Document ID: SEC-2016-0627-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2016-04-12T04:00Z

[Federal Register Volume 81, Number 70 (Tuesday, April 12, 2016)]
[Notices]
[Pages 21626-21631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08307]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77548; File No. SR-NASDAQ-2015-161]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change, as Modified by Amendment 
Nos. 1, 2, and 3 Thereto, Relating to the Listing and Trading of the 
Shares of the First Trust RiverFront Dynamic Europe ETF, First Trust 
RiverFront Dynamic Asia Pacific ETF, First Trust RiverFront Dynamic 
Emerging Markets ETF, and First Trust RiverFront Dynamic Developed 
International ETF of First Trust Exchange-Traded Fund III

April 6, 2016.

I. Introduction

    On December 22, 2015, The NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade the shares of 
the First Trust RiverFront Dynamic Europe ETF (``Europe Fund''); First 
Trust RiverFront Dynamic Asia Pacific ETF (``Asia Pacific Fund''); 
First Trust RiverFront Dynamic Emerging Markets ETF (``Emerging Markets 
Fund''); and First Trust RiverFront Dynamic Developed International ETF 
(``Developed International Fund''). The proposed rule change was 
published for comment in the Federal Register on January 8, 2016.\3\ On 
January 8, 2016, the Exchange filed Amendment No. 1 to the proposed 
rule change.\4\ On February 18, 2016, the Exchange filed Amendment No. 
2 to the proposed rule change.\5\ On February 19, 2016, pursuant to 
Section 19(b)(2) of the Act,\6\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\7\ On April 5, 2016, the Exchange 
filed Amendment No. 3 to the proposed rule change.\8\ The Commission 
received no comments on the proposed rule change. This order grants 
approval of the proposed rule change, as modified by Amendment Nos. 1, 
2, and 3 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76817 (January 4, 
2016), 81 FR 978 (``Notice'').
    \4\ In Amendment No. 1, the Exchange clarified the proposed rule 
change by providing additional information regarding the currencies, 
and instruments that provide exposure to such currencies, in which 
each Fund will invest. Because Amendment No. 1 to the proposed rule 
change does not materially alter the substance of the proposed rule 
change or raise novel regulatory issues, Amendment No. 1 is not 
subject to notice and comment (Amendment No. 1 is available at: 
http:// www.sec.gov/comments/sr-nasdaq-2015-161/nasdaq2015161-1.pdf).
    \5\ In Amendment No. 2, the Exchange expanded the application of 
the Alternative Criteria (as discussed below) so that they will 
apply on a continual basis. Because Amendment No. 2 does not 
materially alter the substance of the proposed rule change or raise 
novel regulatory issues, Amendment No. 2 is not subject to notice 
and comment (Amendment No. 2 is available at: http: //www.sec.gov/comments/sr-nasdaq-2015-161/nasdaq2015161-2.pdf).
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 77192, 81 FR 9575 
(February 25, 2016).
    \8\ In Amendment No. 3 to the proposed rule change, the Exchange 
clarified that: (a) All statements and representations made in the 
proposal regarding the description of the portfolios, limitations on 
portfolio holdings or reference assets, or the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange; (b) the issuer will advise the Exchange of any failure by 
the Funds to comply with the continued listing requirements; (c) 
pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will monitor for compliance with the continued listing 
requirements; and (d) if a Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence 
delisting procedures under the Nasdaq 5800 Series. Because Amendment 
No. 3 to the proposed rule change does not materially alter the 
substance of the proposed rule change or raise unique or novel 
regulatory issues, Amendment No. 3 is not subject to notice and 
comment (Amendment No. 3 is available at: http://www.sec.gov/comments/sr-nasdaq-2015-161/nasdaq2015161-3.pdf).
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II. Exchange's Description of the Proposal

