Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, Regarding Changes to Investments of the First Trust TCW Unconstrained Plus Bond ETF, 58750-58763 [2019-23858]
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Federal Register / Vol. 84, No. 212 / Friday, November 1, 2019 / Notices
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on October 28,
2019, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Express, Priority Mail, &
First-Class Package Service Contract 67
to Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2020–16, CP2020–15.
Sean Robinson,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2019–23864 Filed 10–31–19; 8:45 am]
BILLING CODE 7710–12–P
Product Change—Priority Mail
Negotiated Service Agreement
ACTION:
Postal ServiceTM.
Notice.
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
SUMMARY:
Date of required notice:
November 1, 2019.
DATES:
FOR FURTHER INFORMATION CONTACT:
Sean Robinson, 202–268–8405.
The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on October 29,
2019, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Contract 557 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2020–18, CP2020–17.
SUPPLEMENTARY INFORMATION:
Sean Robinson,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2019–23915 Filed 10–31–19; 8:45 am]
BILLING CODE 7710–12–P
VerDate Sep<11>2014
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[Release No. 34–87410; File No. SR–
NYSEArca–2019–33]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 2, Regarding Changes
to Investments of the First Trust TCW
Unconstrained Plus Bond ETF
October 28, 2019.
POSTAL SERVICE
AGENCY:
SECURITIES AND EXCHANGE
COMMISSION
I. Introduction
On May 6, 2019, NYSE Arca, Inc.
(‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to modify certain investments of
the First Trust TCW Unconstrained Plus
Bond ETF, the shares of which are
currently listed and traded on the
Exchange pursuant to NYSE Arca Rule
8.600–E. On May 16, 2019, the
Exchange filed Amendment No. 1 to the
proposed rule change. The proposed
rule change, as modified by Amendment
No. 1, was published for comment in
the Federal Register on May 28, 2019.3
On July 3, 2019, pursuant to Section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to approve or disapprove the
proposed rule change.5 On August 26,
2019, the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
approve or disapprove the proposed
rule change, as modified by Amendment
No. 1.7 On September 18, 2019, the
Exchange filed Amendment No. 2 to the
proposed rule change.8 The Commission
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 85903
(May 21, 2019), 84 FR 24576.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 86299,
84 FR 32804 (July 9, 2019).
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 86760,
84 FR 45816 (August 30, 2019).
8 In Amendment No. 2, which amended and
replaced the proposed rule change, as modified by
Amendment No. 1, in its entirety, the Exchange (i)
modified its representation regarding holdings of
the Fund (as defined herein) to align with revised
Commentary .01(b)(5) to NYSE Arca Rule 8.600–E;
(ii) conformed a requirement relating to certain
investment restrictions from ‘‘average loan
maturity’’ to ‘‘weighted average loan age’’; (iii)
provided additional arguments in support of the
2 17
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has received no comment letters on the
proposal. The Commission is publishing
this notice to solicit comments on
Amendment No. 2 from interested
persons, and is approving the proposed
rule change, as modified by Amendment
No. 2, on an accelerated basis.
II. The Exchange’s Description of the
Proposed Rule Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes certain
changes, described below under
‘‘Application of Generic Listing
Requirements’’, regarding investments
of the First Trust TCW Unconstrained
Plus Bond ETF (‘‘Fund’’), shares
(‘‘Shares’’) of which are currently listed
and traded on the Exchange under
NYSE Arca Rule 8.600–E, which
governs the listing and trading of
Managed Fund Shares 9 on the
Exchange. Shares of the Fund
commenced trading on the Exchange on
June 5, 2018 in accordance with the
generic listing standards in Commentary
.01 to NYSE Arca Rule 8.600–E.
The Shares are offered by First Trust
Exchange-Traded Fund VIII (the
‘‘Trust’’), which is registered with the
Commission as an open-end
management investment company.10
The Fund is a series of the Trust.
proposed modifications to the Fund’s investments;
and (iv) made non-substantive and technical
changes. Amendment No. 2 is available at: https://
www.sec.gov/comments/sr-nysearca-2019-33/
srnysearca201933-6148204-192289.pdf.
9 A Managed Fund Share is a security that
represents an interest in an investment company
registered under the Investment Company Act of
1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as
an open-end investment company or similar entity
that invests in a portfolio of securities selected by
its investment adviser consistent with its
investment objectives and policies. In contrast, an
open-end investment company that issues
Investment Company Units, listed and traded on
the Exchange under NYSE Arca Rule 5.2–E(j)(3),
seeks to provide investment results that correspond
generally to the price and yield performance of a
specific foreign or domestic stock index, fixed
income securities index or combination thereof.
10 The Trust is registered under the 1940 Act. On
May 29, 2018, the Trust filed with the Commission
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First Trust Advisors L.P. is the
investment adviser (‘‘First Trust’’ or
‘‘Adviser’’) to the Fund. TCW
Investment Management Company LLC
(‘‘TCW’’ or the ‘‘Sub-Adviser’’), serves
as the Fund’s investment sub-adviser.
First Trust Portfolios L.P. is the
distributor (‘‘Distributor’’) for the Fund’s
Shares. The Bank of New York Mellon
acts as the administrator, custodian and
transfer agent (‘‘Custodian’’ or ‘‘Transfer
Agent’’) for the Fund.
Commentary .06 to Rule 8.600–E
provides that, if the investment adviser
to the investment company issuing
Managed Fund Shares is affiliated with
a broker-dealer, such investment adviser
shall erect and maintain a ‘‘fire wall’’
between the investment adviser and the
broker-dealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio.11 In addition,
Commentary .06 further requires that
personnel who make decisions on the
open-end fund’s portfolio composition
must be subject to procedures designed
to prevent the use and dissemination of
material nonpublic information
regarding the open-end fund’s portfolio.
The Adviser and Sub-Adviser are not
registered as broker-dealers. The
Adviser is affiliated with First Trust
Portfolios L.P., a broker-dealer, and has
its registration statement on Form N–1A under the
Securities Act of 1933 (15 U.S.C. 77a), and under
the 1940 Act relating to the Fund (File Nos. 333–
210186 and 811–23147) (‘‘Registration Statement’’).
The description of the operation of the Trust and
the Fund herein is based, in part, on the
Registration Statement. In addition, the
Commission has issued an order upon which the
Trust may rely, granting certain exemptive relief
under the 1940 Act. See Investment Company Act
Release No. 30029 (April 10, 2012) (File No. 812–
13795).
11 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and Sub-Adviser and their
related personnel are subject to the provisions of
Rule 204A–1 under the Advisers Act relating to
codes of ethics. This Rule requires investment
advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as
well as compliance with other applicable securities
laws. Accordingly, procedures designed to prevent
the communication and misuse of non-public
information by an investment adviser must be
consistent with Rule 204A–1 under the Advisers
Act. In addition, Rule 206(4)–7 under the Advisers
Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such
investment adviser has (i) adopted and
implemented written policies and procedures
reasonably designed to prevent violation, by the
investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted
thereunder; (ii) implemented, at a minimum, an
annual review regarding the adequacy of the
policies and procedures established pursuant to
subparagraph (i) above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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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. The SubAdviser is affiliated with multiple
broker-dealers and has implemented
and will maintain a fire wall with
respect to its broker-dealer affiliates
regarding access to information
concerning the composition and/or
changes to the portfolio. In the event (a)
the Adviser or the Sub-Adviser becomes
registered as a broker-dealer or newly
affiliated with a broker-dealer, or (b) any
new adviser or sub-adviser is a
registered broker-dealer or becomes
affiliated with a broker-dealer, it will
implement and maintain a fire wall with
respect to relevant personnel and any
broker-dealer affiliate regarding access
to information concerning the
composition and/or changes to the
portfolio, and will be subject to
procedures designed to prevent the use
and dissemination of material nonpublic information regarding such
portfolio.
First Trust TCW Unconstrained Plus
Bond ETF
Principal Investments
According to the Registration
Statement, the investment objective of
the Fund is to seek to maximize longterm total return. Under normal market
conditions,12 the Fund intends to invest
at least 80% of its net assets (including
investment borrowings) in a portfolio of
‘‘Fixed Income Securities’’ (described
below).
In managing the Fund’s portfolio,
TCW intends to employ a flexible
approach that allocates the Fund’s
investments across a range of global
investment opportunities and actively
manage exposure to interest rates, credit
sectors and currencies. TCW seeks to
utilize independent, bottom-up research
to identify securities that are
12 The term ‘‘normal market conditions’’ is
defined in NYSE Arca Rule 8.600–E(c)(5). On a
temporary basis, including for defensive purposes,
during the initial invest-up period (i.e., the six-week
period following the commencement of trading of
Shares on the Exchange) and during periods of high
cash inflows or outflows (i.e., rolling periods of
seven calendar days during which inflows or
outflows of cash, in the aggregate, exceed 10% of
the Fund’s net assets as of the opening of business
on the first day of such periods), the Fund may
depart from its principal investment strategies; for
example, it may hold a higher than normal
proportion of its assets in cash. During such
periods, the Fund may not be able to achieve its
investment objective. The Fund may adopt a
defensive strategy when the Adviser and/or the
Sub-Adviser believes securities in which the Fund
normally invests have elevated risks due to market,
political or economic factors and in other
extraordinary circumstances.
PO 00000
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58751
undervalued and that offer a superior
risk/return profile. Pursuant to this
investment strategy, the Fund may
invest in the following Fixed Income
Securities, which may be represented by
derivatives relating to such securities, as
discussed below:
• Securities issued or guaranteed by
the U.S. government or its agencies,
instrumentalities or U.S. governmentsponsored entities (‘‘U.S. government
securities’’);
• Treasury Inflation Protected
Securities (‘‘TIPS’’);
• the following non-agency, nongovernment-sponsored entity (‘‘GSE’’)
and privately-issued mortgage-related
and other asset-backed securities:
Residential mortgage-backed securities
(‘‘RMBS’’), commercial mortgage-backed
securities (‘‘CMBS’’), asset-backed
securities (‘‘ABS’’), and collateralized
loan obligations (‘‘CLOs’’ and, together
with such RMBS, CMBS and ABS,
‘‘Private ABS/MBS’’); 13
• Agency RMBS, agency CMBS, and
agency ABS;
• domestic corporate bonds;
• Fixed Income Securities issued by
non-U.S. corporations and non-U.S.
governments;
• bank loans, including first lien
senior secured floating rate bank loans
(‘‘Senior Loans’’), secured and
unsecured loans, second lien or more
junior loans, and bridge loans;
• fixed income convertible securities;
• fixed income preferred securities;
and
• municipal bonds.
The Fund may invest in agency RMBS
and CMBS by investing in to-beannounced transactions (‘‘TBA
Transactions’’).
The Fund may hold cash and cash
equivalents.14 In addition, the Fund
may hold the following short-term
instruments with maturities of three
months or more: Certificates of deposit;
bankers’ acceptances; repurchase
agreements and reverse repurchase
agreements; bank time deposits; and
commercial paper.
The Fund may enter into short sales
of any securities in which the Fund may
invest.
The Fund may utilize exchange-listed
and over-the-counter (‘‘OTC’’) traded
derivatives instruments for duration/
yield curve management and/or hedging
13 For avoidance of doubt, ‘‘Private ABS/MBS’’ as
referenced herein are non-agency, non-GSE and
privately-issued mortgage-related and other assetbacked securities as stated in Commentary .01(b)(5)
to NYSE Arca Rule 8.600–E.
14 For purposes of this filing, cash equivalents are
the short-term instruments with maturities of less
than 3 months enumerated in Commentary .01(c) to
Rule 8.600–E.
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Federal Register / Vol. 84, No. 212 / Friday, November 1, 2019 / Notices
purposes, for risk management purposes
or as part of its investment strategies.
The Fund will use derivative
instruments primarily to hedge interest
rate risk, actively manage interest rate
exposure, hedge foreign currency risk
and actively manage foreign currency
exposure. The Fund may also use
derivative instruments to enhance
returns, as a substitute for, or to gain
exposure to, a position in an underlying
asset, to reduce transaction costs, to
maintain full market exposure, to
manage cash flows or to preserve
capital. Derivatives may also be used to
hedge risks associated with the Fund’s
other portfolio investments. The Fund
will not use derivative instruments to
gain exposure to Private ABS/MBS, and
derivative instruments linked to such
securities will be used for hedging
purposes only. Derivatives that the
Fund may enter into are the following:
Futures on interest rates, currencies,
Fixed Income Securities and fixed
income indices; exchange-traded and
OTC options on interest rates,
currencies, Fixed Income Securities and
fixed income indices; swap agreements
on interest rates, currencies, Fixed
Income Securities and fixed income
indices; credit default swaps (‘‘CDX’’);
and currency forward contracts.
Other Investments
While the Fund, under normal market
conditions, invests at least 80% of its
net assets in the Principal Investments
described above, the Fund may invest
its remaining assets in the following
‘‘Non-Principal Investments.’’
The Fund may invest in exchangetraded common stock, exchange-traded
preferred stock, and exchange-traded
real estate investment trusts (‘‘REITs’’).
The Fund may invest in the securities
of other investment companies
registered under the 1940 Act, including
money market funds, exchange-traded
funds (‘‘ETFs’’), open-end funds (other
than money market funds and other
ETFs), and U.S. exchange-traded closedend funds.15
The Fund may hold exchange-traded
notes (‘‘ETNs’’).16
15 For purposes of this filing, the term ‘‘ETFs’’ are
Investment Company Units (as described in NYSE
Arca Rule 5.2–E(j)(3)); Portfolio Depositary Receipts
(as described in NYSE Arca Rule 8.100–E); and
Managed Fund Shares (as described in NYSE Arca
Rule 8.600–E). All ETFs will be listed and traded
in the U.S. on a national securities exchange. While
the Fund may invest in inverse ETFs, the Fund will
not invest in leveraged (e.g., 2X, –2X, 3X or –3X)
ETFs.
16 ETNs are Index-Linked Securities (as described
in NYSE Arca Rule 5.2–E(j)(6)). While the Fund
may invest in inverse ETNs, the Fund will not
invest in leveraged or inverse leveraged ETNs (e.g.,
2X or –3X).
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The Fund may hold exchange-traded
or OTC ‘‘Work Out Securities.’’ 17
The Fund may hold exchange-traded
or OTC equity securities issued upon
conversion of fixed income convertible
securities.
Investment Restrictions
The Fund may not invest more than
2% of its total assets in any one Fixed
Income Security (excluding U.S.
government securities and TIPS) on a
per CUSIP basis. The Fund’s holdings in
derivative instruments for hedging
purposes would be excluded from the
determination of compliance with this
2% limitation. The total gross notional
value of the Fund’s holdings in
derivative instruments used to gain
exposure to a specific asset is limited to
2% of the Fund’s total assets.
The Fund may invest up to 50% of its
total assets in the aggregate in Private
ABS/MBS, provided that the Fund (1)
may not invest more than 30% of its
total assets in non-agency RMBS; (2)
may not invest more than 25% of its
total assets in non-agency CMBS and
CLOs; and (3) may not invest more than
25% of its total assets in non-agency
ABS.
With respect to the Fund’s
investments in up to 30% of its total
assets in Private ABS/MBS that exceed
the 20% of the weight of the Fund’s
portfolio 18 that may be invested in
Private ABS/MBS under Commentary
.01(b)(5) to NYSE Arca Rule 8.600–E,19
the following restrictions will apply:
• Non-agency RMBS shall have a
weighted average loan age of 84 months
or more;
• Non-agency CMBS and CLOs shall
have a weighted average loan age of 60
months or more; and
17 For purposes of this filing, Work Out Securities
are U.S. or foreign equity securities of any type
acquired in connection with restructurings related
to issuers of Fixed Income Securities held by the
Fund. Work Out Securities are generally traded
OTC, but may be traded on a U.S. or foreign
exchange.
18 See Securities Exchange Act Release No. 86017
(June 3, 2019), 84 FR 26711 (June 7, 2019) (SR–
NYSEArca–2019–06) (order approving an
amendment to Commentary .01(b)(5) to Rule 8.600–
E to delete the reference to the ‘‘fixed income
portion of the’’ portfolio, such that non-agency,
non-GSE, and privately-issued mortgage-related and
other asset-backed securities components of a
portfolio may not account, in the aggregate, for
more than 20% of the weight of the whole
portfolio).
19 Commentary .01(b)(5) to NYSE Arca Rule
8.600–E provides that non-agency, non-GSE and
privately-issued mortgage-related and other assetbacked securities components of a portfolio shall
not account, in the aggregate, for more than 20%
of the weight of the portfolio.
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• Non-agency ABS shall have a
weighted average loan age of 12 months
or more.20
The Exchange proposes that up to
25% of the Fund’s assets may be
invested in OTC derivatives that are
used to reduce currency, interest rate or
credit risk arising from the Fund’s
investments (that is, ‘‘hedge’’). The
Fund’s investments in OTC derivatives
other than OTC derivatives used to
hedge the Fund’s portfolio against
currency, interest rate or credit risk will
be limited to 20% of the assets in the
Fund’s portfolio. For purposes of these
percentage limitations on OTC
derivatives, the weight of such OTC
derivatives will be calculated as the
aggregate gross notional value of such
OTC derivatives.
The Fund’s holdings of bank loans
will not exceed 15% of the Fund’s total
assets, and the Fund’s holdings of bank
loans other than Senior Loans will not
exceed 5% of the Fund’s total assets.
The Fund’s holdings in fixed income
convertible securities and in equity
securities issued upon conversion of
such convertible securities will not
exceed 10% of the Fund’s total assets.
The Fund’s holdings in Work Out
Securities will not exceed 5% of the
Fund’s total assets.
The Fund will not invest in securities
or other financial instruments that have
not been described in this proposed rule
change.
Other Restrictions
The Fund’s investments, including
derivatives, will be consistent with the
Fund’s investment objective and will
not be used to enhance leverage
(although certain derivatives and other
investments may result in leverage).
That is, the Fund’s investments will not
be used to seek performance that is the
multiple or inverse multiple (e.g., 2X or
–3X) of the Fund’s primary broad-based
securities benchmark index (as defined
in Form N–1A).21
Use of Derivatives by the Fund
The Fund may invest in the types of
derivatives described in the ‘‘Principal
Investments’’ section above for the
purposes described in that section.
Investments in derivative instruments
will be made in accordance with the
Fund’s investment objective and
policies.
20 Information relating to weighted average loan
age for non-agency RMBS, non-agency CMBS, CLOs
and non-agency ABS is widely available from major
market data vendors such as Bloomberg.
21 The Fund’s broad-based securities benchmark
index will be identified in a future amendment to
the Registration Statement following the Fund’s
first full calendar year of performance.
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To limit the potential risk associated
with such transactions, the Fund will
enter into offsetting transactions or
segregate or ‘‘earmark’’ assets
determined to be liquid by the Adviser
in accordance with procedures
established by the Trust’s Board of
Trustees (the ‘‘Board’’). In addition, the
Fund has included appropriate risk
disclosure in its offering documents,
including leveraging risk. Leveraging
risk is the risk that certain transactions
of the Fund, including the Fund’s use of
derivatives, may give rise to leverage,
causing the Fund to be more volatile
than if it had not been leveraged.
Because the markets for certain assets,
or the assets themselves, may be
unavailable or cost prohibitive as
compared to derivative instruments,
suitable derivative transactions may be
an efficient alternative for the Fund to
obtain the desired asset exposure.
Impact on Arbitrage Mechanism
The Adviser and the Sub-Adviser
believe there will be minimal, if any,
impact to the arbitrage mechanism as a
result of the Fund’s use of derivatives
and Private ABS/MBS. The Adviser and
the Sub-Adviser understand that market
makers and participants should be able
to value derivatives and Private ABS/
MBS as long as the positions are
disclosed with relevant information.
The Adviser and the Sub-Adviser
believe that the price at which Shares of
the Fund trade will continue to be
disciplined by arbitrage opportunities
created by the ability to purchase or
redeem Shares of the Fund at their net
asset value (‘‘NAV’’), which should
ensure that Shares of the Fund will not
trade at a material discount or premium
in relation to their NAV.
