Document ID: SEC-2013-1344-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-07-25T04:00Z

[Federal Register Volume 78, Number 143 (Thursday, July 25, 2013)]
[Notices]
[Pages 45003-45009]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-17856]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70008; File No. SR-NYSEArca-2013-70]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To List and Trade Shares of First Trust 
Inflation Managed Fund

July 19, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on July 8, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): First 
Trust Inflation Managed Fund. The text of the proposed rule change is 
available on the Exchange's Web site at www.nyse.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 self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those 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 parts 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 (``Shares'') of 
the following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares \4\ on the Exchange: First 
Trust Inflation Managed Fund (``Fund'').\5\ The Shares will be offered 
by First Trust Exchange-Traded Fund IV (the ``Trust''), which is 
organized as a Massachusetts business trust and is registered with the 
Commission as an open-end management investment company.\6\
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), 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 previously approved listing and trading 
on the Exchange of a number of actively managed funds under Rule 
8.600. See, e.g., Securities Exchange Act Release Nos. 57801 (May 8, 
2008), 73 FR 27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order 
approving Exchange listing and trading of twelve actively-managed 
funds of the WisdomTree Trust); 60460 (August 7, 2009), 74 FR 41468 
(August 17, 2009) (SR-NYSEArca-2009-55) (order approving listing of 
Dent Tactical ETF); 62502 (July 15, 2010), 75 FR 42471 (July 21, 
2010) (SR-NYSEArca-2010-57) (order approving listing of 
AdvisorShares WCM/BNY Mellon Focused Growth ADR ETF); 69251 (March 
28, 2013), 78 FR 20162 (April 3, 2013) (SR-NYSEArca-2013-14) (order 
approving listing of Cambria Shareholder Yield ETF).
    \6\ The Trust is registered under the 1940 Act. On December 7, 
2012, the Trust filed with the Commission an amendment to the 
Trust's registration statement on Form N-1A under the Securities Act 
of 1933 (``1933 Act'') and under the 1940 Act relating to the Fund 
(File Nos. 333-174332 and 811-22559) (``Registration Statement''). 
The description of the operation of the Trust and the Fund herein is 
based, in part, on the Registration Statement. In addition, the 
Commission has issued an order granting certain exemptive relief to 
the Trust under the 1940 Act. See Investment Company Act Release No. 
28468 (October 27, 2008) (File No. 812-13477) (``Exemptive Order'').
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    The investment adviser to the Fund will be First Trust Advisors 
L.P. (the ``Adviser'' or ``First Trust''). First Trust Portfolios L.P. 
(the ``Distributor'') will be the principal underwriter and distributor 
of the Fund's Shares. Bank of New York Mellon (the ``Administrator'' or 
``BNY'') will serve as administrator, custodian and transfer agent for 
the Fund.
    Commentary .06 to Rule 8.600 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 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 portfolio. In addition, Commentary 
.06 further requires that personnel who make decisions on the open-end 
fund's portfolio composition must be subject to procedures designed to 
prevent the use and dissemination of material nonpublic information 
regarding the open-end fund's portfolio.\7\ Commentary .06 to Rule 
8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca 
Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the 
establishment of a ``fire wall'' between the investment adviser and the 
broker-dealer reflects the applicable open-end fund's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. The 
Adviser is not a broker-dealer but is affiliated with First Trust 
Portfolios L.P., a broker-dealer, and has implemented a fire wall with 
respect to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio. In the 
event (a) the Adviser or any sub-adviser becomes newly affiliated with 
a broker-dealer, or (b) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with a broker-dealer, it will 
implement a fire wall with respect to its relevant personnel or its 
broker-dealer affiliate regarding access to information

