\57\ Unrated fixed income securities or Debt may be 
considered investment grade if, at the time of purchase, and under 
Normal Market Conditions, the applicable Sub-Adviser determines that 
such securities are of comparable quality based on a fundamental credit 
analysis of the unrated security or Debt instrument and comparable 
NRSRO-rated securities.
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    \57\ For the avoidance of doubt, if a security or Debt is rated 
by multiple NRSROs and receives different ratings, the Fund will 
treat the security or Debt as being rated in the highest rating 
category received from any one NRSRO. If a security or Debt is not 
rated, the Fund may determine its rating by reference to other 
securities issued by the issuer or comparable NRSRO-rated 
securities.
---------------------------------------------------------------------------

    The Fund may invest in fixed income or equity securities and Debt 
issued by both U.S. and non-U.S. issuers (including issuers in emerging 
markets [sic]. Consistent with the Fund's Registration Statement, the 
following diversification requirements will apply: During Normal Market 
Conditions, the Fund: (i) Will not invest more than 25% of its total 
assets in securities or Debt in any one foreign country, other than the 
United States, Canada, the United Kingdom, Japan, Australia and member 
countries of the European Union, or denominated in any one currency, 
other than the U.S. dollar, the Canadian dollar, the British pound, the 
yen, the Australian dollar, or the euro; and (ii) will have ``economic 
exposure'' to at least three countries. ``Economic exposure'' means 
that an issuer of a security or a borrower in respect to Debt: (A) Will 
have a class of securities whose principal securities market is in the 
country; (B) is organized under the laws of, or has a principal office 
in, the country, (iii) [sic] derives 50% or more of its total revenue 
or profit from goods produced, sales made or services provided in the 
country, or (D) maintains 50% of more of its assets in that country. 
See infra ``Investment Restrictions.'' [sic]
    The Fund will not invest more than 20% of the fixed income portion 
of the Fund's portfolio \58\ in ABS/Private MBS or more than 10% of the 
Fund's total

[[Page 55424]]

assets in CDOs.\59\ The Fund will also not invest more than 20% of its 
total assets in Debt that is unsecured and subordinated.
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    \58\ The Exchange notes that the terms ``fixed income weight of 
the portfolio'' and ``weight of the fixed income portion of the 
portfolio'' are used synonymously in Nasdaq Rule 5735. For purposes 
of this proposed rule change, the ``fixed income weight of the 
Fund's portfolio'' includes all fixed income securities (including 
convertible fixed income and preferred securities, even though such 
instruments are not Principal Investments) and Debt held by the Fund 
and excludes equity securities (including ETFs), derivatives and 
cash and cash equivalents.
    \59\ As discussed above, CDOs would be excluded from the 20% 
limit on ABS/Private MBS but would be subject to a separate limit of 
10%, measured with respect to the total assets of the Fund. See 
supra note 31. The Exchange believes that the 10% limit on the 
Fund's holdings in CDOs will help to ensure that the Fund maintains 
a diversified portfolio and will mitigate the risk of manipulation.
---------------------------------------------------------------------------

    The Fund may not concentrate its investments (i.e., invest more 
than 25% of the value of its total assets) in Debt of borrowers in any 
one industry or in fixed income or equity securities of issuers in any 
one industry as provided in the Registration Statement.\60\ The Fund 
may hold up to an aggregate amount of 15% of its net assets in illiquid 
assets (calculated at the time of investment),\61\ including Rule 144A 
securities deemed illiquid by the Manager or the Sub-Adviser.\62\ The 
Fund will monitor its portfolio liquidity on an ongoing basis to 
determine whether, in light of current circumstances, an adequate level 
of liquidity is being maintained and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid securities or other illiquid assets. 
Illiquid securities and other illiquid assets include those subject to 
contractual or other restrictions on resale and other instruments or 
assets that lack readily available markets as determined in accordance 
with Commission staff guidance.\63\
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    \60\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975). For these purposes and as described 
above, Debt is comprised of loans that do not constitute securities 
(consistent with applicable case law) whereas fixed income 
securities would include loans and other fixed income instruments 
that are characterized as securities under applicable case law. See 
supra note 32.
    \61\ See Rule 22e-4(b)(1)(iv). ``No fund or In-Kind ETF may 
acquire any illiquid investment if, immediately after the 
acquisition, the fund or In-Kind ETF would have invested more than 
15% of its net assets in illiquid investments that are assets.'' 
(emphasis added)
    \62\ In reaching liquidity decisions, the Manager or Sub-Adviser 
(as applicable) may consider the following factors: The frequency of 
trades and quotes for the security; the number of dealers wishing to 
purchase or sell the security and the number of other potential 
purchasers; dealer undertakings to make a market in the security; 
and the nature of the security and the nature of the marketplace in 
which it trades (e.g., the time needed to dispose of the security, 
the method of soliciting offers and the mechanics of transfer).
    \63\ Long-standing Commission guidelines have required 
investment companies to hold no more than 15% of their net assets in 
illiquid securities and other illiquid assets. See Investment 
Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 
18, 2008), FN 34; see also Investment Company Act Release Nos. 5847 
(October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement 
Regarding ``Restricted Securities''); and 18612 (March 12, 1992), 57 
FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N-1A). The 
Commission also recently adopted Rule 22e-4 under the 1940 Act, 
which requires that each registered open-end management investment 
company, including ETFs but not including money market mutual funds, 
to establish a liquidity risk management program that includes 
limitations on illiquid investments. See Investment Company Act 
Release No. 32315 (October 13, 2016), 81 FR 82142 (November 18, 
2016). Under Rule 22e-4, a fund's portfolio security is illiquid if 
it cannot be sold or disposed of in current market conditions in 
seven calendar days or less without the sale or disposition 
significantly changing the market value of the investment. See 17 
CFR 270.22e-4(a)(8).
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    As noted in ``The Fund's Use of Derivatives,'' the Fund's 
investments in derivatives will be consistent with the Fund's 
investment objective and will not be used for the purpose of seeking 
leveraged returns or performance that is the multiple or inverse 
multiple of a benchmark (although derivatives have embedded leverage). 
Although the Fund will be permitted to borrow as permitted under the 
1940 Act, it will not be operated as a ``leveraged ETF,'' (i.e., it 
will not be operated in a manner designed to seek a multiple or inverse 
multiple of the performance of an underlying reference index). The Fund 
may engage in frequent and active trading of portfolio securities, 
Debt, and derivatives to achieve its investment objective.
    Under Normal Market Conditions, the Fund will satisfy the following 
requirements, on a continuous basis measured at the time of purchase: 
(i) Component fixed income securities and Debt that in the aggregate 
account for at least 75% of the fixed income weight of the Fund's 
portfolio each shall have a minimum original principal amount 
outstanding of $100 million or more; (ii) no fixed income security held 
in the portfolio (excluding Treasury Securities and GSE-sponsored 
securities) will represent more than 30% of the fixed income weight of 
the Fund's portfolio, and the five most heavily weighted portfolio 
securities (excluding Treasury Securities and GSE-sponsored securities) 
will not in the aggregate account for more than 65% of the fixed income 
weight of the Fund's portfolio; and (iii) the Fund's portfolio of fixed 
income securities (excluding exempted securities) will include a 
minimum of 13 non-affiliated issuers.\64\ Under Normal Market 
Conditions, the Fund will also satisfy the following requirements, on a 
continuous basis measured at the time of purchase: (x) At least 75% of 
the Fund's investments in fixed income securities issued by emerging 
market issuers shall have a minimum original principal amount 
outstanding of $200 million or more; and (y) at least 75% of the Fund's 
investments in Debt shall be in senior loans with an initial deal size 
of $100 million or greater.\65\
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    \64\ These requirements are consistent with the ``generic'' 
listing requirements under Nasdaq Rule 5735(b)(1)(B)(i)-(iii), which 
require: (i) For fixed income securities, that components that in 
the aggregate account for at least 75% of the fixed income weight of 
the portfolio each have a minimum principal amount outstanding of 
$100 million or more (see Nasdaq Rule 5735(b)(1)(B)(i)); (ii) for 
component fixed-income securities (excluding Treasury Securities and 
GSE-sponsored securities) that no component represent more than 30% 
of the fixed income weight of the portfolio (see Nasdaq Rule 
5735(b)(1)(B)(ii)); (iii) that the five most heavily weighted 
component fixed income securities in the portfolio (excluding 
Treasury Securities and GSE-sponsored securities) not in the 
aggregate account for more than 65% of the fixed income weight of 
the portfolio) (see Rule 5735(b)(1)(B)(ii)); and (iv) that an 
underlying portfolio (excluding exempted securities) that includes 
fixed income securities include a minimum of 13 non-affiliated 
issuers (see Nasdaq Rule 5735(b)(1)(B)(iii)). Nasdaq Rule 
5735(b)(1)(B)(iv) includes the following requirement: Component 
securities that in aggregate account for at least 90% of the fixed 
income weight of the portfolio must be either: (a) From issuers that 
are required to file reports pursuant to Sections 13 and 15(d) of 
the Act; (b) from issuers that have a worldwide market value of its 
outstanding common equity held by non-affiliates of $700 million or 
more; (c) from issuers that have outstanding securities that are 
notes, bonds, debentures, or evidence of indebtedness having a total 
remaining principal amount of at least $1 billion; (d) exempted 
securities as defined in Section 3(a)(12) of the Act; or (e) from 
issuers that are a government of a foreign country or a political 
subdivision of a foreign country. Nasdaq Rule 5735(b)(1)(B)(v) 
requires: non-agency, non-GSE and privately-issued mortgage-related 
and other asset-backed securities components of a portfolio shall 
not account, in the aggregate, for more than 20% of the weight of 
the fixed income portion of the portfolio.
    \65\ The Exchange notes that Nasdaq Rule 5735(b)(1)(F) provides 
that, to the extent that derivatives are used to gain exposure to 
individual fixed income securities or indexes of fixed income 
securities, the aggregate gross notional value of such exposure 
shall meet the criteria set forth in Nasdaq Rule 5735(b)(1)(B). The 
Exchange proposes, however, as further described below, that for the 
purposes of the requirements in this paragraph and any requirements 
under Nasdaq Rule 5735(b)(1), the Fund will use the mark-to-market 
value of its derivatives rather than gross notional value.
---------------------------------------------------------------------------

    Those exchange-listed securities and Exchange-Traded Derivatives 
held by the Fund that are listed and traded on a non-ISG member 
exchange or an exchange with which the Exchange does not have a 
comprehensive surveillance sharing agreement are limited to 10% of the 
Fund's assets.
    In addition, the Fund will impose the limits described in the 
following section, which describes differences between the ``generic'' 
listing requirements of Nasdaq Rule 5735(b)(1) and those applicable to 
the Fund.

