Document ID: SEC-2014-1006-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2014-06-18T04:00Z

[Federal Register Volume 79, Number 117 (Wednesday, June 18, 2014)]
[Notices]
[Pages 34805-34808]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14202]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72382; File No. SR-NASDAQ-2014-041]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, To List and Trade of Shares of the First Trust Enhanced Short 
Maturity ETF of First Trust Exchange-Traded Fund IV

June 12, 2014.

I. Introduction

    On April 11, 2014, The NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to the listing and trading of shares 
(``Shares'') of the First Trust Enhanced Short Maturity ETF (``Fund'') 
of First Trust Exchange-Traded Fund IV (``Trust''). On April 24, 2014, 
the Exchange filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission published for comment in the Federal Register notice of the 
proposed rule change, as modified by Amendment No. 1 thereto, on May 1, 
2014.\4\ The Commission received no comments on the proposed rule 
change. This order approves the proposed rule change, as modified by 
Amendment No. 1 thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange: (1) Clarified that the 
Fund (defined below) will limit its investments in asset-backed 
securities and non-agency mortgage-backed securities (in the 
aggregate) to 20% of its net assets; (2) modified its description of 
how asset-backed or mortgage-backed securities will be priced in 
certain circumstances; and (3) made certain grammatical corrections.
    \4\ See Securities Exchange Act Release No. 72030 (April 25, 
2014), 79 FR 24765 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares pursuant to Nasdaq 
Rule 5735, which governs the listing and trading of Managed Fund 
Shares.\5\ The Exchange deems the Shares to be equity securities, 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.\6\
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    \5\ Under Nasdaq's Rules, a Managed Fund Share is a security 
that (a) represents an interest in a registered investment company 
(``Investment Company'') organized as an open-end management 
investment company or similar entity, that invests in a portfolio of 
securities selected by the Investment Company's investment adviser 
consistent with the Investment Company's investment objectives and 
policies; (b) is issued in a specified aggregate minimum number in 
return for a deposit of a specified portfolio of securities and/or a 
cash amount with a value equal to the next determined net asset 
value; and (c) when aggregated in the same specified minimum number, 
may be redeemed at a holder's request, which holder will be paid a 
specified portfolio of securities and/or cash with a value equal to 
the next determined net asset value. See Nasdaq Rule 5735(c)(1).
    \6\ See Notice, supra note 4, 79 FR at 24770.
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    The Shares will be offered by the Trust, which is organized as a 
Massachusetts business trust and is registered with the Commission as 
an investment company.\7\ First Trust Advisors L.P. is the investment 
adviser (``Adviser'') to the Fund. First Trust Portfolios L.P. is the 
principal underwriter and distributor of the Shares (``Distributor''). 
The Bank of New York Mellon Corporation will act as the administrator, 
accounting agent, custodian, and transfer agent to the Fund. The 
Adviser is affiliated with the

[[Page 34806]]

Distributor, a broker-dealer. As required by Nasdaq Rule 5735(g),\8\ 
the Adviser has implemented a firewall with respect to its broker-
dealer affiliate regarding access to information concerning the 
composition of or changes to the portfolio.\9\
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    \7\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). See Post-Effective Amendment No. 66 to 
Registration Statement on Form N-1A for the Trust, dated April 10, 
2014 (File Nos. 333-174332 and 811-22559) (``Registration 
Statement''). The Exchange represents that the Trust has obtained 
certain exemptive relief under the 1940 Act. See Investment Company 
Act Release No. 30029 (April 10, 2012) (File No. 812-13795) 
(``Exemptive Order'').
    \8\ Nasdaq Rule 5735(g) also requires that Adviser personnel who 
make decisions regarding the Fund's portfolio be subject to 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Fund's portfolio.
    \9\ Additionally, the Exchange represents that, in the event (a) 
the Adviser becomes newly affiliated with a broker-dealer, or (b) 
any new adviser or sub-adviser becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to such broker-
dealer regarding access to information concerning the composition of 
or changes to the portfolio, and it will be subject to procedures 
designed to prevent the use and dissemination of material, non-
public information regarding such portfolio.
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First Trust Enhanced Short Maturity ETF 10
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    \10\ Additional information regarding the Trust, the Fund, and 
the Shares, including investment strategies, risks, creation and 
redemption procedures, fees, Fund holdings disclosure policies, 
distributions and taxes, among other things, is included in the 
Notice and Registration Statements, as applicable. See Notice and 
Registration Statement, supra notes 4 and 7, respectively.
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    The investment objective of the Fund will be to seek current 
income, consistent with preservation of capital and daily liquidity. 
Under normal market conditions,\11\ the Fund will seek to achieve its 
investment objective by investing in a portfolio of U.S. dollar-
denominated fixed- and variable-rate \12\ instruments (collectively, 
``Fixed Income Securities'') issued by U.S. and non-U.S. public- and 
private-sector entities. The Fund will hold Fixed Income Securities of 
at least 13 non-affiliated issuers.
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    \11\ According to the Exchange, the term ``under normal market 
conditions includes, but is not limited to, the absence of adverse 
market, economic, political or other conditions, including extreme 
volatility or trading halts in the fixed income 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. For temporary 
defensive purposes, during the initial invest-up period and during 
periods of high cash inflows or outflows, the Fund may depart from 
its principal investment strategies; for example, it may hold a 
higher than normal proportion of its assets in cash. During such 
periods, the Fund may not be able to achieve its investment 
objective. The Fund may adopt a defensive strategy when the Adviser 
believes securities in which the Fund normally invests have elevated 
risks due to political or economic factors and in other 
extraordinary circumstances.
    \12\ For these purposes, the term ``variable-rate'' also 
includes similar terms such as ``floating-rate'' and ``adjustable-
rate.''
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Principal Investments