[[Page 45004]]

concerning the composition and/or changes to the portfolio, and will be 
subject to procedures designed to prevent the use and dissemination of 
material non-public information regarding such portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and its related personnel are 
subject to the provisions of Rule 204A-1 under the Advisers Act 
relating to codes of ethics. This Rule requires investment advisers 
to adopt a code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with Rule 204A-1 under the Advisers Act. 
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful 
for an investment adviser to provide investment advice to clients 
unless such investment adviser has (i) adopted and implemented 
written policies and procedures reasonably designed to prevent 
violation, by the investment adviser and its supervised persons, of 
the Advisers Act and the Commission rules adopted thereunder; (ii) 
implemented, at a minimum, an annual review regarding the adequacy 
of the policies and procedures established pursuant to subparagraph 
(i) above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
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    According to the Registration Statement, the Fund's primary 
investment objective will be to seek long-term capital appreciation and 
its secondary investment objective will be to seek current income. The 
Fund will be an actively managed exchange-traded fund that will invest 
in (1) exchange-listed common stocks and other equity securities 
described below (including ``Depositary Receipts'', as defined herein) 
of companies in the agriculture, energy and metals and mining sectors; 
(2) exchange-traded products (the ``Underlying ETPs'') \8\ that hold 
commodities, such as gold and silver, or futures on such commodities; 
(3) debt securities and Underlying ETPs that invest in such securities; 
and (4) real estate interests, including other exchange-traded funds 
that invest in such interests.
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    \8\ The term ``Underlying ETPs'' includes Investment Company 
Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio 
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100); 
Trust Issued Receipts (as described in NYSE Arca Equities Rule 
8.200); Commodity-Based Trust Shares (as described in NYSE Arca 
Equities Rule 8.201); Currency Trust Shares (as described in NYSE 
Arca Equities Rule 8.202); Commodity Index Trust Shares (as 
described in NYSE Arca Equities Rule 8.203); Trust Units (as 
described in NYSE Arca Equities Rule 8.500); Managed Fund Shares (as 
described in NYSE Arca Equities Rule 8.600); and closed-end funds. 
The Underlying ETPs all will be listed and traded in the U.S. on 
registered exchanges.
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    The asset class allocation between equity securities, bonds, 
commodities and real estate will be performed on a quarterly basis by 
First Trust. Changes to the asset allocation will be considered on a 
shorter-time frame if market conditions warrant.\9\ After the initial 
asset class allocation, the securities for each asset type will be 
selected as described below.
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    \9\ Such market conditions could include periods of extreme 
volatility and force majeure events including, but not limited to, 
elements of nature or acts of God, earthquakes, strikes, riots, acts 
of war, terrorism or other national emergencies.
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Equity Allocation
    According to the Registration Statement, the Fund may invest in 
equity securities, which include common stocks; preferred securities; 
warrants to purchase common stocks or preferred securities; securities 
convertible into common stocks or preferred securities; and other 
securities with equity characteristics. The Fund also may invest in 
U.S. dollar-denominated foreign equity securities.\10\
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    \10\ See notes 12 and 30, infra.
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    Under normal market conditions,\11\ the Fund will invest, in 
addition to common stocks, in U.S. dollar-denominated sponsored 
depositary receipts, which will include American Depositary Receipts 
(``ADRs''), Global Depositary Receipts (``GDRs''), European Depositary 
Receipts (``EDRs'') and American Depositary Shares (``ADSs'') 
(collectively ``Depositary Receipts'') \12\, of agriculture, energy and 
metals and mining companies.
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    \11\ The term ``under normal market conditions'' includes, but 
is not limited to, the absence of extreme volatility or trading 
