83 FR 55416 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the BrandywineGLOBAL-Global Total Return ETF, a Series of Legg Mason ETF Investment Trust Under Nasdaq Rule 5735
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 214 (November 5, 2018)
Federal Register Volume 83, Issue 214 (November 5, 2018)
| Page Range | 55416-55435 | |
| FR Document | 2018-24068 |
[Federal Register Volume 83, Number 214 (Monday, November 5, 2018)] [Notices] [Pages 55416-55435] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-24068] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-84505; File No. SR-NASDAQ-2018-080] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the BrandywineGLOBAL--Global Total Return ETF, a Series of Legg Mason ETF Investment Trust Under Nasdaq Rule 5735 October 30, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on October 17, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade the shares of the BrandywineGLOBAL--Global Total Return ETF (the ``Fund''), a series of Legg Mason ETF Investment Trust (the ``Trust'') under Nasdaq Rule 5735 (``Managed Fund Shares'').\3\ The shares of the Fund are collectively referred to herein as the ``Shares.'' --------------------------------------------------------------------------- \3\ The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 20, 2008) (SR-NASDAQ-2008-039). There are already multiple actively- managed funds listed on the Exchange. See, e.g., Securities Exchange Act Release Nos. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) (SR-NASDAQ-2017-039) (order approving listing and trading of Guggenheim Limited Duration ETF); 78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR-NASDAQ-2016-061) (order approving listing and trading of First Trust Equity Market Neutral ETF); 78443 (July 29, 2016), 81 FR 51517 (August 4, 2016) (SR-NASDAQ-2016-064) (order approving listing and trading of First Trust Strategic Mortgage REIT ETF); 71913 (April 9, 2014), 79 FR 21333 (April 15, 2014) (SR-NASDAQ-2014-019) (order approving listing and trading of First Trust Managed Municipal ETF); 69464 (April 26, 2013), 78 FR 25774 (May 2, 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund); 66489 (February 29, 2012), 77 FR 13379 (March 6, 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund); see also filings for similar ETFs listed on other national securities exchanges: Securities Exchange Act Release Nos. 80657 (May 11, 2017) 82 FR 22702 (May 17, 2017) (SR-NYSE Arca- 2017-09) (order approving listing and trading of Janus Short Duration Income ETF); 79683 (December 23, 2016), 81 FR 96539 (December 30, 2016) (SR-NYSEArca-2016-82) (order approving listing and trading of JPMorgan Diversified Event Driven ETF); 77904 (May 25, 2016), 81 FR 35101 (SR-NYSE Arca-2016-17) (order approving listing and trading of JPMorgan Diversified Alternative ETF); 68870 (February 8 2013), 78 FR 11245 (February 15, 2013) (SR-NYSEArca- 2012-139) (order approving listing and trading of First Trust Preferred Securities and Income ETF). The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders. --------------------------------------------------------------------------- The text of the proposed rule change is available on the Exchange's website at http://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for [[Page 55417]] the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade the Shares of the Fund under Nasdaq Rule 5735, which governs the listing and trading of Managed Fund Shares \4\ on the Exchange. The Fund will be an exchange- traded fund (``ETF'') that is actively-managed. The Shares will be offered by the Trust, which was established as a Maryland statutory trust on June 8, 2015.\5\ The Exchange notes that other actively- managed, broad market fixed-income ETFs have been previously approved by the SEC prior to the adoption of ``generic'' listing standards for actively-managed ETFs.\6\ The Trust is registered with the Commission as an investment company under the 1940 Act and has filed a registration statement on Form N-1A (``Registration Statement'') with the Commission with respect to the Fund.\7\ The Fund will be a series of the Trust. The Fund intends to qualify each year as a regulated investment company (``RIC'') under Subchapter M of the Internal Revenue Code of 1986, as amended. --------------------------------------------------------------------------- \4\ A Managed Fund Share is a security that represents an interest in a company, which is registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') and organized as an open-end investment company or similar entity, that invests in a portfolio of securities selected by its investment adviser consistent with the company's investment objective and policies. In contrast, an open-end investment company that issues Index Fund Shares, listed and traded on the Exchange under Nasdaq Rule 5705, seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. \5\ The Commission has issued an order, upon which the Trust may rely, granting certain exemptive relief under the 1940 Act. See Investment Company Act Release No. 32391 (December 13, 2016) (File No. 812-14547) (the ``Exemptive Relief''). In addition, on December 6, 2012, the staff of the Commission's Division of Investment Management (``Division'') issued a no-action letter (``No-Action Letter'') relating to the use of derivatives by actively-managed ETFs. See No-Action Letter dated December 6, 2012 from Elizabeth G. Osterman, Associate Director, Office of Exemptive Applications, Division of Investment Management. The No-Action Letter stated that the Division would not recommend enforcement action to the Commission under applicable provisions of and rules under the 1940 Act if actively-managed ETFs operating in reliance on specified orders (which include the Exemptive Relief) invest in options contracts, futures contracts or swap agreements provided that they comply with certain representations stated in the No-Action Letter. \6\ See, e.g., Securities Exchange Act Release Nos. 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca- 2015-73) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund (now known as the PIMCO Active Bond Exchange-Traded Fund)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca- 2013-122) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund); see also infra notes 86 and 104. \7\ See Post-Effective Amendment No. 50 to the Registration Statement on Form N-1A for the Trust (File Nos. 333-206784 and 811- 23096) as filed on June 5, 2018. The Trust will file additional amendments to the Registration Statement as necessary to conform to the representations in this filing. The descriptions of the Fund and the Shares contained herein are based, in part, on information in the Registration Statement. --------------------------------------------------------------------------- Legg Mason Partners Fund Advisor, LLC will be the investment adviser to the Fund (the ``Manager'').\8\ Brandywine Global Investment Management, LLC will serve as the sub-adviser to the Fund (the ``Sub- Adviser'').\9\ Legg Mason Investor Services, LLC (the ``Distributor'') will be the distributor of the Fund's Shares. The Investment Adviser, the Sub-Adviser and the Distributor are wholly-owned subsidiaries of Legg Mason, Inc. (``Legg Mason''). An entity that is not affiliated with Legg Mason, and which is named in the Registration Statement, will act as the administrator, accounting agent, custodian, and transfer agent to the Fund. --------------------------------------------------------------------------- \8\ Legg Mason Partners Fund Advisor, LLC describes its role as ``investment manager,'' rather than as ``investment adviser'' in applicable Fund-related documents, including the Registration Statement, in its investment management agreement with the Fund and in connection with its annual approval process by the board of trustees for the Trust (the ``Board''). As a result, the defined term ``Manager'' is used in this filing with respect to a proposed rule change instead of the term ``investment adviser,'' which is the term used by certain other investment advisers to ETFs in their filings with respect to proposed rule changes under Rule 19b-4 of the Act. \9\ The Sub-Adviser is responsible for the day-to-day management of the Fund and, as such, typically makes all decisions with respect to portfolio holdings regardless of where the instruments are traded. The Manager has ongoing oversight responsibility. --------------------------------------------------------------------------- Paragraph (g) of Rule 5735 provides that if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a broker-dealer, such investment adviser shall erect and maintain a ``fire wall'' between the investment adviser and the broker-dealer with respect to access to information concerning the composition and/or changes to such investment company's portfolio.\10\ In addition, paragraph (g) further requires that personnel who make decisions on the investment company's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material, non-public information regarding the investment company's portfolio. --------------------------------------------------------------------------- \10\ An investment adviser to an investment company is required to be registered under the Investment Advisers Act of 1940 (the ``Advisers Act''). As a result, the Manager and the Sub-Adviser, as registered investment advisers, and their related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics. Rule 204A-1 requires investment advisers (such as the Manager and the Sub-Adviser) to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of non-public information by the Manager and the Sub-Adviser must be consistent with the Advisers Act and Rule 204A-1 thereunder. In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser (such as the Manager and the Sub-Adviser) to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. --------------------------------------------------------------------------- Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with the establishment and maintenance of a ``fire wall'' between the investment adviser and the broker-dealer reflects the applicable investment company's portfolio, not an underlying benchmark index, as is the case with index-based funds. Neither the Manager nor the Sub-Adviser is a broker-dealer, but each is affiliated with the Distributor, a broker-dealer, and has implemented and will maintain a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio. In addition, personnel who make decisions on the Fund's portfolio composition will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the Fund's portfolio. In the event (a) the Manager or the Sub-Adviser registers as a broker-dealer or becomes newly affiliated with a broker- dealer, or (b) any new investment adviser or any new sub-adviser to the Fund is a registered broker-dealer or becomes affiliated with another broker-dealer, it will implement [[Page 55418]] and maintain a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning the composition and/or changes to the Fund's portfolio and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. BrandywineGLOBAL--Global Total Return ETF Principal Investments The investment objective of the Fund will be to seek to maximize total return, consisting of income and capital appreciation. Although the Fund may invest in securities and Debt (as defined below) of any maturity, the Fund will normally maintain an effective duration as set forth in the prospectus.\11\ Effective duration seeks to measure the expected sensitivity of market price to changes in interest rates, taking into account the anticipated effects of structural complexities (for example, some bonds can be prepaid by the issuer). --------------------------------------------------------------------------- \11\ The effective duration of the Fund may fall outside of its expected range due to market movements. If this happens, the Sub- Adviser will take action to bring the Fund's effective duration back within its expected range within a reasonable period of time. --------------------------------------------------------------------------- Under Normal Market Conditions,\12\ the Fund will seek to achieve its investment objective by investing at least 80% of its assets in a portfolio comprised of U.S. or foreign fixed income securities; U.S. or foreign Debt (as defined below); \13\ ETFs \14\ that provide exposure to such U.S. or foreign fixed income securities, Debt or other Principal Investments (defined below); derivatives \15\ that (i) provide exposure to such U.S. or foreign fixed income securities, Debt and other Principal Investments, (ii) are used to risk manage the Fund's holdings, and/or (iii) are used to enhance returns, such as through covered call strategies;\16\ U.S. or foreign equity securities of any type acquired in reorganizations of issuers of fixed income securities or Debt held by the Fund (``Work Out Securities''); \17\ U.S. or foreign non-convertible preferred securities (other than trust preferred securities, which the Fund may invest in, but which are treated as fixed income securities \18\) (``Non-Convertible Preferred Securities''); \19\ warrants,\20\ comprised of: Warrants on [[Page 55419]] U.S. or foreign fixed income securities (``Fixed-Income Related Warrants'') and warrants on U.S. or foreign equity securities (``Equity-Related Warrants''),\21\ both fixed income and equity securities of which are generally issued by the issuer of the warrants, and both types of warrants of which are generally attached to, accompany or are purchased alongside investments in U.S. or foreign fixed income securities; cash and cash equivalents; \22\ and foreign currencies (together, the ``Principal Investments'' and the equity elements of the Principal Investments, which consist of Work Out Securities, ETFs that provide exposure to fixed income securities, Debt or other Principal Investments, Equity-Related Warrants \23\ and Non- Convertible Preferred Securities, are referred to as the ``Principal Investment Equities'').\24\ --------------------------------------------------------------------------- \12\ The term ``Normal Market Conditions'' has the meaning set forth in Nasdaq Rule 5735(c)(5). The Fund may vary from ordinary parameters on a temporary basis, including for defensive purposes, during the initial invest-up period (i.e., the six-week period following the commencement of trading of Shares on the Exchange) and during periods of high cash inflows or outflows (i.e., rolling periods of seven calendar days during which inflows or outflows of cash, in the aggregate, exceed 10% of the Fund's assets as of the opening of business on the first day of such periods). In those situations, the Fund may depart from its principal investment strategies and may, for example, hold a higher than normal proportion of its assets in cash and cash equivalents. During such periods, the Fund may not be able to achieve its investment objective. The Fund may also adopt a defensive strategy and hold a significant portion of its assets in cash and cash equivalents when the Manager or the Sub-Adviser believes securities, Debt and other instruments in which the Fund normally invests have elevated risks due to political or economic factors, heightened market volatility or in other extraordinary circumstances that do not constitute ``Normal Market Conditions''. The Fund's investments in cash equivalents are described in greater detail in note 22 infra. \13\ As noted below, the Fund's fixed income security and Debt investments will satisfy specific diversification requirements set forth in the Fund's prospectus that are not included in Nasdaq Rule 5735, including, without limitation, that each issuer of securities or borrower in respect to Debt have economic exposure to at least three countries. See infra ``Investment Restrictions. \14\ The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705(b)), Portfolio Depositary Receipts (as described in Nasdaq Rule 5705(a)), and Managed Fund Shares (as described in Nasdaq Rule 5735). The Fund will not invest in ETFs that are not registered as investment companies under the 1940 Act. The ETFs held by the Fund will invest in fixed income securities, Debt, money-market instruments and other Principal Investments to which the Fund seeks exposure. All such ETFs will trade in markets that are members of the ISG or exchanges that are parties to a comprehensive surveillance sharing agreement with the Exchange. The Fund will not invest in leveraged ETFs, inverse ETFs, or inverse leveraged ETFs. Other fixed-income funds have been approved to include ETFs in their 80% principal investment category. See, e.g., Securities Exchange Act Release No. 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017) (SR-NASDAQ-2017-039) (approving fund seeking to meet its investment objective of having at least 80% of assets invested in a portfolio of debt instruments in part through investments in ETFs that invest substantially all of their assets in such debt instruments). \15\ Derivatives will include: (i) Swaps and security-based swaps, futures, options, options on futures, and swaptions that are traded on an exchange, trading facility, swap execution facility or alternative trading system (``Exchange-Traded Derivatives'') (A) that is a member of the Intermarket Surveillance Group (``ISG''), which includes all U.S. national securities exchanges and most futures exchanges, (B) that is subject to a comprehensive surveillance sharing agreement with the Exchange, or (C) that is not an ISG member and with which the Exchange does not have a comprehensive surveillance sharing agreement; and (ii) swaps and security-based swaps, options, options on futures, swaptions, forwards and similar instruments that are traded in the over-the- counter market and are either centrally cleared or cleared bilaterally (``OTC Derivatives''), as further described below. For the purposes of describing the scope of the Fund's potential investments in derivatives, the terms ``swaps'' and ``security-based swaps'' shall have the meanings set forth in the Commodity Exchange Act (``CEA''), as amended by The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) (``Dodd-Frank''), and regulations thereunder, and references to swaps and forwards on foreign exchange or currencies shall include ``foreign exchange forwards'' and ``foreign exchange swaps'', as such terms are defined in Sections 1a(24)-(25) of the CEA. The terms ``exchange-traded'' and ``exchange-listed'', when used with respect to swaps and security-based swaps, shall include swaps and security- based swaps that are executed on swap execution facilities and security-based swap execution facilities and cleared through regulated, central clearing facilities. The types of derivatives in which the Fund may invest and the reference assets for such derivatives are described in greater detail below. Exchange-Traded Derivatives and OTC Derivatives may reference Principal Investments and other investments. Those Exchange-Traded Derivatives and OTC Derivatives that reference Principal Investments will be treated as Principal Investments and those that do not will not be treated as Principal Investments. For purposes of the 80% Principal Investments measure, the Fund will value Exchange-Traded Derivatives and OTC Derivatives based on the mark-to-market value of such derivatives. This approach is consistent with the valuation methodology for asset coverage purposes in Rule 18f-4 under the 1940 Act proposed by the Commission. See Investment Company Act Release No. 31933 (December 11, 2015); 80 FR 80884 (December 28, 2015) (the ``Derivatives Rule Proposing Release''); see also infra note 107. No more than 10% of the assets of the Fund will be invested in Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. \16\ See also infra ``The Fund's Use of Derivatives.'' \17\ Work Out Securities will generally be traded in the OTC market but may be listed on an exchange that may or may not be an ISG member. To the extent that the Work Out Securities are exchange- listed, they will be subject to the 10% limit on the Fund's total assets that can be listed on a market that is not a member of ISG or a market with which the Exchange does not have a comprehensive surveillance sharing agreement. See infra ``Investment Restrictions.'' \18\ See Nasdaq Rule 5735(b)(1)(B). \19\ Non-convertible preferred stock, such as that comprising the Non-Convertible Preferred Securities, provides holders with a fixed or variable distribution and a status upon bankruptcy of the issuer that is subordinated to debt holders but preferred over common shareholders. Non-Convertible Preferred Securities may be listed on either an ISG member exchange (or an exchange with which the Exchange has a comprehensive surveillance sharing agreement) or a non-ISG member exchange or be unlisted and trade in the over-the- counter market. Non-Convertible Preferred Securities that are listed and traded on a non-ISG member exchange or on an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, together with all other exchange-listed securities and Exchange-Traded Derivatives held by the Fund that are listed on a non-ISG member exchange or exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, are limited to 10% of the Fund's total assets. See infra ``Investment Restrictions.'' \20\ Warrants are equity securities that provide the holder with the right to purchase specified securities of the issuer of the warrants at a specified exercise price until the expiration date of the warrant. The Fund may hold warrants that provide the right to purchase fixed income securities or equity securities and expects that most of the warrants it holds will be attached to related fixed income securities. Warrants held by the Fund may be traded in the OTC market or may be listed on an exchange. Warrants that are listed on a non-ISG member exchange or an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, together with all other exchange-listed securities and Exchange- Traded Derivatives held by the Fund that are listed on a non-ISG member exchange or exchange with which the Exchange does not have a comprehensive surveillance sharing agreement, are limited to 10% of the Fund's total assets. See infra ``Investment Restrictions.'' \21\ The Fund's interests in Equity-Related Warrants are similar to the Fund's interest in Work Out Securities in that they reflect interests in equity securities that are held solely in connection with investments in fixed income securities. \22\ Cash equivalents consist of the following, all of which have maturities of less than 360 days: U.S. government securities; certificates of deposit issued against funds deposited in a bank or savings and loan association; bankers' acceptances (which are short- term credit instruments used to finance commercial transactions); repurchase agreements and reverse repurchase agreements; and bank time deposits (which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest). Cash equivalents also consist of money market funds registered under the 1940 Act and money market funds that are not registered under the 1940 Act but that comply with Rule 2a-7 under the 1940 Act (together, ``Money Market Funds''), money market ETFs and commercial paper, which are short-term unsecured promissory notes, having maturities of 360 days or less. The Exchange notes that, while the Fund treats commercial paper having maturities of 360 days or less as cash equivalents for the purposes of the 80% Principal Investments measure, the Fund will apply the definition of cash equivalents in Nasdaq Rule 5735(b)(1)(C) (which is limited to instruments with maturities of less than three months) for purposes of compliance with Nasdaq Rule 5735(b)(1) and will comply with the applicable requirements of Nasdaq Rule 5735(b)(1) with respect to all commercial paper held by the Fund. Investments in cash equivalents that are Money Market Funds will be made in accordance with Rule 12d1-1 under the 1940 Act. \23\ For purposes of this proposed rule change, Fixed-Income Related Warrants are treated as fixed income securities and not as Principal Investment Equities. Fixed-Income Related Warrants will be subject to and comply with the generic listing requirements for fixed income securities rather than the requirements applicable to equity securities. \24\ The Manager and Sub-Adviser will manage the Fund to ensure that the weight of Non-Convertible Preferred Securities, Equity- Related Warrants and Work Out Securities (which are generally traded solely in the over-the-counter market) together does not exceed 15% of the Fund's assets. --------------------------------------------------------------------------- The Manager or Sub-Adviser (as applicable) may select from any of the following types of fixed income securities: (i) U.S. or foreign corporate debt securities, including notes, bonds, debentures, trust preferred securities, and commercial paper issued by corporations, trusts, limited partnerships, limited liability companies and other types of non-governmental legal entities; (ii) U.S. government securities, including obligations of, or guaranteed by, the U.S. government, its agencies or government-sponsored entities (other than MBS described below); (iii) sovereign debt securities, which include fixed income securities issued by governments, agencies or instrumentalities and their political subdivisions, securities issued by government-owned, controlled or sponsored entities, interests in entities organized and operated for the purpose of restructuring the investment instruments issued by such entities, Brady Bonds,\25\ and fixed income securities issued by supranational entities such as the World Bank; \26\ (iv) municipal securities, which include general obligation bonds, revenue bonds, housing authority bonds, private activity bonds, industrial development bonds, residual interest bonds, tender option bonds, tax and revenue anticipation notes, bond anticipation notes, tax-exempt commercial paper, municipal leases, participation certificates and custodial receipts; (v) zero coupon securities, which are securities that pay no interest during the life of the obligation but are issued at prices below their stated maturity value; (vi) pay-in-kind securities, which have a stated coupon, but the interest is generally paid in the form of obligations of the same type as the underlying pay-in-kind securities (e.g., bonds) rather than in cash; (vii) deferred interest securities, which are obligations that generally provide for a period of delay before the regular payment of interest begins and are issued at a significant discount from face value; (viii) U.S. or foreign structured notes and indexed securities, including securities that have demand, tender or put features, or interest rate reset features; (ix) U.S. or foreign inflation-indexed or inflation-protected securities, which are fixed income securities that are structured to provide protection against inflation and whose principal value or coupon is periodically adjusted according to the rate of inflation and which include, among others, treasury inflation protected securities; and (x) fixed income securities issued by securitization vehicles (``Securitized Products'').\27\ Securitized Products include: (A) U.S. or foreign mortgage-backed securities (``MBS''), which are securities that represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property and which may be issued or guaranteed by government-sponsored entities (``GSEs'') \28\ such as Fannie Mae (formally known as the Federal National Mortgage Association) or Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation) or issued or guaranteed by agencies of the U.S. government, such as the Government National Mortgage Association (``Ginnie Mae''); \29\ (B) U.S. or foreign asset- [[Page 55420]] backed securities (``ABS'') \30\ and (C) U.S. or foreign collateralized debt obligations (``CDOs'').