81 FR 15382 - Order Granting Limited Exemptions From Exchange Act Rule 10b-17 and Rules 101 and 102 of Regulation M to First Trust Dorsey Wright Dynamic Focus 5 ETF Pursuant to Exchange Act Rule 10b-17(b)(2) and Rules 101(d) and 102(e) of Regulation M

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 55 (March 22, 2016)

[Federal Register Volume 81, Number 55 (Tuesday, March 22, 2016)]
[Notices]
[Pages 15382-15384]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-06340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77380; File No. TP 16-5]


Order Granting Limited Exemptions From Exchange Act Rule 10b-17 
and Rules 101 and 102 of Regulation M to First Trust Dorsey Wright 
Dynamic Focus 5 ETF Pursuant to Exchange Act Rule 10b-17(b)(2) and 
Rules 101(d) and 102(e) of Regulation M

March 16, 2016.
    By letter dated March 16, 2016 (the ``Letter''), as supplemented by 
conversations with the staff of the Division of Trading and Markets, 
counsel for First Trust Exchange-Traded Fund VI (the ``Trust'') on 
behalf of the Trust, First Trust Dorsey Wright Dynamic Focus 5 ETF (the 
``Fund''), any national securities exchange on or through which shares 
of the Fund (``Shares'') are listed and/or may subsequently trade, and 
persons or entities engaging in transactions in Shares (collectively, 
the ``Requestors''), requested exemptions, or interpretive or no-action 
relief, from Rule 10b-17 of the Securities Exchange Act of 1934, as 
amended (``Exchange Act''), and Rules 101 and 102 of Regulation M, in 
connection with secondary market transactions in Shares and the 
creation or redemption of aggregations of Shares of 50,000 shares 
(``Creation Units'').
    The Trust is registered with the Commission under the Investment 
Company Act of 1940, as amended (``1940 Act''), as an open-end 
management investment company. The Fund seeks to track the performance 
of an underlying index, the Dorsey Wright Dynamic Focus Five Index 
(``Underlying Index''). The Underlying Index is designed to provide 
targeted exposure to the five First Trust sector-based and industry-
based ETFs that the index provider determines offer the greatest 
potential to outperform the other First Trust sector-based and 
industry-based ETFs. The Underlying Index is also designed to decrease 
overall equity exposure when the cash equivalents \1\

[[Page 15383]]