halts in the equity 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.
    \12\ The equity securities, including Depositary Receipts, in 
which the Fund will invest will trade in markets that are members of 
the Intermarket Surveillance Group (``ISG'') or are parties to 
comprehensive surveillance sharing agreements with the Exchange. See 
note 30, infra.
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    The Adviser anticipates that the equities portion of the portfolio 
initially will represent 60% of the net assets of the Fund, although 
this percentage may vary over time.
    According to the Registration Statement, an initial universe of 
inflation-related stocks will be created by selecting stocks of 
agricultural, energy and metals and mining companies that trade on a 
U.S. stock exchange and have adequate liquidity for investment. The 
Fund's portfolio will be selected by examining the historical financial 
results of the securities from the initial universe. Companies that do 
not produce positive cash flow or companies with credit quality issues 
will be eliminated. The securities will then be evaluated by 
fundamental factors such as sales, earnings and cash flow growth; 
valuation factors such as price/earnings, price/cash flow, price/sales 
and price/book; and technical factors such as price momentum and 
earnings surprises. An estimated value will be calculated for each of 
the companies. The companies that currently trade at an attractive 
market price relative to their estimated value will be favored over 
companies that do not. The final portfolio will then be selected by the 
Adviser based on the security's fundamentals, valuation and technical 
factors, the security's relative valuation and other qualitative 
factors such as competitive advantages, new products and quality of 
management.
Bond Allocation
    The Fund will invest in the types of bonds described below 
primarily through investing in Underlying ETPs that concentrate in 
these types of holdings. Bonds with fixed coupons during periods of 
rising inflation expectations may likely experience price depreciation 
due to the impact of rising interest rates. According to the 
Registration Statement, the negative effects of inflation on bonds may 
be offset through Underlying ETPs that invest in inflation-linked 
bonds. Inflation-linked government bonds, commonly known in the U.S. as 
Treasury Inflation-Protected Securities (``TIPS''), are securities 
issued by governments that are designed to provide inflation protection 
to investors. The coupon payments and principal value on these 
securities are adjusted according to inflation over the life of the 
bonds. The Underlying ETPs chosen to represent the bond portion of the 
portfolio will be reviewed for capitalization, liquidity, expenses, 
tracking error and taxation structure factors. First Trust anticipates 
that the bond portion of the portfolio will initially represent 
approximately 20% of the net assets of the Fund, although this 
percentage may vary over time.
    The Fund, through investments in Underlying ETPs, will invest 
primarily in investment grade debt securities with respect to the bond 
portion of its portfolio and may invest up to 15% of its net assets in 
high yield debt securities, including leveraged loans,\13\ that are 
rated below-investment grade at the time of purchase, or unrated 
securities deemed by the Fund's Adviser to be of comparable quality. 
``Below investment grade'' is defined as those securities that have a 
long-term credit rating below ``BBB-'' by Standard & Poor's Rating 
Group, a division of McGraw Hill Companies, Inc. (``S&P''), or below 
``Baa3'' by Moody's Investors Service, Inc. (``Moody's'') or comparably 
rated by another nationally recognized statistical rating organization 
(``NRSRO'').
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    \13\ Under normal market conditions, the Fund may invest up to 
15% of its net asset value in leveraged loans, including senior 
secured bank loans, unsecured and/or subordinated bank loans, loan 
participations and unfunded contracts. The Fund may invest in such 
loans by purchasing assignments of all or a portion of loans or loan 
participations from third parties. These loans are made by or issued 
to corporations primarily to finance acquisitions, refinance 
existing debt, support organic growth, or pay out dividends, and are 
typically originated by large banks and are then syndicated out to 
institutional investors as well as to other banks.
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    The Fund, or the Underlying ETPs in which it may invest, may invest 
in a

