81 FR 56729 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change To List and Trade Shares of the First Trust Equity Market Neutral ETF of the First Trust Exchange-Traded Fund VIII

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 162 (August 22, 2016)

Page Range		56729-56733
FR Document		2016-19898
Federal Register, Volume 81 Issue 162 (Monday, August 22, 2016)
[Federal Register Volume 81, Number 162 (Monday, August 22, 2016)]
[Notices]
[Pages 56729-56733]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-19898]



[[Page 56729]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78592; File No. SR-NASDAQ-2016-061]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change To List and Trade Shares of 
the First Trust Equity Market Neutral ETF of the First Trust Exchange-
Traded Fund VIII

August 16, 2016.

I. Introduction

    On May 4, 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'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the First 
Trust Equity Market Neutral ETF (``Fund''), under Nasdaq Rule 5735. The 
proposed rule change was published for comment in the Federal Register 
on May 25, 2016.\3\ On July 5, 2016, pursuant to Section 19(b)(2) of 
the Act,\4\ the Commission designated a longer period within which to 
either 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. 77854 (May 19, 
2016), 81 FR 33307 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78227, 81 FR 44907 
(July 11, 2016).
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund, an 
actively-managed exchange-traded fund (``ETF''), under Nasdaq Rule 
5735, which governs the listing and trading of ``Managed Fund Shares'' 
on the Exchange. The Shares will be offered by the First Trust 
Exchange-Traded Fund VIII (``Trust'').\6\ First Trust Advisors L.P. 
will be the investment adviser (``Adviser'') to the Fund.\7\ Perella 
Weinberg Partners Capital Management LP will serve as investment sub-
adviser (``Sub-Adviser'') to the Fund and provide day-to-day portfolio 
management. First Trust Portfolios L.P. 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 has made the 
following representations and statements in describing the Fund and its 
investment strategy, including the Fund's portfolio holdings and 
investment restrictions.\8\
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    \6\ The Trust is registered with the Commission as an investment 
company and has filed a registration statement on Form N-1A 
(``Registration Statement'') with the Commission. See Registration 
Statement on Form N-1A for the Trust filed on March 14, 2016 (File 
Nos. 333-210186 and 811-23147). In addition, the Exchange represents 
that the Trust has obtained certain exemptive relief under the 
Investment Company Act of 1940 (``1940 Act''). See Investment 
Company Act Release No. 28468 (October 27, 2008) (File No. 812-
13477).
    \7\ The Exchange represents that neither the Adviser nor the 
Sub-Adviser is registered as a broker-dealer. The Adviser is 
affiliated with a broker-dealer, and the Sub-Adviser is affiliated 
with two broker-dealers. Each has implemented and will maintain a 
fire wall with respect to its respective broker-dealer affiliate(s) 
regarding access to information concerning the composition of and/or 
changes to the portfolio. In the event (a) the Adviser or Sub-
Adviser becomes newly affiliated with a broker-dealer or registers 
as 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 a fire wall with respect to its relevant personnel 
and/or such broker-dealer affiliate, if applicable, regarding access 
to information concerning the composition of, 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.
    \8\ 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