The Adviser and Sub-Adviser do not
believe there will be any significant
impacts to the settlement or operational
aspects of the Fund’s arbitrage
mechanism due to the use of derivatives
and Private ABS/MBS.
Creation and Redemption of Shares
The Fund will issue and redeem
Shares on a continuous basis at NAV 22
only in large blocks of Shares (‘‘Creation
Units’’) in transactions with authorized
participants, generally including brokerdealers and large institutional investors
(‘‘Authorized Participants’’). Creation
Units generally will consist of 50,000
Shares. The size of a Creation Unit is
22 The NAV of the Fund’s Shares generally will
be calculated once daily Monday through Friday as
of the close of regular trading on the New York
Stock Exchange (‘‘NYSE’’), generally 4:00 p.m.,
Eastern Time (‘‘E.T.’’). NAV per Share will be
calculated by dividing the Fund’s net assets by the
number of Fund Shares outstanding.
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19:23 Oct 31, 2019
Jkt 250001
subject to change. As described in the
Registration Statement, the Fund will
issue and redeem Creation Units in
exchange for an in-kind portfolio of
instruments and/or cash in lieu of such
instruments (the ‘‘Creation Basket’’).23
In addition, if there is a difference
between the NAV attributable to a
Creation Unit and the market value of
the Creation Basket exchanged for the
Creation Unit, the party conveying
instruments (which may include cashin-lieu amounts) with the lower value
will pay to the other an amount in cash
equal to the difference (referred to as the
‘‘Cash Component’’).
Creations and redemptions must be
made by or through an Authorized
Participant that has executed an
agreement that has been agreed to by the
Distributor and the Transfer Agent with
respect to creations and redemptions of
Creation Units. All standard orders to
create Creation Units must be received
by the Transfer Agent no later than the
closing time of the regular trading
session on the NYSE (ordinarily 4:00
p.m., E.T.) (the ‘‘Closing Time’’) in each
case on the date such order is placed in
order for the creation of Creation Units
to be effected based on the NAV of
Shares as next determined on such date
after receipt of the order in proper form.
Shares may be redeemed only in
Creation Units at their NAV next
determined after receipt not later than
the Closing Time of a redemption
request in proper form by the Fund
through the Transfer Agent and only on
a business day. The Custodian, through
the National Securities Clearing
Corporation (‘‘NSCC’’), will make
available on each business day, prior to
the opening of business of the Exchange,
the list of the names and quantities of
the instruments comprising the Creation
Basket, as well as the estimated Cash
Component (if any), for that day. The
published Creation Basket will apply
until a new Creation Basket is
announced on the following business
day prior to commencement of trading
in the Shares.
Application of Generic Listing
Requirements
The Exchange is submitting this
proposed rule change because the
portfolio for the Fund will not meet all
of the ‘‘generic’’ listing requirements of
Commentary .01 to NYSE Arca Rule
8.600–E applicable to the listing of
Managed Fund Shares. The Fund’s
portfolio will meet all such
23 It is expected that the Fund will typically issue
and redeem Creation Units on a cash basis;
however, at times, the Fund may issue and redeem
Creation Units on an in-kind (or partially in-kind)
(or partially cash) basis.
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58753
requirements except for those set forth
in Commentary .01(a)(1), (a)(2), (b)(1),
(b)(4), (b)(5), and (e), as described
below.
The Fund will not comply with the
requirements set forth in Commentary
.01(a)(1) 24 and (a)(2) 25 to NYSE Arca
24 Commentary .01(a)(1) to NYSE Arca Rule
8.600–E provides that the component stocks of the
equity portion of a portfolio that are U.S.
Component Stocks shall meet the following criteria
initially and on a continuing basis: (A) Component
stocks (excluding Derivative Securities Products
and Index-Linked Securities) that in the aggregate
account for at least 90% of the equity weight of the
portfolio (excluding such Derivative Securities
Products and Index-Linked Securities) each shall
have a minimum market value of at least $75
million; (B) Component stocks (excluding
Derivative Securities Products and Index-Linked
Securities) that in the aggregate account for at least
70% of the equity weight of the portfolio (excluding
such Derivative Securities Products and IndexLinked Securities) 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 Derivative Securities Products and
Index-Linked Securities) shall not exceed 30% of
the equity weight of the portfolio, and, to the extent
applicable, the five most heavily weighted
component stocks (excluding Derivative Securities
Products and Index-Linked Securities) 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 Derivative Securities
Products or Index-Linked Securities constitute, at
least in part, components underlying a series of
Managed Fund Shares, or (ii) one or more series of
Derivative Securities Products or Index-Linked
Securities account for 100% of the equity weight of
the portfolio of a series of Managed Fund Shares;
(E) Except as provided herein, 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 Securities Exchange Act of 1934; and (F)
American Depositary Receipts (‘‘ADRs’’) in a
portfolio may be exchange-traded or non-exchangetraded. However, no more than 10% of the equity
weight of a portfolio shall consist of non-exchangetraded ADRs.
25 Commentary .01(a)(2) to NYSE Arca Rule
8.600–E provides that the component stocks of the
equity portion of a portfolio that are Non-U.S.
Component Stocks shall meet the following criteria
initially and on a continuing basis: (A) Non-U.S.
Component Stocks each shall have a minimum
market value of at least $100 million; (B) Non-U.S.
Component Stocks 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 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 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, 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 Derivative Securities Products or
Index-Linked Securities constitute, at least in part,
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Rule 8.600–E with respect to the Fund’s
investments in equity securities.26
Instead, the Exchange proposes that (i)
the Fund’s investments in equity
securities will meet the requirements of
Commentary .01(a) with the exception
of Commentary .01(a)(1)(C) and
.01(a)(1)(D) (with respect to U.S.
Component Stocks) and Commentary
.01(a)(2)(C) and .01(a)(2)(D) (with
respect to Non-U.S. Component Stocks).
Any Fund investment in exchangetraded common stocks, preferred stocks,
REITS, ETFs, ETNs, exchange-traded
equity securities issued upon
conversion of fixed income convertible
securities, exchange-traded Work Out
Securities and U.S. exchange-traded
closed-end funds would provide for
enhanced diversification of the Fund’s
portfolio and, in any case, would be
Non-Principal Investments and would
not exceed 20% of the Fund’s net assets
in the aggregate. With respect to any
Fund holdings of exchange-traded
equity securities issued upon
conversion of fixed income convertible
securities and exchange-traded Work
Out Securities, such securities will not
exceed 10% and 5%, respectively, of the
Fund’s total assets. The Adviser and
Sub-Adviser represent that the Fund
generally will not actively invest in
equity securities issued upon
conversion of fixed income convertible
securities or Work Out Securities, but
may, at times, receive a distribution of
such securities in connection with the
Fund’s holdings in other securities.
Therefore, the Fund’s holdings in equity
securities issued upon conversion of
fixed income convertible securities and
Work Out Securities generally would
not be acquired as the result of the
Fund’s voluntary investment decisions.
The Adviser and Sub-Adviser represent
that, under these circumstances,
application of the weighting
requirements of Commentary
.01(a)(1)(C) and Commentary .01(a)(2)(C)
and the minimum number of
components requirements of
Commentary .01(a)(1)(D) and
Commentary .01(a)(2)(D) would impose
components underlying a series of Managed Fund
Shares, or (ii) one or more series of Derivative
Securities Products or Index-Linked Securities
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 shall be listed
and traded on an exchange that has last-sale
reporting.
26 For purposes of these exceptions, investments
in equity securities that are OTC Work Out
Securities, OTC equity securities issued upon
conversion of fixed income convertible securities,
or non-exchange-traded securities of other open-end
investment companies (e.g., mutual funds) are
excluded and are discussed further below.
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an unnecessary burden on the Fund’s
ability to hold such equity securities.
The Fund will not comply with the
requirement in Commentary .01(b)(1) to
Rule 8.600–E that components that in
the aggregate account for at least 75% of
the fixed income weight of the portfolio
each shall have a minimum original
principal amount outstanding of $100
million or more. Instead, the Exchange
proposes that components that in the
aggregate account for at least 50% of the
fixed income weight of the portfolio
each shall have a minimum original
principal amount outstanding of $50
million or more. As noted above, the
Fund may not invest more than 2% of
its total assets in any one Fixed Income
Security (excluding U.S. government
securities and TIPS) on a per CUSIP
basis. In addition, at least 50% of the
weight of the Fund’s portfolio would
continue to be subject to a substantial
minimum (i.e., $50 million) original
principal amount outstanding. The
Exchange believes this limitation would
provide significant additional
diversification to the Fund’s
investments in Fixed Income Securities,
and reduce concerns that the Fund’s
investments in such securities would be
readily susceptible to market
manipulation.
The Fund will not comply with the
requirements in Commentary .01(b)(4)
to Rule 8.600–E that component
securities that in the aggregate account
for at least 90% of the fixed income
weight of the portfolio meet one of the
criteria specified in Commentary
.01(b)(4), because certain Private ABS/
MBS cannot satisfy the criteria in
Commentary .01(b)(4).27 Instead, the
Exchange proposes that the Fund’s
investments in Fixed Income Securities
other than Private ABS/MBS will be
required to comply with the
requirements of Commentary .01(b)(4).
As noted above, the Fund may not
invest more than 2% of its total assets
in any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per CUSIP basis. The
Exchange believes this limitation would
provide additional diversification to the
27 Commentary .01(b)(4) 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.
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Fund’s investments in Private ABS/
MBS, and reduce concerns that the
Fund’s investment in such securities
would be readily susceptible to market
manipulation.
The Exchange notes that the
Commission has previously approved
the listing of Managed Fund Shares with
similar investment objectives and
strategies without imposing
requirements that a certain percentage
of such funds’ securities meet one of the
criteria set forth in Commentary
.01(b)(4).28
The Fund will not comply with the
requirement in Commentary .01(b)(5) to
Rule 8.600–E that Private ABS/MBS in
the Fund’s portfolio account, in the
aggregate, for no more than 20% of the
weight of the Fund’s portfolio.29
Instead, the Exchange proposes that, in
order to enable the portfolio to be more
diversified and provide the Fund with
an opportunity to earn higher returns,
the Fund may invest up to 50% of its
total assets in the aggregate in Private
ABS/MBS, provided that the Fund (1)
may not invest more than 30% of its
total assets in non-agency RMBS; (2)
may not invest more than 25% of its
total assets in non-agency CMBS and
CLOs; and (3) may not invest more than
25% of its total assets in non-agency
ABS.
With respect to the Fund’s
investments in up to 30% of its total
assets in Private ABS/MBS that exceed
the 20% of the weight of the Fund’s
portfolio that may be invested in Private
ABS/MBS under Commentary .01(b)(5)
to NYSE Arca Rule 8.600–E,30 the
following restrictions will apply:
• Non-agency RMBS shall have a
weighted average loan age of 84 months
or more;
• Non-agency CMBS and CLOs shall
have a weighted average loan age of 60
months or more; and
• Non-agency ABS shall have a
weighted average loan age of 12 months
or more.
In addition, as noted above, the Fund
may not invest more than 2% of its total
assets in any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per CUSIP basis.31 The
28 See, e.g., Exchange Act Release Nos. 67894
(September 20, 2012) 77 FR 59227 (September 26,
2012) (SR–BATS–2012–033) (order approving the
listing and trading of shares of the iShares Short
Maturity Bond Fund); 70342 (September 6, 2013),
78 FR 56256 (September 12, 2013) (SR–NYSEArca–
2013–71) (order approving the listing and trading of
shares of the SPDR SSgA Ultra Short Term Bond
ETF, SPDR SSgA Conservative Ultra Short Term
Bond ETF and SPDR SSgA Aggressive Ultra Short
Term Bond ETF).
29 See note 19, supra.
30 See note 19, supra.
31 As noted above, the Fund’s holdings in
derivative instruments for hedging purposes would
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Exchange believes these limitations
would provide additional
diversification to the Fund’s Private
ABS/MBS investments and reduce
concerns that the Fund’s investment in
such securities would be readily
susceptible to market manipulation.
The Adviser and Sub-Adviser
represent that the RMBS sector can be
an important component of the Fund’s
investment strategy because of the
potential for attractive risk-adjusted
returns relative to other fixed income
sectors and the potential to add
significantly to the diversification in the
Fund’s portfolio. Similarly, the Private
ABS/MBS sectors also have the
potential for attractive risk-adjusted
returns and added portfolio
diversification.
The Fund’s portfolio will not comply
with the requirements set forth in
Commentary .01(e) to NYSE Arca Rule
8.600–E.32 Specifically, the Fund’s
investments in OTC derivatives may
exceed 20% of Fund assets, calculated
as the aggregate gross notional value of
such OTC derivatives. The Exchange
proposes that up to 25% of the Fund’s
assets (calculated as the aggregate gross
notional value) may be invested in OTC
derivatives that are used to reduce
currency, interest rate or credit risk
arising from the Fund’s investments
(that is, ‘‘hedge’’). The Fund’s
investments in OTC derivatives other
than OTC derivatives used to hedge the
Fund’s portfolio against currency,
interest rate or credit risk will be limited
to 20% of the assets in the Fund’s
portfolio, calculated as the aggregate
gross notional value of such OTC
derivatives.
The Adviser and Sub-Adviser believe
that it is important to provide the Fund
with additional flexibility to manage
risk associated with its investments.
Depending on market conditions, it may
be critical that the Fund be able to
utilize available OTC derivatives for this
purpose to attempt to reduce impact of
currency, interest rate or credit
fluctuations on Fund assets. Therefore,
be excluded from the determination of compliance
with this 2% limitation. The total gross notional
value of the Fund’s holdings in derivative
instruments used to gain exposure to a specific
asset is limited to 2% of the Fund’s total assets.
32 Commentary .01(e) to NYSE Arca Rule 8.600–
E provides that the portfolio may hold OTC
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; however, on both an initial and
continuing basis, no more than 20% of the assets
in the portfolio may be invested in OTC derivatives.
For purposes of calculating this limitation, a
portfolio’s investment in OTC derivatives will be
calculated as the aggregate gross notional value of
the OTC derivatives.
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the Exchange believes it is appropriate
to apply a limit of up to 25% of the
Fund’s assets to the Fund’s investments
in OTC derivatives (calculated as the
aggregate gross notional value of such
OTC derivatives), including forwards,
options and swaps, that are used for
hedging purposes, as described above.33
As noted above, the Fund may hold
equity securities that are Work Out
Securities, which generally are traded
OTC (but that may be traded on a U.S.
or foreign exchange), exchange-traded or
OTC equity securities issued upon
conversion of fixed income convertible
securities, and non-exchange-traded
securities of other open-end investment
company securities (e.g., mutual funds).
The Exchange believes that it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund on the Exchange
notwithstanding that the Fund would
not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
Rule 8.600–E with respect to the Fund’s
investments in non-exchange-traded
securities of open-end investment
company securities,34 and
notwithstanding that the Fund’s
holdings of OTC equity securities issued
upon conversion of fixed income
convertible securities and OTC Work
Out Securities would not meet the
requirements of Commentary
.01(a)(1)(A) through (E) and
Commentary .01(a)(2) (A) through (E) to
Rule 8.600–E. Investments in nonexchange-traded securities of open-end
investment company securities will not
be principal investments of the Fund.35
Such investments, which may include
mutual funds that invest, for example,
principally in fixed income securities,
33 The Commission has previously approved an
exception from requirements set forth in
Commentary .01(e) relating to investments in OTC
derivatives similar to those proposed with respect
to the Fund in Securities Exchange Act Release No.
80657 (May 11, 2017), 82 FR 22702 (May 17, 2017)
(SR–NYSEArca–2017–09) (Notice of Filing of
Amendment No. 2 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified
by Amendment No. 2, Regarding Investments of the
Janus Short Duration Income ETF Listed Under
NYSE Arca Equities Rule 8.600).
34 Commentary .01 (a) to Rule 8.600–E specifies
the equity securities accommodated by the generic
criteria in Commentary .01(a), namely, U.S.
Component Stocks (as described in Rule 5.2–
E(j)(3)); Non-U.S. Component Stocks (as described
in Rule 5.2–E(j)(3)); Derivative Securities Products
(i.e., Investment Company Units and securities
described in Section 2 of Rule 8–E); and IndexLinked Securities that qualify for Exchange listing
and trading under Rule 5.2–E(j)(6).
35 For purposes of this section of the filing, nonexchange-traded securities of other registered
investment companies do not include money
market funds, which are cash equivalents under
Commentary .01(c) to Rule 8.600–E and for which
there is no limitation in the percentage of the
portfolio invested in such securities.
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58755
would be utilized to help the Fund meet
its investment objective and to equitize
cash in the short term. With respect to
any Fund holdings of OTC equity
securities issued upon conversion of
fixed income convertible securities and
OTC Work Out Securities, such
securities will not exceed 10% and 5%,
respectively, of the Fund’s total assets.
The Adviser and Sub-Adviser represent
that the Fund generally will not actively
invest in OTC equity securities issued
upon conversion of fixed income
convertible securities or OTC Work Out
Securities, but may, at times, receive a
distribution of such securities in
connection with the Fund’s holdings in
other securities. Therefore, the Fund’s
holdings in equity securities issued
upon conversion of fixed income
convertible securities and Work Out
Securities generally would not be
acquired as the result of the Fund’s
voluntary investment decisions.
With respect to investments in nonexchange-traded investment company
securities, because such securities have
a net asset value based on the value of
securities and financial assets the
investment company holds, the
Exchange believes it is both unnecessary
and inappropriate to apply to such
investment company securities the
criteria in Commentary .01(a)(1).36
The Exchange notes that Commentary
.01(a) through (d) to Rule 8.600–E
exclude application of those provisions
to certain ‘‘Derivative Securities
Products’’ that are exchange-traded
investment company securities,
including Investment Company Units
(as described in NYSE Arca Rule 5.2–
E(j)(3)), Portfolio Depositary Receipts (as
described in NYSE Arca Rule 8.100–E)
and Managed Fund Shares (as described
in NYSE Arca Rule 8.600–E).37 In its
36 The Commission has previously approved
proposed rule changes under Section 19(b) of the
Act for series of Managed Fund Shares that may
invest in non-exchange traded investment company
securities. See, e.g., Securities Exchange Act
Release No. 78414 (July 26, 2016), 81 FR 50576
(August 1, 2016) (SR–NYSEArca–2016–79) (order
approving listing and trading of shares of the Virtus
Japan Alpha ETF under NYSE Arca Equities Rule
8.600).
37 The Commission initially approved the
Exchange’s proposed rule change to exclude
‘‘Derivative Securities Products’’ (i.e., Investment
Company Units and securities described in Section
2 of Rule 8) and ‘‘Index-Linked Securities (as
described in Rule 5.2–E (j)(6)) from Commentary
.01(a)(A) (1) through (4) to Rule 5.2–E(j)(3) in
Securities Exchange Act Release No. 57751 (May 1,
2008), 73 FR 25818 (May 7, 2008) (SR–NYSEArca–
2008–29) (Order Granting Approval of a Proposed
Rule Change, as Modified by Amendment No. 1
Thereto, to Amend the Eligibility Criteria for
Components of an Index Underlying Investment
Company Units) (‘‘2008 Approval Order’’). See also,
Securities Exchange Act Release No. 57561 (March
26, 2008), 73 FR 17390 (April 1, 2008) (Notice of
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2008 Approval Order approving
amendments to Commentary .01(a) to
Rule 5.2(j)(3) that exclude Derivative
Securities Products from certain
provisions of Commentary .01(a) (which
exclusions are similar to those in
Commentary .01(a)(1) to Rule 8.600–E),
the Commission stated that ‘‘based on
the trading characteristics of Derivative
Securities Products, it may be difficult
for component Derivative Securities
Products to satisfy certain quantitative
index criteria, such as the minimum
market value and trading volume
limitations.’’ The Exchange notes that it
would be difficult or impossible to
apply to non-exchange-traded
investment company securities the
generic quantitative criteria (e.g., market
capitalization, trading volume, or
portfolio criteria) in Commentary .01 (a)
through (d) applicable to U.S.