[[Page 55425]]

Application of Generic Listing Requirements
    The Exchange is submitting this proposed rule change because the 
Fund will not meet all of the ``generic'' listing requirements of 
Nasdaq Rule 5735(b)(1). The Fund will meet all such requirements except 
the requirements described below,\66\ and the Exchange proposes that 
the Fund will comply with the alternative limits described below.
---------------------------------------------------------------------------

    \66\ The Exchange notes that, while the Fund treats commercial 
paper having maturities of 360 days or less as cash equivalents for 
the purposes of its 80% Principal Investments measure, the Fund will 
comply with the applicable requirements of Nasdaq Rule 5735(b)(1) 
with respect to all commercial paper held by the Fund. Further, in 
accordance with Nasdaq Rule 5735(b)(1)(B), to the extent that the 
Fund holds securities that are convertible into fixed income 
securities, the fixed income securities into which any such 
securities are converted shall meet the criteria of Nasdaq Rule 
5735(b)(1)(B) after converting.
---------------------------------------------------------------------------

    (i) The Fund will not comply with the requirements in Nasdaq Rule 
5735(b)(1) regarding the use of aggregate gross notional value of 
derivatives when calculating the weight of such derivatives or the 
exposure that such derivatives provide to underlying reference assets, 
including the requirements in Rules 5735(b)(1)(D)(i),\67\ 
5735(b)(1)(D)(ii),\68\ 5735(b)(1)(E) \69\ and 5735(b)(1)(F).\70\ 
Instead, the Exchange proposes that, except as otherwise provided 
herein, for the purposes of any applicable requirements under Nasdaq 
Rule 5735(b)(1), and any alternative requirements proposed by the 
Exchange, the Fund will use the mark-to-market value of its derivatives 
in calculating the weight of such derivatives or the exposure that such 
derivatives provide to their reference assets.\71\ The Exchange 
believes that this alternative requirement is appropriate because the 
mark-to-market value is a more accurate measurement of the actual 
exposure incurred by the Fund in connection with a derivatives 
position.\72\
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    \67\ Nasdaq Rule 5735(b)(1)(D)(i) provides that, at least 90% of 
the weight of a portfolio's holdings invested in futures, exchange-
traded options, and listed swaps shall, on both an initial and 
continuing basis, consist of futures, options and swaps for which 
the Exchange may obtain information via the ISG, from other members 
or affiliates of the ISG, or for which the principal market is a 
market with which the Exchange has a comprehensive surveillance 
sharing agreement; for the purposes of calculating this limitation, 
a portfolio's investment in such listed derivatives will be 
calculated as the aggregate gross notional value of the listed 
derivatives.
    \68\ Nasdaq Rule 5735(b)(1)(D)(ii) provides that, the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets shall not exceed 65% of the weight 
of the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset shall not exceed 30% of the weight 
of the portfolio (including gross notional exposures).
    \69\ Nasdaq Rule 5735(b)(1)(E) provides that, on both an initial 
and continuing basis, no more than 20% of the assets in the 
portfolio may be invested in over-the-counter derivatives, including 
forwards, options, and swaps on commodities, currencies and 
financial instruments (e.g., stocks, fixed income, interest rates, 
and volatility) or a basket or index of any of the foregoing; for 
purposes of calculating this limitation, the Fund's investment in 
OTC Derivatives will be calculated as the aggregate gross notional 
value of the OTC Derivatives.
    \70\ Nasdaq Rule 5735(b)(1)(F) provides that, to the extent that 
listed or over-the-counter derivatives are used to gain exposure to 
individual equities and/or fixed income securities, or to indexes of 
equities and/or indexes of fixed income securities, the aggregate 
gross notional value of such exposure shall meet the criteria set 
forth in Nasdaq Rules 5735(b)(1)(A) and 5735(b)(1)(B), respectively.
    \71\ Further, as described further below, the Exchange is 
proposing that the Fund will comply with alternative requirements 
rather than Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), and 
5735(b)(1)(E).
    \72\ See infra note 107.
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    (ii) The Fund will not comply with the requirement that securities 
comprising at least 90% of the fixed income weight of the Fund's 
portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) in 
respect to its investments in ABS/Private MBS.\73\ Instead, ABS/Private 
MBS will be limited to 20% of the weight of the fixed income portion of 
the Fund's portfolio.\74\ Other than ABS/Private MBS, which will not 
meet the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) but will be subject 
to the 20% limit on aggregate holdings in ABS/Private MBS, all fixed 
income securities held by the Fund (which, for purposes of this 
proposed rule change, include convertible fixed income and preferred 
securities (including CoCos)) will satisfy this 90% requirement. As a 
result, other than ABS/Private MBS, which will not satisfy the 90% 
requirement, and CDOs, which will be excluded from the requirement in 
Nasdaq Rule 5735(b)(1)(B)(v) and, instead, be limited to 10% of the 
total assets of the Fund, all fixed income securities held by the Fund 
will comply with all of the requirements of Nasdaq Rule 
5735(b)(1)(B)(i)-(v). The Exchange believes that this exception is 
appropriate for the reasons stated below in this proposed rule 
change.\75\
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    \73\ Nasdaq Rule 5735(b)(1)(B)(iv) provides that, component 
securities that in the aggregate account for at least 90% of the 
fixed income weight of the portfolio must be either: (a) From 
issuers that are required to file reports pursuant to Sections 13 
and 15(d) of the Act; (b) from issuers that have a worldwide market 
value of its outstanding common equity held by non-affiliates of 
$700 million or more; (c) from issuers that have outstanding 
securities that are notes, bonds debentures, or evidence of 
indebtedness having a total remaining principal amount of at least 
$1 billion; (d) exempted securities as defined in Section 3(a)(12) 
of the Act; or (e) from issuers that are a government of a foreign 
country or a political subdivision of a foreign country.
    \74\ ABS/Private MBS are generally issued by special purpose 
vehicles, so the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) regarding 
an issuer's market capitalization and the remaining principal amount 
of an issuer's securities are typically unavailable with respect to 
ABS/Private MBS, even though such ABS/Private MBS may own 
significant assets.
    \75\ See infra ``Statutory Basis.''
---------------------------------------------------------------------------

    (iii) The Exchange has classified bank loans as Debt for purposes 
of this proposed rule change and not as ``fixed income securities'' as 
they are classified in Nasdaq Rule 5735(b)(1)(B). As a result, the 
Fund's investments in bank loans will comply with the limitations or 
restrictions applicable to the Fund's investments in Debt as set forth 
herein with respect to such holdings and not with the restrictions for 
fixed income securities set forth in Nasdaq Rule 5735(b)(1)(B)(i)-
(v).\76\ The Exchange believes that this exception is appropriate for 
the reasons stated below in this proposed rule change.\77\
---------------------------------------------------------------------------

    \76\ For a listing of such restrictions, see supra ``Investment 
Restrictions.''
    \77\ See infra ``Statutory Basis.''
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    (iv) The Fund will not comply with the equity requirements in 
Nasdaq Rules 5735(b)(1)(A)(i) \78\ and

[[Page 55426]]