    According to the Exchange, the investment objective of the Fund 
will be to seek long-term capital appreciation independent of market 
direction. Under normal market conditions,\9\ the Fund will seek to 
achieve its investment objective by investing at least 80% of its net 
assets in ``Equity Securities'' (as defined below), which may be 
represented by certain derivative instruments,\10\ as well as ETFs \11\ 
that invest primarily in Equity Securities (``80% Investments'').\12\ 
The Equity Securities in which the Fund will invest will be listed on a 
U.S. or a non-U.S. exchange and will consist of the following: (i) 
Common stocks; (ii) preferred securities; (iii) warrants to purchase 
common stocks or preferred securities; (iv) securities convertible into 
common stocks or preferred securities; (v) securities issued by real 
estate investment trusts (``REITs''); (vi) securities issued by master 
limited partnerships (``MLPs''); and (vii) American Depositary Receipts 
(``ADRs''), European Depositary Receipts (``EDRs''), and Global 
Depositary Receipts (``GDRs'' and, together with ADRs and EDRs, 
``Depositary Receipts'').\13\
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    \9\ 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. During such periods, the Fund may not be able to achieve 
its investment objective. The Fund may adopt a defensive strategy 
when the Adviser or the Sub-Adviser believes securities in which the 
Fund normally invests have elevated risks due to political or 
economic factors and in other extraordinary circumstances.
    \10\ Such derivatives are defined as ``Principal Derivatives.'' 
See ``The Fund's Use of Derivatives,'' infra.
    \11\ 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). While the Fund may invest in inverse ETFs, the Fund will 
not invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs.
    \12\ The 80% Investments will take into account such derivative 
instruments and ETFs.
    \13\ The Fund will not invest in any unsponsored Depositary 
Receipts.
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    The Sub-Adviser will use a long/short strategy in seeking to 
construct a portfolio that it believes, based on its proprietary 
analysis, will provide the opportunity for capital preservation and 
appreciation across a wide variety of market conditions. A portion of 
the Fund's portfolio will typically be invested in Equity Securities 
selected by the Sub-Adviser through application of an event-driven 
strategy that seeks to identify and capitalize on certain corporate 
actions which may affect the value of Equity Securities, such as 
mergers and acquisitions, divestitures,

[[Page 56730]]

tender offers, and other corporate events.\14\
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    \14\ In connection with its event-driven strategy, the Fund may 
also invest a portion of its assets in Non-Exchange-Traded Equity 
Securities (as defined infra). See infra note 17 and accompanying 
text under ``Other Investments.''
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The Fund's Use of Derivatives
    The Fund may engage in transactions in derivative instruments, as 
described in this paragraph. As noted above under ``Principal 
Investments,'' the Fund's investments in Equity Securities may be 
represented by derivatives. Investments in Equity Securities that are 
represented by derivatives (referred to collectively as ``Principal 
Derivatives'') will be treated as investments in Equity Securities for 
purposes of the 80% Investments. Principal Derivatives will consist of 
the following: (i) Total return swap agreements; \15\ (ii) exchange-
traded options on stock indices; (iii) exchange-traded options on 
equity securities; and (iv) exchange-traded stock index futures 
contracts. In addition to purchasing exchange-traded options on stock 
indices and exchange-traded options on equity securities, the Fund may 
also sell such exchange-traded options, either outright or as part of 
an options strategy (such as a collar or an option spread). 
Additionally, the Fund may invest in non-U.S. currency swap agreements 
and forward foreign currency exchange contracts (collectively, ``Non-
Principal Derivatives'') to the extent described below in ``Other 
Investments.'' The Fund may also enter into currency transactions on a 
spot (i.e., cash) basis. The Fund will invest (in the aggregate) no 
more than 30% of the value of its net assets (calculated at the time of 
investment) in Principal Derivatives and Non-Principal Derivatives 
(``30% Limitation'').
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    \15\ The Fund will only invest in total return swap agreements 
that have (i) referenced assets that are exchange-traded securities 
or (ii) referenced indexes that are comprised of exchange-traded 
securities.
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    The Fund will only enter into transactions in over-the-counter 
(``OTC'') derivatives (including non-U.S. currency swap agreements, 
total return swap agreements, and forward foreign currency exchange 
contracts) with counterparties that the Adviser and/or the Sub-Adviser 
reasonably believes are capable of performing under the applicable 
contract or agreement.
    According to the Exchange, the Fund's investments in derivative 
instruments will be made in accordance with the 1940 Act, will be 
consistent with the Fund's investment objective and policies, and will 
not be used to seek to achieve a multiple or inverse multiple of an 
index. To limit the potential risk associated with the Fund's 
derivatives transactions, the Exchange states that the Fund will 
segregate or ``earmark'' assets determined to be liquid by the Adviser 
and/or the Sub-Adviser in accordance with procedures established by the 
Board of Trustees of the Trust (``Trust Board'') and in accordance with 
the 1940 Act (or, as permitted by applicable regulation, enter into 
certain offsetting positions) to cover its obligations under derivative 
instruments. In addition, the Exchange provides that the Fund will 
include appropriate risk disclosure in its offering documents, 
including leveraging risk.\16\ The Exchange represents that because the 
markets for certain securities, or the securities 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.
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    \16\ The Exchange represents that to mitigate leveraging risk, 
the Adviser and/or the Sub-Adviser will segregate or ``earmark'' 
liquid assets or otherwise cover the transactions that may give rise 
to such risk.
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    The Exchange states that the Adviser believes there will be 
minimal, if any, impact to the arbitrage mechanism as a result of the 
use of derivatives. Market makers and participants should be able to 
value derivatives as long as the positions are disclosed with relevant 
information. The Exchange states that the Adviser believes that the 
price at which Shares trade will continue to be disciplined by 
arbitrage opportunities created by the ability to purchase or redeem 
creation units at their NAV, which should ensure that Shares will not 
trade at a material discount or premium in relation to their NAV.
    The Exchange states that the Adviser does not believe there will be 
any significant impact to the settlement or operational aspects of the 
Fund's arbitrage mechanism due to the use of derivatives. Because 
derivatives generally are not eligible for in-kind transfer, they will 
typically be substituted with a ``cash in lieu'' amount when the Fund 
processes purchases or redemptions of creation units in-kind.

