81 FR 51517 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Mortgage REIT ETF of First Trust Exchange-Traded Fund VIII

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 150 (August 4, 2016)

Page Range		51517-51521
FR Document		2016-18470

Federal Register, Volume 81 Issue 150 (Thursday, August 4, 2016)

[Federal Register Volume 81, Number 150 (Thursday, August 4, 2016)]
[Notices]
[Pages 51517-51521]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2016-18470]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78443; File No. SR-NASDAQ-2016-064]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule Change Relating to the Listing and
Trading of the Shares of the First Trust Strategic Mortgage REIT ETF of
First Trust Exchange-Traded Fund VIII

July 29, 2016.

I. Introduction

On May 3, 2016, The NASDAQ Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the First Trust Strategic Mortgage REIT ETF (``Fund'')
of First Trust Exchange-Traded Fund VIII (``Trust'') under NASDAQ Rule
5735. The proposed rule change was published for comment in the Federal
Register on May 12, 2016.\3\ On June 15, 2016, 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
disapprove the proposed rule change.\5\ The Commission received no
comments on the proposed rule change. This order grants approval of the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 77781 (May 6, 2016),
81 FR 29590 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 78078 (Jun. 21,
2016), 81 FR 40377.
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II. Exchange's Description of the Proposal

The Exchange proposes to list and trade the Shares under Nasdaq
Rule 5735, which governs the listing and trading of Managed Fund Shares
on the Exchange. The Fund will be an actively-managed exchange-traded
fund (``ETF''). The Shares will be offered by the Trust, which was
established as a Massachusetts business trust on February 22, 2016.\6\
The Fund will be a series of the Trust.
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\6\ The Exchange represents that the Trust is registered under
the Investment Company Act of 1940 (``1940 Act''). See Registration
Statement on Form N-1A for the Trust dated March 14, 2016 (File Nos.
333-210186 and 811-23147) (``Registration Statement''). The Exchange
further states that the Trust has obtained certain exemptive relief
under the 1940 Act. See Investment Company Act Release No. 28468
(October 27, 2008) (File No. 812-13477).
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First Trust Advisors L.P. will be the investment adviser
(``Adviser'') to the Fund. First Trust Portfolios L.P.
(``Distributor'') will be the principal underwriter and distributor of
the Fund's Shares. The Bank of New York Mellon Corporation will act as
the administrator, accounting agent, custodian, and transfer agent to
the Fund. The Exchange states that the Adviser is not a broker-dealer,
but it is affiliated with the Distributor, a broker-dealer.\7\ The
Exchange represents that the Adviser has implemented a fire wall with
respect to its broker-dealer affiliate regarding access to information
concerning the composition of, and changes to, the portfolio.\8\
According to the Exchange, the Fund currently does not intend to use a
sub-advisor.\9\
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\7\ See Notice, supra note 3, 81 FR at 29591.
\8\ See id. The Exchange further represents that, in the event
(a) the Adviser or any sub-adviser registers as a broker-dealer, or
becomes newly affiliated with a broker-dealer, or (b) any new
adviser or sub-adviser registers is a registered broker-dealer or
becomes affiliated with another broker-dealer, it will implement a
fire wall with respect to its relevant personnel and such broker-
dealer affiliate, as applicable, regarding access to information
concerning the composition of, and 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.
\9\ See id.
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The Exchange has made the following representations and statements
in describing the Fund and its investment strategy, including the
Fund's portfolio holdings and investment restrictions.\10\
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\10\ The Commission notes that additional information regarding
the Fund, the Trust, and the Shares, including investment
strategies, risks, creation and redemption procedures, fees,
portfolio holdings disclosure policies, calculation of net asset
value (``NAV''), distributions, and taxes, among other things, can
be found in the Notice and the Registration Statement, as
applicable. See Notice and Registration Statement, supra notes 3 and
6, respectively.
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A. Exchange's Description of the Fund's Principal Investments