5735(b)(1)(A)(ii) \79\ with respect to the Fund's investment in Non-
Convertible Preferred Securities, Work Out Securities, and 
warrants.\80\ Instead, the Exchange proposes that (i) the Fund's 
investments in convertible fixed income and preferred securities shall 
be limited to 20% of the Fund's portfolio; and (ii) the weight of Non-
Convertible Preferred Securities, Work Out Securities and Equity-
Related Warrants in the Fund's portfolio shall together not exceed 15% 
of the Fund's assets. The Exchange believes that these alternative 
limitations are appropriate in light of the fact that the Non-
Convertible Preferred Securities, Equity Related Warrants and Work Out 
Securities are providing debt-oriented exposures or are received in 
connection with the Fund's previous investment in Debt or fixed income 
securities, and all of the other equity securities held by the Fund 
will comply with the requirements of Nasdaq Rule 5735(b)(1)(A).\81\
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    \78\ Nasdaq Rule 5735(b)(1)(A)(i) provides that, the components 
stocks of the equity portion of a portfolio that are U.S. Component 
Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the 
following criteria initially and on a continuing basis: (a) 
Component stocks (excluding Exchange Traded Derivative Securities 
and Linked Securities, as such terms are defined in Nasdaq Rules 
5735(c)(6) and 5710, respectively) that in the aggregate account for 
at least 90% of the equity weight of the portfolio (excluding such 
Exchange Traded Derivative Securities and Linked Securities, as such 
terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) 
each shall have a minimum market value of at least $75 million; (b) 
Component stocks (excluding Exchange Traded Derivative Securities 
and Linked Securities, as such terms are defined in Nasdaq Rules 
5735(c)(6) and 5710, respectively) that in the aggregate account for 
at least 70% of the equity weight of the portfolio (excluding such 
Exchange Traded Derivative Securities and Linked Securities, as such 
terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) 
each shall have a minimum monthly trading volume of 250,000 shares, 
or minimum notional volume traded per month of $25,000,000, averaged 
over the last six months; (c) The most heavily weighted component 
stock (excluding Exchange Traded Derivative Securities and Linked 
Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 
5710, respectively) shall not exceed 30% of the equity weight of the 
portfolio, and, to the extent applicable, the five most heavily 
weighted component stocks (excluding Exchange Traded Derivative 
Securities and Linked Securities, as such terms are defined in 
Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 65% 
of the equity weight of the portfolio; (d) Where the equity portion 
of the portfolio does not include Non-U.S. Component Stocks, the 
equity portion of the portfolio shall include a minimum of 13 
component stocks; provided, however, that there shall be no minimum 
number of component stocks if (i) one or more series of Exchange 
Traded Derivative Securities or Linked Securities, as such terms are 
defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, 
constitute, at least in part, components underlying a series of 
Managed Fund Shares (as defined in Nasdaq Rule 5735), or (ii) one or 
more series of Exchange Traded Derivative Securities or Linked 
Securities, as such terms are defined in Nasdaq Rule 5735(c)(6) and 
5710, respectively, account for 100% of the equity weight of the 
portfolio of a series of Managed Fund Shares; (e) except as 
otherwise provided, equity securities in the portfolio shall be U.S. 
Component Stocks listed on a national securities exchange and shall 
be NMS Stocks as defined in Rule 600 of Regulation NMS under the 
Act; and (f) American Depositary Receipts (``ADRs'') in a portfolio 
may be exchange-traded or non-exchange-traded; however, no more than 
10% of the equity weight of a portfolio shall consist of non-
exchange-traded ADRs.
    \79\ Nasdaq Rule 5735(b)(1)(A)(ii) provides that, the component 
stocks of the equity portion of a portfolio that are Non-U.S. 
Component Stocks (as such term is defined in Nasdaq Rule 5705) shall 
meet the following criteria initially and on a continuing basis: (a) 
Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 
5705) each shall have a minimum market value of at least $100 
million; (b) Non-U.S. Component Stocks (as such term is defined in 
Nasdaq Rule 5705) each shall have a minimum global monthly trading 
volume of 250,000 shares, or minimum global notional volume traded 
per month of $25,000,000, averaged over the last six months; (c) The 
most heavily weighted Non-U.S. Component Stock (as such term is 
defined in Nasdaq Rule 5705) shall not exceed 25% of the equity 
weight of the portfolio, and, to the extent applicable, the five 
most heavily weighted Non-U.S. Component Stocks (as such term is 
defined in Nasdaq Rule 5705) shall not exceed 60% of the equity 
weight of the portfolio; (d) Where the equity portion of the 
portfolio includes Non-U.S. Component Stocks (as such term is 
defined in Nasdaq Rule 5705), the equity portion of the portfolio 
shall include a minimum of 20 component stocks; provided, however, 
that there shall be no minimum number of component stocks if (i) one 
or more series of Exchange Traded Derivative Securities or Linked 
Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 
5710, respectively, constitute, at least in part, components 
underlying a series of Managed Fund Shares, or (ii) one or more 
series of Exchange Traded Derivative Securities or Linked 
Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 
5710, respectively, account for 100% of the equity weight of the 
portfolio of a series of Managed Fund Shares; and (e) Each Non-U.S. 
Component Stock (as such term is defined in Nasdaq Rule 5705) shall 
be listed and traded on an exchange that has last-sale reporting.
    \80\ As noted above, convertible fixed income securities 
(including CoCos) and convertible preferred securities are treated 
as fixed income securities for purposes of this proposed rule 
change. See supra section (ii).
    \81\ Other equities consist of ETFs (including money market 
ETFs) that provide exposure to fixed income securities, Debt and 
other Principal Investments. The weight of such ETFs in the Fund's 
portfolio shall not be limited. As noted above, Fixed-Income Related 
Warrants are treated as fixed income securities for purposes of this 
proposed rule change and will be subject to and comply with the 
generic listing requirements for fixed-income securities, rather 
than the generic listing requirements for equity securities. See 
supra note 23.
---------------------------------------------------------------------------

    (v) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(E) that no more than 20% of the assets in the Fund's 
portfolio may be invested in over-the-counter derivatives. Instead, the 
Exchange proposes that there shall be no limit on the Fund's investment 
in Interest Rate and Currency Derivatives, and the weight of all OTC 
Derivatives other than Interest Rate and Currency Derivatives shall not 
exceed 10% of the Fund's assets. For purposes of this 10% limit on OTC 
Derivatives, the weight of such OTC Derivatives will be calculated 
based on the mark-to-market value of such OTC Derivatives. The Exchange 
believes that this exception for Interest Rate and Currency Derivatives 
is appropriate for the reasons stated below in this proposed rule 
change.\82\
---------------------------------------------------------------------------

    \82\ See infra notes 114-117 and accompanying text.
---------------------------------------------------------------------------

    (vi) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(i) that at least 90% of the weight of the Fund's holdings 
in futures, exchange-traded options, and listed swaps shall, on both an 
initial and continuing basis, consist of futures, options and swaps for 
which the Exchange may obtain information via the ISG from other 
members or affiliates of the ISG, or for which the principal market is 
a market with which the Exchange has a comprehensive surveillance 
sharing agreement. Instead, the Exchange proposes that no more than 10% 
of the assets of the Fund will be invested in Exchange-Traded 
Derivatives and exchange-listed securities whose principal market is 
not a member of ISG or is a market with which the Exchange does not 
have a comprehensive surveillance sharing agreement. For purposes of 
this 10% limit, the weight of such Exchange-Traded Derivatives will be 
calculated based on the mark-to-market value of such Exchange-Traded 
Derivatives. The Exchange believes that this exception is appropriate 
for the reasons stated below in this proposed rule change.\83\
---------------------------------------------------------------------------

    \83\ See infra ``Statutory Basis.''
---------------------------------------------------------------------------

    (vii) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(ii) that the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets 
shall not exceed 65% of the weight of the Fund's portfolio (including 
gross notional exposures), and the aggregate gross notional value of 
listed derivatives based on any single underlying reference asset shall 
not exceed 30% of the weight of the Fund's portfolio (including gross 
notional exposures). Instead, the Exchange proposes that the Fund will 
comply with the concentration requirements in Nasdaq Rule 
5735(b)(1)(D)(ii) except with respect to the Fund's investment in 
futures and options (including options on futures) referencing 
eurodollars and sovereign debt issued by the United States (i.e., 
Treasury Securities) and other ``Group of Seven'' countries \84\ where 
such futures and options contracts are listed on an exchange that is an 
ISG member or an exchange with which the Exchange has a comprehensive 
surveillance sharing agreement (``Eurodollar and G-7 Sovereign Futures 
and Options''). The Fund may maintain significant positions in 
Eurodollar and G-7 Sovereign Futures and Options, and such investments 
will not be subject to the concentration limits provided in Nasdaq Rule 
5735(b)(1)(D)(ii). For purposes of this requirement, the weight of the 
applicable Exchange-Traded Derivatives will be calculated based on the 
mark-to-market value of such Exchange-Traded Derivatives. The Exchange 
believes that this exception is appropriate for the reasons stated 
below in this proposed rule change.\85\
---------------------------------------------------------------------------

    \84\ The ``Group of Seven'' or G-7 countries consist of the 
United States, Canada, France, Germany, Italy, Japan and the United 
Kingdom.
    \85\ See infra note 118 and accompanying text.
---------------------------------------------------------------------------

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

[[Page 55427]]

actively-managed ETFs.\86\ In addition, the Fund will be well 
diversified. For these reasons, the Exchange believes that it is 
appropriate and in the public interest to approve listing and trading 
of Shares of the Fund on the Exchange.
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    \86\ See, e.g., Securities Exchange Act Release Nos. 76719 
(December 21, 2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca-
2015-73) (granting approval for the listing of shares of the 
Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 
6850 (February 9, 2012) (SR-NYSEArca-2011-95) (granting approval for 
the listing of shares of the PIMCO Total Return Exchange Traded Fund 
(now known as the PIMCO Active Bond Exchange-Traded Fund)); and 
72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-
2013-122) (granting approval to the use of derivatives by the PIMCO 
Total Return Exchange Traded Fund). The investments of the 
Guggenheim Total Return Bond ETF include a wide variety of U.S. and 
foreign fixed income instruments (including Private ABS/MBS), 
preferred securities, cash equivalents, other ETFs and listed and 
over-the-counter derivatives and are managed in a manner that 
appears to be generally consistent with that proposed for the Fund. 
Consistent with the requests made in this proposed rule change, the 
Commission's approval of the listing of shares of the Guggenheim 
Total Return Bond ETF did not include many of the conditions imposed 
by the generic listing standards under Nasdaq Rule 5735; the 
Commission's approval did not impose limits regarding the total 
notional size of the ETF's investment in over-the-counter 
derivatives, did not impose concentration limits on the ETF's 
investment in listed derivatives and did not require compliance with 
the same criteria as the fixed income criteria in Nasdaq Rule 
5735(b)(1)(B). The order approving investments in derivatives by the 
PIMCO Total Return Exchange Traded Fund described investments in 
both over-the-counter and listed derivatives, but did not impose 
limits regarding the total notional size of the ETF's investments in 
over-the-counter derivatives, did not impose concentration limits on 
the ETF's investments in listed derivatives, and did not impose 
limitations on investments in listed derivatives whose principal 
market is not a member of ISG or is a market with which its listing 
exchange does not have a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    As further described in ``Statutory Basis,'' deviations from the 
generic requirements are necessary for the Fund to achieve its 
investment objective and efficiently manage the risks associated with 
its investments, and any possible risks have been fully mitigated and 
addressed through the alternative limits proposed by the Exchange. In 
addition, many of the changes requested are generally consistent with 
previous filings approved by the Commission.\87\
---------------------------------------------------------------------------