gain strength. The allocation of the Cash Index is evaluated and 
adjusted periodically. The Cash Index may constitute between 0% and 95% 
of the weight of the Underlying Index.
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    \1\ The cash equivalents in which the Fund may invest are 1- to 
3-month U.S. Treasury Bills representing the component securities of 
an index (the Nasdaq US T-Bill Index (the ``Cash Index'')) that is a 
component of the Underlying Index.
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    The Fund will seek to track the performance of its Underlying Index 
by normally investing at least 80% of its total assets in the 
underlying exchange-traded funds and the cash equivalents that comprise 
the Underlying Index. In light of the composition of the Underlying 
Index, the Fund intends to operate as an ``ETF of ETFs.'' Except for 
the fact that the Fund will operate as an ETF of ETFs, the Fund will 
operate in a manner identical to the underlying ETFs.
    The Requestors represent, among other things, the following:
     Shares of the Fund will be issued by the Trust, an open-
end management investment company that is registered with the 
Commission;
     Creation Units will be continuously redeemable at the net 
asset value (``NAV'') next determined after receipt of a request for 
redemption by the Fund, and the secondary market price of the Shares 
should not vary substantially from the NAV of such Shares;
     Shares of the Fund will be listed and traded on The NASDAQ 
Stock Market LLC or another exchange in accordance with exchange 
listing standards that are, or will become, effective pursuant to 
Section 19(b) of the Exchange Act (the ``Listing Exchange''); \2\
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    \2\ Further, the Letter states that should the Shares also trade 
on a market pursuant to unlisted trading privileges, such trading 
will be conducted pursuant to self-regulatory organization rules 
that have become effective pursuant to Section 19(b) of the Exchange 
Act.
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     The Fund seeks to track the performance of the Underlying 
Index, all the components of which have publicly available last sale 
trade information;
     The Listing Exchange will disseminate continuously every 
15 seconds throughout the trading day, through the facilities of the 
Consolidated Tape Association, the market value of a Share;
     The Listing Exchange, market data vendors or other 
information providers will disseminate, every 15 seconds throughout the 
trading day, a calculation of the intraday indicative value of a Share;
     On each business day before the opening of business on the 
Listing Exchange, the Fund will cause to be published through the 
National Securities Clearing Corporation the list of the names and the 
quantities of securities of the Fund's portfolio that will be 
applicable that day to creation and redemption requests;
     The arbitrage mechanism will be facilitated by the 
transparency of the Fund's portfolio and the availability of the 
intraday indicative value, the liquidity of securities held by the 
Fund, the ability to acquire such securities, as well as arbitrageurs' 
ability to create workable hedges;
     The Fund will invest solely in liquid securities;
     The Fund will invest in securities that will facilitate an 
effective and efficient arbitrage mechanism and the ability to create 
workable hedges;
     All ETFs in which the Fund invests will either meet all 
conditions set forth in one or more class relief letters,\3\ will have 
received individual relief from the Commission, will be able to rely on 
individual relief even though they are not named parties, or will be 
able to rely on applicable class relief for actively-managed ETFs; \4\
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    \3\ Exchange Act Rel. No. 67215 (Jun. 19, 2012), 77 FR 37941 
(Jun. 25, 2012); Letter from Catherine McGuire, Esq., Chief Counsel, 
Division of Market Regulation, to the Securities Industry 
Association Derivative Products Committee (Nov. 21, 2005); Letter 
from Racquel L. Russell, Branch Chief, Division of Market 
Regulation, to George T. Simon, Esq., Foley & Lardner LLP (Jun. 21, 
2006); Letter from James A. Brigagliano, Acting Associate Director, 
Division of Market Regulation, to Stuart M. Strauss, Esq., Clifford 
Chance US LLP (Oct. 24, 2006); Letter from James A. Brigagliano, 
Associate Director, Division of Market Regulation, to Benjamin 
Haskin, Esq., Willkie. Farr & Gallagher LLP (Apr. 9, 2007); or 
Letter from Josephine Tao, Assistant Director, Division of Trading 
and Markets, to Domenick Pugliese, Esq., Paul, Hastings, Janofsky 
and Walker LLP (Jun. 27, 2007).
    \4\ See Staff Legal Bulletin No. 9, ``Frequently Asked Questions 
About Regulation M'' (Apr. 12, 2002) (regarding actively-managed 
ETFs).
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     The Trust believes that arbitrageurs are expected to take 
advantage of price variations between the Fund's market price and its 
NAV; and
     A close alignment between the market price of Shares and 
the Fund's NAV is expected.

Regulation M

    While redeemable securities issued by an open-end management 
investment company are excepted from the provisions of Rule 101 and 102 
of Regulation M, the Requestors may not rely upon that exception for 
the Shares.\5\ However, we find that it is appropriate in the public 
interest and is consistent with the protection of investors to grant a 
conditional exemption from Rules 101 and 102 to persons who may be 
deemed to be participating in a distribution of Shares of the Fund as 
described in more detail below.
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    \5\ While ETFs operate under exemptions from the definitions of 
``open-end company'' under Section 5(a)(1) of the 1940 Act and 
``redeemable security'' under Section 2(a)(32) of the 1940 Act, the 
Fund and its securities do not meet those definitions.
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Rule 101 of Regulation M

    Generally, Rule 101 of Regulation M is an anti-manipulation rule 
that, subject to certain exceptions, prohibits any ``distribution 
participant'' and its ``affiliated purchasers'' from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase 
any security which is the subject of a distribution until after the 
applicable restricted period, except as specifically permitted in the 
rule. Rule 100 of Regulation M defines ``distribution'' to mean any 
offering of securities that is distinguished from ordinary trading 
transactions by the magnitude of the offering and the presence of 
special selling efforts and selling methods. The provisions of Rule 101 
of Regulation M apply to underwriters, prospective underwriters, 
brokers, dealers, or other persons who have agreed to participate or 
are participating in a distribution of securities. The Shares are in a 
continuous distribution and, as such, the restricted period in which 
distribution participants and their affiliated purchasers are 
prohibited from bidding for, purchasing, or attempting to induce others 
to bid for or purchase extends indefinitely.
    Based on the representations and facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company, that Creation Unit size aggregations of the Shares 
of the Fund will be continuously redeemable at the NAV next determined 
after receipt of a request for redemption by the Fund, and that a close 
alignment between the market price of Shares and the Fund's NAV is 
expected, the Commission finds that it is appropriate in the public 
interest and consistent with the protection of investors to grant the 
Trust an exemption under paragraph (d) of Rule 101 of Regulation M with 
respect to the Fund, thus permitting persons participating in a 
distribution of Shares of the Fund to bid for or purchase such Shares 
during their participation in such distribution.\6\
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    \6\ Additionally, we confirm the interpretation that a 
redemption of Creation Unit size aggregations of Shares of the Fund 
and the receipt of securities in exchange by a participant in a 
distribution of Shares of the Fund would not constitute an ``attempt 
to induce any person to bid for or purchase, a covered security 
during the applicable restricted period'' within the meaning of Rule 
101 of Regulation M and therefore would not violate that rule.
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Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security 
holders, and any affiliated purchaser of such person from bidding for, 
purchasing, or attempting to