Component Stocks. For example, the
requirement for U.S. Component Stocks
in Commentary .01(a)(1)(B) that there be
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 is tailored to exchange-traded
securities (e.g., U.S. Component Stocks)
and not to mutual fund shares, which
do not trade in the secondary market.
Moreover, application of such criteria
would not serve the purpose served
with respect to U.S. Component Stocks,
namely, to establish minimum liquidity
and diversification criteria for U.S.
Component Stocks held by series of
Managed Fund Shares.
The Exchange notes that the
Commission has previously approved
listing and trading of an issue of
Managed Fund Shares that may invest
in equity securities that are nonexchange-traded securities of other
open-end investment company
securities notwithstanding that the fund
would not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
Rule 8.600–E with respect to such
fund’s investments in such securities.38
Filing of Proposed Rule Change and Amendment
No. 1 Thereto to Amend the Eligibility Criteria for
Components of an Index Underlying Investment
Company Units). The Commission subsequently
approved generic criteria applicable to listing and
trading of Managed Fund Shares, including
exclusions for Derivative Securities Products and
Index-Linked Securities in Commentary .01(a)(1)(A)
through (D), in Securities Exchange Act Release No.
78397 (July 22, 2016), 81 FR 49320 (July 27, 2016)
(Order Granting Approval of Proposed Rule Change,
as Modified by Amendment No. 7 Thereto,
Amending NYSE Arca Equities Rule 8.600 To
Adopt Generic Listing Standards for Managed Fund
Shares). See also, Amendment No. 7 to SR–
NYSEArca–2015–110, available at https://
www.sec.gov/comments/sr-nysearca-2015-110/
nysearca2015110-9.pdf.
38 See Securities Exchange Act Release No. 83319
(May 24, 2018) (SR–NYSEArca–2018–15) (Order
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19:23 Oct 31, 2019
Jkt 250001
Thus, the Exchange believes that it is
appropriate to permit the Fund to invest
in non-exchange-traded open-end
management investment company
securities, as described above.
Deviations from the generic
requirements are necessary for the Fund
to achieve its investment objective in a
manner that is cost-effective and that
maximizes investors’ returns. Further,
the proposed alternative requirements
are narrowly tailored to allow the Fund
to achieve its investment objective in
manner that is consistent with the
principles of Section 6(b)(5) of the Act.
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.
The Exchange notes that, other than
Commentary .01(a)(1), (a)(2), (b)(1),
(b)(4), (b)(5), and (e) to Rule 8.600–E, as
described above, the Fund’s portfolio
will meet all other requirements of Rule
8.600–E.
Availability of Information
The Fund’s website
(www.ftportfolios.com) will include the
prospectus for the Fund that may be
downloaded. The Fund’s website will
include additional quantitative
information updated on a daily basis
including, for the Fund, (1) daily trading
volume, the prior business day’s
reported closing price, NAV and
midpoint of the bid/ask spread at the
time of calculation of such NAV (the
‘‘Bid/Ask Price’’),39 and a calculation of
the premium and discount of the Bid/
Ask Price against the NAV, and (2) data
in chart format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters. On each business day, before
commencement of trading in Shares in
the Core Trading Session on the
Exchange, the Fund will disclose on its
website the Disclosed Portfolio as
defined in NYSE Arca Rule 8.600–
E(c)(2) that forms the basis for the
Fund’s calculation of NAV at the end of
the business day.40
Approving a Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, to Continue Listing and
Trading Shares of the PGIM Ultra Short Bond ETF
Under NYSE Arca Rule 8.600–E).
39 The Bid/Ask Price of the Fund’s Shares will be
determined using the mid-point 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.
40 Under accounting procedures 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
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On a daily basis, the Fund will
disclose the information required under
NYSE Arca Rule 8.600–E(c)(2) to the
extent applicable. The website
information will be publicly available at
no charge.
In addition, a basket composition file,
which includes the security names and
share quantities, if applicable, required
to be delivered in exchange for the
Fund’s Shares, together with estimates
and actual cash components, will be
publicly disseminated daily prior to the
opening of the Exchange via the NSCC.
The basket represents one Creation Unit
of the Fund. Authorized Participants
may refer to the basket composition file
for information regarding Fixed Income
Securities, and any other instrument
that may comprise the Fund’s basket on
a given day.
Investors can also obtain the Trust’s
Statement of Additional Information
(‘‘SAI’’), the Fund’s Shareholder
Reports, and the Fund’s Forms N–CSR
and Forms N–SAR, filed twice a year.
The Fund’s SAI and Shareholder
Reports will be available free upon
request from the Trust, and those
documents and the Form N–CSR, Form
N–PX and Form N–SAR may be viewed
on-screen or downloaded from the
Commission’s website at www.sec.gov.
Intra-day and closing price
information regarding exchange-traded
options will be available from the
exchange on which such instruments
are traded. Intra-day and closing price
information regarding Fixed Income
Securities will be available from major
market data vendors. Price information
relating to OTC options, forwards and
swaps will be available from major
market data vendors. Intra-day price
information for exchange-traded
derivative instruments will be available
from the applicable exchange and from
major market data vendors. Intraday and
other price information for the Fixed
Income Securities in which the Fund
will invest will be available through
subscription services, such as
Bloomberg, Markit and Thomson
Reuters, which can be accessed by
Authorized Participants and other
market participants. Additionally, the
Trade Reporting and Compliance Engine
(‘‘TRACE’’) of the Financial Industry
Regulatory Authority (‘‘FINRA’’) will be
a source of price information for
corporate bonds, and Private ABS/MBS,
to the extent transactions in such
securities are reported to TRACE.41
day the portfolio that will form the basis for the
NAV calculation at the end of the business day.
41 Broker-dealers that are FINRA member firms
have an obligation to report transactions in
specified debt securities to TRACE to the extent
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Trade price and other information
relating to municipal bonds is available
through the Municipal Securities
Rulemaking Board’s Electronic
Municipal Market Access (‘‘EMMA’’)
system. Non-exchange-traded open-end
investment company securities 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. Price
information regarding U.S. government
securities, bank loans, Private ABS/
MBS, cash equivalents and short-term
instruments with maturities of three
months or more generally may be
obtained from brokers and dealers who
make markets in such securities or
through nationally recognized pricing
services through subscription
agreements. Information relating to
weighted average loan age for Private
ABS/MBS is widely available from
major market data vendors such as
Bloomberg.
Information regarding market price
and trading volume of the Shares, ETFs,
ETNs, common stocks, preferred stocks,
REITs, equity securities issued upon
conversion of fixed income convertible
securities, Work-Out Securities and
closed-end funds will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services.
Information regarding the previous
day’s closing price and trading volume
information for the Shares will be
published daily in the financial section
of newspapers.
Quotation and last sale information
for the Shares, ETFs, ETNs, closed-end
funds, REITs, certain common stocks,
certain preferred stocks, certain equity
securities issued upon conversion of
fixed income convertible securities, and
certain Work-Out Securities will be
available via the Consolidated Tape
Association (‘‘CTA’’) high-speed line.
Exchange-traded options quotation and
last sale information for options cleared
via the Options Clearing Corporation
(‘‘OCC’’) are available via the Options
Price Reporting Authority (‘‘OPRA’’). In
addition, the Portfolio Indicative Value
(‘‘PIV’’), as defined in NYSE Arca Rule
8.600–E(c)(3), will be widely
disseminated by one or more major
market data vendors at least every 15
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.
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seconds during the Core Trading
Session.
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.42 Trading in Shares of the
Fund will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached. Trading also may be
halted because of market conditions or
for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. Trading in the Fund’s
Shares also will be subject to Rule
8.600–E(d)(2)(D) (‘‘Trading Halts’’).
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. Shares will trade on
the NYSE Arca Marketplace from 4 a.m.
to 8 p.m., E.T. in accordance with NYSE
Arca Rule 7.34–E (Early, Core, and Late
Trading Sessions). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Rule 7.6–E, the minimum price
variation (‘‘MPV’’) for quoting and entry
of orders in equity securities traded on
the NYSE Arca Marketplace is $0.01,
with the exception of securities that are
priced less than $1.00 for which the
MPV for order entry is $0.0001.
With the exception of the
requirements of Commentary .01(a)(1),
(a)(2), (b)(1), (b)(4), (b)(5), and (e) to Rule
8.600–E as described above in
‘‘Application of Generic Listing
Requirements,’’ the Shares of the Fund
will conform to the initial and
continued listing criteria under NYSE
Arca Rule 8.600–E. Consistent with
NYSE Arca Rule 8.600–E(d)(2)(B)(ii), the
Adviser and Sub-Adviser will
implement and maintain, or be subject
to, procedures designed to prevent the
use and dissemination of material nonpublic information regarding the actual
components of the Fund’s portfolio.
The Exchange represents that, for
initial and continued listing, the Fund
will be in compliance with Rule 10A–
3 43 under the Act, as provided by NYSE
Arca Rule 5.3–E. The Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. The
42 See
43 17
PO 00000
NYSE Arca Rule 7.12–E.
CFR 240.10A–3.
Frm 00082
Fmt 4703
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58757
Fund’s investments will be consistent
with its investment goal and will not be
used to provide multiple returns of a
benchmark or to produce leveraged
returns.
Surveillance
The Exchange represents that trading
in the Shares will be subject to the
existing trading surveillances,
administered by FINRA on behalf of the
Exchange, or by regulatory staff of the
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws. The
Exchange represents that these
procedures are adequate to properly
monitor Exchange trading of the Shares
in all trading sessions and to deter and
detect violations of Exchange rules and
federal securities laws applicable to
trading on the Exchange.44
The surveillances referred to above
generally focus on detecting securities
trading outside their normal patterns,
which could be indicative of
manipulative or other violative activity.
When such situations are detected,
surveillance analysis follows and
investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations.
The Exchange or FINRA, on behalf of
the Exchange, or both, will
communicate as needed regarding
trading in the Shares, certain exchangetraded options and certain exchangetraded futures, ETFs, ETNs, closed-end
funds, certain common stocks, certain
preferred stocks, certain REITs, certain
equity securities issued upon
conversion of fixed income convertible
securities, certain Work-Out Securities
with other markets and other entities
that are members of the Intermarket
Surveillance Group (‘‘ISG’’), and the
Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading
information regarding trading in such
securities and financial instruments
from such markets and other entities.45
In addition, the Exchange may obtain
information regarding trading in such
securities and financial instruments
from markets and other entities that are
members of ISG or with which the
Exchange has in place a CSSA. In
addition, FINRA, on behalf of the
44 FINRA conducts cross-market surveillances on
behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for
FINRA’s performance under this regulatory services
agreement.
45 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Disclosed Portfolio may trade on
markets that are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement (‘‘CSSA’’).
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Federal Register / Vol. 84, No. 212 / Friday, November 1, 2019 / Notices
Exchange, is able to access, as needed,
trade information for certain fixed
income securities held by the Fund
reported to FINRA’s TRACE. FINRA
also can access data obtained from the
Municipal Securities Rulemaking Board
relating to municipal bond trading
activity for surveillance purposes in
connection with trading in the Shares.
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
All statements and representations
made in this filing regarding (a) the
description of the portfolio or reference
asset, (b) limitations on portfolio
holdings or reference assets, or (c) the
applicability of Exchange listing rules
specified in this rule filing shall
constitute continued listing
requirements for listing the Shares of
the Fund on the Exchange.
The issuer must notify the Exchange
of any failure by the Fund to comply
with the continued listing requirements,
and, pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange
will monitor for compliance with the
continued listing requirements. If the
Fund is not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under NYSE Arca Rule 5.5–
E (m).
Information Bulletin
The Exchange will inform its Equity
Trading Permit Holders in an
Information Bulletin (‘‘Bulletin’’) of the
special characteristics and risks
associated with trading the Shares.
Specifically, the Bulletin will discuss
the following: (1) The procedures for
purchases and redemptions of Shares in
Creation Unit aggregations (and that
Shares are not individually redeemable);
(2) NYSE Arca Rule 9.2–E(a), which
imposes a duty of due diligence on its
Equity Trading Permit Holders to learn
the essential facts relating to every
customer prior to trading the Shares; (3)
the risks involved in trading the Shares
during the Early and Late Trading
Sessions when an updated PIV will not
be calculated or publicly disseminated;
(4) how information regarding the PIV
and the Disclosed Portfolio is
disseminated; (5) the requirement that
Equity Trading Permit Holders deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (6) trading information.
In addition, the Bulletin will
reference that the Fund is subject to
various fees and expenses described in
the Registration Statement. The Bulletin
will discuss any exemptive, no-action,
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19:23 Oct 31, 2019
Jkt 250001
and interpretive relief granted by the
Commission from any rules under the
Act. The Bulletin will also disclose that
the NAV for the Shares will be
calculated after 4:00 p.m., E.T. each
trading day.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 46 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of a free and open market
and, in general, to protect investors and
the public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares are
listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Rule
8.600–E. The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws. The Exchange or FINRA, on behalf
of the Exchange, or both, will
communicate as needed regarding
trading in the Shares, certain exchangetraded options and certain exchangetraded futures, ETFs, ETNs, closed-end
funds, certain common stocks, certain
preferred stocks, certain REITs, certain
equity securities issued upon
conversion of fixed income convertible
securities and certain Work-Out
Securities with other markets and other
entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading
information regarding trading in such
securities and financial instruments
from such markets and other entities.
The Exchange may obtain information
regarding trading in such securities and
financial instruments from markets and
other entities that are members of ISG or
with which the Exchange has in place
a CSSA. In addition, FINRA, on behalf
of the Exchange, is able to access, as
needed, trade information for certain
fixed income securities held by the
Fund reported to TRACE. FINRA also
can access data obtained from the
Municipal Securities Rulemaking Board
relating to municipal bond trading
activity for surveillance purposes in
connection with trading in the Shares.
The Adviser and Sub-Adviser are not
registered as broker-dealers. The
46 15
PO 00000
U.S.C. 78f(b)(5).
Frm 00083
Fmt 4703
Sfmt 4703
Adviser is affiliated with First Trust
Portfolios L.P., 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 portfolios. The SubAdviser is affiliated with multiple
broker-dealers and has implemented
and will maintain a fire wall with
respect to its broker-dealer affiliates
regarding access to information
concerning the composition and/or
changes to the portfolio.
The Exchange notes that, other than
Commentary .01(a)(1), (a)(2), (b)(1),
(b)(4), (b)(5), and (e) to Rule 8.600–E, as
described above, the Fund’s portfolio
will meet all other requirements of Rule
8.600–E.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the Exchange will
obtain a representation from the issuer
of the Shares that the NAV per Share
will be calculated daily and that the
NAV and the Disclosed Portfolio will be
made available to all market
participants at the same time. In
addition, a large amount of information
will be publicly available regarding the
Fund and the Shares, thereby promoting
market transparency. Quotation and last
sale information for the Shares, ETFs,
ETNs, closed-end funds, certain REITs,
certain common stocks, certain
preferred stocks, certain equity
securities issued upon conversion of
fixed income convertible securities, and
certain Work-Out Securities will be
available via the CTA high-speed line.
Exchange-traded options quotation and
last sale information for options cleared
via the OCC are available via OPRA. The
Exchange will inform its Equity Trading
Permit Holders in an Information
Bulletin of the special characteristics
and risks associated with trading the
Shares. Trading in Shares of the Fund
will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. Trading in the
Shares will be subject to NYSE Arca
Rule 8.600–E(d)(2)(D), which sets forth
circumstances under which Shares of
the Fund may be halted. In addition, as
noted above, investors will have ready
access to information regarding the
Fund’s holdings, NAV, the PIV, 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
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Federal Register / Vol. 84, No. 212 / Friday, November 1, 2019 / Notices
it will facilitate the listing and trading
of an additional type of activelymanaged exchange-traded product that
generally will principally hold fixed
income securities and that will enhance
competition among market participants,
to the benefit of investors and the
marketplace. As noted above, the
Exchange has in place surveillance
procedures relating to trading in the
Shares and may obtain information via
ISG from other exchanges that are
members of ISG or with which the
Exchange has entered into a CSSA. In
addition, as noted above, investors will
have ready access to information
regarding the Fund’s holdings, NAV,
Disclosed Portfolio, and quotation and
last sale information for the Shares.
Deviations from the generic
requirements, as described above, are
necessary for the Fund to achieve its
investment objective in a manner that is
cost-effective and that maximizes
investors’ returns. Further, the proposed
alternative requirements are narrowly
tailored to allow the Fund to achieve its
investment objective in a manner that is
consistent with the principles of Section
6(b)(5) of the Act. 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.
As noted above, the Fund will not
comply with the requirements set forth
in Commentary .01(a)(1) and (a)(2) to
NYSE Arca Rule 8.600–E with respect to
the Fund’s investments in equity
securities. Instead, the Exchange
proposes that (i) the Fund’s investments
in equity securities will meet the
requirements of Commentary .01(a) with
the exception of Commentary
.01(a)(1)(C) and .01(a)(1)(D) (with
respect to U.S. Component Stocks) and
Commentary .01(a)(2)(C) and
.01(a)(2)(D) (with respect to Non-U.S.
Component Stocks).47 The Exchange
believes it is appropriate and in the
public interest to approve listing and
trading of Shares of the Fund
notwithstanding that the Fund’s
holdings in such equity securities do
not comply with the requirements set
forth in Commentary .01(a)(1) and (a)(2)
to NYSE Arca Rule 8.600–E in that any
Fund investment in exchange-traded
common stocks, preferred stocks,
REITS, ETFs, ETNs, U.S. exchangetraded closed-end funds, exchangetraded equity securities issued upon
conversion of fixed income convertible
securities, and exchange-traded Work
Out Securities would provide for
enhanced diversification of the Fund’s
portfolio. Such securities would be Non47 See
notes 24 and 25, supra.
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19:23 Oct 31, 2019
Jkt 250001
Principal Investments, not exceeding
20% of the Fund’s net assets in the
aggregate.
The Fund will not comply with the
requirement in Commentary .01(b)(1) to
Rule 8.600–E that components that in
the aggregate account for at least 75% of
the fixed income weight of the portfolio
each shall have a minimum original
principal amount outstanding of $100
million or more. Instead, the Exchange
proposes that components that in the
aggregate account for at least 50% of the
fixed income weight of the portfolio
each shall have a minimum original
principal amount outstanding of $50
million or more. As noted above, the
Fund may not invest more than 2% of
its total assets in any one Fixed Income
Security (excluding U.S. government
securities and TIPS) on a per CUSIP
basis. In addition, at least 50% of the
weight of the Fund’s portfolio would
continue to be subject to a substantial
minimum (i.e., $50 million) original
principal amount outstanding. The
Exchange believes this limitation would
provide significant additional
diversification to the Fund’s
investments in Fixed Income Securities,
and reduce concerns that the Fund’s
investments in such securities would be
readily susceptible to market
manipulation.
The Exchange proposes that Private
ABS/MBS will not be required to
comply with the requirements of
Commentary .01(b)(4) because certain
Private ABS/MBS cannot satisfy the
criteria in Commentary .01(b)(4).
Instead, the Exchange proposes that the
Fund’s investments in Fixed Income
Securities other than Private ABS/MBS
will be required to comply with the
requirements of Commentary .01(b)(4).
The Exchange believes that this is
appropriate because Commentary
.01(b)(4) does not appear to be designed
for structured finance vehicles such as
Private ABS/MBS. As noted above, the
Fund may not invest more than 2% of
its total assets in any one Fixed Income
Security (excluding U.S. government
securities and TIPS) on a per CUSIP
basis. The Exchange believes this
limitation would provide additional
diversification to the Fund’s
investments in Private ABS/MBS, and
reduce concerns that the Fund’s
investment in such securities would be
readily susceptible to market
manipulation.