    The Exchange proposes to list and trade the shares (``Shares'') of 
the Europe Fund, Asia Pacific Fund, Emerging Markets Fund, and 
Developed International Fund (individually, ``Fund,'' and collectively, 
``Funds'') under Nasdaq Rule 5735, which governs the listing and 
trading of Managed Fund Shares on the Exchange. Each Fund, which will 
be a series of First Trust Exchange-Traded Fund III (``Trust''), will 
be an actively managed exchange-traded fund (``ETF''). The Shares will 
be offered by the Trust,\9\ which was established as a Massachusetts 
business trust on January 9, 2008. The Trust is registered with the 
Commission as an investment company and has filed a registration 
statement on Form N-1A with the Commission.\10\
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    \9\ According to the Exchange, the Trust has obtained certain 
exemptive relief under the Investment Company Act of 1940 (``1940 
Act''). See Investment Company Act Release No. 28468 (October 27, 
2008) (File No. 812-13477).
    \10\ See Post-Effective Amendment No. 29 to Registration 
Statement on Form N-1A for the Trust, dated November 19, 2015 (File 
Nos. 333-176976 and 811-22245) (``Registration Statement'').
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    First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the

[[Page 21627]]

Funds. RiverFront Investment Group, LLC will serve as investment sub-
adviser (``Sub-Adviser'') to the Funds and provide day-to-day portfolio 
management. First Trust Portfolios L.P. (``Distributor'') will be the 
principal underwriter and distributor of each Fund's Shares. Brown 
Brothers Harriman & Co. will act as the administrator, accounting 
agent, custodian, and transfer agent to the Funds. According to the 
Exchange, neither the Adviser nor the Sub-Adviser is a broker-dealer, 
although the Adviser is affiliated with the Distributor, a broker-
dealer, and the Sub-Adviser is affiliated with Robert W. Baird & Co. 
Incorporated, a broker-dealer. Each of the Adviser and Sub-Adviser has 
implemented a fire wall with respect to its respective broker-dealer 
affiliate regarding access to information concerning the composition or 
changes to a portfolio.\11\
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    \11\ In the event (a) the Adviser or the Sub-Adviser registers 
as a broker-dealer, or becomes newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with another broker-dealer, it 
will implement a fire wall with respect to its relevant personnel 
and/or such broker-dealer affiliate, as applicable, regarding access 
to information concerning the composition of, and/or changes to, a 
portfolio and will be subject to procedures designed to prevent the 
use and dissemination of material, non-public information regarding 
such portfolio.
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    The Exchange has made the following representations and statements 
describing the Funds and the Funds' investment strategies, including 
the Funds' portfolio holdings and investment restrictions.\12\
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    \12\ Additional information regarding the Funds, the Trust, and 
the Shares, including investment strategies, risks, creation and 
redemption procedures, fees, portfolio holdings disclosure policies, 
calculation of net asset value (``NAV''), distributions, and taxes, 
among other things, can be found in the Notice, the amendments, and 
the Registration Statement, as applicable. See Notice, Amendment 
Nos. 1-3, and Registration Statement, supra notes 3, 4, 5, 8, and 
10, respectively.
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A. Exchange's Description of Principal Investment Strategies Applicable 
to Each Fund