The investment objective of the Fund will be to generate high
current income. Under normal market conditions,\11\ the Fund will seek
to achieve its investment objective by investing at least 80% of its
net assets (including investment borrowings) in the exchange-traded
common shares of U.S. exchange-traded mortgage real estate investment
trusts (``mortgage REITs''). In general terms, a mortgage REIT makes
loans to developers and owners of property and invests primarily in
mortgages and similar real estate interests, and includes companies or
trusts that are primarily engaged in the purchasing or servicing of
commercial or residential mortgage loans or mortgage-related
securities, which may include mortgage-backed securities issued by
private issuers and those issued or guaranteed by U.S. Government
agencies, instrumentalities, or sponsored entities.
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\11\ The term ``under normal market conditions'' as used herein
includes, but is not limited to, the absence of adverse market,
economic, political or other conditions, including extreme
volatility or trading halts in the securities markets or the
financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
type events such as systems failure, natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance. On a temporary
basis, including for defensive purposes, during the initial invest-
up period and during periods of high cash inflows or outflows, the
Fund may depart from its principal investment strategies; for
example, it may hold a higher than normal proportion of its assets
in cash. According to the Exchange, during such periods, the Fund
may not be able to achieve its investment objective. The Fund may
adopt a defensive strategy when the Adviser believes securities in
which the Fund normally invests have elevated risks due to political
or economic factors and in other extraordinary circumstances. See
Notice, supra note 3, 81 FR at 29591 n.8.
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The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.

B. Exchange's Description of the Fund's Other Investments

The Fund may invest (in the aggregate) up to 20% of its net assets
in

[[Page 51518]]