\31\ --------------------------------------------------------------------------- \25\ Brady Bonds are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness. \26\ A supranational entity is a bank, commission or company established or financially supported by the national government of one or more countries to promote reconstruction or development. \27\ As defined in Rule 6710(m) of the Financial Industry Regulatory Authority, Inc. (``FINRA''), the term Securitized Product means a security collateralized by any type of financial asset, such as a loan, a lease, a mortgage, or a secured or unsecured receivable, and includes but is not limited to an asset-backed security as defined in Section 3(a)(79)(A) of the Act, a synthetic asset-backed security, any residual tranche or interest of any security specified above, which tranche or interest is a fixed income security for purposes of FINRA Rule 6700 and paragraph (a) of FINRA Rule 6710. Consistent with the requirements applicable to other fixed income securities listed pursuant to this proposed rule change, Securitized Products are subject to limits set forth in Nasdaq Rule 5735(b)(1)(B)(i), (ii), (iii), (iv) and (v), except that, with respect to the Fund's investments in ABS/Private MBS (as defined below), the Fund will not comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv) and CDOs (as defined below) will not be subject to the limits set forth in Nasdaq Rule 5735(b)(1)(B)(v) but will be required to comply with the tests in Nasdaq Rule 5735(b)(1)(B)(i)-(iv), including, without limitation, the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv). Investments in CDOs will separately be subject to a limit of 10% of total assets of the Fund. In addition, the Fund's total investments in Securitized Products (including CDOs) will be subject to the restrictions applicable to all fixed income securities and Debt holdings of the Fund, including that: No more than 30% of the Debt and fixed income securities held by the Fund will be below investment grade, and no more than 25% of the total assets of the Fund will be invested in Debt or fixed income or equity securities of issuers in any one industry. See infra ``Investment Restrictions.'' \28\ A ``GSE'' is a type of financial services corporation created by the United States Congress. GSEs include Fannie Mae and Freddie Mac but not Sallie Mae, which is no longer a government entity. \29\ MBS include collateralized mortgage obligations (``CMOs''), which are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but they may also be collateralized by whole loans or pass-through securities issued by private issuers (i.e., issuers other than U.S. government agencies or GSEs) (referred to as ``Private MBS''). Payments of principal and of interest on the mortgage-related instruments collateralizing the MBS, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a ``tranche'' of securities, is issued at a specified fixed or floating coupon rate and has a stated maturity or final distribution date. \30\ As defined by FINRA Rule 6710(cc), ABS are Securitized Products in connection with which the securities issued, which may be issued by either a U.S. or a foreign entity, are collateralized by any type of financial asset, such as a consumer or student loan, a lease, or a secured or unsecured receivable. ABS exclude (per the FINRA definition, which is applicable for purposes of reporting and as used herein): (i) A Securitized Product that is backed by residential or commercial mortgage loans, mortgage-backed securities, or other financial assets derivative of mortgage-backed securities; (ii) a small business administration backed ABS traded ``To Be Announced'' or in a specified pool transaction as defined in FINRA Rule 6710(x) and (iii) CDOs (as defined in note 31 infra). Consistent with the requirements of Nasdaq Rule 5735(b)(1)(B)(v), the Fund will limit investments in ABS and Private MBS (together, ``ABS/Private MBS'') to 20% of the weight of the fixed income portion of the Fund's portfolio. \31\ For purposes of this proposed rule change, CDOs are excluded from the definition of ABS and, for purposes of this proposed rule change only, are comprised exclusively of collateralized loan obligations (``CLOs'') and collateralized bond obligations (``CBOs''). CLOs are securities issued by a trust or other special purpose entity that are collateralized by a pool of loans by U.S. banks and participations in loans by U.S. banks that are unsecured or secured by collateral other than real estate. CBOs are securities issued by a trust or other special purpose entity that are backed by a diversified pool of fixed income securities issued by U.S. or foreign governmental entities or fixed income securities issued by U.S. or corporate issuers. CDOs are distinguishable from ABS because they are collateralized by bank loans or by corporate or government fixed income securities and not by consumer, and other loans made by non-bank lenders, including student loans. For purposes of this proposed rule change, CDOs will not be subject to the 20% limit set forth in Nasdaq Rule 5735(b)(1)(B)(v). However, the Exchange believes that the 10% limit on the Fund's holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. See infra ``Investment Restrictions.'' --------------------------------------------------------------------------- The securities in which the Fund invests may pay fixed, variable or floating rates of interest or, in the case of instruments such as zero coupon bonds, do not pay current interest but are issued at a discount from their face values. Securitized Products in which the Fund will invest make periodic payments of interest and/or principal on underlying pools of mortgages, in the case of MBS, loans, leases and receivables other than real estate, in the case of ABS, and government and corporate bonds or non-real estate related loans, in the case of CDOs. The Fund may also invest in stripped Securitized Products, which represent the right to receive either payments of principal or payments of interest on real estate receivables. Interests in CDOs and ABS will not be stripped so as to provide the right to receive only payments of principal or payments of interest. Investments by the Fund in debt instruments that are not characterized as ``securities'' under applicable case law (``Debt''),\32\ are comprised primarily of the following: (i) U.S. or foreign loans made by banks and participations in such loans, loans made by commercial non-bank lenders and participations in such loans, loans made by governmental entities and participations in such loans and/or other extensions of credit, such as guarantees made by any of the foregoing lenders; and (ii) U.S. or foreign loans on real estate secured by mortgages and participations in such loans. Debt may be partially or fully secured by collateral supporting the payment of interest and principal, or unsecured and/or subordinated to other instruments.\33\ Debt may relate to financings for highly-leveraged borrowers. --------------------------------------------------------------------------- \32\ Although bank loans are included as ``fixed income securities'' for purposes of the ``generic'' listing requirements of Nasdaq Rule 5735(b)(1), the types of bank loans in which the Fund invests are not treated as ``securities'' under applicable case law and, as a result, the Fund intends to treat bank loans as Debt and not as fixed income securities. See, e.g., Banco Espanol de Credito et al. v. Security Pacific National Bank, 973 F.2d 51(2d Cir. 1992), cert. denied, 509 U.S. 903 (1993). Accordingly, the Fund will not seek to comply with the parameters on investments in fixed income securities under Nasdaq Rule 5735(b)(1)(B) with respect to the Fund's holdings in bank loans, but instead will comply with the alternative limitations applicable to Debt with respect to such holdings, as set forth herein. See infra ``Investment Restrictions.'' \33\ As discussed infra in ``Investment Restrictions,'' at least 75% of the Fund's investments fixed income securities (including convertible fixed income and preferred securities) and Debt (together constituting the fixed income weight of the portfolio) shall have a minimum principal amount outstanding of $100 million or more. In addition, consistent with the Fund's Registration Statement, the following diversification requirements will apply: During Normal Market Conditions, the Fund: (i) Will not invest more than 25% of its total assets in securities or Debt in any one foreign country, other than the United States, Canada, the United Kingdom, Japan, Australia and member countries of the European Union, or denominated in any one currency, other than the U.S. dollar, the Canadian dollar, the British pound, the yen, the Australian dollar, or the euro; and (ii) will have ``economic exposure'' to at least three countries. ``Economic exposure'' means that an issuer of a security or a borrower in respect to Debt: (A) Will have a class of securities whose principal securities market is in the country; (B) is organized under the laws of, or has a principal office in, the country; (iii) [sic] derives 50% or more of its total revenue or profit from goods produced, sales made or services provided in the country; or (D) maintains 50% of more of its assets in that country. In addition, no more than 30% of the Debt and fixed income securities held by the Fund, will be below investment grade (as defined infra in ``Investment Restrictions''); and (iii) [sic] no more than 25% of the total assets of the Fund will be invested in Debt or fixed income or equity securities of issuers in any one industry. --------------------------------------------------------------------------- With respect to fixed income securities, the Fund may invest in restricted instruments which are subject to resale restrictions that limit purchasers to qualified institutional buyers, as defined in Rule 144A under the Securities Act of 1933, as amended (the ``Securities Act'') or to non-U.S. persons, within the meaning of Regulation S under the Securities Act. The Fund will use derivatives to (i) provide exposure to U.S. or foreign fixed income securities, Debt and other Principal Investments, (ii) risk manage the Fund's holdings,\34\ and/or (iii) enhance returns, such as through covered call strategies.\35\ The Fund will not use derivatives for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark. Derivatives that the Fund may enter into include: (i) Over-the-counter deliverable and non-deliverable foreign exchange forward contracts; (ii) exchange- listed futures contracts on securities (including Treasury Securities \36\ and foreign government securities), Debt, commodities, securities- , commodities-, or combined-asset-class-related indices, interest rates, financial rates and currencies; (iii) exchange-listed or over- the-counter options or swaptions (i.e., options to enter into a swap) on securities, Debt, commodities, securities-, commodities-, or combined-asset-class-related indices, interest rates, financial rates, currencies and futures contracts; (iv) exchange-listed or over-the- counter swaps (including total return swaps) on securities, Debt, commodities, securities-, commodities-, or combined-asset-class-related indices, interest rates, financial rates, and currencies; and (v) credit default swaps on single names, baskets and indices (both as protection seller and as protection buyer). As a result of the Fund's use of derivatives and to serve as collateral, the Fund may also hold significant amounts of Treasury Securities, cash and cash equivalents and, in the case of derivatives that are payable in a foreign currency, the [[Page 55421]] foreign currency in which the derivatives are payable. --------------------------------------------------------------------------- \34\ The risk management uses of derivatives will include managing (i) investment-related risks, (ii) risks due to fluctuations in securities prices, interest rates, or currency exchanges rates, (iii) risks due to the credit-worthiness of an issuer, and (iv) the effective duration of the Fund's portfolio. \35\ See also infra ``The Fund's Use of Derivatives.'' \36\ The term ``Treasury Securities'' has the meaning set forth in Nasdaq Rule 5735(b)(1)(B). --------------------------------------------------------------------------- The Fund may, without limitation, enter into repurchase arrangements and borrowing and reverse repurchase arrangements, purchase and sale contracts, buybacks \37\ and dollar rolls \38\ and spot currency transactions. The Fund may also, subject to required margin and without limitation, purchase securities and other instruments under when-issued, delayed delivery, to be announced or forward commitment transactions, where the securities or instruments will not be delivered or paid for immediately.\39\ To the extent required under applicable federal securities laws (including the 1940 Act), rules, and interpretations thereof, the Fund will ``set aside'' liquid assets or engage in other measures to ``cover'' open positions held in connection with the foregoing types of transactions, as well as derivative transactions. --------------------------------------------------------------------------- \37\ A buyback refers to a TBA transaction that incorporates a special feature for addressing a failure by the seller to deliver the mortgages promised under the contract. A buyback feature typically provides that, in the event a TBA seller fails to deliver the MBS that is the subject of the transaction to the TBA buyer on the scheduled settlement date, the TBA buyer will be entitled to close-out its payment obligations by either (i) selling the deliverable MBS back to the seller at a price established under the buyback or (ii) accepting assignment from the seller of its right to receive the specified MBS from the third-party entity that failed to deliver the MBS to the TBA seller. \38\ A dollar roll transaction is a simultaneous sale and purchase of an Agency Pass-Through Mortgage-Backed Security (as defined in FINRA Rule 6710(v), which is the only reference security for such transaction) for different settlement dates, where the initial seller agrees to take delivery, upon settlement of the re- purchase transaction, of the same or substantially similar securities. See FINRA Rule 6710(z). \39\ FINRA Rule 4210 is scheduled to begin requiring broker- dealers to impose margin requirements on investors in TBAs and certain other delayed delivery transactions beginning March 25, 2019. --------------------------------------------------------------------------- Other Investments Under Normal Market Conditions, the Fund will seek its investment objective by investing at least 80% of its assets in a portfolio of the Principal Investments. The Fund may invest its remaining assets exclusively in: (i) U.S. or foreign exchange-listed \40\ or over-the counter convertible fixed income and preferred securities; \41\ and (ii) OTC Derivatives and Exchange-Traded Derivatives for which the underlying reference asset is not a Principal Investment.\42\ --------------------------------------------------------------------------- \40\ No more than 10% of the Fund's total assets will be invested in exchange-listed securities or Exchange-Traded Derivatives that are listed on an exchange that is not an ISG-member or an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement. See infra ``Investment Restrictions.'' \41\ The Fund's investment in U.S. or foreign fixed income or preferred securities would include contingent convertible securities, which are also referred to as ``CoCos.'' CoCos are fixed income instruments that are convertible into equity if a pre- specified trigger event occurs. The type of event that causes a CoCo to be convertible occurs when capital of the issuer falls below a designated threshold. The Fund will limit investments in convertible securities to 20% of the Fund's assets under Normal Market Conditions. \42\ Investments in OTC Derivatives and Exchange-Traded Derivatives will also be subject to the limitations described in the ``The Fund's Use of Derivatives'' section below. As is the case with respect to the Fund's investments in OTC Derivatives and Exchange- Traded Derivatives for which the underlying reference asset is a Principal Investment, the Fund will invest in OTC Derivatives and Exchange-Traded Derivatives whose underlying reference asset is not a Principal Investment in order to (i) provide exposure to non- Principal Investments instruments; (ii) to risk manage the Fund's holdings; and/or (iii) to enhance returns. --------------------------------------------------------------------------- The Fund's Use of Derivatives The types of derivatives in which the Fund may invest and the reference assets for such derivatives are described in greater detail in ``Principal Investments'' and ``Other Investments'' above. Exchange- Traded Derivatives will primarily be traded on exchanges that are ISG members or exchanges with which the Exchange has a comprehensive surveillance sharing agreement. The Fund may, however, invest up to 10% of the assets of the Fund in Exchange-Traded Derivatives and exchange- listed, securities whose principal market is not a member of ISG or a market with which the Exchange has a comprehensive surveillance sharing agreement. For purposes of this 10% limit, the weight of such Exchange- Traded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Fund will limit the weight of its investments in OTC Derivatives to 10% of the assets of the Fund, with the exception of Interest Rate Derivatives \43\ and Currency Derivatives \44\ (together, ``Interest Rate and Currency Derivatives'') entered into with broker- dealers, banks and other financial intermediaries. Investments in Interest Rate and Currency Derivatives (whether the instruments are Exchange-Traded Derivatives or OTC Derivatives) will not be subject to a limit. The Exchange believes that this exception, which is generally consistent with the requirement in a previous filing for the listing of an ETF approved by the Commission,\45\ is appropriate in light of the fact that Interest Rate and Currency Derivatives are among the most liquid investment instruments (including not only derivatives but also securities) in the market \46\ (and are even more liquid than most non- government or government-guaranteed securities). Based on the data compiled by the Sub-Adviser in respect to its liquidity policy, these derivatives are among the most liquid investments traded. In addition, most Interest Rate Derivatives traded by the Fund are centrally cleared by regulated clearing firms, and Interest Rate and Currency Derivatives are [[Page 55422]] subject to trade reporting,\47\ and other robust regulation.\48\ Given the size of the trading market and the regulatory oversight of the markets, the Exchange believes that Interest Rate and Currency Derivatives are not readily subject to manipulation. The Exchange also believes that allowing the Fund to risk manage its portfolio through the use of Interest Rate and Currency Derivatives without limit is necessary to allow the Fund to achieve its investment objective and protect investors. --------------------------------------------------------------------------- \43\ ``Interest Rate Derivatives'' are comprised of interest rate swaps, swaptions (i.e., options on interest rate swaps), rate options and other similar derivatives, and may be Exchange-Traded Derivatives or OTC Derivatives. As reflected in statistics compiled by the Bank for International Settlements, as of June 30, 2017 there were approximately $416 trillion (notional amount) of total interest rate contracts outstanding in the over-the-counter markets alone. As reflected by the statistics, the market is wide, deep and liquid. See https://www.bis.org/statistics/d7.pdf (accessed November 2017). Interest Rate Derivatives may trade on trading platforms that are not ISG members or that are not subject to a comprehensive surveillance sharing agreement with the Exchange. Holdings in Exchange-Traded Derivatives (together with exchange-listed securities) that are listed on an exchange that is not an ISG member or on a market with which the Exchange does not have a comprehensive surveillance sharing agreement are limited to 10% of the Fund's assets. \44\ ``Currency Derivatives'' are comprised of deliverable forwards, which are agreements between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate, non-deliverable forwards, which are agreements to pay the difference between the exchange rates specified for two currencies at a future date, swaps and options on currencies, and similar currency or foreign exchange derivatives. As reflected in statistics compiled by the Bank for International Settlements, as of June 30, 2017 there were approximately $77 trillion (notional amount) of Currency Derivatives outstanding in the over-the-counter markets alone. As reflected by the statistics, the market is wide, deep and liquid. See https://www.bis.org/statistics/d6.pdf (accessed November 2017). Currency Derivatives may trade on trading platforms that are not ISG members or that are not subject to a comprehensive surveillance sharing agreement with the Exchange. Holdings in Exchange-Traded Derivatives (together with exchange-listed securities) that are listed on an exchange that is not an ISG member or on a market with which the Exchange does not have a comprehensive surveillance sharing agreement are limited to 10% of the Fund's assets. \45\ See Securities Exchange Act Release No. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (approving up to 50% of the fund's assets (calculated on the basis of aggregate gross notional value) to be invested in over-the-counter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund's investments, including forwards, over-the- counter options, and over-the-counter swaps). \46\ Trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, and 67% of this trading activity was in derivatives contracts such as currency or foreign exchange forwards, options and swaps (with the other 33% consisting of spot transactions). See Bank for International Settlements, Triennal [sic] Central Bank Survey, Foreign Exchange Turnover in April 2016, available at http://www.bis.org/publ/rpfx16fx.pdf (accessed November 2017). Trading in OTC interest rate derivatives averaged $2.7 trillion per day in April 2016. See Bank for International Settlements, Triennal [sic] Central Bank Survey, OTC Interest Rate Derivatives Turnover in April 2016, available at http://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017). \47\ Transactions in Interest Rate and Currency Derivatives are required to be reported to a swap data repository, and transactions in Interest Rate Derivatives and certain Currency Derivatives (i.e., Currency Derivatives that are not excluded from the definition of a ``swap'', as described below) are also publicly reported pursuant to rules issued by the Commodity Futures Trading Commission (``CFTC''). See 17 CFR parts 43, 45 and 46. Pursuant to Section 1(a)(47)(E) of the CEA and a related determination by the Department of the Treasury, physically-settled Currency Derivatives that meet the definition of ``foreign exchange forwards'' or ``foreign exchange swaps'' under Sections 1a(24)-(25) of the CEA that are entered into between eligible contract participants (as defined in the CEA) (``Excluded Currency Derivatives'') are excluded from the definition of a ``swap'' under the CEA. See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). Transactions in such Excluded Currency Derivatives are required to be reported to a swap data repository, but they are not subject to the public reporting requirements. \48\ Interest Rate Derivatives and Currency Derivatives other than Excluded Currency Derivatives are comprehensively regulated as swaps under the CEA and regulations issued thereunder by the CFTC and other federal financial regulators. See, e.g., 17 CFR part 23 (capital and margin requirements for swap dealers, business conduct standards for swap dealers, and swap documentation requirements); 17 CFR part 50 (clearing requirements for swaps). While Excluded Currency Derivatives are not subject to all swap regulations, they are subject to the ``business conduct standards'' adopted by the CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). --------------------------------------------------------------------------- For purposes of the 10% limit applicable generally to OTC Derivatives (other than Interest Rate and Currency Derivatives), the weight of such OTC Derivatives will be calculated based on the mark-to- market value of such OTC Derivatives.\49\ The mark-to-market methodology is consistent with the methodology proposed by the SEC in proposed Rule 18f-4 for the purposes of asset coverage requirements \50\ and in keeping with disclosures regarding compliance with Section 18 of the 1940 Act made by other registered investment companies and reviewed by the SEC staff for a number of years.\51\ In that regard, the SEC expressly noted in the Derivatives Rule Proposing Release that reliance on a mark-to-market valuation of a derivatives position for purposes of calculating the required coverage amount ``would generally correspond to the amount of the fund's liability with respect to the derivatives transaction'' and, therefore, be consistent with the appropriate valuation of the derivatives transaction.\52\ The mark-to- market value is also the measure on which collateral posting is based under the Master Agreement published by the International Swaps and Derivatives Association, Inc. (``ISDA''), which is the predominant agreement used to trade derivatives.\53\ This value measures gain and loss to the Fund of the Fund's derivatives positions on a daily basis, as well as on a net basis across all transactions covered by a master netting agreement and, as a result, accurately reflects the actual economic exposure of the Fund to the counterparty on each derivative (as compared to notional amount, which may overstate or understate economic risk). --------------------------------------------------------------------------- \49\ The mark-to-market value reflects the Fund's actual delivery or payment obligation under the derivative. This measure differs from that referenced in Nasdaq Rule 5735(b)(1)(E), which bases its 20% limit of assets in the portfolio applicable for funds issuing Managed Fund Shares on the aggregate gross national value of the over-the-counter derivatives rather than on the mark-to-market value. \50\ See Derivatives Rule Proposing Release at 157-158; see also infra note 107. \51\ See Derivatives Rule Proposing Release at n.58, citing Comment Letter on SEC Concept Release (November 11, 2011) (File No. S7-33-11), Davis Polk & Wardwell LLP, available at http://www.sec.gov/comments/s7-33-11/s73311-49.pdf (``[F]und registration statements indicate that, in recent years, the Staff has not objected to the adoption by funds of policies that require segregation of the mark-to-market value, rather than the notional amount . . . [for asset segregation purposes].''). \52\ See Derivatives Rule Proposing Release at 157-158. \53\ The Credit Support Annex to the ISDA Master Agreement bases the collateral amount owed by a party to a derivatives contract, which is defined as a party's ``exposure,'' by reference to the replacement value of the party's net positions. Replacement value, which has the same meaning as ``mark-to-market'' value, is the amount owed by a party at a point in time determined based on the net termination payment due under the outstanding transaction. --------------------------------------------------------------------------- The Fund may choose not to make use of derivatives. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes. As described above, the Fund will use derivatives to (i) provide exposure to the Principal Investments, (ii) risk manage the Fund's holdings,\54\ and/or (iii) enhance returns, such as through covered call strategies. The Fund will not use derivatives for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark. The Fund will enter into derivatives only with counterparties that the Fund reasonably believes are financially and operationally able to perform the contract or instrument, and the Fund will collect collateral from the counterparty in accordance with credit considerations and margining requirements under applicable law.\55\ --------------------------------------------------------------------------- \54\ The risk management uses of derivatives will include managing (i) investment-related risks, (ii) risks due to fluctuations in securities prices, interest rates, or currency exchanges rates, (iii) risks due to the credit-worthiness of an issuer, and (iv) the effective duration of the Fund's portfolio. \55\ The Fund will seek, where practicable, to trade with counterparties whose financial status is such that the risk of default is reduced. The Sub-Adviser will monitor the financial standing of counterparties on an ongoing basis. This monitoring may include reliance on information provided by credit agencies or of credit analysts employed by the Sub-Adviser. The analysis may include earnings updates, the counterparty's reputation, past experience with the dealer, market levels for the counterparty's debt and equity, credit default swap levels for the counterparty's debt, the liquidity provided by the counterparty and its share of market participation. --------------------------------------------------------------------------- Investments in derivative instruments will be made in accordance with the 1940 Act and consistent with the Fund's investment objective and policies. To limit the potential risk (including leveraging risk) associated with such transactions, the Fund will segregate or ``earmark'' assets determined to be liquid by the Manager and/or the Sub-Adviser in accordance with procedures established by the Board and in accordance with the 1940 Act (or, as permitted by applicable regulation, enter into offsetting positions) to cover its obligations under derivative instruments. These procedures have been adopted consistent with Section 18 of the 1940 Act and related Commission guidance. In addition, the Fund will include appropriate risk disclosure in its offering documents, including leveraging risk. Leveraging risk is the risk that transactions of the Fund, including the Fund's use of derivatives, may give rise to additional leverage, causing the Fund to be more volatile than it would have if it had not been leveraged. Because the markets for securities or Debt, or the securities or Debt themselves, may be unavailable, cost prohibitive or tax-inefficient as compared to derivative instruments, suitable derivative transactions may be an efficient alternative for the Fund to obtain the desired asset exposure. The Manager and the Sub-Adviser believe that derivatives can be an economically attractive substitute for an underlying physical security or Debt that the Fund would otherwise [[Page 55423]] purchase. For example, the Fund could purchase futures contracts on Treasury Securities instead of investing directly in Treasury Securities or could sell credit default protection on a corporate bond instead of buying a physical bond. Economic benefits include potentially lower transactions costs, attractive relative valuation of a derivative versus a physical bond (e.g., differences in yields) or economic exposure without incurring transfer or similar taxes. The Manager and the Sub-Adviser further believe that derivatives can be used as a more liquid means of adjusting portfolio duration, as well as targeting specific areas of yield curve exposure, with potentially lower transaction costs than the underlying securities or Debt (e.g., interest rate swaps may have lower transaction costs than the physical bonds). Similarly, money market futures can be used to gain exposure to short-term interest rates in order to express views on anticipated changes in central bank policy rates. In addition, derivatives can be used to protect client assets through selectively hedging downside (or ``tail risks'') in the Fund. The Fund also can use derivatives to increase or decrease credit exposure. Index credit default swaps can be used to gain exposure to a basket of credit risk by ``selling protection'' against default or other credit events, or to hedge broad market credit risk by ``buying protection.'' Single name credit default swaps can be used to allow the Fund to increase or decrease exposure to specific issuers, saving investor capital through lower trading costs. The Fund can use total return swap contracts to obtain the total return of a reference asset or index in exchange for paying financing costs. A total return swap may be more efficient than buying underlying securities or Debt, potentially lowering transaction costs. The Fund expects to manage foreign currency exchange rate risk by entering into Currency Derivatives. The Sub-Adviser may use options strategies to meet the Fund's investment objectives. Option purchases and sales can also be used to hedge specific exposures in the portfolio and can provide access to return streams available to long-term investors such as the persistent difference between implied and realized volatility. Options strategies can generate income or improve execution prices (e.g., covered calls). Investment Restrictions At least 75% of the Fund's investments in Debt and fixed income securities shall have a minimum principal amount outstanding of $100 million or more. In addition, consistent with the Fund's Registration Statement, the following diversification requirements will apply: During Normal Market Conditions, the Fund: (i) Will not invest more than 25% of its total assets in securities or Debt in any one foreign country, other than the United States, Canada, the United Kingdom, Japan, Australia and member countries of the European Union, or denominated in any one currency, other than the U.S. dollar, the Canadian dollar, the British pound, the yen, the Australian dollar, or the euro; and (ii) will have ``economic exposure'' to at least three countries. ``Economic exposure'' means an issuer of a security or a borrower in respect to Debt: (A) Will have a class of securities whose principal securities market is in the country; (B) is organized under the laws of, or has a principal office in, the country; (iii) [sic] derives 50% or more of its total revenue or profit from goods produced, sales made or services provided in the country; or (D) maintains 50% of more of its assets in that country. The Fund may invest up to 15% of its assets in Non-Convertible Preferred Securities, Equity-Related Warrants and Work Out Securities. The Fund will not invest in equity securities other than Principal Investment Equities.