    The Fund intends to achieve its investment objective by investing, 
under normal market conditions, at least 80% of its net assets in a 
portfolio of U.S. dollar-denominated Fixed Income Securities issued by 
U.S. and non-U.S. public- and private-sector entities. At least 80% of 
the Fund's net assets will be invested in Fixed Income Securities that 
are, at the time of purchase, investment grade. Fixed Income Securities 
will include the following types of fixed- and variable-rate debt 
securities: corporate \13\ and government bonds and notes; agency 
securities; instruments of non-U.S. issuers in developed markets; 
privately-issued securities; \14\ asset-backed securities; \15\ 
mortgage-backed securities; \16\ municipal bonds; money market 
securities; and investment companies \17\ (including investment 
companies advised by the Adviser) that invest primarily in the 
foregoing types of Fixed Income Securities. The Fund will limit its 
investments in asset-backed securities and non-agency mortgage-backed 
securities (in the aggregate) to 20% of its net assets.\18\
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    \13\ While the Fund is permitted to invest without restriction 
in corporate bonds, the Adviser expects that, under normal market 
conditions, generally, with respect to at least 75% of the Fund's 
portfolio, a corporate bond will have, at the time of original 
issuance, $100 million or more par amount outstanding to be 
considered as an eligible investment.
    \14\ ``Privately-issued securities'' for these purposes 
generally includes Rule 144A securities and, in this context, may 
include both mortgage-backed and non-mortgage Rule 144A securities.
    \15\ Asset-backed securities are Fixed Income Securities that 
are backed by a pool of assets. The Fund currently intends to invest 
in asset-backed securities that are consumer asset-backed 
securities.
    \16\ Mortgage-backed securities are Fixed Income Securities that 
are backed by a pool of mortgage loans. There are a wide variety of 
mortgage-backed securities involving commercial or residential, 
fixed-rate or adjustable-rate mortgages and mortgages issued by 
banks or government agencies.
    \17\ Currently, the Fund anticipates investing only in 
registered open-end investment companies that are listed and traded 
in the U.S. on registered exchanges (i.e., other exchange traded 
funds).
    \18\ See Amendment No. 1, supra note3. There is no limit 
applicable to agency mortgage-backed securities.
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    Under normal market conditions, the Fund's duration \19\ is 
expected to be below one year and the maturity \20\ of the Fund's 
portfolio is expected to be below three years.
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    \19\ Duration is a measure of the expected price volatility of a 
debt instrument as a result of changes in market rates of interest, 
based on, among other factors, the weighted average timing of the 
instrument's expected principal and interest payments. Duration 
differs from maturity in that it considers a security's yield, 
coupon payments, principal payments, call features and coupon 
adjustments in addition to the amount of time until the security 
finally matures.
    \20\ Maturity is measured relative to the type of security. For 
Fixed Income Securities (exclusive of asset-backed securities and 
mortgage-backed securities), maturity shall be calculated using 
dollar-weighted average maturity, which is calculated by taking the 
average length of time to maturity. For asset-backed securities and 
mortgage-backed securities, maturity shall be calculated using 
weighted average life, which is the estimated time to principal 
paydown for each underlying instrument held by the Fund, weighted 
according to the relative holdings per instrument.
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Other Investments

    Under normal market conditions, the Fund will invest primarily in 
the Fixed Income Securities described above to meet its investment 
objective. In addition, the Fund may invest up to 20% of its net assets 
in floating rate loans. The floating rate loans in which the Fund will 
invest will represent amounts borrowed by companies or other entities 
from banks and other lenders and a significant portion of such floating 
rate loans may be rated below investment grade or unrated. Floating 
rate loans held by the Fund may be senior or subordinate obligations of 
the borrower and may or may not be secured by collateral.