As noted above, the Fund will not
comply with the requirement in
Commentary .01(b)(5) to Rule 8.600–E
that Private ABS/MBS in the Fund’s
portfolio account, in the aggregate, for
no more than 20% of the weight of the
Fund’s portfolio. Instead, the Exchange
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
58759
proposes that, in order to enable the
portfolio to be more diversified and
provide the Fund with an opportunity
to earn higher returns, the Fund may
invest up to 50% of its total assets in the
aggregate in Private ABS/MBS, provided
that the Fund (1) may not invest more
than 25% of its total assets in nonagency ABS; (2) may not invest more
than 30% of its total assets in nonagency RMBS; and (3) may not invest
more than 25% of its total assets in nonagency CMBS and CLOs. With respect to
the Fund’s investments in up to 30% of
its total assets in Private ABS/MBS that
exceed the 20% of the weight of the
Fund’s portfolio that may be invested in
Private ABS/MBS under Commentary
.01(b)(5) to NYSE Arca Rule 8.600–E,
the Fund’s holdings in Private ABS/
MBS will be subject to minimum
weighted average loan age restrictions
described above.48 In addition, as noted
above, the Fund may not invest more
than 2% of its total assets in any one
Fixed Income Security (excluding U.S.
government securities and TIPS) on a
per CUSIP basis.49 The Exchange
believes these limitations would
provide additional diversification to the
Fund’s Private ABS/MBS investments
and reduce concerns that the Fund’s
investment in such securities would be
readily susceptible to market
manipulation.
The Exchange believes it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund notwithstanding that the
Fund’s holdings in such Private ABS/
MBS do not comply with the
requirements set forth in Commentary
.01(b)(5) to NYSE Arca Rule 8.600–E in
that the Fund’s investment in Private
ABS/MBS is expected to provide the
Fund with benefits associated with
increased diversification, as Private
ABS/MBS investments tend to be less
correlated to interest rates than many
other fixed income securities. The
Fund’s investment in Private ABS/MBS
will be subject to the Fund’s liquidity
procedures as adopted by the Board,
and the Adviser and Sub-Adviser do not
expect that investments in Private ABS/
MBS of up to 50% of the total assets of
the Fund will have any material impact
on the liquidity of the Fund’s
investments.
The Adviser and Sub-Adviser
represent that the RMBS sector can be
an important component of the Fund’s
investment strategy because of the
potential for attractive risk-adjusted
returns relative to other fixed income
sectors and the potential to add
48 See
49 See
E:\FR\FM\01NON1.SGM
note 19 and accompanying text, supra.
note 31, supra.
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significantly to the diversification in the
Fund’s portfolio. Similarly, the Private
ABS/MBS sectors also have the
potential for attractive risk-adjusted
returns and added portfolio
diversification.
The Exchange believes the loan age
parameters described above are
appropriate for the corresponding
Private ABS/MBS; the 84, 60 and 12
month time frames take into account
that the longer Private ABS/MBS
continue to trade, the more price
discovery has occurred in the market
and the more opportunity there has
been for market participants to perform
due diligence in understanding and
evaluating the underlying loans for such
securities.
With respect to non-agency RMBS, a
weighted average loan age of 84 months
accommodates investment in wellseasoned securities that are continuing
to trade with resilient pricing
notwithstanding events during the
market crisis of 2008–2010, during
which loan defaults drastically
impacted pricing in non-agency RMBS.
Pricing in such securities is generally
more reliable than RMBS with a lower
loan age in that pricing is no longer
reliant on market expectations but on
actual post-crisis loan performance.
With respect to non-agency CMBS, a
weighted average loan age of 60 months
would include securities for which
there is a known track record regarding
cash flows and default rates for loans
underlying real estate and other assets
underlying CMBS. A five year loan age
facilitates pricing based on actual loan
performance rather than default
projections. Similarly, for non-agency
CLOs, a weighted average loan age of 60
months provides the opportunity for
market participants to evaluate data
regarding the bank loans underlying the
CLOs and to assess how the loans are
actually being used—for example, to
implement corporate strategy or for
capital usage—rather than relying on
pro forma statements regarding the
loans.
With respect to non-agency ABS, a
weighted average loan age of 12 months
provides an appropriately limited time
frame for market participants to assess
the likely trajectory of expected defaults
(for example, for sub-prime auto loans).
The loans underlying non-agency ABS
are typically of much shorter duration
than other Private ABS/MBS. Because
such loans are more likely to default
within a short time after issuance, a oneyear minimum loan age can be expected
to provide a sufficient time frame for
market participants to assess the
reliability of loan pricing for loans
underlying non-agency ABS.
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19:23 Oct 31, 2019
Jkt 250001
As noted above, the Fund’s portfolio
will not comply with the requirements
set forth in Commentary .01(e) to NYSE
Arca Rule 8.600–E. The Exchange
proposes that up to 25% of the Fund’s
assets (calculated as the aggregate gross
notional value) may be invested in OTC
derivatives that are used to reduce
currency, interest rate or credit risk
arising from the Fund’s investments
(that is, ‘‘hedge’’), and that the Fund’s
investments in OTC derivatives other
than OTC derivatives used to hedge the
Fund’s portfolio against currency,
interest rate or credit risk will be limited
to 20% of the assets in the Fund’s
portfolio, calculated as the aggregate
gross notional value of such OTC
derivatives. As noted above, the Fund
will not use derivative instruments to
gain exposure to Private ABS/MBS, and
derivative instruments linked to such
securities will be used for hedging
purposes only.
The Exchange believes it is
appropriate and in the public interest to
approve listing and trading of Shares of
the Fund notwithstanding that the
Fund’s holdings in OTC derivatives do
not comply with the requirements set
forth in Commentary .01(e) to NYSE
Arca Rule 8.600–E in that, depending on
market conditions, it may be critical that
the Fund be able to utilize available
OTC derivatives to attempt to reduce
impact of currency, interest rate or
credit fluctuations on Fund assets.
Therefore, the Exchange believes it is
appropriate to apply a limit of up to
25% of the Fund’s assets to the Fund’s
investments in OTC derivatives
(calculated as the aggregate gross
notional value of such OTC derivatives),
including forwards, options and swaps,
that are used for hedging purposes, as
described above.
The Adviser and Sub-Adviser
represent that OTC derivatives can be
tailored to hedge the specific risk arising
from the Fund’s investments and
frequently may be a more efficient
hedging vehicle than listed derivatives.
For example, the Fund could obtain an
OTC foreign currency derivative in a
notional amount that exactly matches
the notional amount of the Fund’s
investments. If the Fund were limited to
investing up to 20% of assets in OTC
derivatives, the Fund might have to
‘‘over hedge’’ or ‘‘under hedge’’ if round
lot sizes in listed derivatives were not
available. In addition, for example, an
OTC CDX option can be structured to
provide protection tailored to the
Fund’s credit exposure and can be a
more efficient way to hedge credit risk
with respect to specific exposures than
listed derivatives. Similarly, OTC
interest rate derivatives can be more
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
effective hedges of interest rate exposure
because they can be customized to
match the basis risk arising from the
term of the investments held by the
Fund.
Because the Fund, in furtherance of
its investment objective, may invest a
substantial percentage of its investments
in foreign currency denominated Fixed
Income Securities, the 20% limit in
Commentary .01(e) to Rule 8.600–E
could result in the Fund being unable to
fully pursue its investment objective
while attempting to sufficiently mitigate
investment risks. The inability of the
Fund to adequately hedge its holdings
would effectively limit the Fund’s
ability to invest in certain instruments,
or could expose the Fund to additional
investment risk. For example, if the
Fund’s assets (on a gross notional value
basis) were $100 million and no listed
derivative were suitable to hedge the
Fund’s risk, under the generic standards
the Fund would be limited to holding
up to $20 million gross notional value
in OTC derivatives ($100 million *
20%). Accordingly, the maximum
amount the Fund would be able to
invest in foreign currency denominated
Fixed Income Securities while
remaining adequately hedged would be
$20 million. The Fund then would hold
$60 million in assets that could not be
hedged, other than with listed
derivatives, which, as noted above,
might not be sufficiently tailored to the
specific instruments to be hedged.
In addition, by applying the 20%
limitation in Commentary .01(e) to Rule
8.600–E, the Fund would be less able to
protect its holdings from more than one
risk simultaneously. For example, if the
Fund’s assets (on a gross notional basis)
were $100 million and the Fund held
$20 million in foreign currency
denominated Fixed Income Instruments
with two types of risks (e.g., currency
and credit risk) which could not be
hedged using listed derivatives, the
Fund would be faced with the choice of
either holding $20 million aggregate
gross notional value in OTC derivatives
to mitigate one of the risks while
passing the other risk to its
shareholders, or, for example, holding
$10 million aggregate gross notional
value in OTC derivatives on each of the
risks while passing the remaining
portion of each risk to the Fund’s
shareholders.
The Adviser and Sub-Adviser believe
that it is in the best interests of the
Fund’s shareholders for the Fund to be
allowed to reduce the currency, interest
rate or credit risk arising from the
Fund’s investments using the most
efficient financial instrument. While
certain risks can be hedged via listed
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derivatives, OTC derivatives (such as
forwards, options and swaps) can be
customized to hedge against precise
risks. Accordingly, the Adviser and SubAdviser believe that OTC derivatives
may frequently be a more efficient
hedging vehicle than listed derivatives.
Therefore, the Exchange believes that
increasing the percentage limit in
Commentary .01(e), as described above,
to the Fund’s investments in OTC
derivatives, including forwards, options
and swaps, that are used specifically for
hedging purposes would help protect
investors and the public interest.
As noted above, the Fund’s portfolio
will not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
Rule 8.600–E with respect to the Fund’s
investments in non-exchange-traded
securities of open-end investment
company securities, and, with respect to
the Fund’s holdings of OTC equity
securities issued upon conversion of
fixed income convertible securities and
OTC Work Out Securities, would not
meet the requirements of Commentary
.01(a)(1)(A) through (E) and
Commentary .01(a)(2)(A) through (E) to
Rule 8.600–E. The Exchange believes
that it is appropriate and in the public
interest to approve listing and trading of
Shares of the Fund on the Exchange
notwithstanding that the Fund would
not meet the requirements of
Commentary .01(a)(1)(A) through (E) to
Rule 8.600–E with respect to the Fund’s
investments in non-exchange-traded
securities of open-end investment
company securities,and
notwithstanding that the Fund’s
holdings of OTC equity securities issued
upon conversion of fixed income
convertible securities and OTC Work
Out Securities would not meet the
requirements of Commentary
.01(a)(1)(A) through (E) and
Commentary .01(a)(2)(A) through (E) to
Rule 8.600–E. Investments in nonexchange-traded securities of open-end
investment company securities will not
be principal investments of the Fund.50
Such investments, which may include
mutual funds that invest, for example,
principally in fixed income securities,
would be utilized to help the Fund meet
its investment objective and to equitize
cash in the short term.
With respect to any Fund holdings of
exchange-traded or OTC equity
securities issued upon conversion of
fixed income convertible securities and
Work Out Securities, such securities
will not exceed 10% and 5%,
respectively, of the Fund’s total assets.
The Adviser and Sub-Adviser represent
that the Fund generally will not actively
50 See
note 35, supra.
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invest in equity securities issued upon
conversion of fixed income convertible
securities or Work Out Securities, but
may, at times, receive a distribution of
such securities in connection with the
Fund’s holdings in other securities.
Therefore, the Fund’s holdings in equity
securities issued upon conversion of
fixed income convertible securities and
Work Out Securities generally would
not be acquired as the result of the
Fund’s voluntary investment decisions.
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 shares of an additional type of
actively-managed exchange-traded
product that will enhance competition
among market participants, to the
benefit of investors and the marketplace.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of an
additional type of actively-managed
exchange-traded product that generally
will principally hold fixed income
securities and that will enhance
competition among market participants,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Discussion and Commission’s
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 2, is
consistent with the Act and the rules
and regulations thereunder applicable to
a national securities exchange.51 In
particular, the Commission finds that
the proposed rule change, as modified
by Amendment No. 2, is consistent with
Section 6(b)(5) of the Act,52 which
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
51 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
52 15 U.S.C. 78f(b)(5).
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58761
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
Under the proposal, the Exchange
represents that the Fund’s investments
in equity securities will not meet the
requirements of Commentaries
.01(a)(1)(C) and .01(a)(1)(D) (with
respect to U.S. Component Stocks) and
Commentaries .01(a)(2)(C) and
.01(a)(2)(D) (with respect to Non-U.S.
Component Stocks). The Exchange
further represents that any Fund
holdings of exchange-traded equity
securities issued upon conversion of
fixed income convertible securities and
exchange-traded Work Out Securities
will not exceed 10% and 5%,
respectively, of the Fund’s total assets.
The Exchange also represents that the
Fund generally will not actively invest
in equity securities issued upon
conversion of fixed income convertible
securities or Work Out Securities or
acquire such securities as a result of the
Fund’s voluntary investment decisions.
The Commission believes that, because
the Fund’s investments in exchangetraded common stocks, preferred stocks,
REITS, ETFs, ETNs, exchange-traded
equity securities issued upon
conversion of fixed income convertible
securities, exchange-traded Work Out
Securities, and U.S. exchange-traded
closed-end fund securities would be
Non-Principal Investments and
therefore would not exceed 20% of the
Fund’s total assets, concerns related to
these securities would be mitigated.
In addition, the Exchange represents
that the Fund will not meet the
requirements of Commentaries
.01(a)(1)(A) through (E) to NYSE Arca
Rule 8.600–E with respect to the Fund’s
investments in non-exchange-traded
securities of open-end investment
company securities. The Commission
notes that such open-end investment
company securities are required to be
registered with the Commission and
would be subject to all of the applicable
requirements of the 1940 Act and the
rules and regulations thereunder. The
Commission further notes that it has
approved the listing and trading of other
series of Managed Fund Shares that may
invest in non-exchange-traded open-end
investment company securities
notwithstanding that those series of
Managed Fund Shares would not meet
the requirements of Commentaries
.01(a)(1)(A) through (E) to NYSE Arca
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Rule 8.600–E with respect to
investments in such securities.53
According to the Exchange, the Fund
also will not comply with the
requirement in Commentary .01(b)(1) to
NYSE Arca Rule 8.600–E.54 The
Exchange proposes instead that
components that in the aggregate
account for at least 50% of the fixed
income weight of the portfolio each
shall have a minimum original principal
amount outstanding of $50 million or
more. In addition, the Fund may not
invest more than 2% of its total assets
in any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per-CUSIP basis. In
addition, the Exchange proposes that at
least 50% of the weight of the Fund’s
portfolio would continue to be subject
to a substantial minimum original
principal amount outstanding (i.e., $50
million). The Exchange believes this
aspect of the proposal would provide
additional diversification to the Fund’s
investments in Fixed Income Securities.
The Exchange further represents that
the Fund will not comply with the
requirements in Commentary .01(b)(4)
to NYSE Arca Rule 8.600–E.55 Instead,
the Exchange proposes that the Fund’s
investments in Fixed Income Securities,
except for Private ABS/MBS will
comply with the requirements of
Commentary .01(b)(4). As noted above,
the Exchange proposes that the Fund
may not invest more than 2% of its total
assets in any one Fixed Income Security
(excluding U.S. government securities
and TIPS) on a per-CUSIP basis. The
Commission notes that it has previously
approved the listing of other series of
Managed Fund Shares with similar
investment objectives and strategies
without imposing requirements that a
certain percentage of such funds’
securities meet one of the criteria set
forth in Commentary .01(b)(4).56
Separately, the Exchange proposes to
permit the Fund to invest up to 50% of
its total assets in the aggregate in Private
ABS/MBS, provided that the Fund
would not be permitted to invest more
than: (i) 30% of its total assets in nonagency RMBS, (ii) 25% of its total assets
in non-agency CMBS and CLOs, and (iii)
25% of its total assets in non-agency
ABS. Further, with respect to the Fund’s
investments in up to 30% of its total
assets in Private ABS/MBS that exceed
53 See
supra note 38.
.01(b)(1) to NYSE Arca Rule
8.600–E states that components that in the aggregate
account for at least 75% of the fixed income weight
of the portfolio each shall have a minimum original
principal amount outstanding of $100 million or
more.
55 See supra note 27.
56 See supra note 28.
54 Commentary
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the 20% of the weight of the Fund’s
portfolio that may be invested in Private
ABS/MBS, the Exchange represents that
the Fund’s holdings in Private ABS/
MBS will be subject to certain weighted
average loan age restrictions. The
Exchange also represents that the
Fund’s investments in Private ABS/MBS
will be subject to the Fund’s liquidity
procedures as adopted by the Board.
The Commission also notes that it has
previously approved proposals which
permit other series of Managed Fund
Shares to hold private asset-backed and
mortgaged-backed securities in excess of
the levels permitted under Commentary
.01(b)(5).57
With respect to the Fund’s proposed
investments in OTC derivatives, the
Fund’s investments other than OTC
derivatives used to hedge the Fund’s
portfolio against currency, interest rate
or credit risk, will be limited to 20% of
the Fund’s portfolio. The Exchange
proposes that up to 25% of the Fund’s
assets may be invested in OTC
derivatives that are used to reduce
currency, interest rate, or credit risk
arising from the Fund’s investments.
The Commission notes that it has
approved other proposals that permit a
fund to invest in OTC derivatives in
excess of the 20% limit in Commentary
.01(e).58
The Exchange represents that
information relating to the Fund’s
underlying assets, intra-day and closing
price information regarding Fixed
Income Securities will be available from
major market data vendors, as well as
through subscription services, such as
Bloomberg, Markit, and Thomson
Reuters, which can be accessed by
Authorized Participants and other
market participants.59 Additionally, the
Exchange represents that FINRA’s
TRACE will be a source of price
57 See, e.g., Securities Exchange Act Release Nos.
84047 (September 6, 2018), 83 FR 46200 (September
12, 2018) (SR–Nasdaq–2017–128) (approving the
listing and trading of shares of the Western Asset
Total Return ETF); and 84826 (December 14, 2018),
83 FR 65386 (December 20, 2018) (SR–NYSEArca–
2018–25) (approving the continued listing and
trading of shares of the Natixis Loomis Sayles Short
Duration Income ETF).
58 See Securities Exchange Act Release Nos.
86698 (August 16, 2019), 84 FR 43823 (August 22,
2019) (NYSEArca–2018–83) (order approving the
listing and trading of shares of the iShares
Bloomberg Roll Select Commodity Strategy ETF)
and 86636 (August 12, 2019), 84 FR 42030 (August
16, 2019) (NYSEArca–2018–98) (order approving
the listing and trading of the iShares Commodity
Multi-Strategy ETF).
59 The Exchange also states that price information
regarding U.S. government securities, bank loans,
Private ABS/MBS, cash equivalents, and short-term
instruments with maturities of three months or
more generally may be obtained from brokers and
dealers who make markets in such securities or
through nationally recognized pricing services
through subscription agreements.
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information for corporate bonds and
Private ABS/MBS, to the extent
transactions in such securities are
reported to TRACE.60 According to the
Exchange, information relating to
weighted average loan age for Private
ABS/MBS is widely available from
major market data vendors such as
Bloomberg. Trade price and other
information relating to municipal bonds
is available through the Municipal
Securities Rulemaking Board’s EMMA
system. With respect to the Fund’s
holdings in derivatives, price
information relating to OTC options,
forwards, and swaps will be available
from major market data vendors. Intraday price information for exchangetraded derivative instruments, including
exchange-traded options, will be
available from the applicable exchange
and from major market data vendors.
Exchange-traded options quotation and
last-sale information for options cleared
via the OCC are available through
OPRA. With respect to the Fund’s
holdings in equity securities, nonexchange-traded open-end investment
company securities are typically priced
once each business day and their prices
are available through the applicable
fund’s website or from major market
data vendors. Information regarding
market price and trading volume of the
underlying ETFs, ETNs, common stocks,
preferred stocks, REITs, equity
securities issued upon conversion of
fixed income convertible securities,
Work-Out Securities, and closed-end
funds will be continually available on a
real-time basis throughout the day on
brokers’ computer screens and other
electronic services. Quotation and lastsale information for the underlying
ETFs, ETNs, closed-end funds, REITs,
certain common stocks, certain
preferred stocks, certain equity
securities issued upon conversion of
fixed income convertible securities, and
certain Work-Out Securities will be
available via the CTA high-speed line.
The Exchange further represents that,
with respect to trading in the Shares, the
Exchange or FINRA, on behalf of the
Exchange, or both, will communicate
with and may obtain information from,
other markets and other entities that are
members of the ISG, or with which the
Exchange has in place a CSSA, and
FINRA, on behalf of the Exchange, is
able to access, trade information for
certain fixed income securities held by
the Fund reported to FINRA’s TRACE.