the following securities and instruments:
(1) The Fund may invest in the exchange-traded preferred shares of
U.S. exchange-traded mortgage REITs.
(2) The Fund may invest in (a) U.S. exchange-traded equity and
preferred securities and (b) domestic over-the-counter (``OTC'')
preferred securities, in each case, of companies engaged in the U.S.
real estate industry (other than mortgage REITs) (collectively, ``Real
Estate Companies'').
(3) The Fund may invest in mortgage-backed securities,\12\ and such
investments may, from time to time, include investments in to-be-
announced transactions \13\ and mortgage dollar rolls \14\
(collectively, ``Mortgage-Related Instruments'').
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\12\ Mortgage-backed securities, which are securities that
directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property, will consist
of: (1) Residential mortgage-backed securities; (2) commercial
mortgage-backed securities; (3) stripped mortgage-backed securities,
which are mortgage-backed securities where mortgage payments are
divided between paying the loan's principal and paying the loan's
interest; (4) collateralized mortgage obligations and real estate
mortgage investment conduits, which are mortgage-backed securities
that are divided into multiple classes, with each class being
entitled to a different share of the principal and interest payments
received from the pool of underlying assets.
\13\ A to-be-announced (``TBA'') transaction is a method of
trading mortgage-backed securities. In a TBA transaction, the buyer
and seller agree upon general trade parameters such as agency,
settlement date, par amount, and price. The actual pools delivered
generally are determined two days prior to the settlement date.
\14\ In a mortgage dollar roll, the Fund will sell (or buy)
mortgage-backed securities for delivery on a specified date and
simultaneously contract to repurchase (or sell) substantially
similar (same type, coupon and maturity) securities on a future
date. During the period between a sale and repurchase, the Fund will
forgo principal and interest paid on the mortgage-backed securities.
The Fund will earn or lose money on a mortgage dollar roll from any
difference between the sale price and the future purchase price. In
a sale and repurchase, the Fund will also earn money on the interest
earned on the cash proceeds of the initial sale. According to the
Exchange, the Fund intends to enter into mortgage dollar rolls only
with high quality securities dealers and banks, as determined by the
Adviser. See Notice, supra note 3, 81 FR at 29591 n.11.
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(4) The Fund may invest in (a) exchange-traded and OTC options on
mortgage REITs and Real Estate Companies; (b) OTC options on mortgage
TBA transactions; (c) exchange-traded U.S. Treasury and Eurodollar
futures contracts; (d) exchange-traded and OTC interest rate swap
agreements; (e) exchange-traded options on U.S. Treasury and Eurodollar
futures contracts; and (f) exchange-traded and OTC options on interest
rate swap agreements. The use of these derivative transactions may
allow the Fund to obtain net long or short exposures to selected
interest rates. These derivatives may also be used to hedge risks,
including interest rate risks and credit risks, associated with the
Fund's portfolio investments. The Exchange represents that the Fund's
investments in derivative instruments will be consistent with the
Fund's investment objective and the 1940 Act and will not be used to
seek to achieve a multiple or inverse multiple of an index. The Fund
will only enter into transactions in OTC derivatives (including OTC
options on mortgage REITs, Real Estate Companies, and mortgage TBA
transactions; OTC interest rate swap agreements; and OTC options on
interest rate swap agreements) with counterparties that the Adviser
reasonably believes are capable of performing under the applicable
contract or agreement.\15\
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\15\ According to the Exchange, the Fund will seek, where
possible, to use counterparties, as applicable, whose financial
status is such that the risk of default is reduced; however, the
risk of losses resulting from default is still possible. The Adviser
will evaluate the creditworthiness of counterparties on an ongoing
basis. In addition to information provided by credit agencies, the
Adviser's analysis will evaluate each approved counterparty using
various methods of analysis and may consider the Adviser's past
experience with the counterparty, its known disciplinary history and
its share of market participation. See id. at 29591 n.12.
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(5) The Fund may invest in short-term debt securities and other
short-term debt instruments (described below), as well as cash
equivalents, or it may hold cash. The percentage of the Fund invested
in such holdings or held in cash will vary and will depend on several
factors, including market conditions. The Fund may invest in the
following short-term debt instruments: \16\ (a) Fixed rate and floating
rate U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest, which are either issued
or guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities; (b) certificates of deposit issued against funds
deposited in a bank or savings and loan association; (c) bankers'
acceptances, which are short-term credit instruments used to finance
commercial transactions; (d) repurchase agreements,\17\ which involve
purchases of debt securities; (e) bank time deposits, which are monies
kept on deposit with banks or savings and loan associations for a
stated period of time at a fixed rate of interest; and (f) commercial
paper, which is short-term unsecured promissory notes.\18\
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\16\ Short-term debt instruments are issued by issuers having a
long-term debt rating of at least A by Standard & Poor's Ratings
Services, a Division of The McGraw-Hill Companies, Inc. (``S&P
Ratings''), Moody's Investors Service, Inc. (``Moody's'') or Fitch
Ratings (``Fitch'') and have a maturity of one year or less.
\17\ The Exchange represents that the Fund intends to enter into
repurchase agreements only with financial institutions and dealers
believed by the Adviser to present minimal credit risks in
accordance with criteria approved by the Board of Trustees of the
Trust (``Trust Board''). According to the Exchange, the Adviser will
review and monitor the creditworthiness of such institutions, and
the Adviser will monitor the value of the collateral at the time the
transaction is entered into and at all times during the term of the
repurchase agreement. See id. at 29592 n.14.
\18\ The Exchange states that the Fund may only invest in
commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or
higher by Moody's or F1 or higher by Fitch. See id. at 29592 n.15.
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(6) The Fund may invest (but only, in the aggregate, up to 10% of
its net assets) in the securities of money market funds and other ETFs
that, in each case, will be investment companies registered under the
1940 Act.\19\
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\19\ An ETF is an investment company registered under the 1940
Act that holds a portfolio of securities. Many ETFs are designed to
track the performance of a securities index, including industry,
sector, country and region indexes. ETFs included in the Fund will
be listed and traded in the U.S. on registered exchanges. The Fund
may invest in the securities of ETFs in excess of the limits imposed
under the 1940 Act pursuant to exemptive orders obtained by other
ETFs and their sponsors from the Commission. In addition, the Fund
may invest in the securities of certain other investment companies
in excess of the limits imposed under the 1940 Act pursuant to an
exemptive order that the Trust has obtained from the Commission. See
Investment Company Act Release No. 30377 (February 5, 2013) (File
No. 812-13895). The ETFs in which the Fund may invest include Index
Fund Shares (as described in Nasdaq Rule 5705), Portfolio Depository
Receipts (as described in Nasdaq Rule 5705), and Managed Fund Shares
(as described in Nasdaq Rule 5735). The Exchange represents that
while the Fund may invest in inverse ETFs, the Fund will not invest
in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs. See id. at
29592 n.16.
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C. Exchange's Description of the Fund's Investment Restrictions

The Fund may enter into short sales as part of its overall
portfolio management strategies or to offset a potential decline in the
value of a security; however, the Fund will not engage in short sales
with respect to more than 30% of the value of its net assets. To the
extent required under applicable federal securities laws, rules, and
interpretations thereof, the Fund will ``set aside'' liquid assets or
engage in other measures to ``cover'' open positions and short
positions held in connection with the foregoing types of transactions.
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including Rule 144A securities deemed illiquid by the Adviser.\20\ The
Fund will monitor its