\56\ Principal Investment Equities consist of (i) Non-Convertible Preferred Securities, Equity-Related Warrants and Work Out Securities, which are subject to the 15% limit noted above and (ii) shares of ETFs that provide exposure to fixed income securities, Debt or other Principal Investments, which are subject to no limits. --------------------------------------------------------------------------- \56\ The convertible fixed income securities (including CoCos) and convertible preferred securities will comply with the tests set forth in Nasdaq Rule 5735(b)(1)(B) and will be limited to 20% of the total assets of the Fund. In addition, no more than 10% of such convertible fixed income and convertible preferred securities or Exchange Traded Derivatives on such securities, together with all other listed securities and Exchange Traded Derivatives in which the Fund will invest, will be traded on an exchange that is not an ISG member or an exchange with which the Exchange has comprehensive surveillance sharing agreement. --------------------------------------------------------------------------- While the Fund will invest principally in fixed income securities and Debt that are, at the time of purchase, investment grade, the Fund may invest up to 30% of its assets in below investment grade fixed income securities and Debt. For these purposes, ``investment grade'' is defined as investments with a rating at the time of purchase in one of the four highest rating categories of at least one nationally recognized statistical ratings organization (``NRSRO'') (e.g., BBB- or higher by S&P Global Ratings (``S&P''), and/or Fitch Ratings (``Fitch''), or Baa3 or higher by Moody's Investors Service, Inc. (``Moody's'')).\57\ Unrated fixed income securities or Debt may be considered investment grade if, at the time of purchase, and under Normal Market Conditions, the applicable Sub-Adviser determines that such securities are of comparable quality based on a fundamental credit analysis of the unrated security or Debt instrument and comparable NRSRO-rated securities. --------------------------------------------------------------------------- \57\ For the avoidance of doubt, if a security or Debt is rated by multiple NRSROs and receives different ratings, the Fund will treat the security or Debt as being rated in the highest rating category received from any one NRSRO. If a security or Debt is not rated, the Fund may determine its rating by reference to other securities issued by the issuer or comparable NRSRO-rated securities. --------------------------------------------------------------------------- The Fund may invest in fixed income or equity securities and Debt issued by both U.S. and non-U.S. issuers (including issuers in emerging markets [sic]. Consistent with the Fund's Registration Statement, the following diversification requirements will apply: During Normal Market Conditions, the Fund: (i) Will not invest more than 25% of its total assets in securities or Debt in any one foreign country, other than the United States, Canada, the United Kingdom, Japan, Australia and member countries of the European Union, or denominated in any one currency, other than the U.S. dollar, the Canadian dollar, the British pound, the yen, the Australian dollar, or the euro; and (ii) will have ``economic exposure'' to at least three countries. ``Economic exposure'' means that an issuer of a security or a borrower in respect to Debt: (A) Will have a class of securities whose principal securities market is in the country; (B) is organized under the laws of, or has a principal office in, the country, (iii) [sic] derives 50% or more of its total revenue or profit from goods produced, sales made or services provided in the country, or (D) maintains 50% of more of its assets in that country. See infra ``Investment Restrictions.'' [sic] The Fund will not invest more than 20% of the fixed income portion of the Fund's portfolio \58\ in ABS/Private MBS or more than 10% of the Fund's total [[Page 55424]] assets in CDOs.\59\ The Fund will also not invest more than 20% of its total assets in Debt that is unsecured and subordinated. --------------------------------------------------------------------------- \58\ The Exchange notes that the terms ``fixed income weight of the portfolio'' and ``weight of the fixed income portion of the portfolio'' are used synonymously in Nasdaq Rule 5735. For purposes of this proposed rule change, the ``fixed income weight of the Fund's portfolio'' includes all fixed income securities (including convertible fixed income and preferred securities, even though such instruments are not Principal Investments) and Debt held by the Fund and excludes equity securities (including ETFs), derivatives and cash and cash equivalents. \59\ As discussed above, CDOs would be excluded from the 20% limit on ABS/Private MBS but would be subject to a separate limit of 10%, measured with respect to the total assets of the Fund. See supra note 31. The Exchange believes that the 10% limit on the Fund's holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. --------------------------------------------------------------------------- The Fund may not concentrate its investments (i.e., invest more than 25% of the value of its total assets) in Debt of borrowers in any one industry or in fixed income or equity securities of issuers in any one industry as provided in the Registration Statement.\60\ The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at the time of investment),\61\ including Rule 144A securities deemed illiquid by the Manager or the Sub-Adviser.\62\ The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of the Fund's net assets are held in illiquid securities or other illiquid assets. Illiquid securities and other illiquid assets include those subject to contractual or other restrictions on resale and other instruments or assets that lack readily available markets as determined in accordance with Commission staff guidance.\63\ --------------------------------------------------------------------------- \60\ See Form N-1A, Item 9. The Commission has taken the position that a fund is concentrated if it invests more than 25% of the value of its total assets in any one industry. See, e.g., Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 54241 (November 21, 1975). For these purposes and as described above, Debt is comprised of loans that do not constitute securities (consistent with applicable case law) whereas fixed income securities would include loans and other fixed income instruments that are characterized as securities under applicable case law. See supra note 32. \61\ See Rule 22e-4(b)(1)(iv). ``No fund or In-Kind ETF may acquire any illiquid investment if, immediately after the acquisition, the fund or In-Kind ETF would have invested more than 15% of its net assets in illiquid investments that are assets.'' (emphasis added) \62\ In reaching liquidity decisions, the Manager or Sub-Adviser (as applicable) may consider the following factors: The frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). \63\ Long-standing Commission guidelines have required investment companies to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), FN 34; see also Investment Company Act Release Nos. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ``Restricted Securities''); and 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N-1A). The Commission also recently adopted Rule 22e-4 under the 1940 Act, which requires that each registered open-end management investment company, including ETFs but not including money market mutual funds, to establish a liquidity risk management program that includes limitations on illiquid investments. See Investment Company Act Release No. 32315 (October 13, 2016), 81 FR 82142 (November 18, 2016). Under Rule 22e-4, a fund's portfolio security is illiquid if it cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. See 17 CFR 270.22e-4(a)(8). --------------------------------------------------------------------------- As noted in ``The Fund's Use of Derivatives,'' the Fund's investments in derivatives will be consistent with the Fund's investment objective and will not be used for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark (although derivatives have embedded leverage). Although the Fund will be permitted to borrow as permitted under the 1940 Act, it will not be operated as a ``leveraged ETF,'' (i.e., it will not be operated in a manner designed to seek a multiple or inverse multiple of the performance of an underlying reference index). The Fund may engage in frequent and active trading of portfolio securities, Debt, and derivatives to achieve its investment objective. Under Normal Market Conditions, the Fund will satisfy the following requirements, on a continuous basis measured at the time of purchase: (i) Component fixed income securities and Debt that in the aggregate account for at least 75% of the fixed income weight of the Fund's portfolio each shall have a minimum original principal amount outstanding of $100 million or more; (ii) no fixed income security held in the portfolio (excluding Treasury Securities and GSE-sponsored securities) will represent more than 30% of the fixed income weight of the Fund's portfolio, and the five most heavily weighted portfolio securities (excluding Treasury Securities and GSE-sponsored securities) will not in the aggregate account for more than 65% of the fixed income weight of the Fund's portfolio; and (iii) the Fund's portfolio of fixed income securities (excluding exempted securities) will include a minimum of 13 non-affiliated issuers.\64\ Under Normal Market Conditions, the Fund will also satisfy the following requirements, on a continuous basis measured at the time of purchase: (x) At least 75% of the Fund's investments in fixed income securities issued by emerging market issuers shall have a minimum original principal amount outstanding of $200 million or more; and (y) at least 75% of the Fund's investments in Debt shall be in senior loans with an initial deal size of $100 million or greater.\65\ --------------------------------------------------------------------------- \64\ These requirements are consistent with the ``generic'' listing requirements under Nasdaq Rule 5735(b)(1)(B)(i)-(iii), which require: (i) For fixed income securities, that components that in the aggregate account for at least 75% of the fixed income weight of the portfolio each have a minimum principal amount outstanding of $100 million or more (see Nasdaq Rule 5735(b)(1)(B)(i)); (ii) for component fixed-income securities (excluding Treasury Securities and GSE-sponsored securities) that no component represent more than 30% of the fixed income weight of the portfolio (see Nasdaq Rule 5735(b)(1)(B)(ii)); (iii) that the five most heavily weighted component fixed income securities in the portfolio (excluding Treasury Securities and GSE-sponsored securities) not in the aggregate account for more than 65% of the fixed income weight of the portfolio) (see Rule 5735(b)(1)(B)(ii)); and (iv) that an underlying portfolio (excluding exempted securities) that includes fixed income securities include a minimum of 13 non-affiliated issuers (see Nasdaq Rule 5735(b)(1)(B)(iii)). Nasdaq Rule 5735(b)(1)(B)(iv) includes the following requirement: Component securities that in aggregate account for at least 90% of the fixed income weight of the portfolio must be either: (a) From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds, debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Act; or (e) from issuers that are a government of a foreign country or a political subdivision of a foreign country. Nasdaq Rule 5735(b)(1)(B)(v) requires: non-agency, non-GSE and privately-issued mortgage-related and other asset-backed securities components of a portfolio shall not account, in the aggregate, for more than 20% of the weight of the fixed income portion of the portfolio. \65\ The Exchange notes that Nasdaq Rule 5735(b)(1)(F) provides that, to the extent that derivatives are used to gain exposure to individual fixed income securities or indexes of fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Nasdaq Rule 5735(b)(1)(B). The Exchange proposes, however, as further described below, that for the purposes of the requirements in this paragraph and any requirements under Nasdaq Rule 5735(b)(1), the Fund will use the mark-to-market value of its derivatives rather than gross notional value. --------------------------------------------------------------------------- Those exchange-listed securities and Exchange-Traded Derivatives held by the Fund that are listed and traded on a non-ISG member exchange or an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement are limited to 10% of the Fund's assets. In addition, the Fund will impose the limits described in the following section, which describes differences between the ``generic'' listing requirements of Nasdaq Rule 5735(b)(1) and those applicable to the Fund. [[Page 55425]] Application of Generic Listing Requirements The Exchange is submitting this proposed rule change because the Fund will not meet all of the ``generic'' listing requirements of Nasdaq Rule 5735(b)(1). The Fund will meet all such requirements except the requirements described below,\66\ and the Exchange proposes that the Fund will comply with the alternative limits described below. --------------------------------------------------------------------------- \66\ The Exchange notes that, while the Fund treats commercial paper having maturities of 360 days or less as cash equivalents for the purposes of its 80% Principal Investments measure, the Fund will comply with the applicable requirements of Nasdaq Rule 5735(b)(1) with respect to all commercial paper held by the Fund. Further, in accordance with Nasdaq Rule 5735(b)(1)(B), to the extent that the Fund holds securities that are convertible into fixed income securities, the fixed income securities into which any such securities are converted shall meet the criteria of Nasdaq Rule 5735(b)(1)(B) after converting. --------------------------------------------------------------------------- (i) The Fund will not comply with the requirements in Nasdaq Rule 5735(b)(1) regarding the use of aggregate gross notional value of derivatives when calculating the weight of such derivatives or the exposure that such derivatives provide to underlying reference assets, including the requirements in Rules 5735(b)(1)(D)(i),\67\ 5735(b)(1)(D)(ii),\68\ 5735(b)(1)(E) \69\ and 5735(b)(1)(F).\70\ Instead, the Exchange proposes that, except as otherwise provided herein, for the purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), and any alternative requirements proposed by the Exchange, the Fund will use the mark-to-market value of its derivatives in calculating the weight of such derivatives or the exposure that such derivatives provide to their reference assets.\71\ The Exchange believes that this alternative requirement is appropriate because the mark-to-market value is a more accurate measurement of the actual exposure incurred by the Fund in connection with a derivatives position.\72\ --------------------------------------------------------------------------- \67\ Nasdaq Rule 5735(b)(1)(D)(i) provides that, at least 90% of the weight of a portfolio's holdings invested in futures, exchange- traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options and swaps for which the Exchange may obtain information via the ISG, from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement; for the purposes of calculating this limitation, a portfolio's investment in such listed derivatives will be calculated as the aggregate gross notional value of the listed derivatives. \68\ Nasdaq Rule 5735(b)(1)(D)(ii) provides that, the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the portfolio (including gross notional exposures). \69\ Nasdaq Rule 5735(b)(1)(E) provides that, on both an initial and continuing basis, no more than 20% of the assets in the portfolio may be invested in over-the-counter derivatives, including forwards, options, and swaps on commodities, currencies and financial instruments (e.g., stocks, fixed income, interest rates, and volatility) or a basket or index of any of the foregoing; for purposes of calculating this limitation, the Fund's investment in OTC Derivatives will be calculated as the aggregate gross notional value of the OTC Derivatives. \70\ Nasdaq Rule 5735(b)(1)(F) provides that, to the extent that listed or over-the-counter derivatives are used to gain exposure to individual equities and/or fixed income securities, or to indexes of equities and/or indexes of fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Nasdaq Rules 5735(b)(1)(A) and 5735(b)(1)(B), respectively. \71\ Further, as described further below, the Exchange is proposing that the Fund will comply with alternative requirements rather than Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), and 5735(b)(1)(E). \72\ See infra note 107. --------------------------------------------------------------------------- (ii) The Fund will not comply with the requirement that securities comprising at least 90% of the fixed income weight of the Fund's portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) in respect to its investments in ABS/Private MBS.\73\ Instead, ABS/Private MBS will be limited to 20% of the weight of the fixed income portion of the Fund's portfolio.\74\ Other than ABS/Private MBS, which will not meet the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) but will be subject to the 20% limit on aggregate holdings in ABS/Private MBS, all fixed income securities held by the Fund (which, for purposes of this proposed rule change, include convertible fixed income and preferred securities (including CoCos)) will satisfy this 90% requirement. As a result, other than ABS/Private MBS, which will not satisfy the 90% requirement, and CDOs, which will be excluded from the requirement in Nasdaq Rule 5735(b)(1)(B)(v) and, instead, be limited to 10% of the total assets of the Fund, all fixed income securities held by the Fund will comply with all of the requirements of Nasdaq Rule 5735(b)(1)(B)(i)-(v). The Exchange believes that this exception is appropriate for the reasons stated below in this proposed rule change.\75\ --------------------------------------------------------------------------- \73\ Nasdaq Rule 5735(b)(1)(B)(iv) provides that, component securities that in the aggregate account for at least 90% of the fixed income weight of the portfolio must be either: (a) From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Act; or (e) from issuers that are a government of a foreign country or a political subdivision of a foreign country. \74\ ABS/Private MBS are generally issued by special purpose vehicles, so the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) regarding an issuer's market capitalization and the remaining principal amount of an issuer's securities are typically unavailable with respect to ABS/Private MBS, even though such ABS/Private MBS may own significant assets. \75\ See infra ``Statutory Basis.'' --------------------------------------------------------------------------- (iii) The Exchange has classified bank loans as Debt for purposes of this proposed rule change and not as ``fixed income securities'' as they are classified in Nasdaq Rule 5735(b)(1)(B). As a result, the Fund's investments in bank loans will comply with the limitations or restrictions applicable to the Fund's investments in Debt as set forth herein with respect to such holdings and not with the restrictions for fixed income securities set forth in Nasdaq Rule 5735(b)(1)(B)(i)- (v).\76\ The Exchange believes that this exception is appropriate for the reasons stated below in this proposed rule change.\77\ --------------------------------------------------------------------------- \76\ For a listing of such restrictions, see supra ``Investment Restrictions.'' \77\ See infra ``Statutory Basis.'' --------------------------------------------------------------------------- (iv) The Fund will not comply with the equity requirements in Nasdaq Rules 5735(b)(1)(A)(i) \78\ and [[Page 55426]] 5735(b)(1)(A)(ii) \79\ with respect to the Fund's investment in Non- Convertible Preferred Securities, Work Out Securities, and warrants.\80\ Instead, the Exchange proposes that (i) the Fund's investments in convertible fixed income and preferred securities shall be limited to 20% of the Fund's portfolio; and (ii) the weight of Non- Convertible Preferred Securities, Work Out Securities and Equity- Related Warrants in the Fund's portfolio shall together not exceed 15% of the Fund's assets. The Exchange believes that these alternative limitations are appropriate in light of the fact that the Non- Convertible Preferred Securities, Equity Related Warrants and Work Out Securities are providing debt-oriented exposures or are received in connection with the Fund's previous investment in Debt or fixed income securities, and all of the other equity securities held by the Fund will comply with the requirements of Nasdaq Rule 5735(b)(1)(A).\81\ --------------------------------------------------------------------------- \78\ Nasdaq Rule 5735(b)(1)(A)(i) provides that, the components stocks of the equity portion of a portfolio that are U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the following criteria initially and on a continuing basis: (a) Component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) that in the aggregate account for at least 90% of the equity weight of the portfolio (excluding such Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) each shall have a minimum market value of at least $75 million; (b) Component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) that in the aggregate account for at least 70% of the equity weight of the portfolio (excluding such Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) each shall have a minimum monthly trading volume of 250,000 shares, or minimum notional volume traded per month of $25,000,000, averaged over the last six months; (c) The most heavily weighted component stock (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 30% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Exchange Traded Derivative Securities and Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively) shall not exceed 65% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio does not include Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 13 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, constitute, at least in part, components underlying a series of Managed Fund Shares (as defined in Nasdaq Rule 5735), or (ii) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rule 5735(c)(6) and 5710, respectively, account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; (e) except as otherwise provided, equity securities in the portfolio shall be U.S. Component Stocks listed on a national securities exchange and shall be NMS Stocks as defined in Rule 600 of Regulation NMS under the Act; and (f) American Depositary Receipts (``ADRs'') in a portfolio may be exchange-traded or non-exchange-traded; however, no more than 10% of the equity weight of a portfolio shall consist of non- exchange-traded ADRs. \79\ Nasdaq Rule 5735(b)(1)(A)(ii) provides that, the component stocks of the equity portion of a portfolio that are Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall meet the following criteria initially and on a continuing basis: (a) Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) each shall have a minimum market value of at least $100 million; (b) Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) each shall have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; (c) The most heavily weighted Non-U.S. Component Stock (as such term is defined in Nasdaq Rule 5705) shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705) shall not exceed 60% of the equity weight of the portfolio; (d) Where the equity portion of the portfolio includes Non-U.S. Component Stocks (as such term is defined in Nasdaq Rule 5705), the equity portion of the portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if (i) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, constitute, at least in part, components underlying a series of Managed Fund Shares, or (ii) one or more series of Exchange Traded Derivative Securities or Linked Securities, as such terms are defined in Nasdaq Rules 5735(c)(6) and 5710, respectively, account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; and (e) Each Non-U.S. Component Stock (as such term is defined in Nasdaq Rule 5705) shall be listed and traded on an exchange that has last-sale reporting. \80\ As noted above, convertible fixed income securities (including CoCos) and convertible preferred securities are treated as fixed income securities for purposes of this proposed rule change. See supra section (ii). \81\ Other equities consist of ETFs (including money market ETFs) that provide exposure to fixed income securities, Debt and other Principal Investments. The weight of such ETFs in the Fund's portfolio shall not be limited. As noted above, Fixed-Income Related Warrants are treated as fixed income securities for purposes of this proposed rule change and will be subject to and comply with the generic listing requirements for fixed-income securities, rather than the generic listing requirements for equity securities. See supra note 23. --------------------------------------------------------------------------- (v) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(E) that no more than 20% of the assets in the Fund's portfolio may be invested in over-the-counter derivatives. Instead, the Exchange proposes that there shall be no limit on the Fund's investment in Interest Rate and Currency Derivatives, and the weight of all OTC Derivatives other than Interest Rate and Currency Derivatives shall not exceed 10% of the Fund's assets. For purposes of this 10% limit on OTC Derivatives, the weight of such OTC Derivatives will be calculated based on the mark-to-market value of such OTC Derivatives. The Exchange believes that this exception for Interest Rate and Currency Derivatives is appropriate for the reasons stated below in this proposed rule change.\82\ --------------------------------------------------------------------------- \82\ See infra notes 114-117 and accompanying text. --------------------------------------------------------------------------- (vi) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(i) that at least 90% of the weight of the Fund's holdings in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options and swaps for which the Exchange may obtain information via the ISG from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement. Instead, the Exchange proposes that no more than 10% of the assets of the Fund will be invested in Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. For purposes of this 10% limit, the weight of such Exchange-Traded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Exchange believes that this exception is appropriate for the reasons stated below in this proposed rule change.\83\ --------------------------------------------------------------------------- \83\ See infra ``Statutory Basis.'' --------------------------------------------------------------------------- (vii) The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(ii) that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the Fund's portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the Fund's portfolio (including gross notional exposures). Instead, the Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund's investment in futures and options (including options on futures) referencing eurodollars and sovereign debt issued by the United States (i.e., Treasury Securities) and other ``Group of Seven'' countries \84\ where such futures and options contracts are listed on an exchange that is an ISG member or an exchange with which the Exchange has a comprehensive surveillance sharing agreement (``Eurodollar and G-7 Sovereign Futures and Options''). The Fund may maintain significant positions in Eurodollar and G-7 Sovereign Futures and Options, and such investments will not be subject to the concentration limits provided in Nasdaq Rule 5735(b)(1)(D)(ii). For purposes of this requirement, the weight of the applicable Exchange-Traded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Exchange believes that this exception is appropriate for the reasons stated below in this proposed rule change.\85\ --------------------------------------------------------------------------- \84\ The ``Group of Seven'' or G-7 countries consist of the United States, Canada, France, Germany, Italy, Japan and the United Kingdom. \85\ See infra note 118 and accompanying text. --------------------------------------------------------------------------- The Exchange believes that, notwithstanding that the Fund would not meet a limited number of ``generic'' listing requirements of Nasdaq Rule 5735(b)(1) in order to be able to satisfy its investment objective, the Exchange will be able to appropriately monitor and surveil trading in the underlying investments, including those that do not meet the ``generic'' listing requirements. The Exchange also notes that the parameters around the Fund's portfolio holdings are generally consistent with the parameters approved by the Commission prior to adoption of ``generic'' listing requirements for [[Page 55427]] actively-managed ETFs.