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

    With respect to up to 20% of its net assets, the Fund may invest in 
and/or include in its portfolio (as applicable) the following 
securities and instruments (in the aggregate).
    The Fund may invest in non-exchange-traded equity securities 
(``Non-Exchange-Traded Equity Securities'') acquired in conjunction 
with its event-driven strategy.\17\ The Fund may also invest in 
exchange-traded notes (``ETNs'') and in Non-Principal Derivatives.
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    \17\ For example, in conjunction with its event-driven strategy, 
the Fund may acquire a Non-Exchange-Traded Equity Security as a 
result of a merger or other corporate reorganization. Certain Non-
Exchange-Traded Equity Securities may be Rule 144A securities; the 
Fund will not invest in Rule 144A securities other than Non-
Exchange-Traded Equity Securities. Additionally, Non-Exchange-Traded 
Equity Securities will not be represented by derivative instruments.
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    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 Fund may invest in the following short-term debt 
instruments: (1) 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; (2) 
certificates of deposit issued against funds deposited in a bank or 
savings and loan association; (3) bankers' acceptances; (4) repurchase 
agreements,\18\ which involve purchases of debt securities; (5) bank 
time deposits; and (6) commercial paper.\19\
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    \18\ According to the Exchange, the Fund intends to enter into 
repurchase agreements only with financial institutions and dealers 
believed by the Adviser and/or the Sub-Adviser to present minimal 
credit risks in accordance with criteria approved by the Trust 
Board. The Adviser and/or the Sub-Adviser will review and monitor 
the creditworthiness of such institutions. The Adviser and/or the 
Sub-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.
    \19\ 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.
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    The Fund may invest in money market mutual funds, U.S. exchange-
traded closed-end funds, and other ETFs \20\ that, in each case, will 
be investment companies registered under the 1940 Act. In addition to 
ETFs and closed-end funds, the Fund may invest in certain other 
exchange-traded pooled investment vehicles (``ETPs'').\21\
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    \20\ Such ETFs will not invest primarily in Equity Securities 
(and, therefore, will not be taken into account for purposes of the 
80% Investments) but may otherwise invest in assets of any type.
    \21\ The Fund may invest in the following ETPs: Trust 
certificates, commodity-based trust shares, currency trust shares, 
commodity index trust shares, commodity futures trust shares, 
partnership units, trust units, and managed trust securities (as 
described in Nasdaq Rule 5711); paired class shares (as described in 
Nasdaq Rule 5713); trust issued receipts (as described in Nasdaq 
Rule 5720); and exchange-traded managed fund shares (as described in 
Nasdaq Rule 5745).
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    The Fund's portfolio may include exchange-traded and OTC contingent