    \87\ See, e.g., Securities Exchange Act Release Nos. 80657 (May 
11, 2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) 
(approving up to 50% of the fund's assets (calculated on the basis 
of aggregate gross notional value) to be invested in over-the-
counter derivatives that are used to reduce currency, interest rate, 
or credit risk arising from the fund's investments, including 
forwards, over-the-counter options, and over-the-counter swaps); 
78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR-NASDAQ-
2016-061) (approving investment of up to 20% of the fund's assets 
in, among other things, non-exchange-traded equity securities 
acquired in conjunction with the fund's event-driven strategy, 
including securities acquired by the fund as a result of certain 
corporate events including reorganizations); 76719 (December 21, 
2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca-2015-73) 
(permitting (i) investments in over-the-counter and listed 
derivatives without imposing limits on the total notional size of 
the ETF's investments in over-the-counter derivatives and without 
imposing concentration limits on the ETF's investments in listed 
derivatives and (ii) permitting investments in a wide variety of 
fixed income instruments without compliance with the same criteria 
as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B)); and 
72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-
2013-122) (permitting investments in both over-the-counter and 
listed derivatives, but without imposing limits regarding the total 
notional size of the ETF's investments in over-the-counter 
derivatives, without imposing concentration limits on the ETF's 
investments in listed derivatives, and without imposing limitations 
on investments in listed derivatives whose principal market is not a 
member of ISG or is a market with which its listing exchange does 
not have a comprehensive surveillance sharing agreement); and 69061 
(March 7, 2013), 78 FR 15990 (March 13, 2013) (SR-NYSEArca-2013-01) 
(approving investments in non-agency commercial MBS and non-agency 
residential MBS without a fixed limit but consistent with the fund's 
objective of investing up to 80% of its assets in investment grade 
fixed-income securities).
---------------------------------------------------------------------------

Net Asset Value
    The Fund's administrator will calculate the Fund's net asset value 
(``NAV'') per Share as of the close of regular trading (normally 4:00 
p.m., Eastern time (``E.T.'')) on each day the New York Stock Exchange 
is open for business. NAV per Share will be calculated for the Fund by 
taking the value of the Fund's total assets, including interest or 
dividends accrued but not yet collected, less all liabilities, and 
dividing such amount by the total number of Shares outstanding. The 
result, rounded to the nearest cent, will be the NAV per Share 
(although creations and redemptions will be processed using a price 
denominated to the fifth decimal point, meaning that rounding to the 
nearest cent may result in different prices in certain circumstances).
Impact on Arbitrage Mechanism
    The Manager and the Sub-Adviser believe there will be minimal, if 
any, impact on the arbitrage mechanism for the Fund as a result of its 
use of derivatives. The Manager and the Sub-Adviser understand that 
market makers and other market participants should be able to value 
derivatives held by the Fund as long as the Fund's positions are 
disclosed. The Manager and the Sub-Adviser believe that the price at 
which Shares trade will continue to be disciplined by arbitrage 
opportunities created by the ability for authorized participants 
(``APs'') to purchase or redeem creation Shares at their NAV, which 
should ensure that Shares will not trade at a material discount or 
premium in relation to their NAV.
    The Manager and the Sub-Adviser do not believe that there will be 
any significant impact on the settlement or operational aspects of the 
Fund's arbitrage mechanism due to the use of derivatives. Because 
derivatives generally are not eligible for in-kind transfer, they will 
typically be substituted with a ``cash in lieu'' amount when the Fund 
processes purchases or redemptions of creation units in-kind.
Creation and Redemption of Shares
    The Fund will issue Shares of the Fund at NAV only to APs and only 
in aggregations of at least 50,000 shares (each aggregation is called a 
``Creation Unit'') or multiples thereof, on a continuous basis through 
the Distributor, without a sales load, at the NAV next determined after 
receipt, on any Business Day, of an order in proper form. A ``Business 
Day'' is defined as any day that the Trust is open for business, 
including as required by Section 22(e) of the 1940 Act.
    Although the Fund reserves the right to issue Creation Units on a 
partial or fully ``in kind'' basis, the Fund expects that it will 
primarily issue Creation Units solely for cash. As a result, APs 
seeking to purchase Creation Units will generally be required to 
transfer to the Fund cash in an amount equal to the value of the 
Creation Unit(s) purchased and the applicable transaction fee. To the 
extent that the Fund elects to issue Creation Units on an ``in-kind'' 
basis, the applicable AP will be required to deposit with the Fund a 
designated portfolio of securities and/or instruments (the ``Deposit 
Securities'') that will conform pro rata to the holdings of the Fund 
(except in the circumstances described in the Fund's Statement of 
Additional Information (the ``SAI'')) and/or an amount of cash. If 
there is a difference between the NAV attributable to a Creation Unit 
and the aggregate market value of the Deposit Securities or Redemption 
Securities (defined below) exchanged for the Creation Unit, the party 
conveying the instruments with the lower value will pay to the other an 
amount in cash equal to that difference (the ``Cash Component''). 
Together, the Deposit Securities and the Cash Component will constitute 
the ``Fund Deposit,'' which will represent the minimum initial and 
subsequent investment amount for a Creation Unit of the Fund.
    The Fund also expects to effect redemptions of Creation Units 
primarily on a cash basis, although it reserves the right to effect 
redemption on a partial or wholly ``in-kind'' basis. In connection with 
a cash redemption, the AP will be

[[Page 55428]]

required to transfer to the Fund, Creation Units and cash equal to the 
transaction fee. To the extent that the Fund elects to utilize an ``in-
kind'' redemption, it will deliver to the redeeming AP, in exchange for 
a Creation Unit, securities and/or instruments that will conform pro 
rata to the holdings of the Fund (``Redemption Securities'') plus the 
Cash Component.
    To be eligible to place orders with respect to creations and 
redemptions of Creation Units, an entity must have executed an 
agreement with the Distributor, subject to acceptance by the transfer 
agent, with respect to creations and redemptions of Creation Units. 
Each such entity (an AP) must be (i) a broker-dealer or other 
participant in the clearing process through the continuous net 
settlement system of the National Securities Clearing Corporation 
(``NSCC'') or (ii) a Depository Trust Company participant.
    When the Fund permits Creation Units to be issued principally or 
partially in-kind, the Fund will cause to be published, through the 
NSCC, on each Business Day, at or before 9:00 a.m. E.T., the identity 
and the required principal amount or number of each Deposit Security 
and the amount of the Cash Component (if any) to be included in the 
current Fund Deposit (based on information at the end of the previous 
Business Day).
    All orders to create Creation Units must be received by the 
Distributor within a one-hour window from 9:00 a.m. E.T. to 10:00 a.m. 
E.T. on a given Business Day in order to receive the NAV determined on 
the Business Day on which the order was placed.
    Shares may be redeemed only in Creation Units at their NAV next 
determined after receipt of a redemption request in proper form on a 
Business Day and only through an AP. The Fund will not redeem Shares in 
amounts less than a Creation Unit unless the Fund is being liquidated.
    When the Fund permits Creation Units to be redeemed principally or 
partially in-kind, the Fund will cause to be published, through the 
NSCC, at or before 9:00 a.m. E.T. on each Business Day, the identity of 
the Redemption Securities and/or an amount of cash that will be 
applicable to redemption requests received in proper form on that day. 
The Redemption Securities will be identical to the Deposit Securities.
    In order to redeem Creation Units of the Fund, an AP must submit an 
order to redeem for one or more Creation Units. All such orders must be 
received by the Distributor within a one-hour window from 9:00 a.m. 
E.T. to 10:00 a.m. E.T. on a given Business Day in order to receive the 
NAV determined on the Business Day on which the order was placed.
Availability of Information
    The Fund's website (www.leggmason.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The website will 
include the Shares' ticker, CUSIP and exchange information, along with 
additional quantitative information updated on a daily basis, 
including, for the Fund: (1) The prior Business Day's NAV per share and 
the market closing price or mid-point of the bid/ask spread at the time 
of calculation of such NAV per share (the ``Bid/Ask Price''),\88\ and a 
calculation of the premium or discount of the market closing price or 
Bid/Ask Price against such NAV per share; and (2) a table showing the 
number of days of such premium or discount for the most recently 
completed calendar year, and the most recently completed calendar 
quarters since that year (or the life of Fund, if shorter).
---------------------------------------------------------------------------

    \88\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
---------------------------------------------------------------------------

    On each Business Day, before commencement of trading in Shares in 
the Regular Market Session \89\ on the Exchange, the Fund will disclose 
on its website the identities and quantities of the portfolio of 
securities and other assets (the ``Disclosed Portfolio'' as defined in 
Nasdaq Rule 5735(c)(2)) held by the Fund that will form the basis for 
the Fund's calculation of NAV at the end of the Business Day.\90\ The 
Fund's disclosure of derivative positions in the Disclosed Portfolio 
will include sufficient information for market participants to use to 
value these positions intraday. On a daily basis, the Fund will 
disclose on the Fund's website the following information regarding each 
portfolio holding, as applicable to the type of holding: Ticker symbol, 
CUSIP number or other identifier, if any; a description of the holding 
(including the type of holding), the identity of the security or other 
asset or instrument underlying the holding, if any; for options, the 
option strike price; quantity held (as measured by, for example, par 
value, notional value or number of shares, contracts or units); 
maturity date, if any; coupon rate, if any; effective date, if any; 
market value of the holding; and percentage weighting of the holding in 
the Fund's portfolio.\91\ The website information will be publicly 
available at no charge.
---------------------------------------------------------------------------