    Each Fund's investment objective will be to provide capital 
appreciation. Under normal market conditions,\13\ each Fund will seek 
to achieve its investment objective by investing at least 80% of its 
net assets (including investment borrowings) in a combination of: (i) 
``Principal Fund Equity Securities'' (as defined below); (ii) forward 
currency contracts and non-deliverable forward currency contracts 
(collectively, ``Forward Contracts''); and (iii) currency transactions 
on a spot (i.e., cash) basis.\14\
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    \13\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the securities markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption, or any similar intervening circumstance. On a temporary 
basis, including for defensive purposes, during the initial invest-
up period and during periods of high cash inflows or outflows, a 
Fund may depart from its principal investment strategies; for 
example, it may hold a higher than normal proportion of its assets 
in cash. During such periods, a Fund may not be able to achieve its 
investment objective. A Fund may adopt a defensive strategy when the 
Adviser and/or the Sub-Adviser believes securities in which such 
Fund normally invests have elevated risks due to political or 
economic factors and in other extraordinary circumstances.
    \14\ A Fund would enter into Forward Contracts and/or currency 
spot transactions for hedging purposes.
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    For each Fund, (a) ``Principal Equity Securities'' will consist of 
the following U.S. and non-U.S. exchange-listed securities: (i) Common 
stocks; (ii) common and preferred shares of real estate investment 
trusts (``REITs''); and (iii) American Depositary Receipts (``ADRs''), 
European Depositary Receipts (``EDRs''), and Global Depositary Receipts 
(``GDRs'' and, together with ADRs and EDRs, collectively, ``Depositary 
Receipts''),\15\ and (b) ``Principal Fund Equity Securities'' will 
consist of Principal Equity Securities that are suggested by such 
Fund's name.\16\ Accordingly:
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    \15\ The Funds will not invest in any unsponsored Depositary 
Receipts.
    \16\ With respect to Depositary Receipts, whether such Principal 
Equity Securities are Principal Fund Equity Securities is based on 
the underlying securities, the ownership of which is represented by 
the Depositary Receipts (i.e., whether, as described below, the 
relevant underlying security is a security of a European company, an 
Asian Pacific company, an emerging market company, or a developed 
market company, as applicable).
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    (1) For the Europe Fund, Principal Fund Equity Securities will be 
Principal Equity Securities of European companies; \17\
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    \17\ European companies are those companies (i) whose securities 
are traded principally on a stock exchange in a European country, 
(ii) that are organized under the laws of or have a principal office 
in a European country, or (iii) that have at least 50% of their 
assets in, or derive at least 50% of their revenues or profits from, 
a European country.
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    (2) for the Asia Pacific Fund, Principal Fund Equity Securities 
will be Principal Equity Securities of Asian Pacific companies; \18\
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    \18\ Asian Pacific companies are those companies (i) whose 
securities are traded principally on a stock exchange in an Asian 
Pacific country, (ii) that are organized under the laws of or have a 
principal office in an Asian Pacific country, or (iii) that have at 
least 50% of their assets in, or derive at least 50% of their 
revenues or profits from, an Asian Pacific country.
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    (3) for the Emerging Markets Fund, Principal Fund Equity Securities 
will be Principal Equity Securities of emerging market companies; \19\ 
and
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    \19\ An emerging market company is one (i) domiciled or with a 
principal place of business or primary securities trading market in 
an emerging market country, or (ii) that derives a substantial 
portion of its total revenues or profits from emerging market 
countries.
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    (4) for the Developed International Fund, Principal Fund Equity 
Securities will be Principal Equity Securities of developed market 
companies.\20\
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    \20\ Developed market companies are those companies (i) whose 
securities are traded principally on a stock exchange in a developed 
market country, (ii) that are organized under the laws of or have a 
principal office in a developed market country, or (iii) that have 
at least 50% of their assets in, or derive at least 50% of their 
revenues or profits from, a developed market country.
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    In selecting securities for a Fund, the Sub-Adviser will score 
individual securities from a portfolio of eligible securities according 
to several core attributes, using multiple proprietary factors within 
each core attribute. The Sub-Adviser will then rank each qualifying 
security based on its core attribute score, and the highest scoring 
securities will be considered for inclusion in the Fund's portfolio. 
The Sub-Adviser will utilize its proprietary optimization process to 
maximize the percentage of high-scoring securities included in each 
Fund's portfolio.
    In addition, for each Fund, by entering into Forward Contracts and 
currency spot transactions, the Sub-Adviser will deploy a dynamic 
currency hedge (hedging up to 100% of such Fund's foreign currency 
exposure) based on its proprietary hedging methodology. The Sub-
Adviser's hedging methodology will be constructed from a combination of 
quantitative measures and qualitative measures. Each Fund will only 
enter into transactions in Forward Contracts with counterparties that 
the Adviser and/or the Sub-Adviser reasonably believe are capable of 
performing under the applicable Forward Contract.\21\
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    \21\ According to the Exchange, each Fund will seek, where 
possible, to use counterparties, as applicable, whose financial 
status is such that the risk of default is reduced; however, the 
risk of losses resulting from default is still possible. The Adviser 
and/or the Sub-Adviser will evaluate the creditworthiness of 
counterparties on an ongoing basis. In addition to information 
provided by credit agencies, the Adviser's and/or Sub-Adviser's 
analysis will evaluate each approved counterparty using various 
methods of analysis and may consider the Adviser's and/or Sub-
Adviser's past experience with the counterparty, its known 
disciplinary history, and its share of market participation.
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B. Exchange's Description of Other Investments for the Funds