[[Page 56731]]

value rights (``CVRs'') received by the Fund as consideration in 
connection with a corporate action related to a security held by the 
Fund.\22\
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    \22\ CVRs will not be taken into account for purposes of the 30% 
Limitation.
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C. Exchange's Description of the Fund's Investment Restrictions

    According to the Exchange, 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 will not apply to (a) obligations issued or 
guaranteed by the U.S. government, its agencies, or instrumentalities 
or (b) securities of other investment companies.\23\
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    \23\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
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    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 and/or 
the Sub-Adviser. The Fund will monitor its portfolio liquidity on an 
ongoing basis to determine whether, in light of current circumstances, 
an adequate level of liquidity is being maintained and will consider 
taking appropriate steps in order to maintain adequate liquidity if, 
through a change in values, net assets, or other circumstances, more 
than 15% of the Fund's net assets are held in illiquid assets.

III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \24\ and the rules and regulations thereunder applicable to a 
national securities exchange.\25\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\26\ 
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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    \24\ 15 U.S.C. 78f.
    \25\ 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).
    \26\ 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 Act,\27\ 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. In addition, an estimated value, 
defined in Nasdaq Rule 5735(c)(3) as the Intraday Indicative Value,\28\ 
will be available on the NASDAQ OMX Information LLC proprietary index 
data service,\29\ and will be widely disseminated by one or more major 
market data vendors at least every 15 seconds during the Regular Market 
Session.\30\ On each business day, before commencement of trading in 
Shares in the Regular Market Session on the Exchange, the Fund will 
disclose on its Web site the identities and quantities of the Disclosed 
Portfolio that will form the basis for the Fund's calculation of NAV at 
the end of the business day.\31\
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    \27\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \28\ The Intraday Indicative Value will be based upon the 
current value for the components of the Disclosed Portfolio, as 
defined in Nasdaq Rule 5735(c)(2).
    \29\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the NASDAQ OMX global index data feed service, 
offering real-time updates, daily summary messages, and access to 
widely followed indexes and ETFs. GIDS provides investment 
professionals with the daily and historical information needed to 
track or trade NASDAQ OMX indexes, listed ETFs or third-party 
partner indexes and ETFs.
    \30\ 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 (``E.T.''); (2) Regular Market Session from 9:30 
a.m. to 4 p.m. or 4:15 p.m. E.T.; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m. E.T.).
    \31\ 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, commodity, 
index 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.
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    The Fund's NAV will be determined as of the close of regular 
trading on the New York Stock Exchange (``NYSE'') (ordinarily 4:00 
p.m., E.T.) on each day the NYSE is open for trading. 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. Quotation and last sale information for the 
following equity securities (to the extent traded on a U.S. exchange) 
will be available from the exchanges on which they are traded as well 
as in accordance with any applicable CTA plans: Equity Securities; 
ETFs; closed-end funds; and ETPs. In addition, quotation and last sale 
information for U.S. exchange-traded options (including U.S. exchange-
traded options on equity securities and U.S. exchange-traded options on 
stock indices) will be available via the Options Price Reporting 
Authority. Quotation and last sale information for U.S. exchange-traded 
stock index futures contracts, ETNs and CVRs will be available from the 
exchanges on which they are traded. Pricing information for exchange-
traded equity securities (including Equity Securities; closed-end 
funds; ETFs; and ETPs), ETNs, exchange-traded CVRs, and exchange-traded 
derivatives (including options on stock indices; options on equity 
securities; and stock index futures contracts) will be available from 
the applicable listing exchange and from major market data vendors. 
Pricing information for Non-Exchange-Traded Equity Securities 
(including without limitation Rule 144A securities), short-term U.S. 
government securities, commercial paper, bankers' acceptances, 
repurchase agreements, OTC CVRs, non-U.S. currency swap agreements, 
total return swap agreements, forward foreign currency exchange 
contracts, bank time deposits, certificates of deposit, and currency 
spot transactions will be available from major broker-dealer firms, 
major market data vendors, and/or third party pricing services. Money 
market mutual 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. In addition, the Fund's Web site 
will include a form of the prospectus for the Fund and additional data 
relating to NAV and other applicable quantitative information.
    The Commission further believes that the proposal to list and trade 
the Shares