\86\ In addition, the Fund will be well diversified. For these reasons, the Exchange believes that it is appropriate and in the public interest to approve listing and trading of Shares of the Fund on the Exchange. --------------------------------------------------------------------------- \86\ See, e.g., Securities Exchange Act Release Nos. 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca- 2015-73) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund (now known as the PIMCO Active Bond Exchange-Traded Fund)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca- 2013-122) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund). The investments of the Guggenheim Total Return Bond ETF include a wide variety of U.S. and foreign fixed income instruments (including Private ABS/MBS), preferred securities, cash equivalents, other ETFs and listed and over-the-counter derivatives and are managed in a manner that appears to be generally consistent with that proposed for the Fund. Consistent with the requests made in this proposed rule change, the Commission's approval of the listing of shares of the Guggenheim Total Return Bond ETF did not include many of the conditions imposed by the generic listing standards under Nasdaq Rule 5735; the Commission's approval did not impose limits regarding the total notional size of the ETF's investment in over-the-counter derivatives, did not impose concentration limits on the ETF's investment in listed derivatives and did not require compliance with the same criteria as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B). The order approving investments in derivatives by the PIMCO Total Return Exchange Traded Fund described investments in both over-the-counter and listed derivatives, but did not impose limits regarding the total notional size of the ETF's investments in over-the-counter derivatives, did not impose concentration limits on the ETF's investments in listed derivatives, and did not impose limitations on investments in listed derivatives whose principal market is not a member of ISG or is a market with which its listing exchange does not have a comprehensive surveillance sharing agreement. --------------------------------------------------------------------------- As further described in ``Statutory Basis,'' deviations from the generic requirements are necessary for the Fund to achieve its investment objective and efficiently manage the risks associated with its investments, and any possible risks have been fully mitigated and addressed through the alternative limits proposed by the Exchange. In addition, many of the changes requested are generally consistent with previous filings approved by the Commission.\87\ --------------------------------------------------------------------------- \87\ See, e.g., Securities Exchange Act Release Nos. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (approving up to 50% of the fund's assets (calculated on the basis of aggregate gross notional value) to be invested in over-the- counter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund's investments, including forwards, over-the-counter options, and over-the-counter swaps); 78592 (August 16, 2016), 81 FR 56729 (August 22, 2016) (SR-NASDAQ- 2016-061) (approving investment of up to 20% of the fund's assets in, among other things, non-exchange-traded equity securities acquired in conjunction with the fund's event-driven strategy, including securities acquired by the fund as a result of certain corporate events including reorganizations); 76719 (December 21, 2015), 80 FR 80859 (December 28, 2015) (SR-NYSEArca-2015-73) (permitting (i) investments in over-the-counter and listed derivatives without imposing limits on the total notional size of the ETF's investments in over-the-counter derivatives and without imposing concentration limits on the ETF's investments in listed derivatives and (ii) permitting investments in a wide variety of fixed income instruments without compliance with the same criteria as the fixed income criteria in Nasdaq Rule 5735(b)(1)(B)); and 72666 (July 24, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca- 2013-122) (permitting investments in both over-the-counter and listed derivatives, but without imposing limits regarding the total notional size of the ETF's investments in over-the-counter derivatives, without imposing concentration limits on the ETF's investments in listed derivatives, and without imposing limitations on investments in listed derivatives whose principal market is not a member of ISG or is a market with which its listing exchange does not have a comprehensive surveillance sharing agreement); and 69061 (March 7, 2013), 78 FR 15990 (March 13, 2013) (SR-NYSEArca-2013-01) (approving investments in non-agency commercial MBS and non-agency residential MBS without a fixed limit but consistent with the fund's objective of investing up to 80% of its assets in investment grade fixed-income securities). --------------------------------------------------------------------------- Net Asset Value The Fund's administrator will calculate the Fund's net asset value (``NAV'') per Share as of the close of regular trading (normally 4:00 p.m., Eastern time (``E.T.'')) on each day the New York Stock Exchange is open for business. NAV per Share will be calculated for the Fund by taking the value of the Fund's total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing such amount by the total number of Shares outstanding. The result, rounded to the nearest cent, will be the NAV per Share (although creations and redemptions will be processed using a price denominated to the fifth decimal point, meaning that rounding to the nearest cent may result in different prices in certain circumstances). Impact on Arbitrage Mechanism The Manager and the Sub-Adviser believe there will be minimal, if any, impact on the arbitrage mechanism for the Fund as a result of its use of derivatives. The Manager and the Sub-Adviser understand that market makers and other market participants should be able to value derivatives held by the Fund as long as the Fund's positions are disclosed. The Manager and the Sub-Adviser believe that the price at which Shares trade will continue to be disciplined by arbitrage opportunities created by the ability for authorized participants (``APs'') to purchase or redeem creation Shares at their NAV, which should ensure that Shares will not trade at a material discount or premium in relation to their NAV. The Manager and the Sub-Adviser do not believe that there will be any significant impact on the settlement or operational aspects of the Fund's arbitrage mechanism due to the use of derivatives. Because derivatives generally are not eligible for in-kind transfer, they will typically be substituted with a ``cash in lieu'' amount when the Fund processes purchases or redemptions of creation units in-kind. Creation and Redemption of Shares The Fund will issue Shares of the Fund at NAV only to APs and only in aggregations of at least 50,000 shares (each aggregation is called a ``Creation Unit'') or multiples thereof, on a continuous basis through the Distributor, without a sales load, at the NAV next determined after receipt, on any Business Day, of an order in proper form. A ``Business Day'' is defined as any day that the Trust is open for business, including as required by Section 22(e) of the 1940 Act. Although the Fund reserves the right to issue Creation Units on a partial or fully ``in kind'' basis, the Fund expects that it will primarily issue Creation Units solely for cash. As a result, APs seeking to purchase Creation Units will generally be required to transfer to the Fund cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable transaction fee. To the extent that the Fund elects to issue Creation Units on an ``in-kind'' basis, the applicable AP will be required to deposit with the Fund a designated portfolio of securities and/or instruments (the ``Deposit Securities'') that will conform pro rata to the holdings of the Fund (except in the circumstances described in the Fund's Statement of Additional Information (the ``SAI'')) and/or an amount of cash. If there is a difference between the NAV attributable to a Creation Unit and the aggregate market value of the Deposit Securities or Redemption Securities (defined below) exchanged for the Creation Unit, the party conveying the instruments with the lower value will pay to the other an amount in cash equal to that difference (the ``Cash Component''). Together, the Deposit Securities and the Cash Component will constitute the ``Fund Deposit,'' which will represent the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Fund also expects to effect redemptions of Creation Units primarily on a cash basis, although it reserves the right to effect redemption on a partial or wholly ``in-kind'' basis. In connection with a cash redemption, the AP will be [[Page 55428]] required to transfer to the Fund, Creation Units and cash equal to the transaction fee. To the extent that the Fund elects to utilize an ``in- kind'' redemption, it will deliver to the redeeming AP, in exchange for a Creation Unit, securities and/or instruments that will conform pro rata to the holdings of the Fund (``Redemption Securities'') plus the Cash Component. To be eligible to place orders with respect to creations and redemptions of Creation Units, an entity must have executed an agreement with the Distributor, subject to acceptance by the transfer agent, with respect to creations and redemptions of Creation Units. Each such entity (an AP) must be (i) a broker-dealer or other participant in the clearing process through the continuous net settlement system of the National Securities Clearing Corporation (``NSCC'') or (ii) a Depository Trust Company participant. When the Fund permits Creation Units to be issued principally or partially in-kind, the Fund will cause to be published, through the NSCC, on each Business Day, at or before 9:00 a.m. E.T., the identity and the required principal amount or number of each Deposit Security and the amount of the Cash Component (if any) to be included in the current Fund Deposit (based on information at the end of the previous Business Day). All orders to create Creation Units must be received by the Distributor within a one-hour window from 9:00 a.m. E.T. to 10:00 a.m. E.T. on a given Business Day in order to receive the NAV determined on the Business Day on which the order was placed. Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form on a Business Day and only through an AP. The Fund will not redeem Shares in amounts less than a Creation Unit unless the Fund is being liquidated. When the Fund permits Creation Units to be redeemed principally or partially in-kind, the Fund will cause to be published, through the NSCC, at or before 9:00 a.m. E.T. on each Business Day, the identity of the Redemption Securities and/or an amount of cash that will be applicable to redemption requests received in proper form on that day. The Redemption Securities will be identical to the Deposit Securities. In order to redeem Creation Units of the Fund, an AP must submit an order to redeem for one or more Creation Units. All such orders must be received by the Distributor within a one-hour window from 9:00 a.m. E.T. to 10:00 a.m. E.T. on a given Business Day in order to receive the NAV determined on the Business Day on which the order was placed. Availability of Information The Fund's website (www.leggmason.com), which will be publicly available prior to the public offering of Shares, will include a form of the prospectus for the Fund that may be downloaded. The website will include the Shares' ticker, CUSIP and exchange information, along with additional quantitative information updated on a daily basis, including, for the Fund: (1) The prior Business Day's NAV per share and the market closing price or mid-point of the bid/ask spread at the time of calculation of such NAV per share (the ``Bid/Ask Price''),\88\ and a calculation of the premium or discount of the market closing price or Bid/Ask Price against such NAV per share; and (2) a table showing the number of days of such premium or discount for the most recently completed calendar year, and the most recently completed calendar quarters since that year (or the life of Fund, if shorter). --------------------------------------------------------------------------- \88\ The Bid/Ask Price of the Fund will be determined using the midpoint of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fund's NAV. The records relating to Bid/Ask Prices will be retained by the Fund and its service providers. --------------------------------------------------------------------------- On each Business Day, before commencement of trading in Shares in the Regular Market Session \89\ on the Exchange, the Fund will disclose on its website the identities and quantities of the portfolio of securities and other assets (the ``Disclosed Portfolio'' as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form the basis for the Fund's calculation of NAV at the end of the Business Day.\90\ The Fund's disclosure of derivative positions in the Disclosed Portfolio will include sufficient information for market participants to use to value these positions intraday. On a daily basis, the Fund will disclose on the Fund's website the following information regarding each portfolio holding, as applicable to the type of holding: Ticker symbol, CUSIP number or other identifier, if any; a description of the holding (including the type of holding), the identity of the security or other asset or instrument underlying the holding, if any; for options, the option strike price; quantity held (as measured by, for example, par value, notional value or number of shares, contracts or units); maturity date, if any; coupon rate, if any; effective date, if any; market value of the holding; and percentage weighting of the holding in the Fund's portfolio.\91\ The website information will be publicly available at no charge. --------------------------------------------------------------------------- \89\ See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 a.m., E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 4:15 p.m., E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 p.m. to 8 p.m., E.T.). \90\ Under accounting procedures to be followed by the Fund, trades made on the prior Business Day (``T'') will be booked and reflected in NAV on the current Business Day (``T+1''). Accordingly, the Fund will be able to disclose at the beginning of the Business Day the portfolio that will form the basis for the NAV calculation at the end of the Business Day. \91\ See Nasdaq Rule 5735(c)(2). --------------------------------------------------------------------------- In addition, for the Fund, an estimated value, defined in Rule 5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an estimated intraday value of the Fund's Disclosed Portfolio, will be disseminated. Moreover, the Intraday Indicative Value, available on the Nasdaq Information LLC proprietary index data service,\92\ will be based upon the current value for the components of the Disclosed Portfolio and will be updated and widely disseminated by one or more major market data vendor and broadly displayed at least every 15 seconds during the Regular Market Session. The Intraday Indicative Value will be based on quotes and closing prices provided by a dealer who makes a market in those instruments. Premiums and discounts between the Intraday Indicative Value and the market price may occur. This should not be viewed as a ``real time'' update of the NAV per Share of the Fund, which is calculated only once a day. --------------------------------------------------------------------------- \92\ Currently, the Nasdaq Global Index Data Service (``GIDS'') is the Nasdaq global index data feed service, offering real-time updates, daily summary messages, and access to widely followed indexes and Intraday Indicative Values for ETFs. GIDS provides investment professionals with the daily information needed to track or trade Nasdaq indexes, listed ETFs, or third-party partner indexes and ETFs. --------------------------------------------------------------------------- The dissemination of the Intraday Indicative Value, together with the Disclosed Portfolio, will allow investors to determine the value of the underlying portfolio of the Fund on a daily basis and will provide a close estimate of that value throughout the Business Day. Information regarding the previous day's closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Information regarding market price and trading volume of the Shares will be continually available on a real- time basis throughout the Business Day on brokers' computer screens and other electronic services. Quotation and last sale information for the Shares will be available via Nasdaq [[Page 55429]] proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the Consolidated Tape Association (``CTA'') plans for the Shares and for the following U.S. securities, to the extent that they are exchange-listed securities: Work Out Securities, Non-Convertible Preferred Securities, warrants, convertible fixed income and preferred securities and ETFs. Price information for U.S. exchange-listed options will be available via the Options Price Reporting Authority and for other U.S. Exchange-Traded Derivatives will be available from the applicable listing exchange and from major market data vendors. Price information for TRACE-Eligible Securities \93\ sold in transactions under Rule 144A under the Securities Act will generally be available through FINRA's Trade Reporting and Compliance Engine (``TRACE'') and information regarding transactions in non-TRACE- Eligible Securities or transactions not otherwise subject to TRACE reporting is generally available from major market data vendors and broker-dealers. For most of the U.S. dollar denominated corporate bonds, GSE-sponsored securities, Securitized Products and other U.S. dollar denominated fixed income securities in which the Fund invests, price information will be available from TRACE and EMMA (as defined below).\94\ For those instruments for which FINRA does not disseminate price information from TRACE, such as CDOs and fixed income securities denominated in foreign currencies, pricing information will generally be available from major market data vendors and broker-dealers. Money Market Funds are typically priced once each Business Day and their prices will be available through the applicable fund's website or from major market data vendors. --------------------------------------------------------------------------- \93\ For the definition of ``TRACE-Eligible Security,'' see FINRA Rule 6710(a). \94\ FINRA generally disseminates information on all transactions in TRACE-Eligible Securities, including those effected pursuant to Rule 144A of the Securities Act, immediately upon receipt of the transaction reports. Exceptions to this dissemination schedule are: (i) In respect to CMOs transacted pursuant to Rule 144A under the Securities Act, where the transaction value is $1 million or more and there have been five or more transactions of $1 million or more in the period reported by at least two different market participant identifiers (where FINRA will disseminate information weekly and monthly); (ii) certain transactions with affiliates, certain transfers in connection with mergers and not in furtherance of a trading strategy; and certain primary offerings; (iii) transactions in CDOs, collateralized mortgage backed securities and CMOs, if the transaction value is $1 million or more and does not qualify for periodic dissemination; and (iv) Treasury Securities. See FINRA Rule 6750. --------------------------------------------------------------------------- For other exchange-listed securities (to be comprised primarily of ETFs, warrants and structured notes and which may include exchange- listed securities of both U.S. and non-U.S. issuers), equities traded in the over-the-counter market (including Work Out Securities, and Non- Convertible Preferred Securities), Exchange-Traded Derivatives (including U.S. or foreign), OTC Derivatives, Debt and fixed income securities (including convertible fixed income and convertible preferred securities), and the small number of Securitized Products that are not reported to TRACE,\95\ intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable). Price information for such securities and instruments will also be available from feeds from major market data vendors, published or other public sources, or online information services. As noted above, TRACE will be a source of price information for most of the U.S. dollar denominated corporate bonds, GSE-sponsored securities, Securitized Products and other U.S. dollar denominated fixed income securities in which the Fund invests. Intraday and other price information related to foreign government securities, Money Market Funds, and other cash equivalents that are traded over-the-counter and other Non-TRACE Eligible Securities as well as prices for Treasury Securities, CDOs, commercial mortgage-backed securities, or CMOs purchased through transactions that do not qualify for periodic dissemination by FINRA \96\ will be available through major market data vendors, such as Bloomberg, Markit, IDC and Thomson Reuters, which can be accessed by APs and other investors. Electronic Municipal Market Access (``EMMA'') will be a source of price information for municipal bonds. Pricing for repurchase transactions and reverse repurchase agreements entered into by the Fund are not publicly reported. Prices are determined by negotiation at the time of entry with counterparty brokers, dealers and banks. --------------------------------------------------------------------------- \95\ Non-TRACE Eligible Securities, which are Securitized Products, in which the Fund may invest will primarily consist of fixed income securities issued by foreign entities and denominated in foreign currencies. For such securities that are not TRACE- eligible, pricing information will generally be available from major market data vendors and broker-dealers. \96\ See supra note 94. --------------------------------------------------------------------------- Additional information regarding the Fund and the Shares, including investment strategies, risks, creation and redemption procedures, fees, Fund holdings' disclosure policies, distributions and taxes will be included in the Registration Statement. Investors will also be able to obtain the SAI, the Fund's annual and semi-annual reports (together, ``Shareholder Reports''), and its Form N-CSR and Form N-SAR, filed twice a year, except the SAI, which is filed at least annually. The Fund's SAI and Shareholder Reports will be available free upon request from the Fund, and those documents and the Form N-CSR and Form N-SAR may be viewed on-screen or downloaded from the Commission's website at www.sec.gov. Initial and Continued Listing The Shares will be subject to Nasdaq Rule 5735, which sets forth the initial and continued listing criteria applicable to Managed Fund Shares. The Exchange represents that, for initial and continued listing, the Fund must be in compliance with Rule 10A-3 \97\ under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. --------------------------------------------------------------------------- \97\ See 17 CFR 240.10A-3. --------------------------------------------------------------------------- Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund. Nasdaq will halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121, including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the securities and/or the other assets constituting the Disclosed Portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. Trading Rules Nasdaq deems the Shares to be equity securities, thus rendering trading in the Shares subject to Nasdaq's existing rules governing the trading of equity [[Page 55430]] securities. Nasdaq will allow trading in the Shares from 4:00 a.m. until 8:00 p.m., E.T. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum price variation for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $0.01. Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both Nasdaq and also FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.\98\ The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. --------------------------------------------------------------------------- \98\ FINRA surveils trading on the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA's performance under this regulatory services agreement. --------------------------------------------------------------------------- The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. FINRA, on behalf of the Exchange, will communicate as needed regarding trading in the Shares and the exchange-listed securities and instruments held by the Fund (including exchange-listed equities and Exchange-Traded Derivatives) with other markets and other entities that are members of ISG \99\ and with which the Exchange has comprehensive surveillance sharing agreements,\100\ and FINRA and the Exchange both may obtain information regarding trading in the Shares, the exchange- listed securities, derivatives and other instruments held by the Fund from markets and other entities that are members of ISG, which include securities and futures exchanges and swap execution facilities, or with which the Exchange has in place a comprehensive surveillance sharing agreement.\101\ Moreover, FINRA, on behalf of the Exchange, will be able to access, as needed, trade information for most of the fixed income securities held by the Fund through reporting on FINRA's TRACE and, with respect to municipal securities, EMMA. --------------------------------------------------------------------------- \99\ Exchange-listed securities and Exchange-Traded Derivatives held by the Fund that are listed and traded on a non-ISG member exchange or on an exchange with which the Exchange does not have a comprehensive surveillance sharing agreement together are limited to 10% of the assets of the Fund. \100\ For a list of the current members of ISG, see http://www.isgportal.org. The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. \101\ As noted above, no more than 10% of the assets of the Fund may be invested in Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or a market with which the Exchange has a comprehensive surveillance sharing agreement. --------------------------------------------------------------------------- The majority of the Fund's investments in exchange-listed, equity securities (i.e., Non-Convertible-Preferred Securities, Equity-Related Warrants and ETFs) will constitute securities that trade in markets that are members of ISG or are parties to a comprehensive surveillance sharing agreement with the Exchange. Up to 10% of the Fund's assets may be held in exchange-listed securities and Exchange-Traded Derivatives that are listed and traded on markets that are not members of ISG or a market with which the Exchange does not have a comprehensive surveillance sharing agreement. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (1) The procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq members with respect to recommending transactions in the Shares to customers; (3) how information regarding the Intraday Indicative Value and the Disclosed Portfolio is disseminated; (4) the risks involved in trading the Shares during the Pre-Market and Post-Market Sessions when an updated Intraday Indicative Value will not be calculated or publicly disseminated; (5) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Fund. Members purchasing Shares from the Fund for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. Additionally, the Information Circular will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Circular will also disclose the trading hours of the Shares of the Fund and the applicable NAV calculation time for the Shares. The Information Circular will disclose that information about the Shares of the Fund will be publicly available on the Fund's website. Continued Listing Representations All statements and representations made in this filing regarding (a) the description of the portfolio or reference assets, (b) limitations on portfolio holdings or reference assets, (c) dissemination and availability of the reference asset or intraday indicative values, or (d) the applicability of Exchange listing rules shall constitute continued listing requirements for listing the Shares on the Exchange. In addition, the issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under the Nasdaq 5800 Series. 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act in general and Section 6(b)(5) of the Act in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and [[Page 55431]] open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule 5735. The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by both the Exchange and FINRA, on behalf of the Exchange, which are designed to deter and detect violations of Exchange rules and applicable federal securities laws and are adequate to properly monitor trading in the Shares in all trading sessions. Paragraph (g) of Rule 5735 provides that if the investment adviser to the investment company issuing Managed Fund Shares is affiliated with a broker-dealer, such investment adviser shall erect and maintain a ``fire wall'' between the investment adviser and the broker-dealer with respect to access to information concerning the composition and/or changes to such investment company's portfolio. In addition, paragraph (g) further requires that personnel who make decisions on the investment company's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material, non-public information regarding the investment company's portfolio. Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with the establishment and maintenance of a ``fire wall'' between the investment adviser and the broker-dealer reflects the applicable investment company's portfolio, not an underlying benchmark index, as is the case with index-based funds. Neither the Manager nor any of the Sub-Advisers is a broker-dealer, but each is affiliated with the Distributor, a broker-dealer, and has implemented and will maintain a fire wall with respect to its broker- dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio. In addition, personnel who make decisions on the Fund's portfolio composition will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the Fund's portfolio. In the event (a) the Manager or any of the Sub- Advisers registers as a broker-dealer or becomes newly affiliated with a broker-dealer, or (b) any new investment adviser or any new sub- adviser to the Fund is a registered broker-dealer or becomes affiliated with another broker-dealer, it will implement and maintain a fire wall with respect to its relevant personnel and/or such broker-dealer affiliate, as applicable, regarding access to information concerning the composition and/or changes to the Fund's portfolio and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. The Fund's investments, including derivatives, will be consistent with the Fund's investment objectives, applicable legal requirements \102\ and will not be used for the purpose of seeking leveraged returns or performance that is the multiple or inverse multiple of a benchmark (although derivatives may have embedded leverage). Although the Fund will be permitted to borrow as permitted under the 1940 Act, it will not be operated as a ``leveraged ETF,'' i.e., it will not be operated in a manner designed to seek leveraged returns or a multiple or inverse multiple of the performance of an underlying reference index.\103\ The Fund may engage in frequent and active trading of portfolio investments to achieve its investment objective. --------------------------------------------------------------------------- \102\ As noted above, the Fund will limit its investments in illiquid securities or other illiquid assets to an aggregate amount of 15% of its net assets (calculated at the time of investment), as required by the Commission. \103\ As noted above, the Fund will not invest in leveraged, inverse or inverse leveraged ETFs. --------------------------------------------------------------------------- The Exchange believes that, notwithstanding that the Fund would not meet all of the ``generic'' listing requirements of Nasdaq Rule 5735(b)(1), the Fund will not be subject to manipulation, the investments of the Fund will be able to be monitored and surveilled by the Exchange and risks will be mitigated by alternative limits imposed by the Exchange and by the voluntary limits imposed by the Fund (see supra ``Investment Restrictions''). As a result, it is in the public interest to approve listing and trading of Shares of the Fund on the Exchange pursuant to the requirements set forth herein. Deviations from the generic requirements are necessary for the Fund to achieve its investment objective in a cost-effective manner that maximizes investors' returns and to manage the risks associated with its investments, and the Exchange proposes that the Fund will be required to comply with alternative requirements that are customized to address the objectives of Section 6(b)(5) of the Act, as described herein. Further, the strategy and investments of the Fund are substantially similar to those of other ETFs previously approved by the Commission, which have operated safely and without disrupting the market for several years.\104\ --------------------------------------------------------------------------- \104\ See, e.g., Securities Exchange Act Release Nos. 66321 (February 3, 2012) 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011- 95) (granting approval for the listing of shares of the PIMCO Total Return Exchange Traded Fund); 72666 (July 24, 2014) (granting approval to the use of derivatives by the PIMCO Total Return Exchange Traded Fund); and 76719 (December 21, 2015) (granting approval for the listing of shares of the Guggenheim Total Return Bond ETF). --------------------------------------------------------------------------- The Fund will not comply with the requirements in Nasdaq Rule 5735(b)(1) regarding the use of aggregate gross notional value of derivatives when calculating the weight of such derivatives or the exposure that such derivatives provide to underlying reference assets, including the requirements in Rules 5735(b)(1)(D)(i), 5735(b)(1)(D)(ii), 5735(b)(1)(E) and 5735(b)(1)(F).\105\ Instead, the Exchange proposes that, except as otherwise provided herein, for the purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), and any alternative requirements proposed by the Exchange, the Fund will use the mark-to-market value of its derivatives in calculating the weight of such derivatives or the exposure that such derivatives provide to their reference assets.\106\ The Exchange believes that this alternative requirement is appropriate because the mark-to-market value is a more accurate measurement of the actual exposure incurred by the Fund in connection with a derivatives position.\107\ --------------------------------------------------------------------------- \105\ See supra notes 67-70. \106\ See supra note 71. \107\ As previously noted, the mark-to-market approach is consistent with the valuation methodology for derivatives for asset coverage purposes advocated by the Commission in proposed Rule 18f-4 under the 1940 Act. See Derivatives Rule Proposing Release. In a white paper published by staff of the Division of Economic and Risk Analysis of the SEC (``DERA'') in connection with the proposal of Rule 18f-4 under the 1940 Act, the staff of DERA noted that a derivative's notional amount does not accurately reflect the risk of the derivative. See Daniel Deli, Paul Hanouna, Christof Stahel, Yue Tang and William Yost, Use of Derivatives by Registered Investment Companies (December 2015) at 10 (``On the other hand, there are drawbacks to using notional amounts. First, because of differences in expected volatilities of the underlying assets, notional amounts of derivatives across different underlying asset generally do not represent the same unit of risk. For example, the level of risk associated with a $100 million notional of a S&P500 index futures is not equivalent to the level of risk of a $100 million notional of interest rate swaps, currency forwards or commodity futures.''). --------------------------------------------------------------------------- The Fund will not comply with the requirement that securities comprising at least 90% of the fixed income weight of the Fund's portfolio meet one of the criteria in Nasdaq Rule 5735(b)(1)(B)(iv) in respect to its investments in ABS/ [[Page 55432]] Private MBS.\108\ Instead, ABS/Private MBS will be limited to 20% of the weight of the fixed income portion of the Fund's portfolio.\109\ The Exchange proposes, in the alternative, to require the Fund to ensure that all of the investments in the fixed income portion of the Fund's portfolio, other than ABS/Private MBS, comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv).\110\ The Exchange believes that this alternative limitation is appropriate because Nasdaq Rule 5735(b)(1)(B)(iv) does not appear to be designed for structured finance vehicles such as ABS/Private MBS, and the overall weight of ABS/Private MBS held by the Fund will be limited to 20% of the fixed income portion of the Fund's portfolio, as described above. As discussed above, although ABS/Private MBS will be excluded for the purposes of compliance with Nasdaq Rule 5735(b)(1)(B)(iv), the Fund's portfolio is consistent with the statutory standard as a result of the diversification provided by the investments and the Sub-Adviser's selection process, which closely monitors investments to ensure maintenance of credit and liquidity standards and relies on the higher investment levels in these instruments during periods of U.S. economic strength. --------------------------------------------------------------------------- \108\ See supra note 73. \109\ See supra note 74. \110\ For purposes of this requirement, the weight of the Fund's exposure to any fixed income securities referenced in derivatives shall be calculated based on the mark-to-market value of such derivatives. CDOs, in which the Fund invests, would comply with the 90% requirement in Nasdaq Rule 5735(b)(1)(B)(iv) but would be limited in amount to 10% of the Fund's total assets. The Exchange believes that the 10% limit on the Fund's holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. --------------------------------------------------------------------------- As discussed above, the Exchange has determined to make an exception solely in respect of the Fund such that CDOs will not be deemed to be included in the definition of ABS for purposes of the limitation in Nasdaq Rule 5735(b)(1)(B)(v) and, as a result, will not be subject to the restriction on aggregate holdings of ABS/Private MBS contained in such Rule, which limits such holdings to no more than 20% of the weight of the fixed income portion of the Fund's portfolio. However, the Fund's holdings in CDOs will be limited such that they do not account, in the aggregate, for more than 10% of the total assets of the Fund. The Exchange believes that the 10% limit on the Fund's holdings in CDOs will help to ensure that the Fund maintains a diversified portfolio and will mitigate the risk of manipulation. The Exchange has classified bank loans as Debt for purposes of this proposed rule change and not as ``fixed income securities'' as they are classified in Nasdaq Rule 5735(b)(1)(B). As a result, the Fund's investments in bank loans will comply with the limitations or restrictions applicable to the Fund's investments in Debt as set forth herein with respect to such holdings and not with the restrictions for fixed income securities set forth in Nasdaq Rule 5735(b)(1)(B)(i)- (v).\111\ The Exchange believes that this approach is appropriate given that the ``generic'' listing requirements in Nasdaq Rule 5735(b)(1)(B) generally appear to be tailored to fixed income instruments that are ``securities'', as defined in the Act, rather than loans and other debt instruments that are not characterized as ``securities'' under applicable case law. --------------------------------------------------------------------------- \111\ For a listing of such restrictions, see supra ``Investment Restrictions.'' --------------------------------------------------------------------------- The Fund will not meet the equity requirements in Nasdaq Rule 5735(b)(1)(A) with respect to Non-Convertible Preferred Securities, Work Out Securities and warrants.\112\ Instead, the Exchange proposes that (i) the Fund's investment in convertible fixed income and preferred securities shall be limited to 20% of the Fund's portfolio; and (ii) the weight of Non-Convertible Preferred Securities, Work Out Securities and Equity-Related Warrants in the Fund's portfolio shall together not exceed 15% of the Fund's assets. The Exchange believes that these alternative limitations are appropriate in light of the fact that the Non-Convertible Preferred Securities, Equity Related Warrants and Work Out Securities are providing debt-oriented exposures or are received in connection with the Fund's previous investment in Debt or fixed income securities, and all of the other equity securities held by the Fund will comply with the requirements of Nasdaq Rule 5735(b)(1)(A).\113\ --------------------------------------------------------------------------- \112\ As noted above, convertible fixed income securities (including CoCos) and convertible preferred securities are treated as fixed income securities for purposes of this proposed rule change. See supra ``Application of Generic Listing Requirements'' section (ii) and note 80. \113\ Other equities consist of ETFs (including money market ETFs) that provide exposure to fixed income securities, Debt and other Principal Investments. The weight of such ETFs in the Fund's portfolio shall not be limited. As noted above, Fixed-Income Related Warrants are treated as fixed income securities for purposes of this proposed rule change and will be subject to and comply with the generic listing requirements for fixed-income securities, rather than the generic listing requirements for equity securities. See supra note 23. --------------------------------------------------------------------------- The Fund will not meet the requirement in Nasdaq Rule 5735(b)(1)(E) that no more than 20% of the assets in the Fund's portfolio may be invested in over-the-counter derivatives. Instead, the Exchange proposes that there shall be no limit on the Fund's investment in Interest Rate and Currency Derivatives, and the weight of all OTC Derivatives other than Interest Rate and Currency Derivatives shall not exceed 10% of the Fund's Assets. For purposes of this 10% limit on OTC Derivatives, the weight of such OTC Derivatives will be calculated based on the mark-to-market value of such OTC Derivatives. The Exchange believes that this exception for Interest Rate and Currency Derivatives, which is generally consistent with the requirement in a previous filing for the listing of an ETF approved by the Commission,\114\ is appropriate in light of the fact that Interest Rate and Currency Derivatives are among the most liquid investment instruments (including not only derivatives but also securities) in the market \115\ (and the instruments are even more liquid than most non- government or government-guaranteed securities). Based on the data compiled by the Sub-Adviser in respect to its liquidity policy, these derivatives are among the most liquid investment instruments traded. In addition, most Interest Rate Derivatives traded by the Fund are centrally cleared by regulated clearing firms, and Interest Rate and Currency Derivatives are subject to trade reporting,\116\ and other [[Page 55433]] robust regulation.\117\ Given the size of the trading market and the regulatory oversight of the markets, the Exchange believes that Interest Rate and Currency Derivatives are not readily subject to manipulation. The Exchange also believes that allowing the Fund to risk manage its portfolio through the use of Interest Rate and Currency Derivatives without limit is necessary to allow the Fund to achieve its investment objective and protect investors. --------------------------------------------------------------------------- \114\ See Securities Exchange Act Release No. 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (approving up to 50% of the fund's assets (calculated on the basis of aggregate gross notional value) to be invested in over-the-counter derivatives that are used to reduce currency, interest rate, or credit risk arising from the fund's investments, including forwards, over-the- counter options, and over-the-counter swaps). \115\ Trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, and 67% of this trading activity was in derivatives contracts such as currency or foreign exchange forwards, options and swaps (with the other 33% consisting of spot transactions). See Bank for International Settlements, Triennal [sic] Central Bank Survey, Foreign Exchange Turnover in April 2016, available at http://www.bis.org/publ/rpfx16fx.pdf (accessed November 2017). Trading in OTC interest rate derivatives averaged $2.7 trillion per day in April 2016. See Bank for International Settlements, Triennal [sic] Central Bank Survey, OTC Interest Rate Derivatives Turnover in April 2016, available at http://www.bis.org/publ/rpfx16ir.pdf (accessed November 2017). \116\ Transactions in Interest Rate and Currency Derivatives are required to be reported to a swap data repository, and transactions in Interest Rate Derivatives and certain Currency Derivatives (i.e., Currency Derivatives that are not excluded from the definition of a ``swap'', as described below) are also publicly reported pursuant to rules issued by the CFTC. See 17 CFR parts 43, 45 and 46. Pursuant to Section 1(a)(47)(E) of the CEA and a related determination by the Department of the Treasury, Excluded Currency Derivatives are excluded from the definition of a ``swap'' under the CEA. See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). However, as noted above, transactions in such Excluded Currency Derivatives are required to be reported to a swap data repository, but they are not subject to the public reporting requirements. \117\ Interest Rate Derivatives and Currency Derivatives other than Excluded Currency Derivatives are comprehensively regulated as swaps under the CEA and regulations issued thereunder by the CFTC and other federal financial regulators. See, e.g., 17 CFR part 23 (capital and margin requirements for swap dealers, business conduct standards for swap dealers, and swap documentation requirements); 17 CFR part 50 (clearing requirements for swaps). While Excluded Currency Derivatives are not subject to all swap regulations, they are subject to the ``business conduct standards'' adopted by the CFTC pursuant to the CEA. See Section 1(a)(47)(E) of the CEA; Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 FR 69694 (Nov. 20, 2012). --------------------------------------------------------------------------- The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(i) that at least 90% of the weight of the Fund's holdings in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options, and swaps for which the Exchange may obtain information via the ISG from other members or affiliates of the ISG, or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement. Instead, the Exchange proposes that no more than 10% of the assets of the Fund will be invested in Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is not a market with which the Exchange has a comprehensive surveillance sharing agreement. For purposes of this 10% limit, the weight of such Exchange-Traded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Exchange believes that this alternative limitation is appropriate because the overall limit on Exchange-Traded Derivatives and exchange-listed securities whose principal market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement will still be low relative to the overall size of the Fund. The Fund will not comply with the requirement in Nasdaq Rule 5735(b)(1)(D)(ii) that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the Fund's portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the Fund's portfolio (including gross notional exposures). Instead, the Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund's investment in Eurodollar and G-7 Sovereign Futures and Options. The Fund may maintain significant positions in Eurodollar and G-7 Sovereign Futures and Options, and such investments will not be subject to the concentration limits provided in Nasdaq Rule 5735(b)(1)(D)(ii). For purposes of this [sic] requirements, the weight of the applicable Exchange-Traded Derivatives will be calculated based on the mark-to-market value of such Exchange-Traded Derivatives. The Manager has indicated that obtaining exposure to these investments through futures contracts is often the most cost efficient method to achieve such exposure. The Exchange notes that Eurodollar and G-7 Sovereign Futures and Options are highly liquid investments \118\ and are not subject to the same concentration risks as Exchange-Traded Derivatives referencing other assets because of such liquidity. Further, the Exchange notes that the significantly diminished risk of Treasury Securities is reflected in their exclusion from the concentration requirements applicable to fixed income securities in Nasdaq Rule 5735(b)(1)(B)(ii). The Exchange proposes that the Fund will comply with the concentration requirements in Nasdaq Rule 5735(b)(1)(D)(ii) except with respect to the Fund's investment in Eurodollar and G-7 Sovereign Futures and Options. The Exchange believes that this alternative limitation is appropriate to provide the Fund with sufficient flexibility and because of the highly liquid and transparent nature of Eurodollar and G-7 Sovereign Futures and Options. Further, as described above, the G-7 Sovereign Futures and Options in which the Fund invests will be listed on an exchange that is an ISG [[Page 55434]] member or an exchange with which the Exchange has a comprehensive surveillance sharing agreement. --------------------------------------------------------------------------- \118\ See CME Group, Interest Rate Futures Liquidity Metrics Reach New Highs (October 6, 2017), available at http://www.cmegroup.com/education/interest-rates-liquidity-metrics-reach-new-highs.html (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on eurodollars and Treasury Securities, including that during the first three quarters of 2017, eurodollar futures and options traded through CME Group had an average daily open interest of approximately 53 million contracts and futures and options on Treasury Securities had an average daily open interest of approximately 15 million contracts); The Montreal Exchange, Statistics for Interest Rate Derivatives, Index Derivatives and Equity Derivatives (September 2017), available at https://www.m-x.ca/f_stat_en/1709_stats_en.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on Canadian sovereign debt, including that, as of September 2017, the open interest in futures and options on Canadian sovereign debt traded on The Montreal Exchange was approximately 560,000 contracts); Eurex Exchange, Benchmark Fixed Income Derivatives, available at https://www.eurexchange.com/blob/115654/4c51e4b8bc77355475b3b6f46afc0ef1/data/factsheet_eurex_benchmark_fixed_income_derivatives.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on German sovereign debt, including that, as of July 2015, the open interest in futures on German sovereign debt traded on Eurex was approximately 3,000,000 contracts and the open interest in options on German sovereign debt futures traded on Eurex was approximately 3,000,000 contracts); Eurex Exchange, Eurex Exchange Euro-BTP Futures, Italian Government Bond Futures, available at http://www.eurexchange.com/blob/115624/6a1281939d15ddbab960af40da6f11dc/data/factsheet_eurex_euro_btp_futures_on_italian_government_bonds.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on Italian sovereign debt, including that the open interest peaks in 2017 for futures on long-term and short-term Italian sovereign debt traded on Eurex was approximately 450,000 and 270,000 contracts, respectively); Eurex Exchange, Euro- OAT Derivatives, French Government Bond Futures and Options, available at http://www.eurexchange.com/blob/115652/48198ec577f7b3b0ac44d4c5a39ed0de/data/factsheet_eurex_euro_oat_futures_on_french_government_bonds.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on French sovereign debt, including that, as of July 2017, the open interest in futures on long-term French sovereign debt traded on Eurex was approximately 600,000 contracts); Intercontinental Exchange, Gilt Futures Overview, available at https://www.theice.com/publicdocs/futures/Gilt_Futures_Overview.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures on British sovereign debt, including that, as of the third quarter of 2014, the open interest in futures on long-term British sovereign debt traded on the Intercontinental Exchange was approximately 400,000 contracts); Osaka Exchange, Japanese Government Bond Futures & Options, available at http://www.jpx.co.jp/english/derivatives/products/jgb/jgb-futures/tvdivq0000003n94-att/JGB_FUT_OP_E.pdf (accessed November 2017) (providing statistics regarding liquidity and open interest in futures and options on Japanese sovereign debt, including that as of July 2016, the open interest in futures on 10- year Japanese sovereign debt traded on the Osaka Exchange was approximately 80,000 contracts). The Exchange also notes that the Commission has previously granted exemptions under the Act to facilitate the trading of futures on sovereign debt issued by each of the Group of Seven countries (among other countries) and that such exemptions were based in part on the Commission's assessment of the sufficiency of the credit ratings and liquidity of such sovereign debt. See 17 CFR 240.3a12-8; Securities Exchange Act Release No. 41453 (May 26, 1999), 64 FR 29550 (June 2, 1999). --------------------------------------------------------------------------- The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily every Business Day that the Fund is traded, and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time. In addition, a large amount of information will be publicly available regarding the Fund and the Shares, thereby promoting market transparency. Moreover, the Intraday Indicative Value, available on the Nasdaq Information LLC proprietary index data service, will be widely disseminated by one or more major market data vendors at least every 15 seconds during the Exchange's Regular Market Session. On each Business Day, before commencement of trading in the Shares in the Regular Market Session on the Exchange, the Fund will disclose on its website the Disclosed Portfolio of the Fund that will form the basis for the Fund's calculation of NAV at the end of the Business Day. Information regarding the previous day's closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the Business Day on brokers' computer screens and other electronic services. Quotation and last sale information for the Shares will be available via Nasdaq proprietary quote and trade services, as well as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares and for the following U.S. securities, to the extent they are exchange-listed: Work Out Securities, Non-Convertible Preferred Securities, warrants, convertible fixed income and convertible preferred securities and ETFs. Price information for U.S. exchange-listed options will be available via the Options Price Reporting Authority and for other U.S. Exchange-Traded Derivatives will be available from the applicable listing exchange and from major market data vendors. Price information for restricted securities will be available from major market data vendors, broker-dealers and trading platforms, as well as for most fixed income securities sold in transactions under Rule 144A under the Securities Act, from TRACE and EMMA. Money Market Funds are typically priced once each Business Day and their prices will be available through the applicable fund's website or from major market data vendors. For other exchange-listed securities (to be comprised primarily of ETFs, warrants and structured notes and which may include exchange- listed securities of both U.S. and non-U.S. issuers), equities traded in the over-the-counter market (including Work Out Securities and Non- Convertible Preferred Securities), Exchange-Traded Derivatives (including U.S. or foreign), OTC Derivatives, Debt and fixed income securities (including convertible fixed income and convertible preferred securities), and the small number of Securitized Products that are not reported to TRACE, intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable). TRACE will be a source of price information for most of the U.S. dollar denominated corporate bonds,\119\ GSE-sponsored securities, Securitized Products and other U.S. dollar denominated fixed income securities in which the Fund invests.\120\ Intraday and other price information related to foreign government securities, Money Market Funds, and other cash equivalents that are traded over-the- counter and other Non-TRACE Eligible Securities as well as prices for Treasury Securities, CDOs, commercial mortgage-backed securities, or CMOs purchased through transactions that do not qualify for periodic dissemination by FINRA \121\ will be available through major market data vendors, such as Bloomberg, Markit, IDC and Thomson Reuters, which can be accessed by APs and other investors. EMMA will be a source of price information for municipal bonds. Pricing for repurchase transactions and reverse repurchase agreements entered into by the Fund are not publicly reported. Prices are determined by negotiation at the time of entry with counterparty brokers, dealers and banks. --------------------------------------------------------------------------- \119\ Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules. Generally, such debt securities will have at issuance a maturity that exceeds one calendar year. For fixed income securities that are not reported to TRACE, (i) intraday price quotations will generally be available from broker-dealers and trading platforms (as applicable) and (ii) price information will be available from feeds from market data vendors, published or other public sources, or online information services, as described above. \120\ Broker-dealers that are FINRA member firms have an obligation to report transactions in TRACE-Eligible Securities to TRACE. For the definition of ``TRACE-Eligible Security,'' see FINRA Rule 6710(a). \121\ See supra note 94. --------------------------------------------------------------------------- The Fund's website will include a form of the prospectus for the Fund and additional data relating to NAV and other applicable quantitative information. Moreover, prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Trading in the Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120 and 4121 or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable, and trading in the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. In addition, as noted above, investors will have ready access to information regarding the Fund's holdings, the Intraday Indicative Value, the Disclosed Portfolio, and quotation and last sale information for the Shares. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of actively-managed ETF that will enhance competition among market participants, to the benefit of investors and the marketplace. For the above reasons, the Exchange believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that the proposed rule change will facilitate the listing and trading of an additional type of actively-managed ETF that will enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. [[Page 55435]] III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-NASDAQ-2018-080 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-NASDAQ-2018-080. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASDAQ-2018-080, and should be submitted on or before November 26, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\122\ --------------------------------------------------------------------------- \122\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-24068 Filed 11-2-18; 8:45 am] BILLING CODE 8011-01-P
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National will also provide FINRA with be implemented without undue delay. rule change as described in Items I and
a current list of Dual Members and shall The Commission notes that the prior II below, which Items have been
update the list no less frequently than version of this plan immediately prior to prepared by the Exchange. The
once each quarter.15 The Commission this proposed amendment was Commission is publishing this notice to
believes that these provisions are published for comment and the solicit comments on the proposed rule
designed to provide for continuing Commission did not receive any change from interested persons.