    According to the Exchange, each Fund may invest (in the aggregate) 
up to 20% of its net assets in the following securities and 
instruments.

[[Page 21628]]

    Each Fund may invest in the following U.S. and non-U.S. exchange-
listed securities (other than Principal Fund Equity Securities): (i) 
Common stocks; (ii) common and preferred shares of REITs; (iii) 
Depositary Receipts; and (iv) equity securities of business development 
companies (collectively, ``Other Equity Securities'').\22\
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    \22\ For each Fund, Other Equity Securities and Principal Fund 
Equity Securities are referred to collectively as ``Equity 
Securities.''
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    Each Fund may invest in short-term debt securities and other short-
term debt instruments (described below), as well as cash equivalents, 
or it may hold cash. The percentage of each Fund invested in such 
holdings or held in cash will vary and will depend on several factors, 
including market conditions. Each Fund may invest in the following 
short-term debt instruments: \23\ (1) Fixed rate and floating rate U.S. 
government securities, including bills, notes, and bonds differing as 
to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. government agencies or 
instrumentalities; (2) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (3) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (4) repurchase agreements,\24\ which involve 
purchases of debt securities; (5) 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; (6) commercial 
paper, which is short-term unsecured promissory notes; \25\ and (7) 
short-term debt obligations issued or guaranteed by non-U.S. 
governments or by their agencies or instrumentalities.
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    \23\ The Exchange represents that short-term debt instruments 
will be issued by issuers having a long-term debt rating of at least 
A by Standard & Poor's Ratings Services (``S&P Ratings''), Moody's 
Investors Service, Inc. (``Moody's''), or Fitch Ratings (``Fitch''), 
and have a maturity of one year or less.
    \24\ According to the Exchange, each Fund intends to enter into 
repurchase agreements only with financial institutions and dealers 
believed by the Adviser and/or the Sub-Adviser to present minimal 
credit risks in accordance with criteria approved by the Board of 
Trustees of the Trust. The Adviser and/or the Sub-Adviser will 
review and monitor the creditworthiness of such institutions. The 
Adviser and/or the Sub-Adviser will monitor the value of the 
collateral at the time the transaction is entered into and at all 
times during the term of the repurchase agreement. The Funds will 
not enter into reverse repurchase agreements.
    \25\ Each Fund may only invest in commercial paper rated A-1 or 
higher by S&P Ratings, Prime-1 or higher by Moody's, or F1 or higher 
by Fitch.
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    Each Fund may invest (but only up to 5% of its net assets) in 
exchange-listed equity index futures contracts.