FINRA also can access data obtained
from the Municipal Securities
Rulemaking Board relating to municipal
bond trading activity for surveillance
60 See
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Federal Register / Vol. 84, No. 212 / Friday, November 1, 2019 / Notices
purposes in connection with trading in
the Shares. The Exchange also asserts
that it has a general policy prohibiting
the distribution of material, non-public
information by its employees.
According to the Exchange, other than
Commentaries .01(a)(1), (a)(2), (b)(1),
(b)(4), (b)(5), and (e) to NYSE Arca Rule
8.600–E, as described above, the Fund’s
portfolio will meet all other
requirements of NYSE Arca Rule 8.600–
E. The Commission believes that, based
on the representations of the Exchange
with respect to the Fund’s investment
objective and proposed holdings and
restrictions, the proposal is consistent
with the requirements of Section 6(b)(5)
of the Act. The Exchange represents that
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, and (c) the
applicability of Exchange listing rules
specified in this rule filing shall
constitute continued listing
requirements for listing the Shares. In
addition, the Exchange represents that
the issuer must notify 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 61 for compliance with the
continued listing requirements. If the
Fund is not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under NYSE Arca Rule 5.5–
E(m).
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 2, is consistent with Section 6(b)(5)
of the Act 62 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Solicitation of Comments on
Amendment No. 2 to the Proposed Rule
Change
Interested persons are invited to
submit written views, data, and
arguments concerning whether
Amendment No. 2 is consistent with the
61 The
Commission notes that certain proposals
for the listing and trading of exchange-traded
products include a representation that the exchange
will ‘‘surveil’’ for compliance with the continued
listing requirements. See, e.g., Securities Exchange
Act Release No. 77499 (April 1, 2016), 81 FR 20428,
20432 (April 7, 2016) (SR–BATS–2016–04). In the
context of this representation, it is the
Commission’s view that ‘‘monitor’’ and ‘‘surveil’’
both mean ongoing oversight of compliance with
the continued listing requirements. Therefore, the
Commission does not view ‘‘monitor’’ as a more or
less stringent obligation than ‘‘surveil’’ with respect
to the continued listing requirements.
62 15 U.S.C. 78f(b)(5).
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Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2019–33 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2019–33. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2019–33 and
should be submitted on or before
November 22, 2019.
V. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 2, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 2 in the Federal
Register. The Commission notes that
Amendment No. 2 clarified
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58763
representations to reflect changes
adopted in Commentary .01(b)(5) to
NYSE Arca Rule 8.600–E; conformed a
requirement relating to certain
investment restrictions from ‘‘average
loan maturity’’ to ‘‘weighted average
loan age’’; and provided additional
arguments in support of the Fund’s
proposed changes to its investments and
investment restrictions. Amendment
No. 2 also provided non-substantive
clarifications and technical changes.
The additional information in
Amendment No. 2 assisted the
Commission in evaluating the
Exchange’s proposal and in determining
that the trading of the Shares under the
proposal is consistent with the Act.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,63 to approve the proposed
rule change, as modified by Amendment
No. 2, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,64 that the
proposed rule change (SR–NYSEArca–
2019–33), as modified by Amendment
No. 2, be, and it hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.65
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–23858 Filed 10–31–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87409; File No. SR–
NYSEArca–2019–73]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Permitting the Continued
Listing and Trading of the WisdomTree
Emerging Markets Multifactor Fund
and the WisdomTree International
Multifactor Fund
October 28, 2019.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on October
15, 2019, NYSE Arca, Inc. (‘‘NYSE
Arca’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
63 15
U.S.C. 78s(b)(2).
64 Id.
65 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
E:\FR\FM\01NON1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 212 (Friday, November 1, 2019)]
[Notices]
[Pages 58750-58763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23858]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87410; File No. SR-NYSEArca-2019-33]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, Regarding Changes
to Investments of the First Trust TCW Unconstrained Plus Bond ETF
October 28, 2019.
I. Introduction
On May 6, 2019, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
modify certain investments of the First Trust TCW Unconstrained Plus
Bond ETF, the shares of which are currently listed and traded on the
Exchange pursuant to NYSE Arca Rule 8.600-E. On May 16, 2019, the
Exchange filed Amendment No. 1 to the proposed rule change. The
proposed rule change, as modified by Amendment No. 1, was published for
comment in the Federal Register on May 28, 2019.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 85903 (May 21,
2019), 84 FR 24576.
---------------------------------------------------------------------------
On July 3, 2019, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change.\5\ On August 26, 2019, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change, as modified
by Amendment No. 1.\7\ On September 18, 2019, the Exchange filed
Amendment No. 2 to the proposed rule change.\8\ The Commission has
received no comment letters on the proposal. The Commission is
publishing this notice to solicit comments on Amendment No. 2 from
interested persons, and is approving the proposed rule change, as
modified by Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 86299, 84 FR 32804
(July 9, 2019).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 86760, 84 FR 45816
(August 30, 2019).
\8\ In Amendment No. 2, which amended and replaced the proposed
rule change, as modified by Amendment No. 1, in its entirety, the
Exchange (i) modified its representation regarding holdings of the
Fund (as defined herein) to align with revised Commentary .01(b)(5)
to NYSE Arca Rule 8.600-E; (ii) conformed a requirement relating to
certain investment restrictions from ``average loan maturity'' to
``weighted average loan age''; (iii) provided additional arguments
in support of the proposed modifications to the Fund's investments;
and (iv) made non-substantive and technical changes. Amendment No. 2
is available at: https://www.sec.gov/comments/sr-nysearca-2019-33/srnysearca201933-6148204-192289.pdf.
---------------------------------------------------------------------------
II. The Exchange's Description of the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes certain changes, described below under
``Application of Generic Listing Requirements'', regarding investments
of the First Trust TCW Unconstrained Plus Bond ETF (``Fund''), shares
(``Shares'') of which are currently listed and traded on the Exchange
under NYSE Arca Rule 8.600-E, which governs the listing and trading of
Managed Fund Shares \9\ on the Exchange. Shares of the Fund commenced
trading on the Exchange on June 5, 2018 in accordance with the generic
listing standards in Commentary .01 to NYSE Arca Rule 8.600-E.
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\9\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an
open-end investment company or similar entity that invests in a
portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Investment Company Units,
listed and traded on the Exchange under NYSE Arca Rule 5.2-E(j)(3),
seeks to provide investment results that correspond generally to the
price and yield performance of a specific foreign or domestic stock
index, fixed income securities index or combination thereof.
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The Shares are offered by First Trust Exchange-Traded Fund VIII
(the ``Trust''), which is registered with the Commission as an open-end
management investment company.\10\ The Fund is a series of the Trust.
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\10\ The Trust is registered under the 1940 Act. On May 29,
2018, the Trust filed with the Commission its registration statement
on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a), and
under the 1940 Act relating to the Fund (File Nos. 333-210186 and
811-23147) (``Registration Statement''). The description of the
operation of the Trust and the Fund herein is based, in part, on the
Registration Statement. In addition, the Commission has issued an
order upon which the Trust may rely, granting certain exemptive
relief under the 1940 Act. See Investment Company Act Release No.
30029 (April 10, 2012) (File No. 812-13795).
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[[Page 58751]]
First Trust Advisors L.P. is the investment adviser (``First
Trust'' or ``Adviser'') to the Fund. TCW Investment Management Company
LLC (``TCW'' or the ``Sub-Adviser''), serves as the Fund's investment
sub-adviser. First Trust Portfolios L.P. is the distributor
(``Distributor'') for the Fund's Shares. The Bank of New York Mellon
acts as the administrator, custodian and transfer agent (``Custodian''
or ``Transfer Agent'') for the Fund.
Commentary .06 to Rule 8.600-E provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect
and maintain a ``fire wall'' between the investment adviser and the
broker-dealer with respect to access to information concerning the
composition and/or changes to such investment company portfolio.\11\ In
addition, Commentary .06 further requires that personnel who make
decisions on the open-end fund's portfolio composition must be subject
to procedures designed to prevent the use and dissemination of material
nonpublic information regarding the open-end fund's portfolio. The
Adviser and Sub-Adviser are not registered as broker-dealers. The
Adviser is affiliated with First Trust Portfolios L.P., 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. The Sub-
Adviser is affiliated with multiple broker-dealers and has implemented
and will maintain a fire wall with respect to its broker-dealer
affiliates regarding access to information concerning the composition
and/or changes to the portfolio. In the event (a) the Adviser or the
Sub-Adviser becomes registered as a broker-dealer or newly affiliated
with a broker-dealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with a broker-dealer, it
will implement and maintain a fire wall with respect to relevant
personnel and any broker-dealer affiliate regarding access to
information concerning the composition and/or changes to the portfolio,
and will be subject to procedures designed to prevent the use and
dissemination of material non-public information regarding such
portfolio.
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\11\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and Sub-Adviser and their related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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First Trust TCW Unconstrained Plus Bond ETF
Principal Investments
According to the Registration Statement, the investment objective
of the Fund is to seek to maximize long-term total return. Under normal
market conditions,\12\ the Fund intends to invest at least 80% of its
net assets (including investment borrowings) in a portfolio of ``Fixed
Income Securities'' (described below).
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\12\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5). On a temporary basis, including for
defensive purposes, during the initial invest-up period (i.e., the
six-week period following the commencement of trading of Shares on
the Exchange) and during periods of high cash inflows or outflows
(i.e., rolling periods of seven calendar days during which inflows
or outflows of cash, in the aggregate, exceed 10% of the Fund's net
assets as of the opening of business on the first day of such
periods), the Fund may depart from its principal investment
strategies; for example, it may hold a higher than normal proportion
of its assets in cash. During such periods, the Fund may not be able
to achieve its investment objective. The Fund may adopt a defensive
strategy when the Adviser and/or the Sub-Adviser believes securities
in which the Fund normally invests have elevated risks due to
market, political or economic factors and in other extraordinary
circumstances.
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In managing the Fund's portfolio, TCW intends to employ a flexible
approach that allocates the Fund's investments across a range of global
investment opportunities and actively manage exposure to interest
rates, credit sectors and currencies. TCW seeks to utilize independent,
bottom-up research to identify securities that are undervalued and that
offer a superior risk/return profile. Pursuant to this investment
strategy, the Fund may invest in the following Fixed Income Securities,
which may be represented by derivatives relating to such securities, as
discussed below:
Securities issued or guaranteed by the U.S. government or
its agencies, instrumentalities or U.S. government-sponsored entities
(``U.S. government securities'');
Treasury Inflation Protected Securities (``TIPS'');
the following non-agency, non-government-sponsored entity
(``GSE'') and privately-issued mortgage-related and other asset-backed
securities: Residential mortgage-backed securities (``RMBS''),
commercial mortgage-backed securities (``CMBS''), asset-backed
securities (``ABS''), and collateralized loan obligations (``CLOs''
and, together with such RMBS, CMBS and ABS, ``Private ABS/MBS''); \13\
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\13\ For avoidance of doubt, ``Private ABS/MBS'' as referenced
herein are non-agency, non-GSE and privately-issued mortgage-related
and other asset-backed securities as stated in Commentary .01(b)(5)
to NYSE Arca Rule 8.600-E.
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Agency RMBS, agency CMBS, and agency ABS;
domestic corporate bonds;
Fixed Income Securities issued by non-U.S. corporations
and non-U.S. governments;
bank loans, including first lien senior secured floating
rate bank loans (``Senior Loans''), secured and unsecured loans, second
lien or more junior loans, and bridge loans;
fixed income convertible securities;
fixed income preferred securities; and
municipal bonds.
The Fund may invest in agency RMBS and CMBS by investing in to-be-
announced transactions (``TBA Transactions'').
The Fund may hold cash and cash equivalents.\14\ In addition, the
Fund may hold the following short-term instruments with maturities of
three months or more: Certificates of deposit; bankers' acceptances;
repurchase agreements and reverse repurchase agreements; bank time
deposits; and commercial paper.
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\14\ For purposes of this filing, cash equivalents are the
short-term instruments with maturities of less than 3 months
enumerated in Commentary .01(c) to Rule 8.600-E.
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The Fund may enter into short sales of any securities in which the
Fund may invest.
The Fund may utilize exchange-listed and over-the-counter (``OTC'')
traded derivatives instruments for duration/yield curve management and/
or hedging
[[Page 58752]]
purposes, for risk management purposes or as part of its investment
strategies. The Fund will use derivative instruments primarily to hedge
interest rate risk, actively manage interest rate exposure, hedge
foreign currency risk and actively manage foreign currency exposure.
The Fund may also use derivative instruments to enhance returns, as a
substitute for, or to gain exposure to, a position in an underlying
asset, to reduce transaction costs, to maintain full market exposure,
to manage cash flows or to preserve capital. Derivatives may also be
used to hedge risks associated with the Fund's other portfolio
investments. The Fund will not use derivative instruments to gain
exposure to Private ABS/MBS, and derivative instruments linked to such
securities will be used for hedging purposes only. Derivatives that the
Fund may enter into are the following: Futures on interest rates,
currencies, Fixed Income Securities and fixed income indices; exchange-
traded and OTC options on interest rates, currencies, Fixed Income
Securities and fixed income indices; swap agreements on interest rates,
currencies, Fixed Income Securities and fixed income indices; credit
default swaps (``CDX''); and currency forward contracts.
Other Investments
While the Fund, under normal market conditions, invests at least
80% of its net assets in the Principal Investments described above, the
Fund may invest its remaining assets in the following ``Non-Principal
Investments.''
The Fund may invest in exchange-traded common stock, exchange-
traded preferred stock, and exchange-traded real estate investment
trusts (``REITs'').
The Fund may invest in the securities of other investment companies
registered under the 1940 Act, including money market funds, exchange-
traded funds (``ETFs''), open-end funds (other than money market funds
and other ETFs), and U.S. exchange-traded closed-end funds.\15\
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\15\ For purposes of this filing, the term ``ETFs'' are
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a
national securities exchange. While the Fund may invest in inverse
ETFs, the Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -
3X) ETFs.
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The Fund may hold exchange-traded notes (``ETNs'').\16\
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\16\ ETNs are Index-Linked Securities (as described in NYSE Arca
Rule 5.2-E(j)(6)). While the Fund may invest in inverse ETNs, the
Fund will not invest in leveraged or inverse leveraged ETNs (e.g.,
2X or -3X).
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The Fund may hold exchange-traded or OTC ``Work Out Securities.''
\17\
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\17\ For purposes of this filing, Work Out Securities are U.S.
or foreign equity securities of any type acquired in connection with
restructurings related to issuers of Fixed Income Securities held by
the Fund. Work Out Securities are generally traded OTC, but may be
traded on a U.S. or foreign exchange.
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The Fund may hold exchange-traded or OTC equity securities issued
upon conversion of fixed income convertible securities.
Investment Restrictions
The Fund may not invest more than 2% of its total assets in any one
Fixed Income Security (excluding U.S. government securities and TIPS)
on a per CUSIP basis. The Fund's holdings in derivative instruments for
hedging purposes would be excluded from the determination of compliance
with this 2% limitation. The total gross notional value of the Fund's
holdings in derivative instruments used to gain exposure to a specific
asset is limited to 2% of the Fund's total assets.
The Fund may invest up to 50% of its total assets in the aggregate
in Private ABS/MBS, provided that the Fund (1) may not invest more than
30% of its total assets in non-agency RMBS; (2) may not invest more
than 25% of its total assets in non-agency CMBS and CLOs; and (3) may
not invest more than 25% of its total assets in non-agency ABS.
With respect to the Fund's investments in up to 30% of its total
assets in Private ABS/MBS that exceed the 20% of the weight of the
Fund's portfolio \18\ that may be invested in Private ABS/MBS under
Commentary .01(b)(5) to NYSE Arca Rule 8.600-E,\19\ the following
restrictions will apply:
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\18\ See Securities Exchange Act Release No. 86017 (June 3,
2019), 84 FR 26711 (June 7, 2019) (SR-NYSEArca-2019-06) (order
approving an amendment to Commentary .01(b)(5) to Rule 8.600-E to
delete the reference to the ``fixed income portion of the''
portfolio, such that non-agency, non-GSE, and privately-issued
mortgage-related and other asset-backed securities components of a
portfolio may not account, in the aggregate, for more than 20% of
the weight of the whole portfolio).
\19\ Commentary .01(b)(5) to NYSE Arca Rule 8.600-E provides
that 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
portfolio.
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Non-agency RMBS shall have a weighted average loan age of
84 months or more;
Non-agency CMBS and CLOs shall have a weighted average
loan age of 60 months or more; and
Non-agency ABS shall have a weighted average loan age of
12 months or more.\20\
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\20\ Information relating to weighted average loan age for non-
agency RMBS, non-agency CMBS, CLOs and non-agency ABS is widely
available from major market data vendors such as Bloomberg.
---------------------------------------------------------------------------
The Exchange proposes that up to 25% of the Fund's assets may be
invested in OTC derivatives that are used to reduce currency, interest
rate or credit risk arising from the Fund's investments (that is,
``hedge''). The Fund's investments in OTC derivatives other than OTC
derivatives used to hedge the Fund's portfolio against currency,
interest rate or credit risk will be limited to 20% of the assets in
the Fund's portfolio. For purposes of these percentage limitations on
OTC derivatives, the weight of such OTC derivatives will be calculated
as the aggregate gross notional value of such OTC derivatives.
The Fund's holdings of bank loans will not exceed 15% of the Fund's
total assets, and the Fund's holdings of bank loans other than Senior
Loans will not exceed 5% of the Fund's total assets.
The Fund's holdings in fixed income convertible securities and in
equity securities issued upon conversion of such convertible securities
will not exceed 10% of the Fund's total assets.
The Fund's holdings in Work Out Securities will not exceed 5% of
the Fund's total assets.
The Fund will not invest in securities or other financial
instruments that have not been described in this proposed rule change.
Other Restrictions
The Fund's investments, including derivatives, will be consistent
with the Fund's investment objective and will not be used to enhance
leverage (although certain derivatives and other investments may result
in leverage). That is, the Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (e.g., 2X or -3X)
of the Fund's primary broad-based securities benchmark index (as
defined in Form N-1A).\21\
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\21\ The Fund's broad-based securities benchmark index will be
identified in a future amendment to the Registration Statement
following the Fund's first full calendar year of performance.
---------------------------------------------------------------------------
Use of Derivatives by the Fund
The Fund may invest in the types of derivatives described in the
``Principal Investments'' section above for the purposes described in
that section. Investments in derivative instruments will be made in
accordance with the Fund's investment objective and policies.
[[Page 58753]]
To limit the potential risk associated with such transactions, the
Fund will enter into offsetting transactions or segregate or
``earmark'' assets determined to be liquid by the Adviser in accordance
with procedures established by the Trust's Board of Trustees (the
``Board''). In addition, the Fund has included appropriate risk
disclosure in its offering documents, including leveraging risk.
Leveraging risk is the risk that certain transactions of the Fund,
including the Fund's use of derivatives, may give rise to leverage,
causing the Fund to be more volatile than if it had not been leveraged.
Because the markets for certain assets, or the assets themselves, may
be unavailable or cost prohibitive as compared to derivative
instruments, suitable derivative transactions may be an efficient
alternative for the Fund to obtain the desired asset exposure.
Impact on Arbitrage Mechanism
The Adviser and the Sub-Adviser believe there will be minimal, if
any, impact to the arbitrage mechanism as a result of the Fund's use of
derivatives and Private ABS/MBS. The Adviser and the Sub-Adviser
understand that market makers and participants should be able to value
derivatives and Private ABS/MBS as long as the positions are disclosed
with relevant information. The Adviser and the Sub-Adviser believe that
the price at which Shares of the Fund trade will continue to be
disciplined by arbitrage opportunities created by the ability to
purchase or redeem Shares of the Fund at their net asset value
(``NAV''), which should ensure that Shares of the Fund will not trade
at a material discount or premium in relation to their NAV.