[[Page 45005]]

variety of debt securities, including corporate debt securities, U.S. 
government securities and non-U.S. debt securities. Corporate debt 
securities are fixed-income securities issued by businesses to finance 
their operations. Notes, bonds, debentures and commercial paper are the 
most common types of corporate debt securities, with the primary 
difference being their maturities and secured or unsecured status. 
Commercial paper has the shortest term and is usually unsecured. 
Certain debt securities held by the Fund may include debt instruments 
that have economic characteristics that are similar to preferred 
securities. Such debt instruments are typically issued by corporations, 
generally in the form of interest bearing notes, or by an affiliated 
business trust of a corporation, generally in the form of (i) 
beneficial interests in subordinated debentures or similarly structured 
securities or (ii) more senior debt securities that pay income and 
trade in a manner similar to preferred securities. Such debt 
instruments that have economic characteristics similar to preferred 
securities include trust preferred securities, hybrid trust preferred 
securities and senior notes/baby bonds.
    The Fund will invest in Underlying ETPs that are designed to track 
government bond indexes, bank loan indexes, and floating rate security 
indexes.
Commodities Allocation
    The Fund will invest in commodities through investing in Underlying 
ETPs that invest in commodities or futures on such commodities, such as 
gold, silver and commodity indexes. According to the Registration 
Statement, in general, commodities have relatively high correlations 
with inflation, and the prices of real assets, such as gold, silver, 
oil and copper, often rise along with increasing interest rates and 
inflation. Additionally, commodities normally move in the opposite 
direction of the U.S. dollar. First Trust anticipates that the 
commodities portion of the portfolio will represent 10% of the initial 
net assets of the Fund, although this percentage may vary over time.
Real Estate Allocation
    The Fund will invest in U.S. exchange-listed securities of real 
estate investment trusts (``REITS''). According to the Registration 
Statement, in general, real estate prices have generated a 
correspondingly large increase in return and largely preserved the 
purchasing power of the original investment during periods of high 
inflation. The real estate portion of the portfolio will represent 10% 
of the initial net assets of the Fund, although this percentage may 
vary over time. The Fund also may invest in exchange-traded funds 
designed to track real estate indexes.
Other Investments
    Normally, the Fund will invest substantially all of its assets in 
the securities allocations described above to meet its investment 
objectives. The Fund may invest the remainder of its assets in 
securities with maturities of less than one year or cash equivalents, 
or it may hold cash. The percentage of the Fund invested in such 
holdings may vary and depend on several factors, including market 
conditions. For temporary defensive purposes and during periods of high 
cash inflows or outflows, the Fund may depart from its principal 
investment strategies and invest part or all of its assets in these 
securities or it may hold cash.\14\ During such periods, the Fund may 
not be able to achieve its investment objectives. The Fund may adopt a 
defensive strategy when the portfolio manager believes securities in 
which the Fund normally invests have elevated risks due to political or 
economic factors and in other extraordinary circumstances.
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    \14\ The Fund may, without limit as to percentage of assets, 
purchase U.S. government securities or short-term debt securities to 
keep cash on hand fully invested or for temporary defensive 
purposes. Short-term debt securities are securities from issuers 
having a long-term debt rating of at least A by S&P, Moody's or 
Fitch, Inc. (``Fitch'') and having a maturity of one year or less. 
The use of these temporary investments will not be a part of a 
principal investment strategy of the Fund. Short-term debt 
securities are defined to include, without limitation, the 
following: (1) 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, 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 are short-term 
unsecured promissory notes, including variable rate master demand 
notes issued by corporations to finance their current operations. 
Master demand notes are direct lending arrangements between the Fund 
and a corporation. The Fund may only invest in commercial paper 
rated A-1 or higher by S&P, Prime-1 or higher by Moody's or F2 or 
higher by Fitch.
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    The Fund may invest up to 15% of its net assets in U.S. exchange-
listed futures, interest rate swaps, total return swaps, non-U.S. 
currency swaps, credit default swaps,\15\ U.S. exchange-listed options, 
forward contracts and other derivative instruments in the aggregate to 
seek to enhance returns,\16\ to hedge some of the risks of its 
investments in securities,\17\ as a substitute for a position in the 
underlying asset, to reduce transaction costs, to maintain full market 
exposure in a given asset class, to manage cash flows, to limit 
exposure to losses due to changes to non-U.S. currency exchange rates 
or to preserve capital.\18\
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    \15\ To the extent practicable, the Fund will invest in swaps 
cleared through the facilities of a centralized clearing house.
    \16\ For example, the Fund may sell exchange-listed covered 
calls on equity positions in the portfolio in order to enhance its 
income.
    \17\ The Fund may use derivative investments to hedge against 
interest rate and market risks. The Fund may engage in various 
interest rate and currency hedging transactions, including buying or 
selling U.S. exchange-listed options or entering into other 
transactions including forward contracts, fully collateralized swaps 
and other derivatives transactions.
    \18\ According to the Registration Statement, the Fund will not 
enter into futures and options transactions if the sum of the 
initial margin deposits and premiums paid for unexpired options or 
futures exceeds 5% of the Fund's total assets.
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    The Fund will only enter into transactions in derivative 
instruments with counterparties that First Trust reasonably believes 
are capable of performing under the contract \19\ and will post as 
collateral at least $250,000 each day.
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    \19\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser's Execution Committee will 
evaluate the creditworthiness of counterparties on an ongoing basis. 
In addition to information provided by credit agencies, the 
Adviser's analysts will evaluate each approved counterparty using 
various methods of analysis, including the counterparty's liquidity 
in the event of default, the broker-dealer's reputation, the 
Adviser's past experience with the broker-dealer, the Financial 
Industry Regulatory Authority's (``FINRA'') BrokerCheck and 
disciplinary history and its share of market participation.
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    The Fund may invest in shares of money market funds to the extent 
permitted by the 1940 Act.
    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry or group of 
industries. This restriction does not apply to obligations issued or 
guaranteed by the U.S. government, its agencies or 
instrumentalities.\20\
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    \20\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser \21\ and 
master demand notes.