[[Page 56732]]

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 
Commission notes 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. Trading in the 
Shares will also be subject to Nasdaq Rules 4120 and 4121, including 
the trading pause provisions under Nasdaq Rules 4120(a)(11) and (12). 
Trading in the Shares may be halted because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) The extent to which trading is not 
occurring in the securities and/or the other assets constituting the 
Disclosed Portfolio of the Fund; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present. Trading in the Shares will also be 
subject to Nasdaq Rule 5735(d)(2)(D), which sets forth additional 
circumstances under which trading in the Shares may be halted. The 
Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. In 
addition, the Exchange represents that neither the Adviser nor Sub-
Adviser is registered as a broker-dealer; however, the Adviser is 
affiliated with a broker-dealer, and the Sub-Adviser is affiliated with 
two broker-dealers, and each has implemented and will maintain a fire 
wall with respect to its respective broker-dealer affiliate(s) 
regarding access to information concerning the composition and/or 
changes to the portfolio.\32\
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    \32\ See supra note 7. 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, Sub-Adviser, and their related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act, 
which requires investment advisers to adopt a code of ethics that 
reflects the fiduciary nature of their relationship with their 
clients as well as compliance with other applicable securities laws. 
Accordingly, investment advisers must have procedures designed to 
prevent the communication and misuse of non-public information, 
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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    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.\33\ The Exchange also 
represents that 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 Equity 
Securities, closed-end funds, ETFs, ETPs, ETNs, exchange-traded CVRs, 
options on stock indices, options on equity securities, and stock index 
futures contracts) with other markets and other entities that are 
members of the Intermarket Surveillance Group (``ISG''),\34\ 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 CSSA. Moreover, 
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 (``TRACE'').
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    \33\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
    \34\ 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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    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. In support of this 
proposal, the Exchange has made representations, including the 
following:
    (1) The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares.\35\
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    \35\ See Notice, supra note 3, at 33313.
---------------------------------------------------------------------------

    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.\36\ Trading in the Shares 
will be subject to the existing trading surveillances, administered by 
both Nasdaq and also FINRA on behalf of the Exchange, which are 
designed to detect violations of Exchange rules and applicable federal 
securities laws, and these procedures are adequate to properly monitor 
Exchange trading of the Shares in all trading sessions and to deter and 
detect violations of Exchange rules and applicable federal securities 
laws.\37\
---------------------------------------------------------------------------

    \36\ Id.
    \37\ Id.
---------------------------------------------------------------------------

    (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 Equity Securities, closed-end 
funds, ETFs, ETPs, ETNs, exchange-traded CVRs, options on stock 
indices, options on equity securities, and stock index futures 
contracts) with other markets and other entities that are members of 
the ISG, 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 CSSA. Moreover, 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 TRACE.\38\
---------------------------------------------------------------------------

    \38\ Id.
---------------------------------------------------------------------------

    (4) At least 90% of the Fund's net assets that are invested (in the 
aggregate) in exchange-traded derivatives and in exchange-traded CVRs 
will be invested in instruments that trade in markets that are members 
of ISG or are parties to a CSSA with the Exchange.\39\
---------------------------------------------------------------------------

    \39\ Id. at 33313-33314.
---------------------------------------------------------------------------

    (5) At least 90% of the Fund's net assets that are invested (in the 
aggregate) in ETNs and in exchange-traded equity securities will be 
invested in securities that trade in markets that are members of ISG or 
are parties to a CSSA with the Exchange.\40\
---------------------------------------------------------------------------

    \40\ Id. at 33314.