The Adviser and Sub-Adviser do not believe there will be any
significant impacts to the settlement or operational aspects of the
Fund's arbitrage mechanism due to the use of derivatives and Private
ABS/MBS.
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at NAV
\22\ only in large blocks of Shares (``Creation Units'') in
transactions with authorized participants, generally including broker-
dealers and large institutional investors (``Authorized
Participants''). Creation Units generally will consist of 50,000
Shares. The size of a Creation Unit is subject to change. As described
in the Registration Statement, the Fund will issue and redeem Creation
Units in exchange for an in-kind portfolio of instruments and/or cash
in lieu of such instruments (the ``Creation Basket'').\23\ In addition,
if there is a difference between the NAV attributable to a Creation
Unit and the market value of the Creation Basket exchanged for the
Creation Unit, the party conveying instruments (which may include cash-
in-lieu amounts) with the lower value will pay to the other an amount
in cash equal to the difference (referred to as the ``Cash
Component'').
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\22\ The NAV of the Fund's Shares generally will be calculated
once daily Monday through Friday as of the close of regular trading
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m.,
Eastern Time (``E.T.''). NAV per Share will be calculated by
dividing the Fund's net assets by the number of Fund Shares
outstanding.
\23\ It is expected that the Fund will typically issue and
redeem Creation Units on a cash basis; however, at times, the Fund
may issue and redeem Creation Units on an in-kind (or partially in-
kind) (or partially cash) basis.
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Creations and redemptions must be made by or through an Authorized
Participant that has executed an agreement that has been agreed to by
the Distributor and the Transfer Agent with respect to creations and
redemptions of Creation Units. All standard orders to create Creation
Units must be received by the Transfer Agent no later than the closing
time of the regular trading session on the NYSE (ordinarily 4:00 p.m.,
E.T.) (the ``Closing Time'') in each case on the date such order is
placed in order for the creation of Creation Units to be effected based
on the NAV of Shares as next determined on such date after receipt of
the order in proper form. Shares may be redeemed only in Creation Units
at their NAV next determined after receipt not later than the Closing
Time of a redemption request in proper form by the Fund through the
Transfer Agent and only on a business day. The Custodian, through the
National Securities Clearing Corporation (``NSCC''), will make
available on each business day, prior to the opening of business of the
Exchange, the list of the names and quantities of the instruments
comprising the Creation Basket, as well as the estimated Cash Component
(if any), for that day. The published Creation Basket will apply until
a new Creation Basket is announced on the following business day prior
to commencement of trading in the Shares.
Application of Generic Listing Requirements
The Exchange is submitting this proposed rule change because the
portfolio for the Fund will not meet all of the ``generic'' listing
requirements of Commentary .01 to NYSE Arca Rule 8.600-E applicable to
the listing of Managed Fund Shares. The Fund's portfolio will meet all
such requirements except for those set forth in Commentary .01(a)(1),
(a)(2), (b)(1), (b)(4), (b)(5), and (e), as described below.
The Fund will not comply with the requirements set forth in
Commentary .01(a)(1) \24\ and (a)(2) \25\ to NYSE Arca
[[Page 58754]]
Rule 8.600-E with respect to the Fund's investments in equity
securities.\26\ Instead, the Exchange proposes that (i) the Fund's
investments in equity securities will meet the requirements of
Commentary .01(a) with the exception of Commentary .01(a)(1)(C) and
.01(a)(1)(D) (with respect to U.S. Component Stocks) and Commentary
.01(a)(2)(C) and .01(a)(2)(D) (with respect to Non-U.S. Component
Stocks). Any Fund investment in exchange-traded common stocks,
preferred stocks, REITS, ETFs, ETNs, exchange-traded equity securities
issued upon conversion of fixed income convertible securities,
exchange-traded Work Out Securities and U.S. exchange-traded closed-end
funds would provide for enhanced diversification of the Fund's
portfolio and, in any case, would be Non-Principal Investments and
would not exceed 20% of the Fund's net assets in the aggregate. With
respect to any Fund holdings of exchange-traded equity securities
issued upon conversion of fixed income convertible securities and
exchange-traded Work Out Securities, such securities will not exceed
10% and 5%, respectively, of the Fund's total assets. The Adviser and
Sub-Adviser represent that the Fund generally will not actively invest
in equity securities issued upon conversion of fixed income convertible
securities or Work Out Securities, but may, at times, receive a
distribution of such securities in connection with the Fund's holdings
in other securities. Therefore, the Fund's holdings in equity
securities issued upon conversion of fixed income convertible
securities and Work Out Securities generally would not be acquired as
the result of the Fund's voluntary investment decisions. The Adviser
and Sub-Adviser represent that, under these circumstances, application
of the weighting requirements of Commentary .01(a)(1)(C) and Commentary
.01(a)(2)(C) and the minimum number of components requirements of
Commentary .01(a)(1)(D) and Commentary .01(a)(2)(D) would impose an
unnecessary burden on the Fund's ability to hold such equity
securities.
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\24\ Commentary .01(a)(1) to NYSE Arca Rule 8.600-E provides
that the component stocks of the equity portion of a portfolio that
are U.S. Component Stocks shall meet the following criteria
initially and on a continuing basis: (A) Component stocks (excluding
Derivative Securities Products and Index-Linked Securities) that in
the aggregate account for at least 90% of the equity weight of the
portfolio (excluding such Derivative Securities Products and Index-
Linked Securities) each shall have a minimum market value of at
least $75 million; (B) Component stocks (excluding Derivative
Securities Products and Index-Linked Securities) that in the
aggregate account for at least 70% of the equity weight of the
portfolio (excluding such Derivative Securities Products and Index-
Linked Securities) 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 Derivative Securities Products
and Index-Linked Securities) shall not exceed 30% of the equity
weight of the portfolio, and, to the extent applicable, the five
most heavily weighted component stocks (excluding Derivative
Securities Products and Index-Linked Securities) 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 Derivative
Securities Products or Index-Linked Securities constitute, at least
in part, components underlying a series of Managed Fund Shares, or
(ii) one or more series of Derivative Securities Products or Index-
Linked Securities account for 100% of the equity weight of the
portfolio of a series of Managed Fund Shares; (E) Except as provided
herein, 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 Securities
Exchange Act of 1934; 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.
\25\ Commentary .01(a)(2) to NYSE Arca Rule 8.600-E provides
that the component stocks of the equity portion of a portfolio that
are Non-U.S. Component Stocks shall meet the following criteria
initially and on a continuing basis: (A) Non-U.S. Component Stocks
each shall have a minimum market value of at least $100 million; (B)
Non-U.S. Component Stocks 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 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
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, 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 Derivative Securities Products or Index-Linked Securities
constitute, at least in part, components underlying a series of
Managed Fund Shares, or (ii) one or more series of Derivative
Securities Products or Index-Linked Securities 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 shall be listed and
traded on an exchange that has last-sale reporting.
\26\ For purposes of these exceptions, investments in equity
securities that are OTC Work Out Securities, OTC equity securities
issued upon conversion of fixed income convertible securities, or
non-exchange-traded securities of other open-end investment
companies (e.g., mutual funds) are excluded and are discussed
further below.
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The Fund will not comply with the requirement in Commentary
.01(b)(1) to Rule 8.600-E that components that in the aggregate account
for at least 75% of the fixed income weight of the portfolio each shall
have a minimum original principal amount outstanding of $100 million or
more. Instead, the Exchange proposes that components that in the
aggregate account for at least 50% of the fixed income weight of the
portfolio each shall have a minimum original principal amount
outstanding of $50 million or more. As noted above, the Fund may not
invest more than 2% of its total assets in any one Fixed Income
Security (excluding U.S. government securities and TIPS) on a per CUSIP
basis. In addition, at least 50% of the weight of the Fund's portfolio
would continue to be subject to a substantial minimum (i.e., $50
million) original principal amount outstanding. The Exchange believes
this limitation would provide significant additional diversification to
the Fund's investments in Fixed Income Securities, and reduce concerns
that the Fund's investments in such securities would be readily
susceptible to market manipulation.
The Fund will not comply with the requirements in Commentary
.01(b)(4) to Rule 8.600-E that component securities that in the
aggregate account for at least 90% of the fixed income weight of the
portfolio meet one of the criteria specified in Commentary .01(b)(4),
because certain Private ABS/MBS cannot satisfy the criteria in
Commentary .01(b)(4).\27\ Instead, the Exchange proposes that the
Fund's investments in Fixed Income Securities other than Private ABS/
MBS will be required to comply with the requirements of Commentary
.01(b)(4). As noted above, the Fund may not invest more than 2% of its
total assets in any one Fixed Income Security (excluding U.S.
government securities and TIPS) on a per CUSIP basis. The Exchange
believes this limitation would provide additional diversification to
the Fund's investments in Private ABS/MBS, and reduce concerns that the
Fund's investment in such securities would be readily susceptible to
market manipulation.
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\27\ Commentary .01(b)(4) 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.
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The Exchange notes that the Commission has previously approved the
listing of Managed Fund Shares with similar investment objectives and
strategies without imposing requirements that a certain percentage of
such funds' securities meet one of the criteria set forth in Commentary
.01(b)(4).\28\
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\28\ See, e.g., Exchange Act Release Nos. 67894 (September 20,
2012) 77 FR 59227 (September 26, 2012) (SR-BATS-2012-033) (order
approving the listing and trading of shares of the iShares Short
Maturity Bond Fund); 70342 (September 6, 2013), 78 FR 56256
(September 12, 2013) (SR-NYSEArca-2013-71) (order approving the
listing and trading of shares of the SPDR SSgA Ultra Short Term Bond
ETF, SPDR SSgA Conservative Ultra Short Term Bond ETF and SPDR SSgA
Aggressive Ultra Short Term Bond ETF).
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The Fund will not comply with the requirement in Commentary
.01(b)(5) to Rule 8.600-E that Private ABS/MBS in the Fund's portfolio
account, in the aggregate, for no more than 20% of the weight of the
Fund's portfolio.\29\ Instead, the Exchange proposes that, in order to
enable the portfolio to be more diversified and provide the Fund with
an opportunity to earn higher returns, the Fund may invest up to 50% of
its total assets in the aggregate in Private ABS/MBS, provided that the
Fund (1) may not invest more than 30% of its total assets in non-agency
RMBS; (2) may not invest more than 25% of its total assets in non-
agency CMBS and CLOs; and (3) may not invest more than 25% of its total
assets in non-agency ABS.
---------------------------------------------------------------------------
\29\ See note 19, supra.
---------------------------------------------------------------------------
With respect to the Fund's investments in up to 30% of its total
assets in Private ABS/MBS that exceed the 20% of the weight of the
Fund's portfolio that may be invested in Private ABS/MBS under
Commentary .01(b)(5) to NYSE Arca Rule 8.600-E,\30\ the following
restrictions will apply:
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\30\ See note 19, supra.
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Non-agency RMBS shall have a weighted average loan age of
84 months or more;
Non-agency CMBS and CLOs shall have a weighted average
loan age of 60 months or more; and
Non-agency ABS shall have a weighted average loan age of
12 months or more.
In addition, as noted above, the Fund may not invest more than 2%
of its total assets in any one Fixed Income Security (excluding U.S.
government securities and TIPS) on a per CUSIP basis.\31\ The
[[Page 58755]]
Exchange believes these limitations would provide additional
diversification to the Fund's Private ABS/MBS investments and reduce
concerns that the Fund's investment in such securities would be readily
susceptible to market manipulation.
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\31\ As noted above, the Fund's holdings in derivative
instruments for hedging purposes would be excluded from the
determination of compliance with this 2% limitation. The total gross
notional value of the Fund's holdings in derivative instruments used
to gain exposure to a specific asset is limited to 2% of the Fund's
total assets.
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The Adviser and Sub-Adviser represent that the RMBS sector can be
an important component of the Fund's investment strategy because of the
potential for attractive risk-adjusted returns relative to other fixed
income sectors and the potential to add significantly to the
diversification in the Fund's portfolio. Similarly, the Private ABS/MBS
sectors also have the potential for attractive risk-adjusted returns
and added portfolio diversification.
The Fund's portfolio will not comply with the requirements set
forth in Commentary .01(e) to NYSE Arca Rule 8.600-E.\32\ Specifically,
the Fund's investments in OTC derivatives may exceed 20% of Fund
assets, calculated as the aggregate gross notional value of such OTC
derivatives. The Exchange proposes that up to 25% of the Fund's assets
(calculated as the aggregate gross notional value) may be invested in
OTC derivatives that are used to reduce currency, interest rate or
credit risk arising from the Fund's investments (that is, ``hedge'').
The Fund's investments in OTC derivatives other than OTC derivatives
used to hedge the Fund's portfolio against currency, interest rate or
credit risk will be limited to 20% of the assets in the Fund's
portfolio, calculated as the aggregate gross notional value of such OTC
derivatives.
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\32\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that
the portfolio may hold OTC 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; however, on both an initial
and continuing basis, no more than 20% of the assets in the
portfolio may be invested in OTC derivatives. For purposes of
calculating this limitation, a portfolio's investment in OTC
derivatives will be calculated as the aggregate gross notional value
of the OTC derivatives.
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The Adviser and Sub-Adviser believe that it is important to provide
the Fund with additional flexibility to manage risk associated with its
investments. Depending on market conditions, it may be critical that
the Fund be able to utilize available OTC derivatives for this purpose
to attempt to reduce impact of currency, interest rate or credit
fluctuations on Fund assets. Therefore, the Exchange believes it is
appropriate to apply a limit of up to 25% of the Fund's assets to the
Fund's investments in OTC derivatives (calculated as the aggregate
gross notional value of such OTC derivatives), including forwards,
options and swaps, that are used for hedging purposes, as described
above.\33\
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\33\ The Commission has previously approved an exception from
requirements set forth in Commentary .01(e) relating to investments
in OTC derivatives similar to those proposed with respect to the
Fund in Securities Exchange Act Release No. 80657 (May 11, 2017), 82
FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (Notice of Filing of
Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, Regarding
Investments of the Janus Short Duration Income ETF Listed Under NYSE
Arca Equities Rule 8.600).
---------------------------------------------------------------------------
As noted above, the Fund may hold equity securities that are Work
Out Securities, which generally are traded OTC (but that may be traded
on a U.S. or foreign exchange), exchange-traded or OTC equity
securities issued upon conversion of fixed income convertible
securities, and non-exchange-traded securities of other open-end
investment company securities (e.g., mutual funds). The Exchange
believes that it is appropriate and in the public interest to approve
listing and trading of Shares of the Fund on the Exchange
notwithstanding that the Fund would not meet the requirements of
Commentary .01(a)(1)(A) through (E) to Rule 8.600-E with respect to the
Fund's investments in non-exchange-traded securities of open-end
investment company securities,\34\ and notwithstanding that the Fund's
holdings of OTC equity securities issued upon conversion of fixed
income convertible securities and OTC Work Out Securities would not
meet the requirements of Commentary .01(a)(1)(A) through (E) and
Commentary .01(a)(2) (A) through (E) to Rule 8.600-E. Investments in
non-exchange-traded securities of open-end investment company
securities will not be principal investments of the Fund.\35\ Such
investments, which may include mutual funds that invest, for example,
principally in fixed income securities, would be utilized to help the
Fund meet its investment objective and to equitize cash in the short
term. With respect to any Fund holdings of OTC equity securities issued
upon conversion of fixed income convertible securities and OTC Work Out
Securities, such securities will not exceed 10% and 5%, respectively,
of the Fund's total assets. The Adviser and Sub-Adviser represent that
the Fund generally will not actively invest in OTC equity securities
issued upon conversion of fixed income convertible securities or OTC
Work Out Securities, but may, at times, receive a distribution of such
securities in connection with the Fund's holdings in other securities.
Therefore, the Fund's holdings in equity securities issued upon
conversion of fixed income convertible securities and Work Out
Securities generally would not be acquired as the result of the Fund's
voluntary investment decisions.
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\34\ Commentary .01 (a) to Rule 8.600-E specifies the equity
securities accommodated by the generic criteria in Commentary
.01(a), namely, U.S. Component Stocks (as described in Rule 5.2-
E(j)(3)); Non-U.S. Component Stocks (as described in Rule 5.2-
E(j)(3)); Derivative Securities Products (i.e., Investment Company
Units and securities described in Section 2 of Rule 8-E); and Index-
Linked Securities that qualify for Exchange listing and trading
under Rule 5.2-E(j)(6).
\35\ For purposes of this section of the filing, non-exchange-
traded securities of other registered investment companies do not
include money market funds, which are cash equivalents under
Commentary .01(c) to Rule 8.600-E and for which there is no
limitation in the percentage of the portfolio invested in such
securities.
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With respect to investments in non-exchange-traded investment
company securities, because such securities have a net asset value
based on the value of securities and financial assets the investment
company holds, the Exchange believes it is both unnecessary and
inappropriate to apply to such investment company securities the
criteria in Commentary .01(a)(1).\36\
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\36\ The Commission has previously approved proposed rule
changes under Section 19(b) of the Act for series of Managed Fund
Shares that may invest in non-exchange traded investment company
securities. See, e.g., Securities Exchange Act Release No. 78414
(July 26, 2016), 81 FR 50576 (August 1, 2016) (SR-NYSEArca-2016-79)
(order approving listing and trading of shares of the Virtus Japan
Alpha ETF under NYSE Arca Equities Rule 8.600).
---------------------------------------------------------------------------
The Exchange notes that Commentary .01(a) through (d) to Rule
8.600-E exclude application of those provisions to certain ``Derivative
Securities Products'' that are exchange-traded investment company
securities, including Investment Company Units (as described in NYSE
Arca Rule 5.2-E(j)(3)), Portfolio Depositary Receipts (as described in
NYSE Arca Rule 8.100-E) and Managed Fund Shares (as described in NYSE
Arca Rule 8.600-E).\37\ In its
[[Page 58756]]
2008 Approval Order approving amendments to Commentary .01(a) to Rule
5.2(j)(3) that exclude Derivative Securities Products from certain
provisions of Commentary .01(a) (which exclusions are similar to those
in Commentary .01(a)(1) to Rule 8.600-E), the Commission stated that
``based on the trading characteristics of Derivative Securities
Products, it may be difficult for component Derivative Securities
Products to satisfy certain quantitative index criteria, such as the
minimum market value and trading volume limitations.'' The Exchange
notes that it would be difficult or impossible to apply to non-
exchange-traded investment company securities the generic quantitative
criteria (e.g., market capitalization, trading volume, or portfolio
criteria) in Commentary .01 (a) through (d) applicable to U.S.
Component Stocks. For example, the requirement for U.S. Component
Stocks in Commentary .01(a)(1)(B) that there be 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 is tailored to
exchange-traded securities (e.g., U.S. Component Stocks) and not to
mutual fund shares, which do not trade in the secondary market.
Moreover, application of such criteria would not serve the purpose
served with respect to U.S. Component Stocks, namely, to establish
minimum liquidity and diversification criteria for U.S. Component
Stocks held by series of Managed Fund Shares.
---------------------------------------------------------------------------
\37\ The Commission initially approved the Exchange's proposed
rule change to exclude ``Derivative Securities Products'' (i.e.,
Investment Company Units and securities described in Section 2 of
Rule 8) and ``Index-Linked Securities (as described in Rule 5.2-E
(j)(6)) from Commentary .01(a)(A) (1) through (4) to Rule 5.2-
E(j)(3) in Securities Exchange Act Release No. 57751 (May 1, 2008),
73 FR 25818 (May 7, 2008) (SR-NYSEArca-2008-29) (Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment No. 1
Thereto, to Amend the Eligibility Criteria for Components of an
Index Underlying Investment Company Units) (``2008 Approval
Order''). See also, Securities Exchange Act Release No. 57561 (March
26, 2008), 73 FR 17390 (April 1, 2008) (Notice of Filing of Proposed
Rule Change and Amendment No. 1 Thereto to Amend the Eligibility
Criteria for Components of an Index Underlying Investment Company
Units). The Commission subsequently approved generic criteria
applicable to listing and trading of Managed Fund Shares, including
exclusions for Derivative Securities Products and Index-Linked
Securities in Commentary .01(a)(1)(A) through (D), in Securities
Exchange Act Release No. 78397 (July 22, 2016), 81 FR 49320 (July
27, 2016) (Order Granting Approval of Proposed Rule Change, as
Modified by Amendment No. 7 Thereto, Amending NYSE Arca Equities
Rule 8.600 To Adopt Generic Listing Standards for Managed Fund
Shares). See also, Amendment No. 7 to SR-NYSEArca-2015-110,
available at https://www.sec.gov/comments/sr-nysearca-2015-110/nysearca2015110-9.pdf.