[[Page 51519]]

portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are held
in illiquid assets. Illiquid assets include securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with
Commission staff guidance.
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\20\ In reaching liquidity decisions, the Adviser may consider
the following factors: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
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The Fund may not invest 25% or more of the value of its total
assets in securities of issuers in any one industry. This restriction
does not apply to securities of issuers in the real estate sector,
including real estate investment trusts; obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
or securities of other investment companies. The Fund will be
concentrated in the real estate sector.

III. Discussion and Commission Findings

After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\21\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act,\22\ which requires, among other things, that the Exchange's rules
be designed 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.
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\21\ 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).
\22\ 15 U.S.C. 78f(b)(5).
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The Commission also finds that the proposal to list and trade the
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of
the Exchange Act,\23\ which sets forth the finding of Congress that it
is in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets to assure the
availability to brokers, dealers, and investors of information with
respect to quotations for, and transactions in, securities. Quotation
and last-sale information for the Shares will be available via Nasdaq
proprietary quote and trade services, as well as in accordance with the
Unlisted Trading Privileges and the Consolidated Tape Association
(``CTA'') plans for the Shares. Quotation and last-sale information for
U.S. exchange-traded equity securities (including mortgage REITs, ETFs,
and exchange-traded Real Estate Companies) will be available from the
exchanges on which they are traded as well as in accordance with any
applicable CTA plans. Quotation and last-sale information for U.S.
exchange-traded options will be available via the Options Price
Reporting Authority. On each business day, before commencement of
trading in Shares in the Regular Market Session \24\ on the Exchange,
the Fund will disclose on its Web site the identities and quantities of
the portfolio of securities and other assets (``Disclosed Portfolio,''
as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form
the basis for the Fund's calculation of NAV at the end of the business
day.\25\ An estimated value, defined in Nasdaq Rule 5735(c)(3) as the
``Intraday Indicative Value,'' that reflects an estimated intraday
value of the Fund's Disclosed Portfolio, will be disseminated. The
Intraday Indicative Value, available on the NASDAQ OMX Information LLC
proprietary index data service,\26\ will be based upon the current
value for the components of the Disclosed Portfolio and will be updated
and widely disseminated by one or more major market data vendors and
broadly displayed at least every 15 seconds during the Regular Market
Session.\27\
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\23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\24\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to 4
p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session from 4
p.m. or 4:15 p.m. to 8 p.m., Eastern Time).
\25\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
the Fund will be able to disclose at the beginning of the business
day the portfolio that will form the basis for the NAV calculation
at the end of the business day. The Fund's disclosure of derivative
positions in the Disclosed Portfolio will include sufficient
information for market participants to use to value these positions
intraday. On a daily basis, the Fund will disclose on the Fund's Web
site the following information regarding each portfolio holding, as
applicable to the type of holding: ticker symbol, CUSIP number or
other identifier, if any; a description of the holding (including
the type of holding, such as the type of swap); the identity of the
security or other asset or instrument underlying the holding, if
any; for options, the option strike price; quantity held (as
measured by, for example, par value, notional value or number of
shares, contracts or units); maturity date, if any; coupon rate, if
any; effective date, if any; market value of the holding; and
percentage weighting of the holding in the Fund's portfolio. The Web
site information will be publicly available at no charge.
\26\ Currently, the NASDAQ OMX Global Index Data Service
(``GIDS'') is the Nasdaq global index data feed service, offering
real-time updates, daily summary messages, and access to widely
followed indexes and Intraday Indicative Values for ETFs. According
to the Exchange, GIDS provides investment professionals with the
daily information needed to track or trade Nasdaq indexes, listed
ETFs, or third-party partner indexes and ETFs.
\27\ According to the Exchange, the Intraday Indicative Value
will be based on quotes and closing prices from the securities'
local market and may not reflect events that occur subsequent to the
local market's close. The Exchange states that premiums and
discounts between the Intraday Indicative Value and the market price
may occur. The Exchange states that this should not be viewed as a
``real time'' update of the NAV per Share of the Fund, which is
calculated only once a day. See Notice, supra note 3, 81 FR at 29594
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The Fund's NAV will be determined as of the close of trading
(normally 4:00 p.m. Eastern time) on each day the New York Stock
Exchange LLC is open for business.\28\ Additionally, information
regarding market price and trading volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Pricing information for Mortgage-Related
Instruments, OTC Real Estate Companies, Short-Term Debt Instruments,
repurchase agreements, certificates of deposit, bank time deposits, OTC
options on mortgage REITs, Real Estate Companies and mortgage TBA
transactions, OTC interest rate swap agreements, and OTC options on
interest rate swap agreements will be available from major broker-
dealer firms, major market data vendors, and/or Pricing Services.
Pricing information for mortgage REITs (both common and preferred
shares), exchange-traded Real Estate Companies, ETFs, exchange-traded
options on mortgage REITs and Real Estate Companies, exchange-traded
U.S. Treasury and Eurodollar futures contracts, exchange-traded
interest rate swap agreements, exchange-traded options on U.S. Treasury
and Eurodollar futures contracts, and exchange-traded