[[Page 45006]]

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. Illiquid securities 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.\22\
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    \21\ In reaching liquidity decisions, the Adviser may consider 
the following factors: the frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer).
    \22\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds 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), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the 1933 Act).
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    The Fund intends to qualify annually and to elect to be treated as 
a regulated investment company (``RIC'') under the Internal Revenue 
Code.\23\
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    \23\ 26 U.S.C. 851.
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    The Fund may invest up to 10% of its net assets in inverse 
Underlying ETPs, but it will not invest in leveraged or inverse 
leveraged Underlying ETPs.
    The Fund's investments will be consistent with the Fund's 
investment objectives and will not be used to enhance leverage. That 
is, while the Fund will be permitted to borrow as permitted under the 
1940 Act, the Fund's investments will not be used to seek performance 
that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the 
Fund's broad-based securities market index (as defined in Form N-1A) 
(i.e., S&P 500).
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. The Exchange represents 
that, for initial and/or continued listing, the Fund will be in 
compliance with Rule 10A-3 \24\ under the Act, as provided by NYSE Arca 
Equities Rule 5.3. A minimum of 100,000 Shares for the Fund 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.
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    \24\ 17 CFR 240.10A-3.
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Creations and Redemptions
    The Fund will issue and redeem Shares on a continuous basis, at net 
asset value (``NAV''), only in large specified blocks each consisting 
of 50,000 Shares (each such block of Shares, called a ``Creation 
Unit,'' and any group of Creation Units, the ``Creation Unit 
Aggregation''). The Creation Units will be issued and redeemed for 
securities in which the Fund will invest, cash or both securities and 
cash.
    The consideration for purchase of Creation Units of the Fund may 
consist of (i) cash in lieu of all or a portion of a basket of equity 
securities (``Deposit Securities''), and/or (ii) a designated portfolio 
of equity securities generally held by the Fund as determined by First 
Trust per each Creation Unit (``Fund Securities'') and generally an 
amount of cash (the ``Cash Component''). Together, the Deposit 
Securities and the Cash Component (including the cash in lieu amount) 
constitute the ``Fund Deposit,'' which represents the minimum initial 
and subsequent investment amount for a Creation Unit of the Fund.
    BNY, through the National Securities Clearing Corporation 
(``NSCC''), will make available on each business day, prior to the 
opening of business of the New York Stock Exchange (``NYSE'') 
(currently 9:30 a.m., Eastern time (``E.T.'')), the list of the names 
and the required number of shares of each Deposit Security to be 
included in the current Fund Deposit (based on information at the end 
of the previous business day) for the Fund.
    In addition to the list of names and numbers of securities 
constituting the current Deposit Securities of a Fund Deposit, BNY, 
through the NSCC, also will make available on each business day, the 
estimated Cash Component, effective through and including the previous 
business day, per Creation Unit of the Fund.
    All orders to create or redeem Creation Units must be received by 
the transfer agent no later than the closing time of the regular 
trading session on the NYSE (ordinarily 4:00 p.m., E.T.) in each case 
on the date such order is placed in order for creation or redemption of 
Creation Units to be effected based on the NAV of Shares of the Fund as 
next determined on such date after receipt of the order in proper form.
    Fund Shares may be redeemed only in Creation Units at their NAV 
next determined after receipt of a redemption request in proper form by 
the Fund through the transfer agent and only on a business day. The 
Fund will not redeem Shares in amounts less than a Creation Unit. 
Investors must accumulate enough Shares in the secondary market to 
constitute a Creation Unit in order to have such Shares redeemed by the 
Trust. With respect to the Fund, BNY, through the NSCC, will make 
available prior to the opening of business on the NYSE (currently 9:30 
a.m., E.T.) on each business day, the identity of the Fund Securities 
that will be applicable (subject to possible amendment or correction) 
to redemption requests received in proper form on that day. Fund 
Securities received on redemption may not be identical to Deposit 
Securities that are applicable to creations of Creation Units.
    Unless cash redemptions are available or specified for the Fund, 
the redemption proceeds for a Creation Unit generally will consist of 
Fund Securities--as announced on the business day of the request for 
redemption received in proper form--plus or minus cash in an amount 
equal to the difference between the NAV of the Fund Shares being 
redeemed, as next determined after a receipt of a request in proper 
form, and the value of the Fund Securities, less the applicable 
redemption transaction fee as described in the Registration Statement 
and, if applicable, any operational processing and brokerage costs, 
transfer fees or stamp taxes.
Net Asset Value
    The Fund's NAV will be determined as of the close of trading 
(normally 4:00 p.m., E.T.) on each day the NYSE is open for business. 
NAV will be calculated for the Fund by taking the market price 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.
    The Fund's investments will be valued at market value or, in the 
absence of market value with respect to any portfolio securities, at 
fair value in accordance with valuation procedures adopted by the 
Trust's Board of Trustees (``Board'') and in accordance with the