C. Exchange's Description of the Funds' Equity Securities

    According to the Exchange, under normal market conditions, each 
Fund will invest in at least 20 Equity Securities. Each Fund will 
satisfy the ``ISG Criteria'' (as described below) and/or the 
``Alternative Criteria'' (as described below).
    A Fund will satisfy the ISG Criteria if at least 90% of such Fund's 
net assets that are invested (in the aggregate) in Equity Securities 
will be invested in Equity Securities that trade in markets that are 
members of the Intermarket Surveillance Group (``ISG'') \26\ or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange.
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    \26\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for a Fund may trade on markets that are members 
of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.
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    A Fund will satisfy the Alternative Criteria if, under normal 
market conditions, its Equity Securities meet the following criteria at 
the time of purchase and on a continuous basis: (1) Non-U.S. Equity 
Securities \27\ each shall have a minimum market value of at least $100 
million; (2) non-U.S. Equity Securities 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; (3) the most heavily weighted non-U.S. Equity Security 
shall not exceed 25% of the weight of the Fund's entire portfolio and, 
to the extent applicable, the five most heavily weighted non-U.S. 
Equity Securities shall not exceed 60% of the weight of the Fund's 
entire portfolio; (4) each non-U.S. Equity Security shall be listed and 
traded on an exchange that has last-sale reporting; and (5) all of such 
Fund's net assets that are invested (in the aggregate) in Equity 
Securities other than non-U.S. Equity Securities shall be invested in 
Equity Securities that trade in markets that are members of ISG or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange.
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    \27\ For purposes of this filing, the term ``non-U.S. Equity 
Securities'' means Equity Securities that are not listed on a U.S. 
exchange.
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D. Exchange's Description of the Funds' Transactions in Forward 
Contracts and Exchange-Listed Equity Index Futures Contracts

    According to the Exchange, each Fund's transactions in Forward 
Contracts and exchange-listed equity index futures contracts will be 
consistent with its investment objective and the 1940 Act and will not 
be used to seek to achieve a multiple or inverse multiple of an index. 
Each Fund will comply with the regulatory requirements of the 
Commission with respect to coverage in connection with its transactions 
in Forward Contracts and exchange-listed equity index futures 
contracts. If the applicable guidelines prescribed under the 1940 Act 
so require, a Fund will earmark cash, U.S. government securities and/or 
other liquid assets permitted by the Commission in the amount 
prescribed.

E. Exchange's Description of the Funds' Investment Restrictions

    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
deemed illiquid by the Adviser and/or the Sub-Adviser.\28\ Each 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 such 
Fund's net assets are held in illiquid assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
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    \28\ According to the Exchange, in determining the liquidity of 
the Funds' investments, the Adviser and/or the Sub-Adviser may 
consider the following factors: (i) The frequency of trades and 
quotes for the security or other instrument; (ii) the number of 
dealers wishing to purchase or sell the security or other instrument 
and the number of other potential purchasers; (iii) dealer 
undertakings to make a market in the security or other instrument; 
and (iv) the nature of the security or other instrument and the 
nature of the marketplace in which it trades (e.g., the time needed 
to dispose of the security or other instrument, the method of 
soliciting offers and the mechanics of transfer).
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    The Funds may not invest 25% or more of the value of their 
respective total assets in securities of issuers in any one industry. 
This restriction does not apply to (a) obligations issued or guaranteed 
by the U.S. government, its agencies or instrumentalities, or (b) 
securities of other investment companies.
    Each Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the Exchange Act and the rules and 
regulations thereunder

[[Page 21629]]