[[Page 51520]]

options on interest rate swap agreements will be available from the
applicable listing exchange and from major market data vendors. Money
market funds are typically priced once each business day, and their
prices will be available through the applicable fund's Web site or from
major market data vendors. The Fund's Web site, which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund and additional data relating to NAV and
other applicable quantitative information that may be downloaded.
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\28\ NAV per Share will be calculated for the Fund by taking the
value of the Fund's total assets, including interest or dividends
accrued but not yet collected, less all liabilities, including
accrued expenses and dividends declared but unpaid, and dividing
such amount by the total number of Shares outstanding. See Notice,
supra note 3, 81 FR at 29593-29594 (providing more detailed
information on the NAV valuation methodology for each of the Fund's
holdings).
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The Commission also believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Exchange states that it 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.\29\ The Exchange
also represents that the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of
the Fund. Nasdaq will halt trading in the Shares under the conditions
specified in Nasdaq Rules 4120 and 4121, including the trading pauses
under Nasdaq Rules 4120(a)(11) and (12). Trading may be halted because
of market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable.\30\ Trading in the Shares also
will be subject to Rule 5735(d)(2)(D), which sets forth circumstances
under which trading of Shares of the Fund may be halted.\31\ The
Exchange states that it has a general policy prohibiting the
distribution of material, non-public information by its employees.\32\
The Exchange also represents that the Adviser is not a broker-dealer,
although it is affiliated with the Distributor, a broker-dealer, and
that the Adviser has implemented a fire wall with respect to its
broker-dealer affiliate regarding access to information concerning the
composition and/or changes to the portfolio.\33\ Further, the
Commission notes that the Reporting Authority \34\ that provides the
Disclosed Portfolio must 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
portfolio.\35\ The Exchange represents that trading in the Shares will
be subject to the existing trading surveillances, administered by both
Nasdaq and also the Financial Industry Regulatory Authority (``FINRA'')
on behalf of the Exchange, which are designed to detect violations of
Exchange rules and applicable federal securities laws.\36\
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\29\ See id. at 29595.
\30\ These may include: (1) The extent to which trading is not
occurring in the securities and/or the financial instruments
constituting the Disclosed Portfolio of the Fund; or (2) whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. See id.
\31\ See id.
\32\ See id.
\33\ See id. at 29591. See also supra note 8. The Exchange
further represents that an investment adviser to an open-end fund is
required to be registered under the Investment Advisers Act of 1940
(``Advisers Act''). As a result, the Adviser and its related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
\34\ Nasdaq Rule 5730(c)(4) defines ``Reporting Authority.''
\35\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\36\ FINRA surveils trading on the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement.
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Nasdaq deems the Shares to be equity securities, thus rendering
trading in the Shares subject to Nasdaq's existing rules governing the
trading of equity securities. In support of this proposal, the Exchange
represented that:
(1) The Shares will be subject to Nasdaq Rule 5735, which sets
forth the initial and continued listing criteria applicable to Managed
Fund Shares.
(2) Trading in the Shares will be subject to the existing trading
surveillances administered by both Nasdaq and FINRA on behalf of the
Exchange, which are designed to detect violations of Exchange rules and
applicable federal securities laws, and these procedures are adequate
to properly monitor Exchange trading of the Shares in all trading
sessions and to detect and help deter violations of Exchange rules and
applicable federal securities laws.
(3) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund (including mortgage REITs (both common and
preferred shares); exchange-traded Real Estate Companies; ETFs;
exchange-traded options on mortgage REITs and Real Estate Companies;
exchange-traded U.S. Treasury and Eurodollar futures contracts;
exchange-traded interest rate swap agreements; exchange-traded options
on U.S. Treasury and Eurodollar futures contracts; and exchange-traded
options on interest rate swap agreements) with other markets and other
entities that are members of the Intermarket Surveillance Group
(``ISG''),\37\ and FINRA may obtain trading information regarding
trading in the Shares and such exchange-traded securities and
instruments held by the Fund from such markets and other entities. In
addition, the Exchange may obtain information regarding trading in the
Shares and the exchange-traded securities and instruments held by the
Fund from markets and other entities that are members of ISG, which
includes securities and futures exchanges, or with which the Exchange
has in place a comprehensive surveillance sharing agreement. FINRA, on
behalf of the Exchange, will be able to access, as needed, trade
information for certain fixed income securities held by the Fund
reported to FINRA's Trade Reporting and Compliance Engine.
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\37\ 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.
---------------------------------------------------------------------------