[[Page 45007]]

1940 Act. Portfolio securities traded on more than one securities 
exchange will be valued at the last sale price or, if so disseminated 
by an exchange, the official closing price, 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. Portfolio 
securities traded in the over-the-counter market will be valued at the 
closing bid prices. Short-term investments that mature in less than 60 
days when purchased will be valued at amortized cost.
Availability of Information
    The Fund's Web site (www.ftportfolios.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 Fund's Web 
site will include additional quantitative information updated on a 
daily basis, including, for the Fund, (1) daily trading volume, the 
prior business day's reported closing price, NAV and mid-point of the 
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask 
Price''),\25\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Core Trading Session (9:30 a.m. to 4:00 
p.m. E.T.) on the Exchange, the Fund will disclose on its Web site the 
Disclosed Portfolio as defined in NYSE Arca Equities Rule 8.600(c)(2) 
that will form the basis for the Fund's calculation of NAV at the end 
of the business day.\26\
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    \25\ The Bid/Ask Price of the Fund will be determined using the 
mid-point 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.
    \26\ Under accounting procedures 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.
---------------------------------------------------------------------------

    On a daily basis, the Fund will disclose for each portfolio 
security and other financial instrument of the Fund the following 
information on the Fund's Web site: ticker symbol (if applicable), name 
of security and financial instrument, number of shares (if applicable) 
and dollar value of securities and financial instruments held in the 
portfolio, and percentage weighting of the security and financial 
instrument in the portfolio. The Web site information will be publicly 
available at no charge.
    In addition, a basket composition file, which will include the 
security names and share quantities required to be delivered in 
exchange for the Fund's Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the NYSE via the NSCC. The basket will represent one Creation Unit of 
the Fund.
    Information regarding the intra-day value of the Shares of the 
Fund, which is the Portfolio Indicative Value (``PIV'') as defined in 
NYSE Arca Equities Rule 8.600(c)(3), will be widely disseminated every 
15 seconds throughout the Exchange's Core Trading Session by one or 
more major market data vendors.\27\ The PIV should not be viewed as a 
``real-time'' update of the NAV per Share of the Fund because the PIV 
may not be calculated in the same manner as the NAV, which is computed 
once a day, generally at the end of the business day. The price of a 
non-U.S. security that is primarily traded on a non-U.S. exchange shall 
be updated, using the last sale price, every 15 seconds throughout the 
trading day, provided, that upon the closing of such non-U.S. exchange, 
the closing price of the security, after being converted to U.S. 
dollars, will be used. Furthermore, in calculating the PIV of the 
Fund's Shares, exchange rates may be used throughout the Core Trading 
Session that may differ from those used to calculate the NAV per Share 
of the Fund and consequently may result in differences between the NAV 
and the PIV.
---------------------------------------------------------------------------