applicable to a national securities exchange.\29\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1, 2, and 3 thereto, is consistent with Section 6(b)(5) 
of the Exchange Act,\30\ which requires, among other things, that the 
Exchange's rules be designed to promote just and equitable principles 
of trade, to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Exchange Act,\31\ which sets forth 
Congress's finding that it is in the public interest and appropriate 
for the protection of investors and the maintenance of fair and orderly 
markets to assure the availability to brokers, dealers, and investors 
of information with respect to quotations for, and transactions in, 
securities.
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    \31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Quotation and last-sale information for the Shares will be 
available via Nasdaq proprietary quote and trade services, as well as 
in accordance with the Unlisted Trading Privileges and the Consolidated 
Tape Association (``CTA'') plans for the Shares. On each business day, 
before commencement of trading in Shares in the Regular Market Session 
\32\ on the Exchange, each Fund will disclose on its Web site the 
Disclosed Portfolio held by such Fund that will form the basis for such 
Fund's calculation of NAV at the end of the business day.\33\ The NAV 
of each Fund's Shares generally will be calculated once daily Monday 
through Friday as of the close of regular trading on the New York Stock 
Exchange, generally 4:00 p.m., Eastern Time.\34\
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    \32\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4:00 a.m. to 
9:30 a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. 
to 4:00 p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session 
from 4:00 p.m. or 4:15 p.m. to 8:00 p.m., Eastern Time).
    \33\ Nasdaq Rule 5735(c)(2) defines the term ``Disclosed 
Portfolio.'' According to the Exchange, each 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, each Fund will also disclose 
on its Web site the following information regarding each portfolio 
holding, as applicable to the type of holding: ticker symbol, CUSIP 
number or other identifier, if any; a description of the holding 
(including the type of holding); the identity of the security, 
index, or other asset or instrument underlying the holding, if any; 
quantity held (as measured by, for example, par value, notional 
value, or number of shares, contracts, or units); maturity date, if 
any; coupon rate, if any; effective date, if any; market value of 
the holding; and percentage weighting of the holding in the Fund's 
portfolio. The Web site information will be publicly available at no 
charge.
    \34\ According to the Exchange, the Funds' investments will be 
valued daily. The following investments will typically be valued 
using information provided by a third-party pricing service 
(``Pricing Service''): (a) Except as provided below, short term U.S. 
government securities, commercial paper, bankers' acceptances, and 
short-term debt obligations issued or guaranteed by non-U.S. 
governments or by their agencies or instrumentalities (collectively, 
``Short Term Debt Instruments''); and (b) currency spot 
transactions. Debt instruments may be valued at evaluated mean 
prices, as provided by Pricing Services. Short Term Debt Instruments 
having a remaining maturity of 60 days or less when purchased will 
typically be valued at cost adjusted for amortization of premiums 
and accretion of discounts, provided the pricing committee of the 
Adviser (``Pricing Committee'') has determined that the use of 
amortized cost is an appropriate reflection of value given market 
and issuer specific conditions existing at the time of the 
determination. Overnight repurchase agreements will be valued at 
amortized cost when it represents the best estimate of value. Term 
repurchase agreements (i.e., those whose maturity exceeds seven 
days) will be valued at the average of the bid quotations obtained 
daily from at least two recognized dealers. Certificates of deposit 