---------------------------------------------------------------------------

[[Page 56733]]

    (6) The Equity Securities in which the Fund will invest will be 
listed on a U.S. or a non-U.S. exchange.\41\
---------------------------------------------------------------------------

    \41\ Id. at 33308.
---------------------------------------------------------------------------

    (7) ETFs included in the Fund will be listed and traded in the U.S. 
on registered exchanges.\42\
---------------------------------------------------------------------------

    \42\ Id. at n.10.
---------------------------------------------------------------------------

    (8) The Fund will not invest in any unsponsored Depositary 
Receipts.\43\
---------------------------------------------------------------------------

    \43\ Id. at 33309, n.12.
---------------------------------------------------------------------------

    (9) The Fund will only invest in total return swap agreements that 
have (i) referenced assets that are exchange-traded securities or (ii) 
referenced indexes that are comprised of exchange-traded 
securities.\44\
---------------------------------------------------------------------------

    \44\ Id. at 33309, n.15.
---------------------------------------------------------------------------

    (10) While the Fund may invest in inverse ETFs, the Fund will not 
invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs.\45\
---------------------------------------------------------------------------

    \45\ Id. at 33308, n.10.
---------------------------------------------------------------------------

    (11) The Fund will only enter into transactions in OTC derivatives 
with counterparties that the Adviser and/or the Sub-Adviser reasonably 
believes are capable of performing under the applicable contract or 
agreement.\46\
---------------------------------------------------------------------------

    \46\ Id. at 33309.
---------------------------------------------------------------------------

    (12) 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 and/or 
the Sub-Adviser.\47\
---------------------------------------------------------------------------

    \47\ Id. at 33310.
---------------------------------------------------------------------------

    (13) The Fund will not invest in Rule 144A securities other than 
Non-Exchange-Traded Equity Securities. Additionally, Non-Exchange-
Traded Equity Securities will not be represented by derivative 
instruments.\48\
---------------------------------------------------------------------------

    \48\ Id. at n.20.
---------------------------------------------------------------------------

    (14) 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 (a) obligations issued or guaranteed by the U.S. 
government, its agencies or instrumentalities or (b) securities of 
other investment companies.\49\
---------------------------------------------------------------------------

    \49\ Id. at 33310.
---------------------------------------------------------------------------

    (15) The Fund will invest (in the aggregate) no more than 30% of 
the value of its net assets (calculated at the time of investment) in 
Principal Derivatives and Non-Principal Derivatives.\50\
---------------------------------------------------------------------------

    \50\ Id. at 33314.
---------------------------------------------------------------------------

    (16) 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 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. The Information Circular will 
also discuss any exemptive, no-action and interpretive relief granted 
by the Commission from any rules under the Act.\51\
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

    (17) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\52\
---------------------------------------------------------------------------

    \52\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (18) The Fund's investments in derivative instruments will be made 
in accordance with the 1940 Act, will be consistent with the Fund's 
investment objective and policies, and will not be used to seek to 
achieve a multiple or inverse multiple of an index.\53\
---------------------------------------------------------------------------

    \53\ See Notice, supra note 3, at 33309.
---------------------------------------------------------------------------

    (20) To limit the potential risk associated with the Fund's 
derivatives transactions, the Fund will segregate or ``earmark'' assets 
determined to be liquid by the Adviser and/or the Sub-Adviser in 
accordance with procedures established by the Trust Board and in 
accordance with the 1940 Act (or, as permitted by applicable 
regulation, enter into certain offsetting positions) to cover its 
obligations under derivative instruments. These procedures have been 
adopted consistent with Section 18 of the 1940 Act and related 
Commission guidance. In addition, the Fund will include appropriate 
risk disclosure in its offering documents, including leveraging 
risk.\54\
---------------------------------------------------------------------------