communication between the Parties to comments thereon.17 Furthermore, the I. Self-Regulatory Organization’s
ensure the continued accuracy of the Commission does not believe that the Statement of the Terms of Substance of
scope of the proposed allocation of amendment to the plan raises any new the Proposed Rule Change
regulatory responsibility. regulatory issues that the Commission
The Commission is hereby declaring has not previously considered. The Exchange proposes to list and
effective an Amended Plan that, among trade the shares of the
other things, allocates regulatory VI. Conclusion BrandywineGLOBAL—Global Total
responsibility to FINRA for the This order gives effect to the Return ETF (the ‘‘Fund’’), a series of
oversight and enforcement of all NYSE Amended Plan filed with the Legg Mason ETF Investment Trust (the
National rules that are substantially Commission in File No. 4–694. The ‘‘Trust’’) under Nasdaq Rule 5735
similar to the rules of FINRA for Dual Parties shall notify all members affected (‘‘Managed Fund Shares’’).3 The shares
Members of NYSE National and FINRA. by the Amended Plan of their rights and of the Fund are collectively referred to
Therefore, modifications to the obligations under the Amended Plan. herein as the ‘‘Shares.’’
Certification need not be filed with the It is therefore ordered, pursuant to The text of the proposed rule change
Commission as an amendment to the Section 17(d) of the Act, that the is available on the Exchange’s website at
Amended Plan, provided that the Amended Plan in File No. 4–694, http://nasdaq.cchwallstreet.com, at the
Parties are only adding to, deleting between the FINRA and NYSE National, principal office of the Exchange, and at
from, or confirming changes to NYSE filed pursuant to Rule 17d-2 under the the Commission’s Public Reference
National rules in the Certification in Act, hereby is approved and declared Room.
conformance with the definition of effective. II. Self-Regulatory Organization’s
Common Rules provided in the It is further ordered that NYSE Statement of the Purpose of, and
Amended Plan. However, should the National is relieved of those Statutory Basis for, the Proposed Rule
Parties decide to add an NYSE National responsibilities allocated to FINRA Change
rule to the Certification that is not under the Amended Plan in File No. 4–
substantially similar to a FINRA rule; 694. In its filing with the Commission, the
delete an NYSE National rule from the Exchange included statements
For the Commission, by the Division of concerning the purpose of and basis for
Certification that is substantially similar Trading and Markets, pursuant to delegated
to a FINRA rule; or leave on the authority.18 3 The Commission approved Nasdaq Rule 5735 in
Certification an NYSE National rule that Eduardo A. Aleman, Securities Exchange Act Release No. 57962 (June
is no longer substantially similar to a Assistant Secretary. 13, 2008), 73 FR 35175 (June 20, 2008) (SR–
FINRA rule, then such a change would [FR Doc. 2018–24070 Filed 11–2–18; 8:45 am]
NASDAQ–2008–039). There are already multiple
constitute an amendment to the actively-managed funds listed on the Exchange.
BILLING CODE 8011–01–P See, e.g., Securities Exchange Act Release Nos.
Amended Plan, which must be filed 80946 (June 15, 2017), 82 FR 28126 (June 20, 2017)
with the Commission pursuant to Rule (SR–NASDAQ–2017–039) (order approving listing
17d–2 under the Act.16 SECURITIES AND EXCHANGE
and trading of Guggenheim Limited Duration ETF);
Under paragraph (c) of Rule 17d–2, 78592 (August 16, 2016), 81 FR 56729 (August 22,
COMMISSION 2016) (SR–NASDAQ–2016–061) (order approving
the Commission may, after appropriate listing and trading of First Trust Equity Market
notice and comment, declare a plan, or [Release No. 34–84505; File No. SR– Neutral ETF); 78443 (July 29, 2016), 81 FR 51517
any part of a plan, effective. In this NASDAQ–2018–080] (August 4, 2016) (SR–NASDAQ–2016–064) (order
instance, the Commission believes that approving listing and trading of First Trust Strategic
appropriate notice and comment can Self-Regulatory Organizations; The Mortgage REIT ETF); 71913 (April 9, 2014), 79 FR
Nasdaq Stock Market LLC; Notice of 21333 (April 15, 2014) (SR–NASDAQ–2014–019)
take place after the proposed (order approving listing and trading of First Trust
amendment is effective. The primary Filing of a Proposed Rule Change To Managed Municipal ETF); 69464 (April 26, 2013),
purposes of the amendment are to (1) List and Trade Shares of the 78 FR 25774 (May 2, 2013) (SR–NASDAQ–2013–
reflect the name change of National BrandywineGLOBAL—Global Total 036) (order approving listing and trading of First
Return ETF, a Series of Legg Mason Trust Senior Loan Fund); 66489 (February 29,
Stock Exchange, Inc. to NYSE National, 2012), 77 FR 13379 (March 6, 2012) (SR–NASDAQ–
Inc., (2) update the SRO rules that are ETF Investment Trust Under Nasdaq 2012–004) (order approving listing and trading of
covered by the agreement, and (3) to the Rule 5735 WisdomTree Emerging Markets Corporate Bond
Fund); see also filings for similar ETFs listed on
extent that it becomes a member of October 30, 2018. other national securities exchanges: Securities
NYSE National, allocate regulatory Pursuant to Section 19(b)(1) of the Exchange Act Release Nos. 80657 (May 11, 2017)
responsibility to FINRA for NYSE 82 FR 22702 (May 17, 2017) (SR–NYSE Arca–2017–
Securities Exchange Act of 1934 09) (order approving listing and trading of Janus
National’s affiliated routing broker- (‘‘Act’’),1 and Rule 19b–4 thereunder,2 Short Duration Income ETF); 79683 (December 23,
dealer, Archipelago Securities. By notice is hereby given that on October 2016), 81 FR 96539 (December 30, 2016) (SR–
declaring it effective today, the 17, 2018, The Nasdaq Stock Market LLC NYSEArca–2016–82) (order approving listing and
Amended Plan can become effective and trading of JPMorgan Diversified Event Driven ETF);
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the 77904 (May 25, 2016), 81 FR 35101 (SR–NYSE
Securities and Exchange Commission Arca–2016–17) (order approving listing and trading
15 See paragraph 3 of the Amended Plan. (‘‘SEC’’ or ‘‘Commission’’) the proposed of JPMorgan Diversified Alternative ETF); 68870
16 The Commission also notes that the addition to (February 8 2013), 78 FR 11245 (February 15, 2013)
or deletion from the Certification of any federal 17 See supra note 11 (citing to Securities
(SR–NYSEArca–2012–139) (order approving listing
securities laws, rules, and regulations for which and trading of First Trust Preferred Securities and
FINRA would bear responsibility under the Exchange Act Release No. 77089). Income ETF). The Exchange believes the proposed
18 17 CFR 200.30–3(a)(34).
Amended Plan for examining, and enforcing rule change raises no significant issues not
1 15 U.S.C. 78s(b)(1).
compliance by, Dual Members, also would previously addressed in those prior Commission
constitute an amendment to the Amended Plan. 2 17 CFR 240.19b–4. orders.
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backed securities (‘‘ABS’’) 30 and (C) Securitized Products, which represent financings for highly-leveraged
U.S. or foreign collateralized debt the right to receive either payments of borrowers.
obligations (‘‘CDOs’’).31 principal or payments of interest on real With respect to fixed income
The securities in which the Fund estate receivables. Interests in CDOs and securities, the Fund may invest in
invests may pay fixed, variable or ABS will not be stripped so as to restricted instruments which are subject
floating rates of interest or, in the case provide the right to receive only to resale restrictions that limit
of instruments such as zero coupon payments of principal or payments of purchasers to qualified institutional
bonds, do not pay current interest but interest. buyers, as defined in Rule 144A under
are issued at a discount from their face Investments by the Fund in debt
the Securities Act of 1933, as amended
values. Securitized Products in which instruments that are not characterized as
the Fund will invest make periodic ‘‘securities’’ under applicable case law (the ‘‘Securities Act’’) or to non-U.S.
payments of interest and/or principal on (‘‘Debt’’),32 are comprised primarily of persons, within the meaning of
underlying pools of mortgages, in the the following: (i) U.S. or foreign loans Regulation S under the Securities Act.
case of MBS, loans, leases and made by banks and participations in The Fund will use derivatives to (i)
receivables other than real estate, in the such loans, loans made by commercial provide exposure to U.S. or foreign
case of ABS, and government and non-bank lenders and participations in fixed income securities, Debt and other
corporate bonds or non-real estate such loans, loans made by governmental Principal Investments, (ii) risk manage
related loans, in the case of CDOs. The entities and participations in such loans the Fund’s holdings,34 and/or (iii)
Fund may also invest in stripped and/or other extensions of credit, such enhance returns, such as through
as guarantees made by any of the covered call strategies.35 The Fund will
collateralized by whole loans or pass-through foregoing lenders; and (ii) U.S. or not use derivatives for the purpose of
securities issued by private issuers (i.e., issuers foreign loans on real estate secured by seeking leveraged returns or
other than U.S. government agencies or GSEs)
(referred to as ‘‘Private MBS’’). Payments of mortgages and participations in such performance that is the multiple or
principal and of interest on the mortgage-related loans. Debt may be partially or fully inverse multiple of a benchmark.
instruments collateralizing the MBS, and any secured by collateral supporting the Derivatives that the Fund may enter into
reinvestment income thereon, provide the funds to
pay debt service on the CMOs. In a CMO, a series payment of interest and principal, or include: (i) Over-the-counter deliverable
of bonds or certificates is issued in multiple classes. unsecured and/or subordinated to other and non-deliverable foreign exchange
Each class of CMOs, often referred to as a ‘‘tranche’’ instruments.33 Debt may relate to forward contracts; (ii) exchange-listed
of securities, is issued at a specified fixed or
floating coupon rate and has a stated maturity or
futures contracts on securities
32 Although bank loans are included as ‘‘fixed
final distribution date. (including Treasury Securities 36 and
income securities’’ for purposes of the ‘‘generic’’
30 As defined by FINRA Rule 6710(cc), ABS are
listing requirements of Nasdaq Rule 5735(b)(1), the
foreign government securities), Debt,
Securitized Products in connection with which the types of bank loans in which the Fund invests are commodities, securities-, commodities-,
securities issued, which may be issued by either a
U.S. or a foreign entity, are collateralized by any
not treated as ‘‘securities’’ under applicable case or combined-asset-class-related indices,
law and, as a result, the Fund intends to treat bank interest rates, financial rates and
type of financial asset, such as a consumer or
loans as Debt and not as fixed income securities.
student loan, a lease, or a secured or unsecured
See, e.g., Banco Espanol de Credito et al. v. Security currencies; (iii) exchange-listed or over-
receivable. ABS exclude (per the FINRA definition, the-counter options or swaptions (i.e.,
Pacific National Bank, 973 F.2d 51(2d Cir. 1992),
which is applicable for purposes of reporting and
as used herein): (i) A Securitized Product that is
cert. denied, 509 U.S. 903 (1993). Accordingly, the options to enter into a swap) on
Fund will not seek to comply with the parameters securities, Debt, commodities,
backed by residential or commercial mortgage
on investments in fixed income securities under
loans, mortgage-backed securities, or other financial
Nasdaq Rule 5735(b)(1)(B) with respect to the securities-, commodities-, or combined-
assets derivative of mortgage-backed securities; (ii) asset-class-related indices, interest rates,
Fund’s holdings in bank loans, but instead will
a small business administration backed ABS traded
‘‘To Be Announced’’ or in a specified pool comply with the alternative limitations applicable financial rates, currencies and futures
transaction as defined in FINRA Rule 6710(x) and to Debt with respect to such holdings, as set forth contracts; (iv) exchange-listed or over-
(iii) CDOs (as defined in note 31 infra). Consistent herein. See infra ‘‘Investment Restrictions.’’
33 As discussed infra in ‘‘Investment the-counter swaps (including total
with the requirements of Nasdaq Rule
5735(b)(1)(B)(v), the Fund will limit investments in Restrictions,’’ at least 75% of the Fund’s return swaps) on securities, Debt,
ABS and Private MBS (together, ‘‘ABS/Private investments fixed income securities (including commodities, securities-, commodities-,
MBS’’) to 20% of the weight of the fixed income convertible fixed income and preferred securities) or combined-asset-class-related indices,
portion of the Fund’s portfolio. and Debt (together constituting the fixed income
weight of the portfolio) shall have a minimum
interest rates, financial rates, and
31 For purposes of this proposed rule change,
CDOs are excluded from the definition of ABS and, principal amount outstanding of $100 million or currencies; and (v) credit default swaps
for purposes of this proposed rule change only, are more. In addition, consistent with the Fund’s on single names, baskets and indices
comprised exclusively of collateralized loan Registration Statement, the following diversification (both as protection seller and as
obligations (‘‘CLOs’’) and collateralized bond requirements will apply: During Normal Market
Conditions, the Fund: (i) Will not invest more than
protection buyer). As a result of the
obligations (‘‘CBOs’’). CLOs are securities issued by
a trust or other special purpose entity that are 25% of its total assets in securities or Debt in any Fund’s use of derivatives and to serve as
collateralized by a pool of loans by U.S. banks and one foreign country, other than the United States, collateral, the Fund may also hold
participations in loans by U.S. banks that are Canada, the United Kingdom, Japan, Australia and significant amounts of Treasury
unsecured or secured by collateral other than real member countries of the European Union, or
denominated in any one currency, other than the
Securities, cash and cash equivalents
estate. CBOs are securities issued by a trust or other
special purpose entity that are backed by a U.S. dollar, the Canadian dollar, the British pound, and, in the case of derivatives that are
diversified pool of fixed income securities issued by the yen, the Australian dollar, or the euro; and (ii) payable in a foreign currency, the
U.S. or foreign governmental entities or fixed will have ‘‘economic exposure’’ to at least three
income securities issued by U.S. or corporate countries. ‘‘Economic exposure’’ means that an
issuer of a security or a borrower in respect to Debt: than 25% of the total assets of the Fund will be
issuers. CDOs are distinguishable from ABS because
(A) Will have a class of securities whose principal invested in Debt or fixed income or equity
they are collateralized by bank loans or by corporate
securities market is in the country; (B) is organized securities of issuers in any one industry.
or government fixed income securities and not by 34 The risk management uses of derivatives will
consumer, and other loans made by non-bank under the laws of, or has a principal office in, the
lenders, including student loans. For purposes of country; (iii) [sic] derives 50% or more of its total include managing (i) investment-related risks, (ii)
this proposed rule change, CDOs will not be subject revenue or profit from goods produced, sales made risks due to fluctuations in securities prices,
to the 20% limit set forth in Nasdaq Rule or services provided in the country; or (D) interest rates, or currency exchanges rates, (iii) risks
5735(b)(1)(B)(v). However, the Exchange believes maintains 50% of more of its assets in that country. due to the credit-worthiness of an issuer, and (iv)
that the 10% limit on the Fund’s holdings in CDOs In addition, no more than 30% of the Debt and the effective duration of the Fund’s portfolio.
35 See also infra ‘‘The Fund’s Use of Derivatives.’’
will help to ensure that the Fund maintains a fixed income securities held by the Fund, will be
diversified portfolio and will mitigate the risk of below investment grade (as defined infra in 36 The term ‘‘Treasury Securities’’ has the
manipulation. See infra ‘‘Investment Restrictions.’’ ‘‘Investment Restrictions’’); and (iii) [sic] no more meaning set forth in Nasdaq Rule 5735(b)(1)(B).