(4) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(5) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes
suitability obligations on Nasdaq members with respect to recommending
transactions in the Shares to customers; (c) how information regarding
the Intraday Indicative Value and the Disclosed Portfolio is
disseminated; (d) the risks

[[Page 51521]]

involved in trading the Shares during the Pre-Market and Post-Market
Sessions when an updated Intraday Indicative Value will not be
calculated or publicly disseminated; (e) the requirement that members
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; and (f)
trading information.
(6) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Act.\38\
---------------------------------------------------------------------------

\38\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

(7) The Fund's investments in derivative instruments will be
consistent with the Fund's investment objective and the 1940 Act and
will not be used to seek to achieve a multiple or inverse multiple of
an index, and the Fund will only enter into transactions in OTC
derivatives (including OTC options on mortgage REITs, Real Estate
Companies and mortgage TBA transactions; OTC interest rate swap
agreements; and OTC options on interest rate swap agreements) with
counterparties that the Adviser reasonably believes are capable of
performing under the applicable contract or agreement.
(8) The Fund may invest (but only, in the aggregate, up to 10% of
its net assets) in the securities of money market funds and other ETFs
that, in each case, will be investment companies registered under the
1940 Act, and ETFs included in the Fund will be listed and traded in
the U.S. on registered exchanges.
(9) The Fund will not invest in leveraged or inverse leveraged
(e.g., 2X or -3X) ETFs.
(10) The Fund will not engage in short sales with respect to more
than 30% of the value of its net assets. To the extent required under
applicable federal securities laws, rules, and interpretations thereof,
the Fund will ``set aside'' liquid assets or engage in other measures
to ``cover'' open positions and short positions held in connection with
the foregoing types of transactions.
(11) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including securities deemed illiquid by the Adviser.
(12) At least 90% of the Fund's net assets that are invested in
exchange-traded derivatives (including exchange-traded options on
mortgage REITs and Real Estate Companies; exchange-traded U.S. Treasury
and Eurodollar futures contracts; exchange-traded interest rate swap
agreements; exchange-traded options on U.S. Treasury and Eurodollar
futures contracts; and exchange-traded options on interest rate swap
agreements) (in the aggregate) will be invested in instruments that
trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange.
(13) All of the Fund's net assets that are invested in exchange-
traded equity securities (including mortgage REITs (both common and
preferred shares); ETFs; and exchange-traded Real Estate Companies) (in
the aggregate) will be invested in securities that trade in markets
that are members of ISG or are parties to a comprehensive surveillance
sharing agreement with the Exchange.
(14) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.