    \54\ Id.
---------------------------------------------------------------------------

    (21) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.\55\
---------------------------------------------------------------------------

    \55\ Id. at 33313.
---------------------------------------------------------------------------

    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. If the Fund is not 
in compliance with the applicable listing requirements, the Exchange 
will commence delisting procedures under the Nasdaq 5800 Series.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Fund. The Commission notes that the 
Fund and the Shares must comply with the initial and continued listing 
criteria in Nasdaq Rule 5735 for the Shares to be listed and traded on 
the Exchange.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \56\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\57\ that the proposed rule change (SR-NASDAQ-2016-061), be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78s(b)(2).
    \58\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-19898 Filed 8-19-16; 8:45 am]
 BILLING CODE 8011-01-P
Federal Register / Vol. 81, No. 162 / Monday, August 22, 2016 / Notices 56733

(6) The Equity Securities in which the (and that Shares are not individually constitute continued listing
Fund will invest will be listed on a U.S. redeemable); (b) Nasdaq Rule 2111A, requirements for listing the Shares on
or a non-U.S. exchange.41 which imposes suitability obligations on the Exchange. In addition, the issuer has
(7) ETFs included in the Fund will be Nasdaq members with respect to represented to the Exchange that it will
listed and traded in the U.S. on recommending transactions in the advise the Exchange of any failure by
registered exchanges.42 Shares to customers; (c) how the Fund to comply with the continued
(8) The Fund will not invest in any information regarding the Intraday listing requirements, and, pursuant to
unsponsored Depositary Receipts.43 Indicative Value and the Disclosed its obligations under Section 19(g)(1) of
(9) The Fund will only invest in total Portfolio is disseminated; (d) the risks the Act, the Exchange will monitor for
return swap agreements that have (i) involved in trading the Shares during compliance with the continued listing
referenced assets that are exchange- the Pre-Market and Post-Market requirements. If the Fund is not in
traded securities or (ii) referenced Sessions when an updated Intraday compliance with the applicable listing
indexes that are comprised of exchange- Indicative Value will not be calculated requirements, the Exchange will
traded securities.44 or publicly disseminated; (e) the commence delisting procedures under
(10) While the Fund may invest in requirement that members deliver a the Nasdaq 5800 Series.
inverse ETFs, the Fund will not invest prospectus to investors purchasing This approval order is based on all of
in leveraged or inverse leveraged (e.g., newly issued Shares prior to or the Exchange’s representations,
2X or ¥3X) ETFs.45 concurrently with the confirmation of a including those set forth above and in
(11) The Fund will only enter into transaction; and (f) trading information. the Notice, and the Exchange’s
transactions in OTC derivatives with The Information Circular will also description of the Fund. The
counterparties that the Adviser and/or discuss any exemptive, no-action and Commission notes that the Fund and the
the Sub-Adviser reasonably believes are interpretive relief granted by the Shares must comply with the initial and
capable of performing under the Commission from any rules under the continued listing criteria in Nasdaq Rule
applicable contract or agreement.46 Act.51 5735 for the Shares to be listed and
(12) The Fund may hold up to an traded on the Exchange.
(17) For initial and continued listing,
aggregate amount of 15% of its net For the foregoing reasons, the
the Fund must be in compliance with
assets in illiquid assets (calculated at Commission finds that the proposed
Rule 10A–3 under the Act.52