---------------------------------------------------------------------------
The Exchange notes that the Commission has previously approved
listing and trading of an issue of Managed Fund Shares that may invest
in equity securities that are non-exchange-traded securities of other
open-end investment company securities notwithstanding that the fund
would not meet the requirements of Commentary .01(a)(1)(A) through (E)
to Rule 8.600-E with respect to such fund's investments in such
securities.\38\ Thus, the Exchange believes that it is appropriate to
permit the Fund to invest in non-exchange-traded open-end management
investment company securities, as described above.
---------------------------------------------------------------------------
\38\ See Securities Exchange Act Release No. 83319 (May 24,
2018) (SR-NYSEArca-2018-15) (Order Approving a Proposed Rule Change,
as Modified by Amendment No. 1 Thereto, to Continue Listing and
Trading Shares of the PGIM Ultra Short Bond ETF Under NYSE Arca Rule
8.600-E).
---------------------------------------------------------------------------
Deviations from the generic requirements are necessary for the Fund
to achieve its investment objective in a manner that is cost-effective
and that maximizes investors' returns. Further, the proposed
alternative requirements are narrowly tailored to allow the Fund to
achieve its investment objective in manner that is consistent with the
principles of Section 6(b)(5) of the Act. 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.
The Exchange notes that, other than Commentary .01(a)(1), (a)(2),
(b)(1), (b)(4), (b)(5), and (e) to Rule 8.600-E, as described above,
the Fund's portfolio will meet all other requirements of Rule 8.600-E.
Availability of Information
The Fund's website (www.ftportfolios.com) will include the
prospectus for the Fund that may be downloaded. The Fund's website will
include additional quantitative information updated on a daily basis
including, for the Fund, (1) daily trading volume, the prior business
day's reported closing price, NAV and midpoint of the bid/ask spread at
the time of calculation of such NAV (the ``Bid/Ask Price''),\39\ and a
calculation of the premium and discount of the Bid/Ask Price against
the NAV, and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily Bid/Ask Price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. On each business day, before commencement
of trading in Shares in the Core Trading Session on the Exchange, the
Fund will disclose on its website the Disclosed Portfolio as defined in
NYSE Arca Rule 8.600-E(c)(2) that forms the basis for the Fund's
calculation of NAV at the end of the business day.\40\
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\39\ The Bid/Ask Price of the Fund's Shares will be determined
using the mid-point 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.
\40\ Under accounting procedures followed by the Fund, trades
made on the prior business day (``T'') will be booked and reflected
in NAV on the current business day (``T+1''). Accordingly, the Fund
will be able to disclose at the beginning of the business day the
portfolio that will form the basis for the NAV calculation at the
end of the business day.
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On a daily basis, the Fund will disclose the information required
under NYSE Arca Rule 8.600-E(c)(2) to the extent applicable. The
website information will be publicly available at no charge.
In addition, a basket composition file, which includes the security
names and share quantities, if applicable, required to be delivered in
exchange for the Fund's Shares, together with estimates and actual cash
components, will be publicly disseminated daily prior to the opening of
the Exchange via the NSCC. The basket represents one Creation Unit of
the Fund. Authorized Participants may refer to the basket composition
file for information regarding Fixed Income Securities, and any other
instrument that may comprise the Fund's basket on a given day.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Fund's
Forms N-CSR and Forms N-SAR, filed twice a year. The Fund's SAI and
Shareholder Reports will be available free upon request from the Trust,
and those documents and the Form N-CSR, Form N-PX and Form N-SAR may be
viewed on-screen or downloaded from the Commission's website at
www.sec.gov.
Intra-day and closing price information regarding exchange-traded
options will be available from the exchange on which such instruments
are traded. Intra-day and closing price information regarding Fixed
Income Securities will be available from major market data vendors.
Price information relating to OTC options, forwards and swaps will be
available from major market data vendors. Intra-day price information
for exchange-traded derivative instruments will be available from the
applicable exchange and from major market data vendors. Intraday and
other price information for the Fixed Income Securities in which the
Fund will invest will be available through subscription services, such
as Bloomberg, Markit and Thomson Reuters, which can be accessed by
Authorized Participants and other market participants. Additionally,
the Trade Reporting and Compliance Engine (``TRACE'') of the Financial
Industry Regulatory Authority (``FINRA'') will be a source of price
information for corporate bonds, and Private ABS/MBS, to the extent
transactions in such securities are reported to TRACE.\41\
[[Page 58757]]
Trade price and other information relating to municipal bonds is
available through the Municipal Securities Rulemaking Board's
Electronic Municipal Market Access (``EMMA'') system. Non-exchange-
traded open-end investment company securities 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. Price
information regarding U.S. government securities, bank loans, Private
ABS/MBS, cash equivalents and short-term instruments with maturities of
three months or more generally may be obtained from brokers and dealers
who make markets in such securities or through nationally recognized
pricing services through subscription agreements. Information relating
to weighted average loan age for Private ABS/MBS is widely available
from major market data vendors such as Bloomberg.
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\41\ 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.
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Information regarding market price and trading volume of the
Shares, ETFs, ETNs, common stocks, preferred stocks, REITs, equity
securities issued upon conversion of fixed income convertible
securities, Work-Out Securities and closed-end funds will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers.
Quotation and last sale information for the Shares, ETFs, ETNs,
closed-end funds, REITs, certain common stocks, certain preferred
stocks, certain equity securities issued upon conversion of fixed
income convertible securities, and certain Work-Out Securities will be
available via the Consolidated Tape Association (``CTA'') high-speed
line. Exchange-traded options quotation and last sale information for
options cleared via the Options Clearing Corporation (``OCC'') are
available via the Options Price Reporting Authority (``OPRA''). In
addition, the Portfolio Indicative Value (``PIV''), as defined in NYSE
Arca Rule 8.600-E(c)(3), will be widely disseminated by one or more
major market data vendors at least every 15 seconds during the Core
Trading Session.
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.\42\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. Trading in the Fund's Shares also
will be subject to Rule 8.600-E(d)(2)(D) (``Trading Halts'').
---------------------------------------------------------------------------
\42\ See NYSE Arca Rule 7.12-E.
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Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4 a.m. to 8 p.m., E.T. in accordance
with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions).
The Exchange has appropriate rules to facilitate transactions in the
Shares during all trading sessions. As provided in NYSE Arca Rule 7.6-
E, the minimum price variation (``MPV'') for quoting and entry of
orders in equity securities traded on the NYSE Arca Marketplace is
$0.01, with the exception of securities that are priced less than $1.00
for which the MPV for order entry is $0.0001.
With the exception of the requirements of Commentary .01(a)(1),
(a)(2), (b)(1), (b)(4), (b)(5), and (e) to Rule 8.600-E as described
above in ``Application of Generic Listing Requirements,'' the Shares of
the Fund will conform to the initial and continued listing criteria
under NYSE Arca Rule 8.600-E. Consistent with NYSE Arca Rule 8.600-
E(d)(2)(B)(ii), the Adviser and Sub-Adviser will implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Fund's portfolio.
The Exchange represents that, for initial and continued listing,
the Fund will be in compliance with Rule 10A-3 \43\ under the Act, as
provided by NYSE Arca Rule 5.3-E. The Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share
will be calculated daily and that the NAV and the Disclosed Portfolio
will be made available to all market participants at the same time. The
Fund's investments will be consistent with its investment goal and will
not be used to provide multiple returns of a benchmark or to produce
leveraged returns.
---------------------------------------------------------------------------
\43\ 17 CFR 240.10A-3.
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Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by FINRA on behalf
of the Exchange, or by regulatory staff of the Exchange, which are
designed to detect violations of Exchange rules and applicable federal
securities laws. The Exchange represents that these procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and federal securities laws applicable to trading on the Exchange.\44\
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\44\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, certain
exchange-traded options and certain exchange-traded futures, ETFs,
ETNs, closed-end funds, certain common stocks, certain preferred
stocks, certain REITs, certain equity securities issued upon conversion
of fixed income convertible securities, certain Work-Out Securities
with other markets and other entities that are members of the
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on
behalf of the Exchange, or both, may obtain trading information
regarding trading in such securities and financial instruments from
such markets and other entities.\45\ In addition, the Exchange may
obtain information regarding trading in such securities and financial
instruments from markets and other entities that are members of ISG or
with which the Exchange has in place a CSSA. In addition, FINRA, on
behalf of the
[[Page 58758]]
Exchange, is able to access, as needed, trade information for certain
fixed income securities held by the Fund reported to FINRA's TRACE.
FINRA also can access data obtained from the Municipal Securities
Rulemaking Board relating to municipal bond trading activity for
surveillance purposes in connection with trading in the Shares.
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\45\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio may trade on markets that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement (``CSSA'').
---------------------------------------------------------------------------
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolio or reference asset, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange listing rules specified in this rule filing
shall constitute continued listing requirements for listing the Shares
of the Fund on the Exchange.
The issuer must notify the Exchange of any failure by the Fund to
comply with the continued listing requirements, and, pursuant to its
obligations under Section 19(g)(1) of the Act, the Exchange will
monitor for compliance with the continued listing requirements. If the
Fund is not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures under NYSE Arca Rule 5.5-E
(m).
Information Bulletin
The Exchange will inform its Equity Trading Permit Holders in an
Information Bulletin (``Bulletin'') of the special characteristics and
risks associated with trading the Shares. Specifically, the Bulletin
will discuss the following: (1) The procedures for purchases and
redemptions of Shares in Creation Unit aggregations (and that Shares
are not individually redeemable); (2) NYSE Arca Rule 9.2-E(a), which
imposes a duty of due diligence on its Equity Trading Permit Holders to
learn the essential facts relating to every customer prior to trading
the Shares; (3) the risks involved in trading the Shares during the
Early and Late Trading Sessions when an updated PIV will not be
calculated or publicly disseminated; (4) how information regarding the
PIV and the Disclosed Portfolio is disseminated; (5) the requirement
that Equity Trading Permit Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information.
In addition, the Bulletin will reference that the Fund is subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \46\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares are listed and traded on the Exchange pursuant to the initial
and continued listing criteria in NYSE Arca Rule 8.600-E. The Exchange
has in place surveillance procedures that are adequate to properly
monitor trading in the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities
laws. The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, certain
exchange-traded options and certain exchange-traded futures, ETFs,
ETNs, closed-end funds, certain common stocks, certain preferred
stocks, certain REITs, certain equity securities issued upon conversion
of fixed income convertible securities and certain Work-Out Securities
with other markets and other entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in such securities and financial
instruments from such markets and other entities. The Exchange may
obtain information regarding trading in such securities and financial
instruments from markets and other entities that are members of ISG or
with which the Exchange has in place a CSSA. In addition, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities held by the Fund reported to TRACE.
FINRA also can access data obtained from the Municipal Securities
Rulemaking Board relating to municipal bond trading activity for
surveillance purposes in connection with trading in the Shares. The
Adviser and Sub-Adviser are not registered as broker-dealers. The
Adviser is affiliated with First Trust Portfolios L.P., 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 portfolios. The Sub-
Adviser is affiliated with multiple broker-dealers and has implemented
and will maintain a fire wall with respect to its broker-dealer
affiliates regarding access to information concerning the composition
and/or changes to the portfolio.
The Exchange notes that, other than Commentary .01(a)(1), (a)(2),
(b)(1), (b)(4), (b)(5), and (e) to Rule 8.600-E, as described above,
the Fund's portfolio will meet all other requirements of Rule 8.600-E.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information will be publicly available regarding the Fund and the
Shares, thereby promoting market transparency. Quotation and last sale
information for the Shares, ETFs, ETNs, closed-end funds, certain
REITs, certain common stocks, certain preferred stocks, certain equity
securities issued upon conversion of fixed income convertible
securities, and certain Work-Out Securities will be available via the
CTA high-speed line. Exchange-traded options quotation and last sale
information for options cleared via the OCC are available via OPRA. The
Exchange will inform its Equity Trading Permit Holders in an
Information Bulletin of the special characteristics and risks
associated with trading the Shares. Trading in Shares of the Fund will
be halted if the circuit breaker parameters in NYSE Arca Rule 7.12-E
have been reached or because of market conditions or for reasons that,
in the view of the Exchange, make trading in the Shares inadvisable.
Trading in the Shares will be subject to NYSE Arca Rule 8.600-
E(d)(2)(D), which sets forth circumstances under which Shares of the
Fund may be halted. In addition, as noted above, investors will have
ready access to information regarding the Fund's holdings, NAV, the
PIV, 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
[[Page 58759]]
it will facilitate the listing and trading of an additional type of
actively-managed exchange-traded product that generally will
principally hold fixed income securities and that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a CSSA. In addition, as noted above,
investors will have ready access to information regarding the Fund's
holdings, NAV, Disclosed Portfolio, and quotation and last sale
information for the Shares.
Deviations from the generic requirements, as described above, are
necessary for the Fund to achieve its investment objective in a manner
that is cost-effective and that maximizes investors' returns. Further,
the proposed alternative requirements are narrowly tailored to allow
the Fund to achieve its investment objective in a manner that is
consistent with the principles of Section 6(b)(5) of the Act. 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.
As noted above, the Fund will not comply with the requirements set
forth in Commentary .01(a)(1) and (a)(2) to NYSE Arca Rule 8.600-E with
respect to the Fund's investments in equity securities. Instead, the
Exchange proposes that (i) the Fund's investments in equity securities
will meet the requirements of Commentary .01(a) with the exception of
Commentary .01(a)(1)(C) and .01(a)(1)(D) (with respect to U.S.
Component Stocks) and Commentary .01(a)(2)(C) and .01(a)(2)(D) (with
respect to Non-U.S. Component Stocks).\47\ The Exchange believes it is
appropriate and in the public interest to approve listing and trading
of Shares of the Fund notwithstanding that the Fund's holdings in such
equity securities do not comply with the requirements set forth in
Commentary .01(a)(1) and (a)(2) to NYSE Arca Rule 8.600-E in that any
Fund investment in exchange-traded common stocks, preferred stocks,
REITS, ETFs, ETNs, U.S. exchange-traded closed-end funds, exchange-
traded equity securities issued upon conversion of fixed income
convertible securities, and exchange-traded Work Out Securities would
provide for enhanced diversification of the Fund's portfolio. Such
securities would be Non-Principal Investments, not exceeding 20% of the
Fund's net assets in the aggregate.
---------------------------------------------------------------------------
\47\ See notes 24 and 25, supra.
---------------------------------------------------------------------------
The Fund will not comply with the requirement in Commentary
.01(b)(1) to Rule 8.600-E that components that in the aggregate account
for at least 75% of the fixed income weight of the portfolio each shall
have a minimum original principal amount outstanding of $100 million or
more. Instead, the Exchange proposes that components that in the
aggregate account for at least 50% of the fixed income weight of the
portfolio each shall have a minimum original principal amount
outstanding of $50 million or more. As noted above, the Fund may not
invest more than 2% of its total assets in any one Fixed Income
Security (excluding U.S. government securities and TIPS) on a per CUSIP
basis. In addition, at least 50% of the weight of the Fund's portfolio
would continue to be subject to a substantial minimum (i.e., $50
million) original principal amount outstanding. The Exchange believes
this limitation would provide significant additional diversification to
the Fund's investments in Fixed Income Securities, and reduce concerns
that the Fund's investments in such securities would be readily
susceptible to market manipulation.
The Exchange proposes that Private ABS/MBS will not be required to
comply with the requirements of Commentary .01(b)(4) because certain
Private ABS/MBS cannot satisfy the criteria in Commentary .01(b)(4).
Instead, the Exchange proposes that the Fund's investments in Fixed
Income Securities other than Private ABS/MBS will be required to comply
with the requirements of Commentary .01(b)(4). The Exchange believes
that this is appropriate because Commentary .01(b)(4) does not appear
to be designed for structured finance vehicles such as Private ABS/MBS.
As noted above, the Fund may not invest more than 2% of its total
assets in any one Fixed Income Security (excluding U.S. government
securities and TIPS) on a per CUSIP basis. The Exchange believes this
limitation would provide additional diversification to the Fund's
investments in Private ABS/MBS, and reduce concerns that the Fund's
investment in such securities would be readily susceptible to market
manipulation.
As noted above, the Fund will not comply with the requirement in
Commentary .01(b)(5) to Rule 8.600-E that Private ABS/MBS in the Fund's
portfolio account, in the aggregate, for no more than 20% of the weight
of the Fund's portfolio. Instead, the Exchange proposes that, in order
to enable the portfolio to be more diversified and provide the Fund
with an opportunity to earn higher returns, the Fund may invest up to
50% of its total assets in the aggregate in Private ABS/MBS, provided
that the Fund (1) may not invest more than 25% of its total assets in
non-agency ABS; (2) may not invest more than 30% of its total assets in
non-agency RMBS; and (3) may not invest more than 25% of its total
assets in non-agency CMBS and CLOs. With respect to the Fund's
investments in up to 30% of its total assets in Private ABS/MBS that
exceed the 20% of the weight of the Fund's portfolio that may be
invested in Private ABS/MBS under Commentary .01(b)(5) to NYSE Arca
Rule 8.600-E, the Fund's holdings in Private ABS/MBS will be subject to
minimum weighted average loan age restrictions described above.\48\ In
addition, as noted above, the Fund may not invest more than 2% of its
total assets in any one Fixed Income Security (excluding U.S.
government securities and TIPS) on a per CUSIP basis.\49\ The Exchange
believes these limitations would provide additional diversification to
the Fund's Private ABS/MBS investments and reduce concerns that the
Fund's investment in such securities would be readily susceptible to
market manipulation.
---------------------------------------------------------------------------
\48\ See note 19 and accompanying text, supra.
\49\ See note 31, supra.
---------------------------------------------------------------------------
The Exchange believes it is appropriate and in the public interest
to approve listing and trading of Shares of the Fund notwithstanding
that the Fund's holdings in such Private ABS/MBS do not comply with the
requirements set forth in Commentary .01(b)(5) to NYSE Arca Rule 8.600-
E in that the Fund's investment in Private ABS/MBS is expected to
provide the Fund with benefits associated with increased
diversification, as Private ABS/MBS investments tend to be less
correlated to interest rates than many other fixed income securities.
The Fund's investment in Private ABS/MBS will be subject to the Fund's
liquidity procedures as adopted by the Board, and the Adviser and Sub-
Adviser do not expect that investments in Private ABS/MBS of up to 50%
of the total assets of the Fund will have any material impact on the
liquidity of the Fund's investments.
The Adviser and Sub-Adviser represent that the RMBS sector can be
an important component of the Fund's investment strategy because of the
potential for attractive risk-adjusted returns relative to other fixed
income sectors and the potential to add
[[Page 58760]]
significantly to the diversification in the Fund's portfolio.
Similarly, the Private ABS/MBS sectors also have the potential for
attractive risk-adjusted returns and added portfolio diversification.
The Exchange believes the loan age parameters described above are
appropriate for the corresponding Private ABS/MBS; the 84, 60 and 12
month time frames take into account that the longer Private ABS/MBS
continue to trade, the more price discovery has occurred in the market
and the more opportunity there has been for market participants to
perform due diligence in understanding and evaluating the underlying
loans for such securities.
With respect to non-agency RMBS, a weighted average loan age of 84
months accommodates investment in well-seasoned securities that are
continuing to trade with resilient pricing notwithstanding events
during the market crisis of 2008-2010, during which loan defaults
drastically impacted pricing in non-agency RMBS. Pricing in such
securities is generally more reliable than RMBS with a lower loan age
in that pricing is no longer reliant on market expectations but on
actual post-crisis loan performance.