and bank time deposits will typically be valued at cost. Equity 
Securities that are listed on any exchange other than the Exchange 
and the London Stock Exchange Alternative Investment Market 
(``AIM'') will typically be valued at the last-sale price on the 
exchange on which they are principally traded on the business day as 
of which such value is being determined. Equity Securities listed on 
the Exchange or the AIM will typically be valued at the official 
closing price on the business day as of which such value is being 
determined. If there has been no sale on such day, or no official 
closing price in the case of securities traded on the Exchange or 
the AIM, such securities will typically be valued using fair value 
pricing. Equity Securities traded on more than one securities 
exchange will be valued at the last sale price or official closing 
price, as applicable, on the business day as of which such value is 
being determined at the close of the exchange representing the 
principal market for such securities. Exchange-listed equity index 
futures contracts will typically be valued at the closing price in 
the market where such instruments are principally traded. Forward 
Contracts will typically be valued at the current day's interpolated 
foreign exchange rate, as calculated using the current day's spot 
rate, and the thirty, sixty, ninety, and one-hundred-eighty day 
forward rates provided by a Pricing Service or by certain 
independent dealers in such contracts. Assets denominated in foreign 
currencies will be translated into U.S. dollars at the exchange rate 
of such currencies against the U.S. dollar as provided by a Pricing 
Service. The value of assets denominated in foreign currencies will 
be converted into U.S. dollars at the exchange rates in effect at 
the time of valuation.
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    In addition, the Intraday Indicative Value \35\ for each Fund, 
available on the NASDAQ OMX Information LLC proprietary index data 
service, will be based upon the current value for the components of the 
Disclosed Portfolio and will be updated and widely disseminated by one 
or more major market data vendors and broadly displayed at least every 
15 seconds during the Regular Market Session. The Intraday Indicative 
Value will be based on quotes and closing prices from the securities' 
local market and may not reflect events that occur subsequent to the 
local market's close.
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    \35\ Nasdaq Rule 5735(c)(3) defines the term ``Intraday 
Indicative Value.''
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    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last-sale information for the 
Equity Securities (to the extent traded on a U.S. exchange) will be 
available from the exchanges on which they are traded as well as in 
accordance with any applicable CTA plans. Pricing information for 
Short-Term Debt Instruments, repurchase agreements, Forward Contracts, 
bank time deposits, certificates of deposit, and currency spot 
transactions will be available from major broker-dealer firms and/or 
major market data vendors and/or Pricing Services. Pricing information 
for exchange-listed equity index futures contracts and non-U.S. Equity 
Securities will be available from the applicable listing exchange and 
from major market data vendors. In addition, the Exchange notes that 
the Funds' Web site will include a form of the prospectus for the Funds 
and additional data relating to NAV and other applicable quantitative 
information.
    The Commission also believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange states that it will obtain a representation from 
the issuer of the Shares that the NAV per Share will be calculated 
daily and that the NAV and the Disclosed Portfolio will be made 
available to all market participants at the same time. The Exchange 
also represents that it may consider all relevant factors in exercising 
its discretion to halt or suspend trading in the Shares of a Fund. The 
Exchange 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