    \89\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 
4:15 p.m., E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 
p.m. to 8 p.m., E.T.).
    \90\ Under accounting procedures to be followed by the Fund, 
trades made on the prior Business Day (``T'') will be booked and 
reflected in NAV on the current Business Day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the Business 
Day the portfolio that will form the basis for the NAV calculation 
at the end of the Business Day.
    \91\ See Nasdaq Rule 5735(c)(2).
---------------------------------------------------------------------------

    In addition, for the Fund, an estimated value, defined in Rule 
5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's Disclosed Portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value, available on the 
Nasdaq Information LLC proprietary index data service,\92\ will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated by one or more 
major market data vendor and broadly displayed at least every 15 
seconds during the Regular Market Session. The Intraday Indicative 
Value will be based on quotes and closing prices provided by a dealer 
who makes a market in those instruments. Premiums and discounts between 
the Intraday Indicative Value and the market price may occur. This 
should not be viewed as a ``real time'' update of the NAV per Share of 
the Fund, which is calculated only once a day.
---------------------------------------------------------------------------

    \92\ Currently, the Nasdaq Global Index Data Service (``GIDS'') 
is the Nasdaq global index data feed service, offering real-time 
updates, daily summary messages, and access to widely followed 
indexes and Intraday Indicative Values for ETFs. GIDS provides 
investment professionals with the daily information needed to track 
or trade Nasdaq indexes, listed ETFs, or third-party partner indexes 
and ETFs.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of the Fund on a daily basis and will provide 
a close estimate of that value throughout the Business Day.
    Information regarding the previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers. Information regarding market price and 
trading volume of the Shares will be continually available on a real-
time basis throughout the Business Day on brokers' computer screens and 
other electronic services. Quotation and last sale information for the 
Shares will be available via Nasdaq

[[Page 55429]]

proprietary quote and trade services, as well as in accordance with the 
Unlisted Trading Privileges and the Consolidated Tape Association 
(``CTA'') plans for the Shares and for the following U.S. securities, 
to the extent that they are exchange-listed securities: Work Out 
Securities, Non-Convertible Preferred Securities, warrants, convertible 
fixed income and preferred securities and ETFs. Price information for 
U.S. exchange-listed options will be available via the Options Price 
Reporting Authority and for other U.S. Exchange-Traded Derivatives will 
be available from the applicable listing exchange and from major market 
data vendors. Price information for TRACE-Eligible Securities \93\ sold 
in transactions under Rule 144A under the Securities Act will generally 
be available through FINRA's Trade Reporting and Compliance Engine 
(``TRACE'') and information regarding transactions in non-TRACE-
Eligible Securities or transactions not otherwise subject to TRACE 
reporting is generally available from major market data vendors and 
broker-dealers. For most of the U.S. dollar denominated corporate 
bonds, GSE-sponsored securities, Securitized Products and other U.S. 
dollar denominated fixed income securities in which the Fund invests, 
price information will be available from TRACE and EMMA (as defined 
below).\94\ For those instruments for which FINRA does not disseminate 
price information from TRACE, such as CDOs and fixed income securities 
denominated in foreign currencies, pricing information will generally 
be available from major market data vendors and broker-dealers. Money 
Market Funds are typically priced once each Business Day and their 
prices will be available through the applicable fund's website or from 
major market data vendors.
---------------------------------------------------------------------------

    \93\ For the definition of ``TRACE-Eligible Security,'' see 
FINRA Rule 6710(a).
    \94\ FINRA generally disseminates information on all 
transactions in TRACE-Eligible Securities, including those effected 
pursuant to Rule 144A of the Securities Act, immediately upon 
receipt of the transaction reports. Exceptions to this dissemination 
schedule are: (i) In respect to CMOs transacted pursuant to Rule 
144A under the Securities Act, where the transaction value is $1 
million or more and there have been five or more transactions of $1 
million or more in the period reported by at least two different 
market participant identifiers (where FINRA will disseminate 
information weekly and monthly); (ii) certain transactions with 
affiliates, certain transfers in connection with mergers and not in 
furtherance of a trading strategy; and certain primary offerings; 
(iii) transactions in CDOs, collateralized mortgage backed 
securities and CMOs, if the transaction value is $1 million or more 
and does not qualify for periodic dissemination; and (iv) Treasury 
Securities. See FINRA Rule 6750.
---------------------------------------------------------------------------

    For other exchange-listed securities (to be comprised primarily of 
ETFs, warrants and structured notes and which may include exchange-
listed securities of both U.S. and non-U.S. issuers), equities traded 
in the over-the-counter market (including Work Out Securities, and Non-
Convertible Preferred Securities), Exchange-Traded Derivatives 
(including U.S. or foreign), OTC Derivatives, Debt and fixed income 
securities (including convertible fixed income and convertible 
preferred securities), and the small number of Securitized Products 
that are not reported to TRACE,\95\ intraday price quotations will 
generally be available from broker-dealers and trading platforms (as 
applicable). Price information for such securities and instruments will 
also be available from feeds from major market data vendors, published 
or other public sources, or online information services. As noted 
above, TRACE will be a source of price information for most of the U.S. 
dollar denominated corporate bonds, GSE-sponsored securities, 
Securitized Products and other U.S. dollar denominated fixed income 
securities in which the Fund invests. Intraday and other price 
information related to foreign government securities, Money Market 
Funds, and other cash equivalents that are traded over-the-counter and 
other Non-TRACE Eligible Securities as well as prices for Treasury 
Securities, CDOs, commercial mortgage-backed securities, or CMOs 
purchased through transactions that do not qualify for periodic 
dissemination by FINRA \96\ will be available through major market data 
vendors, such as Bloomberg, Markit, IDC and Thomson Reuters, which can 
be accessed by APs and other investors. Electronic Municipal Market 
Access (``EMMA'') will be a source of price information for municipal 
bonds. Pricing for repurchase transactions and reverse repurchase 
agreements entered into by the Fund are not publicly reported. Prices 
are determined by negotiation at the time of entry with counterparty 
brokers, dealers and banks.
---------------------------------------------------------------------------

    \95\ Non-TRACE Eligible Securities, which are Securitized 
Products, in which the Fund may invest will primarily consist of 
fixed income securities issued by foreign entities and denominated 
in foreign currencies. For such securities that are not TRACE-
eligible, pricing information will generally be available from major 
market data vendors and broker-dealers.
    \96\ See supra note 94.
---------------------------------------------------------------------------

    Additional information regarding the Fund and the Shares, including 
investment strategies, risks, creation and redemption procedures, fees, 
Fund holdings' disclosure policies, distributions and taxes will be 
included in the Registration Statement. Investors will also be able to 
obtain the SAI, the Fund's annual and semi-annual reports (together, 
``Shareholder Reports''), and its Form N-CSR and Form N-SAR, filed 
twice a year, except the SAI, which is filed at least annually. The 
Fund's SAI and Shareholder Reports will be available free upon request 
from the Fund, and those documents and the Form N-CSR and Form N-SAR 
may be viewed on-screen or downloaded from the Commission's website at 
www.sec.gov.
Initial and Continued Listing
    The Shares will be subject to Nasdaq Rule 5735, which sets forth 
the initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and continued 
listing, the Fund must be in compliance with Rule 10A-3 \97\ under the 
Act. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. The Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time.
---------------------------------------------------------------------------

    \97\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. Nasdaq will halt trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). 
Trading may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
These may include: (1) The extent to which trading is not occurring in 
the securities and/or the other assets constituting the Disclosed 
Portfolio of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to 
Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which 
Shares of the Fund may be halted.
Trading Rules
    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity

[[Page 55430]]

securities. Nasdaq will allow trading in the Shares from 4:00 a.m. 
until 8:00 p.m., E.T. The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
Nasdaq Rule 5735(b)(3), the minimum price variation for quoting and 
entry of orders in Managed Fund Shares traded on the Exchange is $0.01.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both Nasdaq and 
also FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\98\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and applicable 
federal securities laws.
---------------------------------------------------------------------------

    \98\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-listed securities and 
instruments held by the Fund (including exchange-listed equities and 
Exchange-Traded Derivatives) with other markets and other entities that 
are members of ISG \99\ and with which the Exchange has comprehensive 
surveillance sharing agreements,\100\ and FINRA and the Exchange both 
may obtain information regarding trading in the Shares, the exchange-
listed securities, derivatives and other instruments held by the Fund 
from markets and other entities that are members of ISG, which include 
securities and futures exchanges and swap execution facilities, or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement.\101\ Moreover, FINRA, on behalf of the Exchange, will be 
able to access, as needed, trade information for most of the fixed 
income securities held by the Fund through reporting on FINRA's TRACE 
and, with respect to municipal securities, EMMA.
---------------------------------------------------------------------------