[[Page 15384]]

induce any person to bid for or purchase a covered security during the 
applicable restricted period in connection with a distribution of 
securities effected by or on behalf of an issuer or selling security 
holder.
    Based on the representations and facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company, that Creation Unit size aggregations of the Shares 
of the Fund will be continuously redeemable at the NAV next determined 
after receipt of a request for redemption by the Fund, and that a close 
alignment between the market price of Shares and the Fund's NAV is 
expected, the Commission finds that it is appropriate in the public 
interest and consistent with the protection of investors to grant the 
Trust an exemption under paragraph (e) of Rule 102 of Regulation M with 
respect to the Fund, thus permitting the Fund to redeem Shares of the 
Fund during the continuous offering of such Shares.

Rule 10b-17

    Rule 10b-17, with certain exceptions, requires an issuer of a class 
of publicly traded securities to give notice of certain specified 
actions (for example, a dividend distribution) relating to such class 
of securities in accordance with Rule 10b-17(b). Based on the 
representations and facts in the Letter, and subject to the conditions 
below, we find that it is appropriate in the public interest, and 
consistent with the protection of investors to grant the Trust a 
conditional exemption from Rule 10b-17 because market participants will 
receive timely notification of the existence and timing of a pending 
distribution, and thus the concerns that the Commission raised in 
adopting Rule 10b-17 will not be implicated.\7\
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    \7\ We also note that timely compliance with Rule 10b-
17(b)(1)(v)(a) and (b) would be impractical in light of the nature 
of the Fund. This is because it is not possible for the Fund to 
accurately project ten days in advance what dividend, if any, would 
be paid on a particular record date.
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Conclusion

    It is hereby ordered, pursuant to Rule 101(d) of Regulation M, that 
the Trust, based on the representations and facts presented in the 
Letter, is exempt from the requirements of Rule 101 with respect to the 
Fund, thus permitting persons who may be deemed to be participating in 
a distribution of Shares of the Fund to bid for or purchase such Shares 
during their participation in such distribution.
    It is further ordered, pursuant to Rule 102(e) of Regulation M, 
that the Trust, based on the representations and the facts presented in 
the Letter, is exempt from the requirements of Rule 102 with respect to 
the Fund, thus permitting the Fund to redeem Shares of the Fund during 
the continuous offering of such Shares.
    It is further ordered, pursuant to Rule 10b-17(b)(2), that the 
Trust, based on the representations and the facts presented in the 
Letter and subject to the conditions below, is exempt from the 
requirements of Rule 10b-17 with respect to transactions in the shares 
of the Fund.
    This exemptive relief is subject to the following conditions:
     The Trust will comply with Rule 10b-17 except for Rule 
10b-17(b)(1)(v)(a) and (b); and
     The Trust will provide the information required by Rule 
10b-17(b)(1)(v)(a) and (b) to the Listing Exchange as soon as 
practicable before trading begins on the ex-dividend date, but in no 
event later than the time when the Listing Exchange last accepts 
information relating to distributions on the day before the ex-dividend 
date.
    This exemptive relief is subject to modification or revocation at 
any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act. Persons 
relying upon this exemptive relief shall discontinue transactions 
involving the Shares of the Fund, pending presentation of the facts for 
the Commission's consideration, in the event that any material change 
occurs with respect to any of the facts or representations made by the 
Requestors and, consistent with all preceding letters, particularly 
with respect to the close alignment between the market price of Shares 
and the Fund's NAV. In addition, persons relying on this exemption are 
directed to the anti-fraud and anti-manipulation provisions of the 
Exchange Act, particularly Sections 9(a) and 10(b), and Rule 10b-5 
thereunder.
    Responsibility for compliance with these and any other applicable 
provisions of the federal securities laws must rest with the persons 
relying on these exemptions. This order should not be considered a view 
with respect to any other question that the proposed transactions may 
raise, including, but not limited to the adequacy of the disclosure 
concerning, and the applicability of other federal or state laws to, 
the proposed transactions.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(6) and (9).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-06340 Filed 3-21-16; 8:45 am]
 BILLING CODE 8011-01-P