[[Page 21630]]

trading in the Shares inadvisable.\36\ Trading in the Shares also will 
be subject to Rule 5735(d)(2)(D), which sets forth circumstances under 
which Shares of a Fund may be halted.
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    \36\ 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 a Fund; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
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    The Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. The 
Exchange further states that neither the Adviser nor the Sub-Adviser is 
a broker-dealer, but each is affiliated with a broker-dealer, and that 
the Adviser and Sub-Adviser has each implemented a fire wall with 
respect to its respective broker-dealer affiliate regarding access to 
information concerning the composition of, and changes to, each Fund's 
portfolio.\37\ Further, the Commission notes that the Reporting 
Authority \38\ that provides the Disclosed Portfolio must implement and 
maintain, or be subject to, procedures designed to prevent the use and 
dissemination of material, non-public information regarding the actual 
components of the portfolio.\39\ The Exchange represents that trading 
in the Shares will be subject to the existing trading surveillances, 
administered by both Nasdaq and also the Financial Industry Regulatory 
Authority (``FINRA'') on behalf of the Exchange, which are designed to 
detect violations of Exchange rules and applicable federal securities 
laws.\40\
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    \37\ See supra note 11 and accompanying text. The Exchange 
further represents that an investment adviser to an open-end fund is 
required to be registered under the Investment Advisers Act of 1940 
(``Advisers Act''). As a result, the Adviser, the Sub-Adviser, and 
their related personnel are subject to the provisions of Rule 204A-1 
under the Advisers Act relating to codes of ethics. This Rule 
requires investment advisers to adopt a code of ethics that reflects 
the fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
    \38\ Nasdaq Rule 5735(c)(4) defines ``Reporting Authority.''
    \39\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \40\ The Exchange represents that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
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    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity securities. In support of this proposal, the Exchange 
represented that:
    (1) The Shares will be subject to Nasdaq Rule 5735, which sets 
forth the initial and continued listing criteria applicable to Managed 
Fund Shares.
    (2) Trading in the Shares will be subject to the existing trading 
surveillances, administered by both Nasdaq and FINRA on behalf of the 
Exchange, which are designed to detect violations of Exchange rules and 
applicable federal securities laws. 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.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and certain of the Equity Securities 
and exchange-listed equity index futures contracts held by the Funds 
with other markets and other entities that are members of ISG, and 
FINRA may obtain trading information regarding trading in the Shares 
and such securities and instruments held by the Funds from such markets 
and other entities. In addition, the Exchange may obtain information 
regarding trading in the Shares and certain of the Equity Securities 
and exchange-listed equity index futures contracts held by the Funds 
from markets and other entities that are members of ISG, which includes 
securities and futures exchanges, or with which the Exchange has in 
place a comprehensive surveillance sharing agreement. Moreover, FINRA, 
on behalf of the Exchange, will be able to access, as needed, trade 
information for certain fixed income securities held by the Funds 
reported to FINRA's Trade Reporting and Compliance Engine (``TRACE'').
    (4) For each Fund, at least 90% of such Fund's net assets that are 
invested (in the aggregate) in exchange-listed equity index futures 
contracts will be invested in instruments that trade in markets that 
are members of ISG or are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
    (5) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (6) 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 for each Fund will discuss the following: (a) The 
procedures for purchases and redemptions of Shares in Creation Units 
(and that Shares are not individually redeemable); (b) Nasdaq Rule 
2111A, which imposes suitability obligations on Nasdaq members with 
respect to recommending transactions in the Shares to customers; (c) 
how information regarding the Intraday Indicative Value and the 
Disclosed Portfolio is disseminated; (d) the risks involved in trading 
the Shares during the Pre-Market and Post-Market Sessions when an 
updated Intraday Indicative Value will not be calculated or publicly 
disseminated; (e) the requirement that members deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (f) trading information.
    (7) For initial and continued listing, the Funds must be in 
compliance with Rule 10A-3 under the Act.\41\
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    \41\ See 17 CFR 240.10A-3.
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    (8) Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets.
    (9) The Pricing Committee will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding each Fund's portfolio.
    (10) Each Fund will satisfy: (a) The ISG Criteria; and/or (b) the 
Alternative Criteria at the time of purchase and on a continuous basis.
    (11) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    The Exchange represents that all statements and representations 
made in the filing regarding (a) the description of the portfolios, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules and surveillance procedures shall 
constitute continued listing requirements for listing the Shares on the 
Exchange. In addition, the issuer has represented to the Exchange that 
it will advise the Exchange of any failure by the Funds 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.\42\ If a Fund is 
not in

[[Page 21631]]

compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under the Nasdaq 5800 Series. This 
approval order is based on all of the Exchange's representations, 
including those set forth above, in the Notice, and in Amendment Nos. 
1, 2, and 3 to the proposed rule change. The Commission notes that the 
Funds and the Shares must comply with the requirements of Nasdaq Rule 
5735, including those set forth in this proposed rule change, as 
modified by Amendment Nos. 1, 2, and 3 thereto, to be listed and traded 
on the Exchange on an initial and continuing basis.
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    \42\ The Commission notes that certain other proposals for the 
listing and trading of Managed Fund Shares include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Amendment No. 2 to SR-BATS-2016-04, 
available at: http://www.sec.gov/comments/sr-bats-2016-04/bats201604-2.pdf. In the context of this representation, it is the 
Commission's view that ``monitor'' and ``surveil'' both mean ongoing 
oversight of the Fund's compliance with the continued listing 
requirements. Therefore, the Commission does not view ``monitor'' as 
a more or less stringent obligation than ``surveil'' with respect to 
the continued listing requirements.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, is 
consistent with Section 6(b)(5) of the Act \43\ and the rules and 
regulations thereunder applicable to a national securities exchange.
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    \43\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\44\ that the proposed rule change (SR-NASDAQ-2015-161), 
as modified by Amendment Nos. 1, 2, and 3 thereto, be, and it hereby 
is, approved.
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    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08307 Filed 4-11-16; 8:45 am]
BILLING CODE 8011-01-P