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foreign currency in which the and Exchange-Traded Derivatives for ‘‘Interest Rate and Currency
derivatives are payable. which the underlying reference asset is Derivatives’’) entered into with broker-
The Fund may, without limitation, not a Principal Investment.42 dealers, banks and other financial
enter into repurchase arrangements and intermediaries. Investments in Interest
borrowing and reverse repurchase The Fund’s Use of Derivatives
Rate and Currency Derivatives (whether
arrangements, purchase and sale The types of derivatives in which the the instruments are Exchange-Traded
contracts, buybacks 37 and dollar rolls 38 Fund may invest and the reference Derivatives or OTC Derivatives) will not
and spot currency transactions. The assets for such derivatives are described be subject to a limit. The Exchange
Fund may also, subject to required in greater detail in ‘‘Principal believes that this exception, which is
margin and without limitation, purchase Investments’’ and ‘‘Other Investments’’ generally consistent with the
securities and other instruments under above. Exchange-Traded Derivatives requirement in a previous filing for the
when-issued, delayed delivery, to be will primarily be traded on exchanges listing of an ETF approved by the
announced or forward commitment that are ISG members or exchanges with Commission,45 is appropriate in light of
transactions, where the securities or which the Exchange has a the fact that Interest Rate and Currency
instruments will not be delivered or comprehensive surveillance sharing Derivatives are among the most liquid
paid for immediately.39 To the extent agreement. The Fund may, however, investment instruments (including not
required under applicable federal invest up to 10% of the assets of the only derivatives but also securities) in
securities laws (including the 1940 Act), Fund in Exchange-Traded Derivatives the market 46 (and are even more liquid
rules, and interpretations thereof, the and exchange-listed, securities whose than most non-government or
Fund will ‘‘set aside’’ liquid assets or principal market is not a member of ISG government-guaranteed securities).
engage in other measures to ‘‘cover’’ or a market with which the Exchange Based on the data compiled by the Sub-
open positions held in connection with has a comprehensive surveillance Adviser in respect to its liquidity policy,
the foregoing types of transactions, as sharing agreement. For purposes of this these derivatives are among the most
well as derivative transactions. 10% limit, the weight of such Exchange- liquid investments traded. In addition,
Traded Derivatives will be calculated most Interest Rate Derivatives traded by
Other Investments based on the mark-to-market value of the Fund are centrally cleared by
Under Normal Market Conditions, the such Exchange-Traded Derivatives. regulated clearing firms, and Interest
Fund will seek its investment objective The Fund will limit the weight of its Rate and Currency Derivatives are
by investing at least 80% of its assets in investments in OTC Derivatives to 10%
a portfolio of the Principal Investments. of the assets of the Fund, with the between the contracting parties to exchange a
The Fund may invest its remaining exception of Interest Rate Derivatives 43 specified amount of currency at a specified future
and Currency Derivatives 44 (together, time at a specified rate, non-deliverable forwards,
assets exclusively in: (i) U.S. or foreign which are agreements to pay the difference between
exchange-listed 40 or over-the counter the exchange rates specified for two currencies at
convertible fixed income and preferred instruments that are convertible into equity if a pre- a future date, swaps and options on currencies, and
specified trigger event occurs. The type of event similar currency or foreign exchange derivatives. As
securities; 41 and (ii) OTC Derivatives that causes a CoCo to be convertible occurs when reflected in statistics compiled by the Bank for
capital of the issuer falls below a designated International Settlements, as of June 30, 2017 there
37 A buyback refers to a TBA transaction that threshold. The Fund will limit investments in were approximately $77 trillion (notional amount)
incorporates a special feature for addressing a convertible securities to 20% of the Fund’s assets of Currency Derivatives outstanding in the over-the-
failure by the seller to deliver the mortgages under Normal Market Conditions. counter markets alone. As reflected by the statistics,
promised under the contract. A buyback feature 42 Investments in OTC Derivatives and Exchange-
the market is wide, deep and liquid. See https://
typically provides that, in the event a TBA seller Traded Derivatives will also be subject to the www.bis.org/statistics/d6.pdf (accessed November
fails to deliver the MBS that is the subject of the limitations described in the ‘‘The Fund’s Use of 2017). Currency Derivatives may trade on trading
transaction to the TBA buyer on the scheduled Derivatives’’ section below. As is the case with platforms that are not ISG members or that are not
settlement date, the TBA buyer will be entitled to respect to the Fund’s investments in OTC subject to a comprehensive surveillance sharing
close-out its payment obligations by either (i) Derivatives and Exchange-Traded Derivatives for agreement with the Exchange. Holdings in
selling the deliverable MBS back to the seller at a which the underlying reference asset is a Principal
Exchange-Traded Derivatives (together with
price established under the buyback or (ii) Investment, the Fund will invest in OTC
exchange-listed securities) that are listed on an
accepting assignment from the seller of its right to Derivatives and Exchange-Traded Derivatives
exchange that is not an ISG member or on a market
receive the specified MBS from the third-party whose underlying reference asset is not a Principal
with which the Exchange does not have a
entity that failed to deliver the MBS to the TBA Investment in order to (i) provide exposure to non-
Principal Investments instruments; (ii) to risk comprehensive surveillance sharing agreement are
seller. limited to 10% of the Fund’s assets.
38 A dollar roll transaction is a simultaneous sale manage the Fund’s holdings; and/or (iii) to enhance
45 See Securities Exchange Act Release No. 80657
returns.
and purchase of an Agency Pass-Through Mortgage- 43 ‘‘Interest Rate Derivatives’’ are comprised of (May 11, 2017), 82 FR 22702 (May 17, 2017) (SR–
Backed Security (as defined in FINRA Rule 6710(v), NYSEArca–2017–09) (approving up to 50% of the
which is the only reference security for such interest rate swaps, swaptions (i.e., options on
interest rate swaps), rate options and other similar fund’s assets (calculated on the basis of aggregate
transaction) for different settlement dates, where gross notional value) to be invested in over-the-
derivatives, and may be Exchange-Traded
the initial seller agrees to take delivery, upon counter derivatives that are used to reduce
Derivatives or OTC Derivatives. As reflected in
settlement of the re-purchase transaction, of the currency, interest rate, or credit risk arising from
statistics compiled by the Bank for International
same or substantially similar securities. See FINRA the fund’s investments, including forwards, over-
Settlements, as of June 30, 2017 there were
Rule 6710(z). the-counter options, and over-the-counter swaps).
approximately $416 trillion (notional amount) of
39 FINRA Rule 4210 is scheduled to begin 46 Trading in foreign exchange markets averaged
total interest rate contracts outstanding in the over-
requiring broker-dealers to impose margin the-counter markets alone. As reflected by the $5.1 trillion per day in April 2016, and 67% of this
requirements on investors in TBAs and certain statistics, the market is wide, deep and liquid. See trading activity was in derivatives contracts such as
other delayed delivery transactions beginning https://www.bis.org/statistics/d7.pdf (accessed currency or foreign exchange forwards, options and
March 25, 2019. November 2017). Interest Rate Derivatives may swaps (with the other 33% consisting of spot
40 No more than 10% of the Fund’s total assets
trade on trading platforms that are not ISG members transactions). See Bank for International
will be invested in exchange-listed securities or or that are not subject to a comprehensive Settlements, Triennal [sic] Central Bank Survey,
Exchange-Traded Derivatives that are listed on an surveillance sharing agreement with the Exchange. Foreign Exchange Turnover in April 2016, available
exchange that is not an ISG-member or an exchange Holdings in Exchange-Traded Derivatives (together at http://www.bis.org/publ/rpfx16fx.pdf (accessed
with which the Exchange does not have a with exchange-listed securities) that are listed on an November 2017). Trading in OTC interest rate
comprehensive surveillance sharing agreement. See exchange that is not an ISG member or on a market derivatives averaged $2.7 trillion per day in April
infra ‘‘Investment Restrictions.’’ with which the Exchange does not have a 2016. See Bank for International Settlements,
41 The Fund’s investment in U.S. or foreign fixed comprehensive surveillance sharing agreement are Triennal [sic] Central Bank Survey, OTC Interest
income or preferred securities would include limited to 10% of the Fund’s assets. Rate Derivatives Turnover in April 2016, available
contingent convertible securities, which are also 44 ‘‘Currency Derivatives’’ are comprised of at http://www.bis.org/publ/rpfx16ir.pdf (accessed
referred to as ‘‘CoCos.’’ CoCos are fixed income deliverable forwards, which are agreements November 2017).
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![55422 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices
subject to trade reporting,47 and other compliance with Section 18 of the 1940 and/or (iii) enhance returns, such as
robust regulation.48 Given the size of the Act made by other registered investment through covered call strategies. The
trading market and the regulatory companies and reviewed by the SEC Fund will not use derivatives for the
oversight of the markets, the Exchange staff for a number of years.51 In that purpose of seeking leveraged returns or
believes that Interest Rate and Currency regard, the SEC expressly noted in the performance that is the multiple or
Derivatives are not readily subject to Derivatives Rule Proposing Release that inverse multiple of a benchmark. The
manipulation. The Exchange also reliance on a mark-to-market valuation Fund will enter into derivatives only
believes that allowing the Fund to risk of a derivatives position for purposes of with counterparties that the Fund
manage its portfolio through the use of calculating the required coverage reasonably believes are financially and
Interest Rate and Currency Derivatives amount ‘‘would generally correspond to operationally able to perform the
without limit is necessary to allow the the amount of the fund’s liability with contract or instrument, and the Fund
Fund to achieve its investment objective respect to the derivatives transaction’’ will collect collateral from the
and protect investors. and, therefore, be consistent with the counterparty in accordance with credit
For purposes of the 10% limit appropriate valuation of the derivatives considerations and margining
applicable generally to OTC Derivatives transaction.52 The mark-to-market value requirements under applicable law.55
(other than Interest Rate and Currency is also the measure on which collateral Investments in derivative instruments
Derivatives), the weight of such OTC posting is based under the Master will be made in accordance with the
Derivatives will be calculated based on Agreement published by the 1940 Act and consistent with the Fund’s
the mark-to-market value of such OTC International Swaps and Derivatives investment objective and policies. To
Derivatives.49 The mark-to-market Association, Inc. (‘‘ISDA’’), which is the limit the potential risk (including
methodology is consistent with the predominant agreement used to trade leveraging risk) associated with such
methodology proposed by the SEC in derivatives.53 This value measures gain transactions, the Fund will segregate or
proposed Rule 18f–4 for the purposes of and loss to the Fund of the Fund’s ‘‘earmark’’ assets determined to be
asset coverage requirements 50 and in derivatives positions on a daily basis, as liquid by the Manager and/or the Sub-
keeping with disclosures regarding well as on a net basis across all Adviser in accordance with procedures
transactions covered by a master netting established by the Board and in
47 Transactions in Interest Rate and Currency
agreement and, as a result, accurately accordance with the 1940 Act (or, as
Derivatives are required to be reported to a swap permitted by applicable regulation,
data repository, and transactions in Interest Rate reflects the actual economic exposure of
Derivatives and certain Currency Derivatives (i.e., the Fund to the counterparty on each enter into offsetting positions) to cover
Currency Derivatives that are not excluded from the derivative (as compared to notional its obligations under derivative
definition of a ‘‘swap’’, as described below) are also
amount, which may overstate or instruments. These procedures have
publicly reported pursuant to rules issued by the been adopted consistent with Section 18
Commodity Futures Trading Commission (‘‘CFTC’’). understate economic risk).
of the 1940 Act and related Commission
See 17 CFR parts 43, 45 and 46. Pursuant to Section The Fund may choose not to make use
1(a)(47)(E) of the CEA and a related determination guidance. In addition, the Fund will
of derivatives.
by the Department of the Treasury, physically- include appropriate risk disclosure in
settled Currency Derivatives that meet the Generally, derivatives are financial its offering documents, including
definition of ‘‘foreign exchange forwards’’ or contracts whose value depends upon, or leveraging risk. Leveraging risk is the
‘‘foreign exchange swaps’’ under Sections 1a(24)– is derived from, the value of an
(25) of the CEA that are entered into between risk that transactions of the Fund,
eligible contract participants (as defined in the underlying asset, reference rate or including the Fund’s use of derivatives,
CEA) (‘‘Excluded Currency Derivatives’’) are index, and may relate to stocks, bonds, may give rise to additional leverage,
excluded from the definition of a ‘‘swap’’ under the interest rates, currencies or currency causing the Fund to be more volatile
CEA. See Determination of Foreign Exchange Swaps exchange rates, commodities, and
and Foreign Exchange Forwards Under the than it would have if it had not been
Commodity Exchange Act, 77 FR 69694 (Nov. 20, related indexes. As described above, the leveraged. Because the markets for
2012). Transactions in such Excluded Currency Fund will use derivatives to (i) provide securities or Debt, or the securities or
Derivatives are required to be reported to a swap exposure to the Principal Investments,
data repository, but they are not subject to the Debt themselves, may be unavailable,
public reporting requirements.
(ii) risk manage the Fund’s holdings,54 cost prohibitive or tax-inefficient as
48 Interest Rate Derivatives and Currency
51 See Derivatives Rule Proposing Release at n.58,
compared to derivative instruments,
Derivatives other than Excluded Currency suitable derivative transactions may be
Derivatives are comprehensively regulated as swaps citing Comment Letter on SEC Concept Release
under the CEA and regulations issued thereunder (November 11, 2011) (File No. S7–33–11), Davis an efficient alternative for the Fund to
by the CFTC and other federal financial regulators. Polk & Wardwell LLP, available at http:// obtain the desired asset exposure.
See, e.g., 17 CFR part 23 (capital and margin www.sec.gov/comments/s7-33-11/s73311-49.pdf The Manager and the Sub-Adviser
requirements for swap dealers, business conduct (‘‘[F]und registration statements indicate that, in believe that derivatives can be an
standards for swap dealers, and swap recent years, the Staff has not objected to the
adoption by funds of policies that require
economically attractive substitute for an
documentation requirements); 17 CFR part 50
(clearing requirements for swaps). While Excluded segregation of the mark-to-market value, rather than underlying physical security or Debt
Currency Derivatives are not subject to all swap the notional amount . . . [for asset segregation that the Fund would otherwise
regulations, they are subject to the ‘‘business purposes].’’).
conduct standards’’ adopted by the CFTC pursuant 52 See Derivatives Rule Proposing Release at 157–
due to the credit-worthiness of an issuer, and (iv)
to the CEA. See Section 1(a)(47)(E) of the CEA; 158. the effective duration of the Fund’s portfolio.
Determination of Foreign Exchange Swaps and 53 The Credit Support Annex to the ISDA Master
55 The Fund will seek, where practicable, to trade
Foreign Exchange Forwards Under the Commodity Agreement bases the collateral amount owed by a with counterparties whose financial status is such
Exchange Act, 77 FR 69694 (Nov. 20, 2012). party to a derivatives contract, which is defined as that the risk of default is reduced. The Sub-Adviser
49 The mark-to-market value reflects the Fund’s a party’s ‘‘exposure,’’ by reference to the will monitor the financial standing of
actual delivery or payment obligation under the replacement value of the party’s net positions. counterparties on an ongoing basis. This monitoring
derivative. This measure differs from that Replacement value, which has the same meaning as may include reliance on information provided by
referenced in Nasdaq Rule 5735(b)(1)(E), which ‘‘mark-to-market’’ value, is the amount owed by a credit agencies or of credit analysts employed by
bases its 20% limit of assets in the portfolio party at a point in time determined based on the the Sub-Adviser. The analysis may include earnings
applicable for funds issuing Managed Fund Shares net termination payment due under the outstanding updates, the counterparty’s reputation, past
on the aggregate gross national value of the over- transaction. experience with the dealer, market levels for the
the-counter derivatives rather than on the mark-to- 54 The risk management uses of derivatives will counterparty’s debt and equity, credit default swap
market value. include managing (i) investment-related risks, (ii) levels for the counterparty’s debt, the liquidity
50 See Derivatives Rule Proposing Release at 157– risks due to fluctuations in securities prices, provided by the counterparty and its share of
158; see also infra note 107. interest rates, or currency exchanges rates, (iii) risks market participation.
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![Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices 55423
purchase. For example, the Fund could principal amount outstanding of $100 higher by S&P Global Ratings (‘‘S&P’’),
purchase futures contracts on Treasury million or more. In addition, consistent and/or Fitch Ratings (‘‘Fitch’’), or Baa3
Securities instead of investing directly with the Fund’s Registration Statement, or higher by Moody’s Investors Service,
in Treasury Securities or could sell the following diversification Inc. (‘‘Moody’s’’)).57 Unrated fixed
credit default protection on a corporate requirements will apply: During Normal income securities or Debt may be
bond instead of buying a physical bond. Market Conditions, the Fund: (i) Will considered investment grade if, at the
Economic benefits include potentially not invest more than 25% of its total time of purchase, and under Normal
lower transactions costs, attractive assets in securities or Debt in any one Market Conditions, the applicable Sub-
relative valuation of a derivative versus foreign country, other than the United Adviser determines that such securities
a physical bond (e.g., differences in States, Canada, the United Kingdom, are of comparable quality based on a
yields) or economic exposure without Japan, Australia and member countries fundamental credit analysis of the
incurring transfer or similar taxes. of the European Union, or denominated unrated security or Debt instrument and
The Manager and the Sub-Adviser in any one currency, other than the U.S. comparable NRSRO-rated securities.
further believe that derivatives can be dollar, the Canadian dollar, the British
used as a more liquid means of pound, the yen, the Australian dollar, or The Fund may invest in fixed income
adjusting portfolio duration, as well as the euro; and (ii) will have ‘‘economic or equity securities and Debt issued by
targeting specific areas of yield curve exposure’’ to at least three countries. both U.S. and non-U.S. issuers
exposure, with potentially lower ‘‘Economic exposure’’ means an issuer (including issuers in emerging markets
transaction costs than the underlying of a security or a borrower in respect to [sic]. Consistent with the Fund’s
securities or Debt (e.g., interest rate Debt: (A) Will have a class of securities Registration Statement, the following
swaps may have lower transaction costs whose principal securities market is in diversification requirements will apply:
than the physical bonds). Similarly, the country; (B) is organized under the During Normal Market Conditions, the
money market futures can be used to laws of, or has a principal office in, the Fund: (i) Will not invest more than 25%
gain exposure to short-term interest country; (iii) [sic] derives 50% or more of its total assets in securities or Debt in
rates in order to express views on of its total revenue or profit from goods any one foreign country, other than the
anticipated changes in central bank produced, sales made or services United States, Canada, the United
policy rates. In addition, derivatives can provided in the country; or (D) Kingdom, Japan, Australia and member
be used to protect client assets through maintains 50% of more of its assets in countries of the European Union, or
selectively hedging downside (or ‘‘tail that country. denominated in any one currency, other
risks’’) in the Fund. The Fund may invest up to 15% of its than the U.S. dollar, the Canadian
The Fund also can use derivatives to assets in Non-Convertible Preferred dollar, the British pound, the yen, the
increase or decrease credit exposure. Securities, Equity-Related Warrants and Australian dollar, or the euro; and (ii)
Index credit default swaps can be used Work Out Securities. The Fund will not will have ‘‘economic exposure’’ to at
to gain exposure to a basket of credit invest in equity securities other than least three countries. ‘‘Economic
risk by ‘‘selling protection’’ against Principal Investment Equities.56 exposure’’ means that an issuer of a
default or other credit events, or to Principal Investment Equities consist of security or a borrower in respect to
hedge broad market credit risk by (i) Non-Convertible Preferred Securities, Debt: (A) Will have a class of securities
‘‘buying protection.’’ Single name credit Equity-Related Warrants and Work Out whose principal securities market is in
default swaps can be used to allow the Securities, which are subject to the 15% the country; (B) is organized under the
Fund to increase or decrease exposure limit noted above and (ii) shares of ETFs laws of, or has a principal office in, the
to specific issuers, saving investor that provide exposure to fixed income country, (iii) [sic] derives 50% or more
capital through lower trading costs. The securities, Debt or other Principal of its total revenue or profit from goods
Fund can use total return swap Investments, which are subject to no produced, sales made or services
contracts to obtain the total return of a limits. provided in the country, or (D)
reference asset or index in exchange for While the Fund will invest maintains 50% of more of its assets in
paying financing costs. A total return principally in fixed income securities that country. See infra ‘‘Investment
swap may be more efficient than buying and Debt that are, at the time of Restrictions.’’ [sic]
underlying securities or Debt, purchase, investment grade, the Fund The Fund will not invest more than
potentially lowering transaction costs. may invest up to 30% of its assets in 20% of the fixed income portion of the
The Fund expects to manage foreign below investment grade fixed income Fund’s portfolio 58 in ABS/Private MBS
currency exchange rate risk by entering securities and Debt. For these purposes, or more than 10% of the Fund’s total
into Currency Derivatives. ‘‘investment grade’’ is defined as
The Sub-Adviser may use options investments with a rating at the time of 57 For the avoidance of doubt, if a security or Debt
strategies to meet the Fund’s investment purchase in one of the four highest is rated by multiple NRSROs and receives different
objectives. Option purchases and sales rating categories of at least one ratings, the Fund will treat the security or Debt as
can also be used to hedge specific nationally recognized statistical ratings being rated in the highest rating category received
exposures in the portfolio and can from any one NRSRO. If a security or Debt is not
organization (‘‘NRSRO’’) (e.g., BBB- or rated, the Fund may determine its rating by
provide access to return streams reference to other securities issued by the issuer or
available to long-term investors such as 56 The convertible fixed income securities comparable NRSRO-rated securities.
the persistent difference between (including CoCos) and convertible preferred 58 The Exchange notes that the terms ‘‘fixed
implied and realized volatility. Options securities will comply with the tests set forth in income weight of the portfolio’’ and ‘‘weight of the
Nasdaq Rule 5735(b)(1)(B) and will be limited to fixed income portion of the portfolio’’ are used
strategies can generate income or 20% of the total assets of the Fund. In addition, no synonymously in Nasdaq Rule 5735. For purposes
improve execution prices (e.g., covered more than 10% of such convertible fixed income of this proposed rule change, the ‘‘fixed income
calls). and convertible preferred securities or Exchange weight of the Fund’s portfolio’’ includes all fixed
Traded Derivatives on such securities, together with income securities (including convertible fixed
Investment Restrictions all other listed securities and Exchange Traded income and preferred securities, even though such
Derivatives in which the Fund will invest, will be instruments are not Principal Investments) and Debt
At least 75% of the Fund’s traded on an exchange that is not an ISG member held by the Fund and excludes equity securities
investments in Debt and fixed income or an exchange with which the Exchange has (including ETFs), derivatives and cash and cash
securities shall have a minimum comprehensive surveillance sharing agreement. equivalents.