    \99\ Exchange-listed securities and Exchange-Traded Derivatives 
held by the Fund that are listed and traded on a non-ISG member 
exchange or on an exchange with which the Exchange does not have a 
comprehensive surveillance sharing agreement together are limited to 
10% of the assets of the Fund.
    \100\ For a list of the current members of ISG, see https://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.
    \101\ As noted above, no more than 10% of the assets of the Fund 
may be invested in Exchange-Traded Derivatives and exchange-listed 
securities whose principal market is not a member of ISG or a market 
with which the Exchange has a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    The majority of the Fund's investments in exchange-listed, equity 
securities (i.e., Non-Convertible-Preferred Securities, Equity-Related 
Warrants and ETFs) will constitute securities that trade in markets 
that are members of ISG or are parties to a comprehensive surveillance 
sharing agreement with the Exchange. Up to 10% of the Fund's assets may 
be held in exchange-listed securities and Exchange-Traded Derivatives 
that are listed and traded on markets that are not members of ISG or a 
market with which the Exchange does not have a comprehensive 
surveillance sharing agreement.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Intraday Indicative Value and the Disclosed Portfolio is 
disseminated; (4) the risks involved in trading the Shares during the 
Pre-Market and Post-Market Sessions when an updated Intraday Indicative 
Value will not be calculated or publicly disseminated; (5) the 
requirement that members deliver a prospectus to investors purchasing 
newly issued Shares prior to or concurrently with the confirmation of a 
transaction; and (6) trading information. The Information Circular will 
also discuss any exemptive, no-action and interpretive relief granted 
by the Commission from any rules under the Act.
    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Fund. Members purchasing Shares from the Fund for 
resale to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV calculation time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the Fund's 
website.
Continued Listing Representations
    All statements and representations made in this filing regarding 
(a) the description of the portfolio or reference assets, (b) 
limitations on portfolio holdings or reference assets, (c) 
dissemination and availability of the reference asset or intraday 
indicative values, or (d) the applicability of Exchange listing rules 
shall constitute continued listing requirements for listing the Shares 
on the Exchange. In addition, the issuer has represented to the 
Exchange that it will advise the Exchange of any failure by the Fund to 
comply with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Act, the Exchange will 
monitor for compliance with the continued listing requirements. If the 
Fund is not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under the Nasdaq 5800 
Series.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act in general and Section 6(b)(5) of the Act in particular 
in that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and

[[Page 55431]]

open market and, in general, to protect investors and the public 
interest.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Nasdaq Rule 5735. The 
Exchange represents that trading in the Shares will be subject to the 
existing trading surveillances, administered by both the Exchange and 
FINRA, on behalf of the Exchange, which are designed to deter and 
detect violations of Exchange rules and applicable federal securities 
laws and are adequate to properly monitor trading in the Shares in all 
trading sessions.
    Paragraph (g) of Rule 5735 provides that if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect and maintain 
a ``fire wall'' between the investment adviser and the broker-dealer 
with respect to access to information concerning the composition and/or 
changes to such investment company's portfolio. In addition, paragraph 
(g) further requires that personnel who make decisions on the 
investment company's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the investment company's portfolio.
    Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, 
paragraph (g) in connection with the establishment and maintenance of a 
``fire wall'' between the investment adviser and the broker-dealer 
reflects the applicable investment company's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. 
Neither the Manager nor any of the Sub-Advisers is a broker-dealer, but 
each is affiliated with the Distributor, a broker-dealer, and has 
implemented and will maintain a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the 
composition and/or changes to the portfolio.
    In addition, personnel who make decisions on the Fund's portfolio 
composition will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
Fund's portfolio. In the event (a) the Manager or any of the Sub-
Advisers registers as a broker-dealer or becomes newly affiliated with 
a broker-dealer, or (b) any new investment adviser or any new sub-
adviser to the Fund is a registered broker-dealer or becomes affiliated 
with another broker-dealer, it will implement and maintain a fire wall 
with respect to its relevant personnel and/or such broker-dealer 
affiliate, as applicable, regarding access to information concerning 
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.
    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objectives, applicable legal requirements 
\102\ and will not be used for the purpose of seeking leveraged returns 
or performance that is the multiple or inverse multiple of a benchmark 
(although derivatives may have embedded leverage). Although the Fund 
will be permitted to borrow as permitted under the 1940 Act, it will 
not be operated as a ``leveraged ETF,'' i.e., it will not be operated 
in a manner designed to seek leveraged returns or a multiple or inverse 
multiple of the performance of an underlying reference index.\103\ The 
Fund may engage in frequent and active trading of portfolio investments 
to achieve its investment objective.
---------------------------------------------------------------------------

    \102\ As noted above, the Fund will limit its investments in 
illiquid securities or other illiquid assets to an aggregate amount 
of 15% of its net assets (calculated at the time of investment), as 
required by the Commission.
    \103\ As noted above, the Fund will not invest in leveraged, 
inverse or inverse leveraged ETFs.
---------------------------------------------------------------------------

    The Exchange believes that, notwithstanding that the Fund would not 
meet all of the ``generic'' listing requirements of Nasdaq Rule 
5735(b)(1), the Fund will not be subject to manipulation, the 
investments of the Fund will be able to be monitored and surveilled by 
the Exchange and risks will be mitigated by alternative limits imposed 
by the Exchange and by the voluntary limits imposed by the Fund (see 
supra ``Investment Restrictions''). As a result, it is in the public 
interest to approve listing and trading of Shares of the Fund on the 
Exchange pursuant to the requirements set forth herein. Deviations from 
the generic requirements are necessary for the Fund to achieve its 
investment objective in a cost-effective manner that maximizes 
investors' returns and to manage the risks associated with its 
investments, and the Exchange proposes that the Fund will be required 
to comply with alternative requirements that are customized to address 
the objectives of Section 6(b)(5) of the Act, as described herein. 
Further, the strategy and investments of the Fund are substantially 
similar to those of other ETFs previously approved by the Commission, 
which have operated safely and without disrupting the market for 
several years.\104\
---------------------------------------------------------------------------

    \104\ See, e.g., Securities Exchange Act Release Nos. 66321 
(February 3, 2012) 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-
95) (granting approval for the listing of shares of the PIMCO Total 
Return Exchange Traded Fund); 72666 (July 24, 2014) (granting 
approval to the use of derivatives by the PIMCO Total Return 
Exchange Traded Fund); and 76719 (December 21, 2015) (granting 
approval for the listing of shares of the Guggenheim Total Return 
Bond ETF).
---------------------------------------------------------------------------

    The Fund will not comply with the requirements in Nasdaq Rule 
5735(b)(1) regarding the use of aggregate gross notional value of 
derivatives when calculating the weight of such derivatives or the 
exposure that such derivatives provide to underlying reference assets, 
including the requirements in Rules 5735(b)(1)(D)(i), 
5735(b)(1)(D)(ii), 5735(b)(1)(E) and 5735(b)(1)(F).\105\ Instead, the 
Exchange proposes that, except as otherwise provided herein, for the 
purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), 
and any alternative requirements proposed by the Exchange, the Fund 
will use the mark-to-market value of its derivatives in calculating the 
weight of such derivatives or the exposure that such derivatives 
provide to their reference assets.\106\ The Exchange believes that this 
alternative requirement is appropriate because the mark-to-market value 
is a more accurate measurement of the actual exposure incurred by the 
Fund in connection with a derivatives position.\107\
---------------------------------------------------------------------------

    \105\ See supra notes 67-70.
    \106\ See supra note 71.
    \107\ As previously noted, the mark-to-market approach is 
consistent with the valuation methodology for derivatives for asset 
coverage purposes advocated by the Commission in proposed Rule 18f-4 
under the 1940 Act. See Derivatives Rule Proposing Release. In a 
white paper published by staff of the Division of Economic and Risk 
Analysis of the SEC (``DERA'') in connection with the proposal of 
Rule 18f-4 under the 1940 Act, the staff of DERA noted that a 
derivative's notional amount does not accurately reflect the risk of 
the derivative. See Daniel Deli, Paul Hanouna, Christof Stahel, Yue 
Tang and William Yost, Use of Derivatives by Registered Investment 
Companies (December 2015) at 10 (``On the other hand, there are 
drawbacks to using notional amounts. First, because of differences 
in expected volatilities of the underlying assets, notional amounts 
of derivatives across different underlying asset generally do not 
represent the same unit of risk. For example, the level of risk 
associated with a $100 million notional of a S&P500 index futures is 
not equivalent to the level of risk of a $100 million notional of 
interest rate swaps, currency forwards or commodity futures.'').
---------------------------------------------------------------------------

    The Fund will not comply with the requirement that securities 
comprising at least 90% of the fixed income weight of the Fund's 
portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) in 
respect to its investments in ABS/

[[Page 55432]]

Private MBS.\108\ Instead, ABS/Private MBS will be limited to 20% of 
the weight of the fixed income portion of the Fund's portfolio.\109\ 
The Exchange proposes, in the alternative, to require the Fund to 
ensure that all of the investments in the fixed income portion of the 
Fund's portfolio, other than ABS/Private MBS, comply with the 90% 
requirement in Nasdaq Rule 5735(b)(1)(B)(iv).\110\ The Exchange 
believes that this alternative limitation is appropriate because Nasdaq 
Rule 5735(b)(1)(B)(iv) does not appear to be designed for structured 
finance vehicles such as ABS/Private MBS, and the overall weight of 
ABS/Private MBS held by the Fund will be limited to 20% of the fixed 
income portion of the Fund's portfolio, as described above. As 
discussed above, although ABS/Private MBS will be excluded for the 
purposes of compliance with Nasdaq Rule 5735(b)(1)(B)(iv), the Fund's 
portfolio is consistent with the statutory standard as a result of the 
diversification provided by the investments and the Sub-Adviser's 
selection process, which closely monitors investments to ensure 
maintenance of credit and liquidity standards and relies on the higher 
investment levels in these instruments during periods of U.S. economic 
strength.
---------------------------------------------------------------------------

    \108\ See supra note 73.
    \109\ See supra note 74.
    \110\ For purposes of this requirement, the weight of the Fund's 
exposure to any fixed income securities referenced in derivatives 
shall be calculated based on the mark-to-market value of such 
derivatives. CDOs, in which the Fund invests, would comply with the 
90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv) but would be 
limited in amount to 10% of the Fund's total assets. The Exchange 
believes that the 10% limit on the Fund's holdings in CDOs will help 
to ensure that the Fund maintains a diversified portfolio and will 
mitigate the risk of manipulation.
---------------------------------------------------------------------------