the time of investment), including Rule (18) The Fund’s investments in rule change is consistent with Section
144A securities deemed illiquid by the derivative instruments will be made in 6(b)(5) of the Act 56 and the rules and
Adviser and/or the Sub-Adviser.47 accordance with the 1940 Act, will be regulations thereunder applicable to a
(13) The Fund will not invest in Rule national securities exchange.
consistent with the Fund’s investment
144A securities other than Non-
objective and policies, and will not be
Exchange-Traded Equity Securities. IV. Conclusion
used to seek to achieve a multiple or
Additionally, Non-Exchange-Traded IT IS THEREFORE ORDERED,
inverse multiple of an index.53
Equity Securities will not be (20) To limit the potential risk pursuant to Section 19(b)(2) of the
represented by derivative instruments.48 associated with the Fund’s derivatives Act,57 that the proposed rule change
(14) The Fund may not invest 25% or (SR–NASDAQ–2016–061), be, and it
transactions, the Fund will segregate or
more of the value of its total assets in hereby is, approved.
‘‘earmark’’ assets determined to be
securities of issuers in any one industry.
liquid by the Adviser and/or the Sub- For the Commission, by the Division of
This restriction does not apply to (a)
Adviser in accordance with procedures Trading and Markets, pursuant to delegated
obligations issued or guaranteed by the
established by the Trust Board and in authority.58
U.S. government, its agencies or
accordance with the 1940 Act (or, as Robert W. Errett,
instrumentalities or (b) securities of
permitted by applicable regulation, Deputy Secretary.
other investment companies.49
(15) The Fund will invest (in the enter into certain offsetting positions) to [FR Doc. 2016–19898 Filed 8–19–16; 8:45 am]
aggregate) no more than 30% of the cover its obligations under derivative BILLING CODE 8011–01–P
value of its net assets (calculated at the instruments. These procedures have
time of investment) in Principal been adopted consistent with Section 18
Derivatives and Non-Principal of the 1940 Act and related Commission SECURITIES AND EXCHANGE
Derivatives.50 guidance. In addition, the Fund will COMMISSION
(16) Prior to the commencement of include appropriate risk disclosure in
[Release No. 34–78588; File No. SR–Phlx–
trading, the Exchange will inform its its offering documents, including
2016–79]
members in an Information Circular of leveraging risk.54
the special characteristics and risks (21) A minimum of 100,000 Shares Self-Regulatory Organizations;
associated with trading the Shares. will be outstanding at the NASDAQ PHLX LLC; Notice of Filing of
Specifically, the Information Circular commencement of trading on the Proposed Rule Change To Amend Rule
will discuss the following: (a) The Exchange.55 1017, Openings in Options
The Exchange represents that all
procedures for purchases and
statements and representations made in August 16, 2016.
redemptions of Shares in creation units
this filing regarding (a) the description Pursuant to Section 19(b)(1) of the
41 Id. at 33308.
of the portfolio, (b) limitations on Securities Exchange Act of 1934
asabaliauskas on DSK3SPTVN1PROD with NOTICES

42 Id. at n.10. portfolio holdings or reference assets, or (‘‘Act’’),1 and Rule 19b–4 thereunder,2
43 Id. at 33309, n.12. (c) the applicability of Exchange rules notice is hereby given that on August 4,
44 Id. at 33309, n.15. and surveillance procedures shall 2016, NASDAQ PHLX LLC (‘‘Phlx’’ or
45 Id. at 33308, n.10.
46 Id. at 33309. 51 Id. 56 15 U.S.C. 78f(b)(5).
47 Id. at 33310. 52 See 17 CFR 240.10A–3. 57 15 U.S.C. 78s(b)(2).
48 Id. at n.20. 53 See Notice, supra note 3, at 33309. 58 17 CFR 200.30–3(a)(12).
49 Id. at 33310. 54 Id. 1 15 U.S.C. 78s(b)(1).
50 Id. at 33314. 55 Id. at 33313. 2 17 CFR 240.19b–4.

VerDate Sep<11>2014 17:13 Aug 19, 2016 Jkt 238001 PO 00000 Frm 00157 Fmt 4703 Sfmt 4703 E:\FR\FM\22AUN1.SGM 22AUN1
Document Created: 2018-02-09 11:38:06
Document Modified: 2018-02-09 11:38:06
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 56729