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![55432 Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices
Private MBS.108 Instead, ABS/Private The Exchange has classified bank the assets in the Fund’s portfolio may be
MBS will be limited to 20% of the loans as Debt for purposes of this invested in over-the-counter derivatives.
weight of the fixed income portion of proposed rule change and not as ‘‘fixed Instead, the Exchange proposes that
the Fund’s portfolio.109 The Exchange income securities’’ as they are classified there shall be no limit on the Fund’s
proposes, in the alternative, to require in Nasdaq Rule 5735(b)(1)(B). As a investment in Interest Rate and
the Fund to ensure that all of the result, the Fund’s investments in bank Currency Derivatives, and the weight of
investments in the fixed income portion loans will comply with the limitations all OTC Derivatives other than Interest
of the Fund’s portfolio, other than ABS/ or restrictions applicable to the Fund’s Rate and Currency Derivatives shall not
Private MBS, comply with the 90% investments in Debt as set forth herein exceed 10% of the Fund’s Assets. For
requirement in Nasdaq Rule with respect to such holdings and not purposes of this 10% limit on OTC
5735(b)(1)(B)(iv).110 The Exchange with the restrictions for fixed income Derivatives, the weight of such OTC
believes that this alternative limitation securities set forth in Nasdaq Rule Derivatives will be calculated based on
is appropriate because Nasdaq Rule 5735(b)(1)(B)(i)–(v).111 The Exchange the mark-to-market value of such OTC
5735(b)(1)(B)(iv) does not appear to be believes that this approach is Derivatives. The Exchange believes that
designed for structured finance vehicles appropriate given that the ‘‘generic’’ this exception for Interest Rate and
such as ABS/Private MBS, and the listing requirements in Nasdaq Rule Currency Derivatives, which is generally
overall weight of ABS/Private MBS held 5735(b)(1)(B) generally appear to be consistent with the requirement in a
by the Fund will be limited to 20% of tailored to fixed income instruments previous filing for the listing of an ETF
the fixed income portion of the Fund’s that are ‘‘securities’’, as defined in the approved by the Commission,114 is
portfolio, as described above. As Act, rather than loans and other debt appropriate in light of the fact that
discussed above, although ABS/Private instruments that are not characterized as Interest Rate and Currency Derivatives
MBS will be excluded for the purposes ‘‘securities’’ under applicable case law. are among the most liquid investment
of compliance with Nasdaq Rule The Fund will not meet the equity instruments (including not only
5735(b)(1)(B)(iv), the Fund’s portfolio is requirements in Nasdaq Rule derivatives but also securities) in the
consistent with the statutory standard as 5735(b)(1)(A) with respect to Non- market 115 (and the instruments are even
a result of the diversification provided Convertible Preferred Securities, Work more liquid than most non-government
by the investments and the Sub- Out Securities and warrants.112 Instead, or government-guaranteed securities).
Adviser’s selection process, which the Exchange proposes that (i) the Based on the data compiled by the Sub-
closely monitors investments to ensure Fund’s investment in convertible fixed Adviser in respect to its liquidity policy,
maintenance of credit and liquidity income and preferred securities shall be these derivatives are among the most
standards and relies on the higher limited to 20% of the Fund’s portfolio; liquid investment instruments traded. In
investment levels in these instruments and (ii) the weight of Non-Convertible addition, most Interest Rate Derivatives
during periods of U.S. economic Preferred Securities, Work Out traded by the Fund are centrally cleared
strength. Securities and Equity-Related Warrants by regulated clearing firms, and Interest
As discussed above, the Exchange has in the Fund’s portfolio shall together not Rate and Currency Derivatives are
determined to make an exception solely exceed 15% of the Fund’s assets. The subject to trade reporting,116 and other
in respect of the Fund such that CDOs Exchange believes that these alternative
will not be deemed to be included in the limitations are appropriate in light of
114 See Securities Exchange Act Release No.
definition of ABS for purposes of the 80657 (May 11, 2017), 82 FR 22702 (May 17, 2017)
the fact that the Non-Convertible (SR–NYSEArca–2017–09) (approving up to 50% of
limitation in Nasdaq Rule Preferred Securities, Equity Related the fund’s assets (calculated on the basis of
5735(b)(1)(B)(v) and, as a result, will not Warrants and Work Out Securities are aggregate gross notional value) to be invested in
be subject to the restriction on aggregate providing debt-oriented exposures or over-the-counter derivatives that are used to reduce
holdings of ABS/Private MBS contained currency, interest rate, or credit risk arising from
are received in connection with the the fund’s investments, including forwards, over-
in such Rule, which limits such Fund’s previous investment in Debt or the-counter options, and over-the-counter swaps).
holdings to no more than 20% of the fixed income securities, and all of the 115 Trading in foreign exchange markets averaged
weight of the fixed income portion of other equity securities held by the Fund $5.1 trillion per day in April 2016, and 67% of this
the Fund’s portfolio. However, the trading activity was in derivatives contracts such as
will comply with the requirements of currency or foreign exchange forwards, options and
Fund’s holdings in CDOs will be limited Nasdaq Rule 5735(b)(1)(A).113 swaps (with the other 33% consisting of spot
such that they do not account, in the The Fund will not meet the transactions). See Bank for International
aggregate, for more than 10% of the total requirement in Nasdaq Rule Settlements, Triennal [sic] Central Bank Survey,
assets of the Fund. The Exchange Foreign Exchange Turnover in April 2016, available
5735(b)(1)(E) that no more than 20% of at http://www.bis.org/publ/rpfx16fx.pdf (accessed
believes that the 10% limit on the November 2017). Trading in OTC interest rate
Fund’s holdings in CDOs will help to 111 For a listing of such restrictions, see supra
derivatives averaged $2.7 trillion per day in April
ensure that the Fund maintains a ‘‘Investment Restrictions.’’ 2016. See Bank for International Settlements,
112 As noted above, convertible fixed income Triennal [sic] Central Bank Survey, OTC Interest
diversified portfolio and will mitigate
securities (including CoCos) and convertible Rate Derivatives Turnover in April 2016, available
the risk of manipulation. preferred securities are treated as fixed income at http://www.bis.org/publ/rpfx16ir.pdf (accessed
securities for purposes of this proposed rule change. November 2017).
108 See supra note 73. See supra ‘‘Application of Generic Listing 116 Transactions in Interest Rate and Currency
109 See supra note 74. Requirements’’ section (ii) and note 80. Derivatives are required to be reported to a swap
110 For purposes of this requirement, the weight 113 Other equities consist of ETFs (including data repository, and transactions in Interest Rate
of the Fund’s exposure to any fixed income money market ETFs) that provide exposure to fixed Derivatives and certain Currency Derivatives (i.e.,
securities referenced in derivatives shall be income securities, Debt and other Principal Currency Derivatives that are not excluded from the
calculated based on the mark-to-market value of Investments. The weight of such ETFs in the Fund’s definition of a ‘‘swap’’, as described below) are also
such derivatives. CDOs, in which the Fund invests, portfolio shall not be limited. As noted above, publicly reported pursuant to rules issued by the
would comply with the 90% requirement in Nasdaq Fixed-Income Related Warrants are treated as fixed CFTC. See 17 CFR parts 43, 45 and 46. Pursuant to
Rule 5735(b)(1)(B)(iv) but would be limited in income securities for purposes of this proposed rule Section 1(a)(47)(E) of the CEA and a related
amount to 10% of the Fund’s total assets. The change and will be subject to and comply with the determination by the Department of the Treasury,
Exchange believes that the 10% limit on the Fund’s generic listing requirements for fixed-income Excluded Currency Derivatives are excluded from
holdings in CDOs will help to ensure that the Fund securities, rather than the generic listing the definition of a ‘‘swap’’ under the CEA. See
maintains a diversified portfolio and will mitigate requirements for equity securities. See supra note Determination of Foreign Exchange Swaps and
the risk of manipulation. 23. Foreign Exchange Forwards Under the Commodity
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![Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices 55433
robust regulation.117 Given the size of The Fund will not comply with the the same concentration risks as
the trading market and the regulatory requirement in Nasdaq Rule Exchange-Traded Derivatives
oversight of the markets, the Exchange 5735(b)(1)(D)(ii) that the aggregate gross referencing other assets because of such
believes that Interest Rate and Currency notional value of listed derivatives liquidity. Further, the Exchange notes
Derivatives are not readily subject to based on any five or fewer underlying that the significantly diminished risk of
manipulation. The Exchange also reference assets shall not exceed 65% of Treasury Securities is reflected in their
believes that allowing the Fund to risk the weight of the Fund’s portfolio exclusion from the concentration
manage its portfolio through the use of (including gross notional exposures), requirements applicable to fixed income
Interest Rate and Currency Derivatives and the aggregate gross notional value of securities in Nasdaq Rule
without limit is necessary to allow the listed derivatives based on any single 5735(b)(1)(B)(ii). The Exchange
Fund to achieve its investment objective underlying reference asset shall not proposes that the Fund will comply
and protect investors. exceed 30% of the weight of the Fund’s with the concentration requirements in
The Fund will not comply with the portfolio (including gross notional Nasdaq Rule 5735(b)(1)(D)(ii) except
requirement in Nasdaq Rule exposures). Instead, the Exchange with respect to the Fund’s investment in
5735(b)(1)(D)(i) that at least 90% of the proposes that the Fund will comply Eurodollar and G–7 Sovereign Futures
weight of the Fund’s holdings in with the concentration requirements in and Options. The Exchange believes
futures, exchange-traded options, and Nasdaq Rule 5735(b)(1)(D)(ii) except that this alternative limitation is
listed swaps shall, on both an initial and with respect to the Fund’s investment in appropriate to provide the Fund with
continuing basis, consist of futures, Eurodollar and G–7 Sovereign Futures sufficient flexibility and because of the
options, and swaps for which the and Options. The Fund may maintain highly liquid and transparent nature of
Exchange may obtain information via significant positions in Eurodollar and Eurodollar and G–7 Sovereign Futures
the ISG from other members or affiliates G–7 Sovereign Futures and Options, and and Options. Further, as described
of the ISG, or for which the principal such investments will not be subject to above, the G–7 Sovereign Futures and
market is a market with which the the concentration limits provided in Options in which the Fund invests will
Exchange has a comprehensive Nasdaq Rule 5735(b)(1)(D)(ii). For be listed on an exchange that is an ISG
purposes of this [sic] requirements, the
surveillance sharing agreement. Instead,
weight of the applicable Exchange- approximately 3,000,000 contracts); Eurex
the Exchange proposes that no more Exchange, Eurex Exchange Euro-BTP Futures,
Traded Derivatives will be calculated
than 10% of the assets of the Fund will Italian Government Bond Futures, available at
based on the mark-to-market value of
be invested in Exchange-Traded http://www.eurexchange.com/blob/115624/
such Exchange-Traded Derivatives. The 6a1281939d15ddbab960af40da6f11dc/data/
Derivatives and exchange-listed
Manager has indicated that obtaining factsheet_eurex_euro_btp_futures_on_italian_
securities whose principal market is not government_bonds.pdf (accessed November 2017)
exposure to these investments through
a member of ISG or is not a market with (providing statistics regarding liquidity and open
futures contracts is often the most cost interest in futures on Italian sovereign debt,
which the Exchange has a
efficient method to achieve such including that the open interest peaks in 2017 for
comprehensive surveillance sharing
exposure. The Exchange notes that futures on long-term and short-term Italian
agreement. For purposes of this 10% Eurodollar and G–7 Sovereign Futures sovereign debt traded on Eurex was approximately
limit, the weight of such Exchange- and Options are highly liquid 450,000 and 270,000 contracts, respectively); Eurex
Traded Derivatives will be calculated Exchange, Euro-OAT Derivatives, French
investments 118 and are not subject to Government Bond Futures and Options, available at
based on the mark-to-market value of http://www.eurexchange.com/blob/115652/
such Exchange-Traded Derivatives. The 118 See CME Group, Interest Rate Futures 48198ec577f7b3b0ac44d4c5a39ed0de/data/
Exchange believes that this alternative Liquidity Metrics Reach New Highs (October 6, factsheet_eurex_euro_oat_futures_on_french_
limitation is appropriate because the 2017), available at http://www.cmegroup.com/ government_bonds.pdf (accessed November 2017)
education/interest-rates-liquidity-metrics-reach- (providing statistics regarding liquidity and open
overall limit on Exchange-Traded interest in futures on French sovereign debt,
new-highs.html (accessed November 2017)
Derivatives and exchange-listed (providing statistics regarding liquidity and open including that, as of July 2017, the open interest in
securities whose principal market is not interest in futures and options on eurodollars and futures on long-term French sovereign debt traded
a member of ISG or is a market with Treasury Securities, including that during the first on Eurex was approximately 600,000 contracts);
three quarters of 2017, eurodollar futures and Intercontinental Exchange, Gilt Futures Overview,
which the Exchange does not have a available at https://www.theice.com/publicdocs/
options traded through CME Group had an average
comprehensive surveillance sharing daily open interest of approximately 53 million futures/Gilt_Futures_Overview.pdf (accessed
agreement will still be low relative to contracts and futures and options on Treasury November 2017) (providing statistics regarding
the overall size of the Fund. Securities had an average daily open interest of liquidity and open interest in futures on British
approximately 15 million contracts); The Montreal sovereign debt, including that, as of the third
Exchange, Statistics for Interest Rate Derivatives, quarter of 2014, the open interest in futures on long-
Exchange Act, 77 FR 69694 (Nov. 20, 2012). Index Derivatives and Equity Derivatives term British sovereign debt traded on the
However, as noted above, transactions in such (September 2017), available at https://www.m-x.ca/ Intercontinental Exchange was approximately
Excluded Currency Derivatives are required to be f_stat_en/1709_stats_en.pdf (accessed November 400,000 contracts); Osaka Exchange, Japanese
reported to a swap data repository, but they are not 2017) (providing statistics regarding liquidity and Government Bond Futures & Options, available at
subject to the public reporting requirements. open interest in futures and options on Canadian http://www.jpx.co.jp/english/derivatives/products/
117 Interest Rate Derivatives and Currency sovereign debt, including that, as of September jgb/jgb-futures/tvdivq0000003n94-att/JGB_FUT_
Derivatives other than Excluded Currency 2017, the open interest in futures and options on OP_E.pdf (accessed November 2017) (providing
Derivatives are comprehensively regulated as swaps Canadian sovereign debt traded on The Montreal statistics regarding liquidity and open interest in
under the CEA and regulations issued thereunder Exchange was approximately 560,000 contracts); futures and options on Japanese sovereign debt,
by the CFTC and other federal financial regulators. Eurex Exchange, Benchmark Fixed Income including that as of July 2016, the open interest in
See, e.g., 17 CFR part 23 (capital and margin Derivatives, available at https:// futures on 10-year Japanese sovereign debt traded
requirements for swap dealers, business conduct www.eurexchange.com/blob/115654/ on the Osaka Exchange was approximately 80,000
standards for swap dealers, and swap 4c51e4b8bc77355475b3b6f46afc0ef1/data/ contracts). The Exchange also notes that the
documentation requirements); 17 CFR part 50 factsheet_eurex_benchmark_fixed_income_ Commission has previously granted exemptions
(clearing requirements for swaps). While Excluded derivatives.pdf (accessed November 2017) under the Act to facilitate the trading of futures on
Currency Derivatives are not subject to all swap (providing statistics regarding liquidity and open sovereign debt issued by each of the Group of Seven
regulations, they are subject to the ‘‘business interest in futures and options on German sovereign countries (among other countries) and that such
conduct standards’’ adopted by the CFTC pursuant debt, including that, as of July 2015, the open exemptions were based in part on the Commission’s
to the CEA. See Section 1(a)(47)(E) of the CEA; interest in futures on German sovereign debt traded assessment of the sufficiency of the credit ratings
Determination of Foreign Exchange Swaps and on Eurex was approximately 3,000,000 contracts and liquidity of such sovereign debt. See 17 CFR
Foreign Exchange Forwards Under the Commodity and the open interest in options on German 240.3a12–8; Securities Exchange Act Release No.
Exchange Act, 77 FR 69694 (Nov. 20, 2012). sovereign debt futures traded on Eurex was 41453 (May 26, 1999), 64 FR 29550 (June 2, 1999).
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![Federal Register / Vol. 83, No. 214 / Monday, November 5, 2018 / Notices 55435
III. Date of Effectiveness of the inspection and copying at the principal website (http://markets.cboe.com/us/
Proposed Rule Change and Timing for office of the Exchange. All comments equities/regulation/rule_filings/bzx/), at
Commission Action received will be posted without change. the Exchange’s Office of the Secretary,
Within 45 days of the date of Persons submitting comments are and at the Commission’s Public
publication of this notice in the Federal cautioned that we do not redact or edit Reference Room.
Register or within such longer period personal identifying information from
comment submissions. You should II. Self-Regulatory Organization’s
up to 90 days (i) as the Commission may Statement of the Purpose of, and
submit only information that you wish
designate if it finds such longer period Statutory Basis for, the Proposed Rule
to make available publicly. All
to be appropriate and publishes its Change
submissions should refer to File
reasons for so finding or (ii) as to which
Number SR–NASDAQ–2018–080, and In its filing with the Commission, the
the self-regulatory organization
should be submitted on or before Exchange included statements
consents, the Commission will:
November 26, 2018. concerning the purpose of and basis for
(A) By order approve or disapprove
such proposed rule change, or For the Commission, by the Division of the proposed rule change and discussed
(B) institute proceedings to determine Trading and Markets, pursuant to delegated any comments it received on the
authority.122 proposed rule change. The text of these
whether the proposed rule change
should be disapproved. Eduardo A. Aleman, statements may be examined at the
Assistant Secretary. places specified in Item IV below. The
IV. Solicitation of Comments [FR Doc. 2018–24068 Filed 11–2–18; 8:45 am] Exchange has prepared summaries, set
Interested persons are invited to BILLING CODE 8011–01–P forth in sections A, B, and C below, of
submit written data, views, and the most significant aspects of such
arguments concerning the foregoing, statements.
including whether the proposed rule SECURITIES AND EXCHANGE
change is consistent with the Act. COMMISSION A. Self-Regulatory Organization’s
Comments may be submitted by any of Statement of the Purpose of, and the
[Release No. 34–84507; File No. SR– Statutory Basis for, the Proposed Rule
the following methods: CboeBZX–2018–079]
Change
Electronic Comments Self-Regulatory Organizations; Cboe 1. Purpose
• Use the Commission’s internet BZX Exchange, Inc.; Notice of Filing of
comment form (http://www.sec.gov/ a Proposed Rule Change, as Modified The Exchange proposes to amend
rules/sro.shtml); or by Amendment No. 1, To Establish BZX Rule 11.23, Auctions, to amend
• Send an email to rule-comments@ How the BZX Official Closing Price how the BZX Official Closing Price 4
sec.gov. Please include File Number SR– Would Be Determined for BZX-Listed would be determined for any BZX-listed
NASDAQ–2018–080 on the subject line. Securities security that is not a corporate security
(a ‘‘Derivative Securities Product’’) 5 if
Paper Comments October 30, 2018.
the Exchange does not conduct a
• Send paper comments in triplicate Pursuant to Section 19(b)(1) of the Closing Auction or if a Closing Auction
to Secretary, Securities and Exchange Securities Exchange Act of 1934 (the trade is less than a round lot
Commission, 100 F Street NE, ‘‘Act’’),1 and Rule 19b–4 thereunder,2 (collectively, an ‘‘Illiquid Auction’’).
Washington, DC 20549–1090. notice is hereby given that on October Rule 11.23(c)(2)(B) currently provides
18, 2018, Cboe BZX Exchange, Inc. (the how the Exchange determines the price
All submissions should refer to File
‘‘Exchange’’ or ‘‘BZX’’) filed with the of the Closing Auction and the BZX
Number SR–NASDAQ–2018–080. This Securities and Exchange Commission
file number should be included on the Official Closing Price. This proposed
(the ‘‘Commission’’) the proposed rule
subject line if email is used. To help the functionality is very similar to
change as described in Items I, II, and
Commission process and review your functionality that has already been
III below, which Items have been
comments more efficiently, please use approved by the Commission and is
prepared by the Exchange.3 The
only one method. The Commission will operational on NYSE Arca, Inc. (‘‘Arca’’)
Commission is publishing this notice to
post all comments on the Commission’s (the ‘‘Arca Rule’’) 6 and the Exchange
solicit comments on the proposed rule
internet website (http://www.sec.gov/ believes that it raises no new
change, as modified by Amendment No.
rules/sro.shtml). Copies of the 1, from interested persons.
submission, all subsequent 4 As defined in Rule 11.23(a)(3), the term ‘‘BZX
amendments, all written statements I. Self-Regulatory Organization’s Official Closing Price’’ shall mean the price
Statement of the Terms of Substance of disseminated to the consolidated tape as the market
with respect to the proposed rule center closing trade.
change that are filed with the the Proposed Rule Change 5 With respect to equities traded on the Exchange,
Commission, and all written The Exchange proposes a rule change the term ‘‘new derivative securities product’’ means
communications relating to the to establish how the BZX Official a security that meets the definition of ‘‘new
proposed rule change between the derivative securities product’’ in Rule 19b–4(e)
Closing Price would be determined for under the Securities Exchange Act of 1934. See BZX
Commission and any person, other than BZX-listed securities. Rule 14.11(j). For purposes of Rule 19b–4(e), a ‘‘new
those that may be withheld from the The text of the proposed rule change derivative securities product’’ means any type of
public in accordance with the is also available on the Exchange’s option, warrant, hybrid securities product or any
provisions of 5 U.S.C. 552, will be other security, other than a single equity option or
a security futures product, whose value is based, in
available for website viewing and 122 17 CFR 200.30–3(a)(12). whole or in part, upon the performance of, or
printing in the Commission’s Public 1 15 U.S.C. 78s(b)(1). interest, in, an underlying instrument. 17 CFR
Reference Room, 100 F Street NE, 2 17 CFR 240.19b–4. 240.19b–4(e).
3 On October 29, 2018, the Exchange filed 6 See Securities Exchange Act Release No. 82907
Washington, DC 20549, on official
Amendment No. 1 to the proposed rule change to (March 20, 2018), 83 FR 12980 (March 26, 2018)
business days between the hours of specify the date upon which the Exchange’s (SR–NYSEArca–2018–08) (order approving
10:00 a.m. and 3:00 p.m. Copies of the President (or designee) approved the proposed rule proposed changes to Arca Rule 1.1(ll) related to
filing also will be available for change, pursuant to delegated authority. determining an Official Closing Price).
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Document Created: 2018-11-03 00:28:35
Document Modified: 2018-11-03 00:28:35
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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| Section | Notices | |
| FR Citation | 83 FR 55416 |
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