    As discussed above, the Exchange has determined to make an 
exception solely in respect of the Fund such that CDOs will not be 
deemed to be included in the definition of ABS for purposes of the 
limitation in Nasdaq Rule 5735(b)(1)(B)(v) and, as a result, will not 
be subject to the restriction on aggregate holdings of ABS/Private MBS 
contained in such Rule, which limits such holdings to no more than 20% 
of the weight of the fixed income portion of the Fund's portfolio. 
However, the Fund's holdings in CDOs will be limited such that they do 
not account, in the aggregate, for more than 10% of the total assets of 
the Fund. The Exchange believes that the 10% limit on the Fund's 
holdings in CDOs will help to ensure that the Fund maintains a 
diversified portfolio and will mitigate the risk of manipulation.
    The Exchange has classified bank loans as Debt for purposes of this 
proposed rule change and not as ``fixed income securities'' as they are 
classified in Nasdaq Rule 5735(b)(1)(B). As a result, the Fund's 
investments in bank loans will comply with the limitations or 
restrictions applicable to the Fund's investments in Debt as set forth 
herein with respect to such holdings and not with the restrictions for 
fixed income securities set forth in Nasdaq Rule 5735(b)(1)(B)(i)-
(v).\111\ The Exchange believes that this approach is appropriate given 
that the ``generic'' listing requirements in Nasdaq Rule 5735(b)(1)(B) 
generally appear to be tailored to fixed income instruments that are 
``securities'', as defined in the Act, rather than loans and other debt 
instruments that are not characterized as ``securities'' under 
applicable case law.
---------------------------------------------------------------------------

    \111\ For a listing of such restrictions, see supra ``Investment 
Restrictions.''
---------------------------------------------------------------------------

    The Fund will not meet the equity requirements in Nasdaq Rule 
5735(b)(1)(A) with respect to Non-Convertible Preferred Securities, 
Work Out Securities and warrants.\112\ Instead, the Exchange proposes 
that (i) the Fund's investment in convertible fixed income and 
preferred securities shall be limited to 20% of the Fund's portfolio; 
and (ii) the weight of Non-Convertible Preferred Securities, Work Out 
Securities and Equity-Related Warrants in the Fund's portfolio shall 
together not exceed 15% of the Fund's assets. The Exchange believes 
that these alternative limitations are appropriate in light of the fact 
that the Non-Convertible Preferred Securities, Equity Related Warrants 
and Work Out Securities are providing debt-oriented exposures or are 
received in connection with the Fund's previous investment in Debt or 
fixed income securities, and all of the other equity securities held by 
the Fund will comply with the requirements of Nasdaq Rule 
5735(b)(1)(A).\113\
---------------------------------------------------------------------------

    \112\ As noted above, convertible fixed income securities 
(including CoCos) and convertible preferred securities are treated 
as fixed income securities for purposes of this proposed rule 
change. See supra ``Application of Generic Listing Requirements'' 
section (ii) and note 80.
    \113\ Other equities consist of ETFs (including money market 
ETFs) that provide exposure to fixed income securities, Debt and 
other Principal Investments. The weight of such ETFs in the Fund's 
portfolio shall not be limited. As noted above, Fixed-Income Related 
Warrants are treated as fixed income securities for purposes of this 
proposed rule change and will be subject to and comply with the 
generic listing requirements for fixed-income securities, rather 
than the generic listing requirements for equity securities. See 
supra note 23.
---------------------------------------------------------------------------

    The Fund will not meet the requirement in Nasdaq Rule 5735(b)(1)(E) 
that no more than 20% of the assets in the Fund's portfolio may be 
invested in over-the-counter derivatives. Instead, the Exchange 
proposes that there shall be no limit on the Fund's investment in 
Interest Rate and Currency Derivatives, and the weight of all OTC 
Derivatives other than Interest Rate and Currency Derivatives shall not 
exceed 10% of the Fund's Assets. For purposes of this 10% limit on OTC 
Derivatives, the weight of such OTC Derivatives will be calculated 
based on the mark-to-market value of such OTC Derivatives. The Exchange 
believes that this exception for Interest Rate and Currency 
Derivatives, which is generally consistent with the requirement in a 
previous filing for the listing of an ETF approved by the 
Commission,\114\ is appropriate in light of the fact that Interest Rate 
and Currency Derivatives are among the most liquid investment 
instruments (including not only derivatives but also securities) in the 
market \115\ (and the instruments are even more liquid than most non-
government or government-guaranteed securities). Based on the data 
compiled by the Sub-Adviser in respect to its liquidity policy, these 
derivatives are among the most liquid investment instruments traded. In 
addition, most Interest Rate Derivatives traded by the Fund are 
centrally cleared by regulated clearing firms, and Interest Rate and 
Currency Derivatives are subject to trade reporting,\116\ and other

[[Page 55433]]

robust regulation.\117\ Given the size of the trading market and the 
regulatory oversight of the markets, the Exchange believes that 
Interest Rate and Currency Derivatives are not readily subject to 
manipulation. The Exchange also believes that allowing the Fund to risk 
manage its portfolio through the use of Interest Rate and Currency 
Derivatives without limit is necessary to allow the Fund to achieve its 
investment objective and protect investors.
---------------------------------------------------------------------------

    \114\ See Securities Exchange Act Release No. 80657 (May 11, 
2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (approving 
up to 50% of the fund's assets (calculated on the basis of aggregate 
gross notional value) to be invested in over-the-counter derivatives 
that are used to reduce currency, interest rate, or credit risk 
arising from the fund's investments, including forwards, over-the-
counter options, and over-the-counter swaps).
    \115\ Trading in foreign exchange markets averaged $5.1 trillion 
per day in April 2016, and 67% of this trading activity was in 
derivatives contracts such as currency or foreign exchange forwards, 
options and swaps (with the other 33% consisting of spot 
transactions). See Bank for International Settlements, Triennal 
[sic] Central Bank Survey, Foreign Exchange Turnover in April 2016, 
available at https://www.bis.org/publ/rpfx16fx.pdf (accessed November 
2017). Trading in OTC interest rate derivatives averaged $2.7 
trillion per day in April 2016. See Bank for International 
Settlements, Triennal [sic] Central Bank Survey, OTC Interest Rate 
Derivatives Turnover in April 2016, available at https://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017).
    \116\ Transactions in Interest Rate and Currency Derivatives are 
required to be reported to a swap data repository, and transactions 
in Interest Rate Derivatives and certain Currency Derivatives (i.e., 
Currency Derivatives that are not excluded from the definition of a 
``swap'', as described below) are also publicly reported pursuant to 
rules issued by the CFTC. See 17 CFR parts 43, 45 and 46. Pursuant 
to Section 1(a)(47)(E) of the CEA and a related determination by the 
Department of the Treasury, Excluded Currency Derivatives are 
excluded from the definition of a ``swap'' under the CEA. See 
Determination of Foreign Exchange Swaps and Foreign Exchange 
Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 
2012). However, as noted above, transactions in such Excluded 
Currency Derivatives are required to be reported to a swap data 
repository, but they are not subject to the public reporting 
requirements.
    \117\ Interest Rate Derivatives and Currency Derivatives other 
than Excluded Currency Derivatives are comprehensively regulated as 
swaps under the CEA and regulations issued thereunder by the CFTC 
and other federal financial regulators. See, e.g., 17 CFR part 23 
(capital and margin requirements for swap dealers, business conduct 
standards for swap dealers, and swap documentation requirements); 17 
CFR part 50 (clearing requirements for swaps). While Excluded 
Currency Derivatives are not subject to all swap regulations, they 
are subject to the ``business conduct standards'' adopted by the 
CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; 
Determination of Foreign Exchange Swaps and Foreign Exchange 
Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 
2012).
---------------------------------------------------------------------------

    The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(i) that at least 90% of the weight of the Fund's holdings 
in futures, exchange-traded options, and listed swaps shall, on both an 
initial and continuing basis, consist of futures, options, and swaps 
for which the Exchange may obtain information via the ISG from other 
members or affiliates of the ISG, or for which the principal market is 
a market with which the Exchange has a comprehensive surveillance 
sharing agreement. Instead, the Exchange proposes that no more than 10% 
of the assets of the Fund will be invested in Exchange-Traded 
Derivatives and exchange-listed securities whose principal market is 
not a member of ISG or is not a market with which the Exchange has a 
comprehensive surveillance sharing agreement. For purposes of this 10% 
limit, the weight of such Exchange-Traded Derivatives will be 
calculated based on the mark-to-market value of such Exchange-Traded 
Derivatives. The Exchange believes that this alternative limitation is 
appropriate because the overall limit on Exchange-Traded Derivatives 
and exchange-listed securities whose principal market is not a member 
of ISG or is a market with which the Exchange does not have a 
comprehensive surveillance sharing agreement will still be low relative 
to the overall size of the Fund.
    The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(ii) that the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets 
shall not exceed 65% of the weight of the Fund's portfolio (including 
gross notional exposures), and the aggregate gross notional value of 
listed derivatives based on any single underlying reference asset shall 
not exceed 30% of the weight of the Fund's portfolio (including gross 
notional exposures). Instead, the Exchange proposes that the Fund will 
comply with the concentration requirements in Nasdaq Rule 
5735(b)(1)(D)(ii) except with respect to the Fund's investment in 
Eurodollar and G-7 Sovereign Futures and Options. The Fund may maintain 
significant positions in Eurodollar and G-7 Sovereign Futures and 
Options, and such investments will not be subject to the concentration 
limits provided in Nasdaq Rule 5735(b)(1)(D)(ii). For purposes of this 
[sic] requirements, the weight of the applicable Exchange-Traded 
Derivatives will be calculated based on the mark-to-market value of 
such Exchange-Traded Derivatives. The Manager has indicated that 
obtaining exposure to these investments through futures contracts is 
often the most cost efficient method to achieve such exposure. The 
Exchange notes that Eurodollar and G-7 Sovereign Futures and Options 
are highly liquid investments \118\ and are not subject to the same 
concentration risks as Exchange-Traded Derivatives referencing other 
assets because of such liquidity. Further, the Exchange notes that the 
significantly diminished risk of Treasury Securities is reflected in 
their exclusion from the concentration requirements applicable to fixed 
income securities in Nasdaq Rule 5735(b)(1)(B)(ii). The Exchange 
proposes that the Fund will comply with the concentration requirements 
in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund's 
investment in Eurodollar and G-7 Sovereign Futures and Options. The 
Exchange believes that this alternative limitation is appropriate to 
provide the Fund with sufficient flexibility and because of the highly 
liquid and transparent nature of Eurodollar and G-7 Sovereign Futures 
and Options. Further, as described above, the G-7 Sovereign Futures and 
Options in which the Fund invests will be listed on an exchange that is 
an ISG