With respect to non-agency CMBS, a weighted average loan age of 60
months would include securities for which there is a known track record
regarding cash flows and default rates for loans underlying real estate
and other assets underlying CMBS. A five year loan age facilitates
pricing based on actual loan performance rather than default
projections. Similarly, for non-agency CLOs, a weighted average loan
age of 60 months provides the opportunity for market participants to
evaluate data regarding the bank loans underlying the CLOs and to
assess how the loans are actually being used--for example, to implement
corporate strategy or for capital usage--rather than relying on pro
forma statements regarding the loans.
With respect to non-agency ABS, a weighted average loan age of 12
months provides an appropriately limited time frame for market
participants to assess the likely trajectory of expected defaults (for
example, for sub-prime auto loans). The loans underlying non-agency ABS
are typically of much shorter duration than other Private ABS/MBS.
Because such loans are more likely to default within a short time after
issuance, a one-year minimum loan age can be expected to provide a
sufficient time frame for market participants to assess the reliability
of loan pricing for loans underlying non-agency ABS.
As noted above, the Fund's portfolio will not comply with the
requirements set forth in Commentary .01(e) to NYSE Arca Rule 8.600-E.
The Exchange proposes that up to 25% of the Fund's assets (calculated
as the aggregate gross notional value) may be invested in OTC
derivatives that are used to reduce currency, interest rate or credit
risk arising from the Fund's investments (that is, ``hedge''), and that
the Fund's investments in OTC derivatives other than OTC derivatives
used to hedge the Fund's portfolio against currency, interest rate or
credit risk will be limited to 20% of the assets in the Fund's
portfolio, calculated as the aggregate gross notional value of such OTC
derivatives. As noted above, the Fund will not use derivative
instruments to gain exposure to Private ABS/MBS, and derivative
instruments linked to such securities will be used for hedging purposes
only.
The Exchange believes it is appropriate and in the public interest
to approve listing and trading of Shares of the Fund notwithstanding
that the Fund's holdings in OTC derivatives do not comply with the
requirements set forth in Commentary .01(e) to NYSE Arca Rule 8.600-E
in that, depending on market conditions, it may be critical that the
Fund be able to utilize available OTC derivatives to attempt to reduce
impact of currency, interest rate or credit fluctuations on Fund
assets. Therefore, the Exchange believes it is appropriate to apply a
limit of up to 25% of the Fund's assets to the Fund's investments in
OTC derivatives (calculated as the aggregate gross notional value of
such OTC derivatives), including forwards, options and swaps, that are
used for hedging purposes, as described above.
The Adviser and Sub-Adviser represent that OTC derivatives can be
tailored to hedge the specific risk arising from the Fund's investments
and frequently may be a more efficient hedging vehicle than listed
derivatives. For example, the Fund could obtain an OTC foreign currency
derivative in a notional amount that exactly matches the notional
amount of the Fund's investments. If the Fund were limited to investing
up to 20% of assets in OTC derivatives, the Fund might have to ``over
hedge'' or ``under hedge'' if round lot sizes in listed derivatives
were not available. In addition, for example, an OTC CDX option can be
structured to provide protection tailored to the Fund's credit exposure
and can be a more efficient way to hedge credit risk with respect to
specific exposures than listed derivatives. Similarly, OTC interest
rate derivatives can be more effective hedges of interest rate exposure
because they can be customized to match the basis risk arising from the
term of the investments held by the Fund.
Because the Fund, in furtherance of its investment objective, may
invest a substantial percentage of its investments in foreign currency
denominated Fixed Income Securities, the 20% limit in Commentary .01(e)
to Rule 8.600-E could result in the Fund being unable to fully pursue
its investment objective while attempting to sufficiently mitigate
investment risks. The inability of the Fund to adequately hedge its
holdings would effectively limit the Fund's ability to invest in
certain instruments, or could expose the Fund to additional investment
risk. For example, if the Fund's assets (on a gross notional value
basis) were $100 million and no listed derivative were suitable to
hedge the Fund's risk, under the generic standards the Fund would be
limited to holding up to $20 million gross notional value in OTC
derivatives ($100 million * 20%). Accordingly, the maximum amount the
Fund would be able to invest in foreign currency denominated Fixed
Income Securities while remaining adequately hedged would be $20
million. The Fund then would hold $60 million in assets that could not
be hedged, other than with listed derivatives, which, as noted above,
might not be sufficiently tailored to the specific instruments to be
hedged.
In addition, by applying the 20% limitation in Commentary .01(e) to
Rule 8.600-E, the Fund would be less able to protect its holdings from
more than one risk simultaneously. For example, if the Fund's assets
(on a gross notional basis) were $100 million and the Fund held $20
million in foreign currency denominated Fixed Income Instruments with
two types of risks (e.g., currency and credit risk) which could not be
hedged using listed derivatives, the Fund would be faced with the
choice of either holding $20 million aggregate gross notional value in
OTC derivatives to mitigate one of the risks while passing the other
risk to its shareholders, or, for example, holding $10 million
aggregate gross notional value in OTC derivatives on each of the risks
while passing the remaining portion of each risk to the Fund's
shareholders.
The Adviser and Sub-Adviser believe that it is in the best
interests of the Fund's shareholders for the Fund to be allowed to
reduce the currency, interest rate or credit risk arising from the
Fund's investments using the most efficient financial instrument. While
certain risks can be hedged via listed
[[Page 58761]]
derivatives, OTC derivatives (such as forwards, options and swaps) can
be customized to hedge against precise risks. Accordingly, the Adviser
and Sub-Adviser believe that OTC derivatives may frequently be a more
efficient hedging vehicle than listed derivatives. Therefore, the
Exchange believes that increasing the percentage limit in Commentary
.01(e), as described above, to the Fund's investments in OTC
derivatives, including forwards, options and swaps, that are used
specifically for hedging purposes would help protect investors and the
public interest.
As noted above, the Fund's portfolio will not meet the requirements
of Commentary .01(a)(1)(A) through (E) to Rule 8.600-E with respect to
the Fund's investments in non-exchange-traded securities of open-end
investment company securities, and, with respect to the Fund's holdings
of OTC equity securities issued upon conversion of fixed income
convertible securities and OTC Work Out Securities, would not meet the
requirements of Commentary .01(a)(1)(A) through (E) and Commentary
.01(a)(2)(A) through (E) to Rule 8.600-E. The Exchange believes that it
is appropriate and in the public interest to approve listing and
trading of Shares of the Fund on the Exchange notwithstanding that the
Fund would not meet the requirements of Commentary .01(a)(1)(A) through
(E) to Rule 8.600-E with respect to the Fund's investments in non-
exchange-traded securities of open-end investment company
securities,and notwithstanding that the Fund's holdings of OTC equity
securities issued upon conversion of fixed income convertible
securities and OTC Work Out Securities would not meet the requirements
of Commentary .01(a)(1)(A) through (E) and Commentary .01(a)(2)(A)
through (E) to Rule 8.600-E. Investments in non-exchange-traded
securities of open-end investment company securities will not be
principal investments of the Fund.\50\ Such investments, which may
include mutual funds that invest, for example, principally in fixed
income securities, would be utilized to help the Fund meet its
investment objective and to equitize cash in the short term.
---------------------------------------------------------------------------
\50\ See note 35, supra.
---------------------------------------------------------------------------
With respect to any Fund holdings of exchange-traded or OTC equity
securities issued upon conversion of fixed income convertible
securities and Work Out Securities, such securities will not exceed 10%
and 5%, respectively, of the Fund's total assets. The Adviser and Sub-
Adviser represent that the Fund generally will not actively invest in
equity securities issued upon conversion of fixed income convertible
securities or Work Out Securities, but may, at times, receive a
distribution of such securities in connection with the Fund's holdings
in other securities. Therefore, the Fund's holdings in equity
securities issued upon conversion of fixed income convertible
securities and Work Out Securities generally would not be acquired as
the result of the Fund's voluntary investment decisions.
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
shares of an additional type of actively-managed exchange-traded
product that will enhance competition among market participants, to the
benefit of investors and the marketplace.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of actively-managed exchange-traded product that
generally will principally hold fixed income securities and that will
enhance competition among market participants, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 2, is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\51\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 2, is consistent
with Section 6(b)(5) of the Act,\52\ which requires, among other
things, that the Exchange's rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.
---------------------------------------------------------------------------
\51\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\52\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Under the proposal, the Exchange represents that the Fund's
investments in equity securities will not meet the requirements of
Commentaries .01(a)(1)(C) and .01(a)(1)(D) (with respect to U.S.
Component Stocks) and Commentaries .01(a)(2)(C) and .01(a)(2)(D) (with
respect to Non-U.S. Component Stocks). The Exchange further represents
that any Fund holdings of exchange-traded equity securities issued upon
conversion of fixed income convertible securities and exchange-traded
Work Out Securities will not exceed 10% and 5%, respectively, of the
Fund's total assets. The Exchange also represents that the Fund
generally will not actively invest in equity securities issued upon
conversion of fixed income convertible securities or Work Out
Securities or acquire such securities as a result of the Fund's
voluntary investment decisions. The Commission believes that, because
the Fund's investments in exchange-traded common stocks, preferred
stocks, REITS, ETFs, ETNs, exchange-traded equity securities issued
upon conversion of fixed income convertible securities, exchange-traded
Work Out Securities, and U.S. exchange-traded closed-end fund
securities would be Non-Principal Investments and therefore would not
exceed 20% of the Fund's total assets, concerns related to these
securities would be mitigated.
In addition, the Exchange represents that the Fund will not meet
the requirements of Commentaries .01(a)(1)(A) through (E) to NYSE Arca
Rule 8.600-E with respect to the Fund's investments in non-exchange-
traded securities of open-end investment company securities. The
Commission notes that such open-end investment company securities are
required to be registered with the Commission and would be subject to
all of the applicable requirements of the 1940 Act and the rules and
regulations thereunder. The Commission further notes that it has
approved the listing and trading of other series of Managed Fund Shares
that may invest in non-exchange-traded open-end investment company
securities notwithstanding that those series of Managed Fund Shares
would not meet the requirements of Commentaries .01(a)(1)(A) through
(E) to NYSE Arca
[[Page 58762]]
Rule 8.600-E with respect to investments in such securities.\53\
---------------------------------------------------------------------------
\53\ See supra note 38.
---------------------------------------------------------------------------
According to the Exchange, the Fund also will not comply with the
requirement in Commentary .01(b)(1) to NYSE Arca Rule 8.600-E.\54\ The
Exchange proposes instead that components that in the aggregate account
for at least 50% of the fixed income weight of the portfolio each shall
have a minimum original principal amount outstanding of $50 million or
more. In addition, the Fund may not invest more than 2% of its total
assets in any one Fixed Income Security (excluding U.S. government
securities and TIPS) on a per-CUSIP basis. In addition, the Exchange
proposes that at least 50% of the weight of the Fund's portfolio would
continue to be subject to a substantial minimum original principal
amount outstanding (i.e., $50 million). The Exchange believes this
aspect of the proposal would provide additional diversification to the
Fund's investments in Fixed Income Securities.
---------------------------------------------------------------------------
\54\ Commentary .01(b)(1) to NYSE Arca Rule 8.600-E states that
components that in the aggregate account for at least 75% of the
fixed income weight of the portfolio each shall have a minimum
original principal amount outstanding of $100 million or more.
---------------------------------------------------------------------------
The Exchange further represents that the Fund will not comply with
the requirements in Commentary .01(b)(4) to NYSE Arca Rule 8.600-E.\55\
Instead, the Exchange proposes that the Fund's investments in Fixed
Income Securities, except for Private ABS/MBS will comply with the
requirements of Commentary .01(b)(4). As noted above, the Exchange
proposes that the Fund may not invest more than 2% of its total assets
in any one Fixed Income Security (excluding U.S. government securities
and TIPS) on a per-CUSIP basis. The Commission notes that it has
previously approved the listing of other series of Managed Fund Shares
with similar investment objectives and strategies without imposing
requirements that a certain percentage of such funds' securities meet
one of the criteria set forth in Commentary .01(b)(4).\56\
---------------------------------------------------------------------------
\55\ See supra note 27.
\56\ See supra note 28.
---------------------------------------------------------------------------
Separately, the Exchange proposes to permit the Fund to invest up
to 50% of its total assets in the aggregate in Private ABS/MBS,
provided that the Fund would not be permitted to invest more than: (i)
30% of its total assets in non-agency RMBS, (ii) 25% of its total
assets in non-agency CMBS and CLOs, and (iii) 25% of its total assets
in non-agency ABS. Further, with respect to the Fund's investments in
up to 30% of its total assets in Private ABS/MBS that exceed the 20% of
the weight of the Fund's portfolio that may be invested in Private ABS/
MBS, the Exchange represents that the Fund's holdings in Private ABS/
MBS will be subject to certain weighted average loan age restrictions.
The Exchange also represents that the Fund's investments in Private
ABS/MBS will be subject to the Fund's liquidity procedures as adopted
by the Board. The Commission also notes that it has previously approved
proposals which permit other series of Managed Fund Shares to hold
private asset-backed and mortgaged-backed securities in excess of the
levels permitted under Commentary .01(b)(5).\57\
---------------------------------------------------------------------------
\57\ See, e.g., Securities Exchange Act Release Nos. 84047
(September 6, 2018), 83 FR 46200 (September 12, 2018) (SR-Nasdaq-
2017-128) (approving the listing and trading of shares of the
Western Asset Total Return ETF); and 84826 (December 14, 2018), 83
FR 65386 (December 20, 2018) (SR-NYSEArca-2018-25) (approving the
continued listing and trading of shares of the Natixis Loomis Sayles
Short Duration Income ETF).
---------------------------------------------------------------------------
With respect to the Fund's proposed investments in OTC derivatives,
the Fund's investments other than OTC derivatives used to hedge the
Fund's portfolio against currency, interest rate or credit risk, will
be limited to 20% of the Fund's portfolio. The Exchange proposes that
up to 25% of the Fund's assets may be invested in OTC derivatives that
are used to reduce currency, interest rate, or credit risk arising from
the Fund's investments. The Commission notes that it has approved other
proposals that permit a fund to invest in OTC derivatives in excess of
the 20% limit in Commentary .01(e).\58\
---------------------------------------------------------------------------
\58\ See Securities Exchange Act Release Nos. 86698 (August 16,
2019), 84 FR 43823 (August 22, 2019) (NYSEArca-2018-83) (order
approving the listing and trading of shares of the iShares Bloomberg
Roll Select Commodity Strategy ETF) and 86636 (August 12, 2019), 84
FR 42030 (August 16, 2019) (NYSEArca-2018-98) (order approving the
listing and trading of the iShares Commodity Multi-Strategy ETF).
---------------------------------------------------------------------------
The Exchange represents that information relating to the Fund's
underlying assets, intra-day and closing price information regarding
Fixed Income Securities will be available from major market data
vendors, as well as through subscription services, such as Bloomberg,
Markit, and Thomson Reuters, which can be accessed by Authorized
Participants and other market participants.\59\ Additionally, the
Exchange represents that FINRA's TRACE will be a source of price
information for corporate bonds and Private ABS/MBS, to the extent
transactions in such securities are reported to TRACE.\60\ According to
the Exchange, information relating to weighted average loan age for
Private ABS/MBS is widely available from major market data vendors such
as Bloomberg. Trade price and other information relating to municipal
bonds is available through the Municipal Securities Rulemaking Board's
EMMA system. With respect to the Fund's holdings in derivatives, price
information relating to OTC options, forwards, and swaps will be
available from major market data vendors. Intra-day price information
for exchange-traded derivative instruments, including exchange-traded
options, will be available from the applicable exchange and from major
market data vendors. Exchange-traded options quotation and last-sale
information for options cleared via the OCC are available through OPRA.
With respect to the Fund's holdings in equity securities, non-exchange-
traded open-end investment company securities are typically priced once
each business day and their prices are available through the applicable
fund's website or from major market data vendors. Information regarding
market price and trading volume of the underlying ETFs, ETNs, common
stocks, preferred stocks, REITs, equity securities issued upon
conversion of fixed income convertible securities, Work-Out Securities,
and closed-end funds will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services. Quotation and last-sale information for the underlying ETFs,
ETNs, closed-end funds, REITs, certain common stocks, certain preferred
stocks, certain equity securities issued upon conversion of fixed
income convertible securities, and certain Work-Out Securities will be
available via the CTA high-speed line.
---------------------------------------------------------------------------
\59\ The Exchange also states that price information regarding
U.S. government securities, bank loans, Private ABS/MBS, cash
equivalents, and short-term instruments with maturities of three
months or more generally may be obtained from brokers and dealers
who make markets in such securities or through nationally recognized
pricing services through subscription agreements.
\60\ See supra note 41.
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The Exchange further represents that, with respect to trading in
the Shares, the Exchange or FINRA, on behalf of the Exchange, or both,
will communicate with and may obtain information from, other markets
and other entities that are members of the ISG, or with which the
Exchange has in place a CSSA, and FINRA, on behalf of the Exchange, is
able to access, trade information for certain fixed income securities
held by the Fund reported to FINRA's TRACE. FINRA also can access data
obtained from the Municipal Securities Rulemaking Board relating to
municipal bond trading activity for surveillance
[[Page 58763]]
purposes in connection with trading in the Shares. The Exchange also
asserts that it has a general policy prohibiting the distribution of
material, non-public information by its employees.
According to the Exchange, other than Commentaries .01(a)(1),
(a)(2), (b)(1), (b)(4), (b)(5), and (e) to NYSE Arca Rule 8.600-E, as
described above, the Fund's portfolio will meet all other requirements
of NYSE Arca Rule 8.600-E. The Commission believes that, based on the
representations of the Exchange with respect to the Fund's investment
objective and proposed holdings and restrictions, the proposal is
consistent with the requirements of Section 6(b)(5) of the Act. The
Exchange represents that 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, and
(c) the applicability of Exchange listing rules specified in this rule
filing shall constitute continued listing requirements for listing the
Shares. In addition, the Exchange represents that the issuer must
notify 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 \61\ for
compliance with the continued listing requirements. If the Fund is not
in compliance with the applicable listing requirements, the Exchange
will commence delisting procedures under NYSE Arca Rule 5.5-E(m).
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\61\ The Commission notes that certain proposals for the listing
and trading of exchange-traded products include a representation
that the exchange will ``surveil'' for compliance with the continued
listing requirements. See, e.g., Securities Exchange Act Release No.
77499 (April 1, 2016), 81 FR 20428, 20432 (April 7, 2016) (SR-BATS-
2016-04). In the context of this representation, it is the
Commission's view that ``monitor'' and ``surveil'' both mean ongoing
oversight of compliance with the continued listing requirements.
Therefore, the Commission does not view ``monitor'' as a more or
less stringent obligation than ``surveil'' with respect to the
continued listing requirements.
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For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with Section
6(b)(5) of the Act \62\ and the rules and regulations thereunder
applicable to a national securities exchange.
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\62\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendment No. 2 to the Proposed Rule
Change
Interested persons are invited to submit written views, data, and
arguments concerning whether Amendment No. 2 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-NYSEArca-2019-33 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2019-33. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2019-33 and should be submitted
on or before November 22, 2019.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 2, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
2 in the Federal Register. The Commission notes that Amendment No. 2
clarified representations to reflect changes adopted in Commentary
.01(b)(5) to NYSE Arca Rule 8.600-E; conformed a requirement relating
to certain investment restrictions from ``average loan maturity'' to
``weighted average loan age''; and provided additional arguments in
support of the Fund's proposed changes to its investments and
investment restrictions. Amendment No. 2 also provided non-substantive
clarifications and technical changes. The additional information in
Amendment No. 2 assisted the Commission in evaluating the Exchange's
proposal and in determining that the trading of the Shares under the
proposal is consistent with the Act. Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2) of the Act,\63\ to approve the
proposed rule change, as modified by Amendment No. 2, on an accelerated
basis.
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\63\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\64\ that the proposed rule change (SR-NYSEArca-2019-33), as
modified by Amendment No. 2, be, and it hereby is, approved on an
accelerated basis.
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\64\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\65\
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\65\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-23858 Filed 10-31-19; 8:45 am]
BILLING CODE 8011-01-P