The Exchange represents that all statements and representations made in
this filing regarding (a) the description of the portfolio, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange rules and surveillance procedures shall
constitute continued listing requirements for listing the Shares on the
Exchange. In addition, the issuer has represented to the Exchange that
it will advise the Exchange of any failure by the Fund to comply with
the continued listing requirements, and, pursuant to its obligations
under Section 19(g)(1) of the Act, the Exchange will monitor for
compliance with the continued listing requirements.\39\ If the Fund is
not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures under the Nasdaq 5800
Series.
---------------------------------------------------------------------------

\39\ The Commission notes that certain other proposals for the
listing and trading of Managed Fund Shares 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 (April 7, 2016) (Notice of Filing
of Amendment No. 2, and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, to List and
Trade Shares of the SPDR DoubleLine Short Duration Total Return
Tactical ETF of the SSgA Active Trust), available at: http://www.sec.gov/rules/sro/bats/2016/34-77499.pdf. In the context of this
representation, it is the Commission's view that ``monitor'' and
``surveil'' both mean ongoing oversight of the Fund's 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.
---------------------------------------------------------------------------

This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice. The
Commission notes that the Fund and the Shares must comply with the
requirements of Nasdaq Rule 5735 to be listed and traded on the
Exchange on an initial and continuing basis.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \40\ and the
rules and regulations thereunder applicable to a national securities
exchange.
---------------------------------------------------------------------------

\40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\41\ that the proposed rule change (SR-NASDAQ-2016-064)
be, and it hereby is, approved.
---------------------------------------------------------------------------

\41\ 15 U.S.C. 78s(b)(2).
\42\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18470 Filed 8-3-16; 8:45 am]
BILLING CODE 8011-01-P