[[Page 55434]]

member or an exchange with which the Exchange has a comprehensive 
surveillance sharing agreement.
---------------------------------------------------------------------------

    \118\ See CME Group, Interest Rate Futures Liquidity Metrics 
Reach New Highs (October 6, 2017), available at https://www.cmegroup.com/education/interest-rates-liquidity-metrics-reach-new-highs.html (accessed November 2017) (providing statistics 
regarding liquidity and open interest in futures and options on 
eurodollars and Treasury Securities, including that during the first 
three quarters of 2017, eurodollar futures and options traded 
through CME Group had an average daily open interest of 
approximately 53 million contracts and futures and options on 
Treasury Securities had an average daily open interest of 
approximately 15 million contracts); The Montreal Exchange, 
Statistics for Interest Rate Derivatives, Index Derivatives and 
Equity Derivatives (September 2017), available at https://www.m-x.ca/f_stat_en/1709_stats_en.pdf (accessed November 2017) (providing 
statistics regarding liquidity and open interest in futures and 
options on Canadian sovereign debt, including that, as of September 
2017, the open interest in futures and options on Canadian sovereign 
debt traded on The Montreal Exchange was approximately 560,000 
contracts); Eurex Exchange, Benchmark Fixed Income Derivatives, 
available at https://www.eurexchange.com/blob/115654/4c51e4b8bc77355475b3b6f46afc0ef1/data/factsheet_eurex_benchmark_fixed_income_derivatives.pdf (accessed 
November 2017) (providing statistics regarding liquidity and open 
interest in futures and options on German sovereign debt, including 
that, as of July 2015, the open interest in futures on German 
sovereign debt traded on Eurex was approximately 3,000,000 contracts 
and the open interest in options on German sovereign debt futures 
traded on Eurex was approximately 3,000,000 contracts); Eurex 
Exchange, Eurex Exchange Euro-BTP Futures, Italian Government Bond 
Futures, available at https://www.eurexchange.com/blob/115624/6a1281939d15ddbab960af40da6f11dc/data/factsheet_eurex_euro_btp_futures_on_italian_government_bonds.pdf 
(accessed November 2017) (providing statistics regarding liquidity 
and open interest in futures on Italian sovereign debt, including 
that the open interest peaks in 2017 for futures on long-term and 
short-term Italian sovereign debt traded on Eurex was approximately 
450,000 and 270,000 contracts, respectively); Eurex Exchange, Euro-
OAT Derivatives, French Government Bond Futures and Options, 
available at https://www.eurexchange.com/blob/115652/48198ec577f7b3b0ac44d4c5a39ed0de/data/factsheet_eurex_euro_oat_futures_on_french_government_bonds.pdf 
(accessed November 2017) (providing statistics regarding liquidity 
and open interest in futures on French sovereign debt, including 
that, as of July 2017, the open interest in futures on long-term 
French sovereign debt traded on Eurex was approximately 600,000 
contracts); Intercontinental Exchange, Gilt Futures Overview, 
available at https://www.theice.com/publicdocs/futures/Gilt_Futures_Overview.pdf (accessed November 2017) (providing 
statistics regarding liquidity and open interest in futures on 
British sovereign debt, including that, as of the third quarter of 
2014, the open interest in futures on long-term British sovereign 
debt traded on the Intercontinental Exchange was approximately 
400,000 contracts); Osaka Exchange, Japanese Government Bond Futures 
& Options, available at https://www.jpx.co.jp/english/derivatives/products/jgb/jgb-futures/tvdivq0000003n94-att/JGB_FUT_OP_E.pdf 
(accessed November 2017) (providing statistics regarding liquidity 
and open interest in futures and options on Japanese sovereign debt, 
including that as of July 2016, the open interest in futures on 10-
year Japanese sovereign debt traded on the Osaka Exchange was 
approximately 80,000 contracts). The Exchange also notes that the 
Commission has previously granted exemptions under the Act to 
facilitate the trading of futures on sovereign debt issued by each 
of the Group of Seven countries (among other countries) and that 
such exemptions were based in part on the Commission's assessment of 
the sufficiency of the credit ratings and liquidity of such 
sovereign debt. See 17 CFR 240.3a12-8; Securities Exchange Act 
Release No. 41453 (May 26, 1999), 64 FR 29550 (June 2, 1999).
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    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily every Business 
Day that the Fund is traded, and that the NAV and the Disclosed 
Portfolio will be made available to all market participants at the same 
time. In addition, a large amount of information will be publicly 
available regarding the Fund and the Shares, thereby promoting market 
transparency.
    Moreover, the Intraday Indicative Value, available on the Nasdaq 
Information LLC proprietary index data service, will be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Exchange's Regular Market Session. On each Business 
Day, before commencement of trading in the Shares in the Regular Market 
Session on the Exchange, the Fund will disclose on its website the 
Disclosed Portfolio of the Fund that will form the basis for the Fund's 
calculation of NAV at the end of the Business Day. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Information regarding market price and trading 
volume of the Shares will be continually available on a real-time basis 
throughout the Business Day on brokers' computer screens and other 
electronic services. Quotation and last sale information for the Shares 
will be available via Nasdaq proprietary quote and trade services, as 
well as in accordance with the Unlisted Trading Privileges and the CTA 
plans for the Shares and for the following U.S. securities, to the 
extent they are exchange-listed: Work Out Securities, Non-Convertible 
Preferred Securities, warrants, convertible fixed income and 
convertible preferred securities and ETFs. Price information for U.S. 
exchange-listed options will be available via the Options Price 
Reporting Authority and for other U.S. Exchange-Traded Derivatives will 
be available from the applicable listing exchange and from major market 
data vendors. Price information for restricted securities will be 
available from major market data vendors, broker-dealers and trading 
platforms, as well as for most fixed income securities sold in 
transactions under Rule 144A under the Securities Act, from TRACE and 
EMMA. Money Market Funds are typically priced once each Business Day 
and their prices will be available through the applicable fund's 
website or from major market data vendors.
    For other exchange-listed securities (to be comprised primarily of 
ETFs, warrants and structured notes and which may include exchange-
listed securities of both U.S. and non-U.S. issuers), equities traded 
in the over-the-counter market (including Work Out Securities and Non-
Convertible Preferred Securities), Exchange-Traded Derivatives 
(including U.S. or foreign), OTC Derivatives, Debt and fixed income 
securities (including convertible fixed income and convertible 
preferred securities), and the small number of Securitized Products 
that are not reported to TRACE, intraday price quotations will 
generally be available from broker-dealers and trading platforms (as 
applicable). TRACE will be a source of price information for most of 
the U.S. dollar denominated corporate bonds,\119\ GSE-sponsored 
securities, Securitized Products and other U.S. dollar denominated 
fixed income securities in which the Fund invests.\120\ Intraday and 
other price information related to foreign government securities, Money 
Market Funds, and other cash equivalents that are traded over-the-
counter and other Non-TRACE Eligible Securities as well as prices for 
Treasury Securities, CDOs, commercial mortgage-backed securities, or 
CMOs purchased through transactions that do not qualify for periodic 
dissemination by FINRA \121\ will be available through major market 
data vendors, such as Bloomberg, Markit, IDC and Thomson Reuters, which 
can be accessed by APs and other investors. EMMA will be a source of 
price information for municipal bonds. Pricing for repurchase 
transactions and reverse repurchase agreements entered into by the Fund 
are not publicly reported. Prices are determined by negotiation at the 
time of entry with counterparty brokers, dealers and banks.
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    \119\ Broker-dealers that are FINRA member firms have an 
obligation to report transactions in specified debt securities to 
TRACE to the extent required under applicable FINRA rules. 
Generally, such debt securities will have at issuance a maturity 
that exceeds one calendar year. For fixed income securities that are 
not reported to TRACE, (i) intraday price quotations will generally 
be available from broker-dealers and trading platforms (as 
applicable) and (ii) price information will be available from feeds 
from market data vendors, published or other public sources, or 
online information services, as described above.
    \120\ Broker-dealers that are FINRA member firms have an 
obligation to report transactions in TRACE-Eligible Securities to 
TRACE. For the definition of ``TRACE-Eligible Security,'' see FINRA 
Rule 6710(a).
    \121\ See supra note 94.
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    The Fund's website will include a form of the prospectus for the 
Fund and additional data relating to NAV and other applicable 
quantitative information. Moreover, prior to the commencement of 
trading, the Exchange will inform its members in an Information 
Circular of the special characteristics and risks associated with 
trading the Shares. Trading in the Shares of the Fund will be halted 
under the conditions specified in Nasdaq Rules 4120 and 4121 or because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable, and trading in the Shares will 
be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances 
under which Shares of the Fund may be halted. In addition, as noted 
above, investors will have ready access to information regarding the 
Fund's holdings, the Intraday Indicative Value, the Disclosed 
Portfolio, and quotation and last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed ETF that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.
    For the above reasons, the Exchange believes the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

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

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

    No written comments were either solicited or received.

[[Page 55435]]

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2018-080 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2018-080. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-080, and should be submitted 
on or before November 26, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\122\
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    \122\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24068 Filed 11-2-18; 8:45 am]
 BILLING CODE 8011-01-P

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