Investment Restrictions

    The Fund will not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to (a) obligations issued or guaranteed by the U.S. 
government, its agencies or instrumentalities or (b) securities of 
other investment companies.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser. The Fund 
will monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets. 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.\21\
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    \21\ See Notice, supra note 4, 79 FR at 24768, n.26.
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    The Fund will not invest in non-U.S. equity securities.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1 thereto, is consistent with the 
requirements of Section 6 of the Act \22\ and the rules and

[[Page 34807]]

regulations thereunder applicable to a national securities 
exchange.\23\ In particular, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act,\24\ 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. The 
Commission notes that the Fund and the Shares will be listed and traded 
on the Exchange pursuant to the initial and continued listing criteria 
in Nasdaq's Rule 5735.
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    \22\ 15 U.S.C. 78f.
    \23\ 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).
    \24\ 17 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\25\ which sets forth Congress' 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. 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. 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 plans for the 
Shares. Intraday executable price quotations on Fixed Income Securities 
and other assets not traded on an exchange will be available from major 
broker-dealer firms or market data vendors, as well as from automated 
quotation systems, published or other public sources, or online 
information services. For exchange-listed assets, intraday pricing 
information will be available directly from the applicable listing 
exchange. Intraday price information will also be available through 
subscription services, such as Bloomberg, Markit, and Thomson Reuters, 
which can be accessed by authorized participants and other investors.
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    \25\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission 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 
NAV of the 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. On each business day, 
before commencement of trading in Shares in the Regular Market Session 
\26\ on the Exchange, the Fund will disclose on its Web site the 
identities and quantities of the portfolio of securities and other 
assets (``Disclosed Portfolio'' as defined in Nasdaq Rule 5735(c)(2)) 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the business day.\27\ 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.\28\ 
Moreover, the Intraday Indicative Value, available on the NASDAQ OMX 
Information LLC proprietary index data service, will be widely 
disseminated by one or more major market data vendors and broadly 
displayed at least every 15 seconds during the Regular Market 
Session.\29\ Trading in Shares will be halted if the circuit breaker 
parameters in Nasdaq Rule 4120(a)(11) have been reached 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 trading in the Shares may be halted. The Exchange states 
that it has a general policy prohibiting the distribution of material, 
non-public information by its employees. Further, the Commission notes 
that the Reporting Authority 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.\30\ The Adviser is 
affiliated with a broker-dealer and has implemented a firewall with 
respect to that broker-dealer regarding access to information 
concerning the composition and/or changes to the Fund's portfolio.\31\
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    \26\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., Eastern time; (2) Regular Market Session from 9:30 a.m. to 4 
p.m. or 4:15 p.m., Eastern time; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m., Eastern time).
    \27\ 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.
    \28\ See Notice, supra note 4, 79 FR at 24770.
    \29\ See id.
    \30\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \31\ See note 9, supra and accompanying text.
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    Further, regarding trading in the Shares and the exchange-traded 
securities held by the Fund, the Commission notes that the Financial 
Industry Regulatory Authority (``FINRA'') will communicate as needed on 
behalf of the Exchange \32\ with other markets and other entities that 
are members of the Intermarket Surveillance Group (``ISG''),\33\ and 
FINRA may obtain trading information regarding trading in the Shares 
and the exchange-traded securities held by the Fund from such markets 
and other entities that are members of the ISG, which includes 
securities and futures exchanges, or from markets which the Exchange 
has in place a comprehensive surveillance sharing agreement.\34\ 
Moreover, the Exchange states that FINRA will be able to access on its 
behalf, as needed, trade information for certain Fixed Income 
Securities held by the Fund reported to FINRA's Trade Reporting and 
Compliance Engine.\35\ The Exchange states that trading in the Shares 
will be subject to the existing trading surveillances, administered by 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities laws, 
and 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.\36\
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    \32\ The Exchange states that, while 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. See Notice, supra note 4, 79 FR at 
24771, n.34.
    \33\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange states 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. See id. at 24771, n.35.
    \34\ See id. at 24771.
    \35\ See id.
    \36\ See id. at 24770-71.
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    In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares will conform to the initial and continued listing 
criteria under Nasdaq Rule 5735.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.

[[Page 34808]]

    (3) The Exchange represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by FINRA on 
behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws and 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.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2310, 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 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.\37\
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    \37\ See id. at 24771.
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    (5) For initial and continued listing, the Fund will be in 
compliance with Rule 10A-3 under the Act.\38\
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    \38\ 17 CFR 240.10A-3.
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    (6) While the Fund is permitted to invest without restriction in 
corporate bonds, the Adviser expects that, under normal market 
conditions, generally, with respect to at least 75% of the Fund's 
portfolio, a corporate bond will have, at the time of original 
issuance, $100 million or more par amount outstanding to be considered 
as an eligible investment.
    (7) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser.
    (8) The Fund will limit its investments in asset-backed securities 
and non-agency mortgage-backed securities (in the aggregate) to 20% of 
its net assets.
    (9) The Fund will not invest in non-U.S. equity securities.
    (10) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading.

This approval order is based on all of the Exchange's representations, 
including those set forth in the Notice.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \39\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \39\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\40\ that the proposed rule change (SR-NASDAQ-2014-041), as 
modified by Amendment No. 1, be, and it hereby is, approved.
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    \40\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14202 Filed 6-17-14; 8:45 am]
BILLING CODE 8011-01-P