Federal Register / Vol. 81, No. 150 / Thursday, August 4, 2016 / Notices 51521

involved in trading the Shares during futures contracts; and exchange-traded Exchange on an initial and continuing
the Pre-Market and Post-Market options on interest rate swap basis.
Sessions when an updated Intraday agreements) (in the aggregate) will be For the foregoing reasons, the
Indicative Value will not be calculated invested in instruments that trade in Commission finds that the proposed
or publicly disseminated; (e) the markets that are members of ISG or are rule change is consistent with Section
requirement that members deliver a parties to a comprehensive surveillance 6(b)(5) of the Act 40 and the rules and
prospectus to investors purchasing sharing agreement with the Exchange. regulations thereunder applicable to a
newly issued Shares prior to or (13) All of the Fund’s net assets that national securities exchange.
concurrently with the confirmation of a are invested in exchange-traded equity
transaction; and (f) trading information. IV. Conclusion
securities (including mortgage REITs
(6) For initial and continued listing, (both common and preferred shares); It is therefore ordered, pursuant to
the Fund must be in compliance with ETFs; and exchange-traded Real Estate Section 19(b)(2) of the Exchange Act,41
Rule 10A–3 under the Act.38 Companies) (in the aggregate) will be that the proposed rule change (SR–
(7) The Fund’s investments in invested in securities that trade in NASDAQ–2016–064) be, and it hereby
derivative instruments will be markets that are members of ISG or are is, approved.
consistent with the Fund’s investment parties to a comprehensive surveillance For the Commission, by the Division of
objective and the 1940 Act and will not sharing agreement with the Exchange. Trading and Markets, pursuant to delegated
be used to seek to achieve a multiple or (14) A minimum of 100,000 Shares authority.42
inverse multiple of an index, and the will be outstanding at the Robert W. Errett,
Fund will only enter into transactions in commencement of trading on the Deputy Secretary.
OTC derivatives (including OTC options Exchange. [FR Doc. 2016–18470 Filed 8–3–16; 8:45 am]
on mortgage REITs, Real Estate
The Exchange represents that all BILLING CODE 8011–01–P
Companies and mortgage TBA
statements and representations made in
transactions; OTC interest rate swap
this filing regarding (a) the description
agreements; and OTC options on
of the portfolio, (b) limitations on SECURITIES AND EXCHANGE
interest rate swap agreements) with
portfolio holdings or reference assets, or COMMISSION
counterparties that the Adviser
(c) the applicability of Exchange rules
reasonably believes are capable of [Release No. 34–78442; File No. SR–NYSE–
and surveillance procedures shall 2016–31]
performing under the applicable
constitute continued listing
contract or agreement.
(8) The Fund may invest (but only, in requirements for listing the Shares on Self-Regulatory Organizations; New
the aggregate, up to 10% of its net the Exchange. In addition, the issuer has York Stock Exchange LLC; Notice of
assets) in the securities of money market represented to the Exchange that it will Designation of a Longer Period for
funds and other ETFs that, in each case, advise the Exchange of any failure by Commission Action on a Proposed
will be investment companies registered the Fund to comply with the continued Rule Change Amending NYSE Rule 6A
under the 1940 Act, and ETFs included listing requirements, and, pursuant to To Exclude the Physical Area Within
in the Fund will be listed and traded in its obligations under Section 19(g)(1) of Fully Enclosed Telephone Booths
the U.S. on registered exchanges. the Act, the Exchange will monitor for Located in 18 Broad Street From the
(9) The Fund will not invest in compliance with the continued listing Definition of Trading Floor
leveraged or inverse leveraged (e.g., 2X requirements.39 If the Fund is not in
compliance with the applicable listing July 29, 2016.
or ¥3X) ETFs.
(10) The Fund will not engage in short requirements, the Exchange will On May 31, 2016, New York Stock
sales with respect to more than 30% of commence delisting procedures under Exchange LLC (‘‘NYSE’’ or the
the value of its net assets. To the extent the Nasdaq 5800 Series. ‘‘Exchange’’) filed with the Securities
required under applicable federal This approval order is based on all of and Exchange Commission
securities laws, rules, and the Exchange’s representations, (‘‘Commission’’), pursuant to section
interpretations thereof, the Fund will including those set forth above and in 19(b)(1) of the Securities Exchange Act
‘‘set aside’’ liquid assets or engage in the Notice. The Commission notes that of 1934 (‘‘Act’’) 1 and Rule 19b–4
other measures to ‘‘cover’’ open the Fund and the Shares must comply thereunder,2 a proposed rule change to
positions and short positions held in with the requirements of Nasdaq Rule amend NYSE Rule 6A (‘‘Trading Floor’’)
connection with the foregoing types of 5735 to be listed and traded on the to exclude an area within fully enclosed
transactions. telephone booths located in 18 Broad
(11) The Fund may hold up to an 39 The Commission notes that certain other Street from the definition of Trading
aggregate amount of 15% of its net proposals for the listing and trading of Managed Floor. The proposed rule change was
Fund Shares include a representation that the published for comment in the Federal
assets in illiquid assets (calculated at exchange will ‘‘surveil’’ for compliance with the
the time of investment), including continued listing requirements. See, e.g., Securities Register on June 17, 2016.3 No
securities deemed illiquid by the Exchange Act Release No. 77499 (April 1, 2016), 81 comments have been received on the
Adviser. FR 20428 (April 7, 2016) (Notice of Filing of proposed rule change.
Amendment No. 2, and Order Granting Accelerated Section 19(b)(2) of the Act 4 provides
(12) At least 90% of the Fund’s net Approval of a Proposed Rule Change, as Modified
assets that are invested in exchange- by Amendment No. 2, to List and Trade Shares of that within 45 days of the publication of
traded derivatives (including exchange- the SPDR DoubleLine Short Duration Total Return notice of the filing of a proposed rule
Tactical ETF of the SSgA Active Trust), available
sradovich on DSK3GMQ082PROD with NOTICES

traded options on mortgage REITs and
at: http://www.sec.gov/rules/sro/bats/2016/34- 40 15 U.S.C. 78f(b)(5).
Real Estate Companies; exchange-traded 77499.pdf. In the context of this representation, it 41 15 U.S.C. 78s(b)(2).
U.S. Treasury and Eurodollar futures is the Commission’s view that ‘‘monitor’’ and 42 17 CFR 200.30–3(a)(12).
contracts; exchange-traded interest rate ‘‘surveil’’ both mean ongoing oversight of the 1 15 U.S.C. 78s(b)(1).
swap agreements; exchange-traded Fund’s compliance with the continued listing
2 17 CFR 240.19b–4.
requirements. Therefore, the Commission does not
options on U.S. Treasury and Eurodollar view ‘‘monitor’’ as a more or less stringent 3 See Securities Exchange Act Release No. 78057

obligation than ‘‘surveil’’ with respect to the (June 13, 2016), 81 FR 39722 (June 17, 2016).
38 See 17 CFR 240.10A–3. continued listing requirements. 4 15 U.S.C. 78s(b)(2).

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Document Created: 2016-08-04 02:53:32
Document Modified: 2016-08-04 02:53:32

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 51517