    \27\ Currently, it is the Exchange's understanding that several 
major market data vendors widely disseminate PIVs taken from the 
Consolidated Tape Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    The Adviser represents that the Trust, First Trust and BNY will not 
disseminate non-public information concerning the Trust.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and the Trust's 
Form N-CSR and Form N-SAR, filed twice a year. The Trust's SAI and 
Shareholder Reports are available free upon request from the Trust, and 
those documents and the Form N-CSR and Form N-SAR may be viewed on-
screen or downloaded from the Commission's Web site at www.sec.gov. 
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 
Shares will be available via the CTA high-speed line. The intra-day, 
closing and settlement prices of the portfolio securities are also 
readily available from the national securities exchanges trading such 
securities, automated quotation systems, published or other public 
sources, or on-line information services such as Bloomberg or Reuters.
    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, distributions 
and taxes is included in the Registration Statement. All terms relating 
to the Fund that are referred to, but not defined in, this proposed 
rule change are defined in the Registration Statement.
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.\28\ Trading in Shares of the Fund 
will be halted if the circuit breaker parameters in NYSE Arca Equities 
Rule 7.12 have been reached. Trading also 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 
financial instruments comprising the Disclosed Portfolio of the Fund; 
or (2) whether other unusual conditions or circumstances detrimental to 
the maintenance of a fair and orderly market are present. Trading in 
the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), 
which sets forth circumstances under which Shares of the Fund may be 
halted.
---------------------------------------------------------------------------

    \28\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE

[[Page 45008]]

Arca Equities Rule 7.6, Commentary .03, the minimum price variation 
(``MPV'') for quoting and entry of orders in equity securities traded 
on the NYSE Arca Marketplace is $0.01, with the exception of securities 
that are priced less than $1.00 for which the MPV for order entry is 
$0.0001.
Surveillance
    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. 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.\29\
---------------------------------------------------------------------------

    \29\ 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, equity securities, futures contracts 
and options contracts with other markets and other entities that are 
members of the ISG and FINRA, on behalf of the Exchange, may obtain 
trading information regarding trading in the Shares, equity securities, 
futures contracts and options contracts from such markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares, equity securities, futures contracts and options 
contracts from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.\30\
---------------------------------------------------------------------------

    \30\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    As noted above, the equity securities in which the Fund will 
invest, including Underlying ETPs, Depositary Receipts, REITs, common 
stocks, preferred securities, warrants, convertible securities, and 
U.S. dollar-denominated foreign securities, as well as certain 
derivatives such as options and futures contracts, will trade in 
markets that are ISG members or are parties to a comprehensive 
surveillance sharing agreement with the Exchange.\31\
---------------------------------------------------------------------------

    \31\ See note 12, supra.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
(``Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Bulletin will discuss the 
following: (1) The procedures for purchases and redemptions of Shares 
in Creation Units (and that Shares are not individually redeemable); 
(2) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due 
diligence on its ETP Holders to learn the essential facts relating to 
every customer prior to trading the Shares; (3) the risks involved in 
trading the Shares during the Opening and Late Trading Sessions when an 
updated PIV will not be calculated or publicly disseminated; (4) how 
information regarding the PIV will be disseminated; (5) the requirement 
that ETP Holders deliver a prospectus to investors purchasing newly 
issued Shares prior to or concurrently with the confirmation of a 
transaction; and (6) trading information.
    In addition, the Bulletin will reference that the Fund is subject 
to various fees and expenses described in the Registration Statement. 
The Bulletin will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. The 
Bulletin will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \32\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 NYSE Arca Equities Rule 
8.600. The Adviser has implemented a fire wall with respect to its 
broker-dealer affiliate regarding access to information concerning the 
composition and/or changes to the portfolio. The Exchange has in place 
surveillance procedures that are adequate to properly monitor trading 
in the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws. 
FINRA, on behalf of the Exchange, will communicate as needed regarding 
trading in the Shares, equity securities, futures contracts and options 
contracts with other markets and other entities that are members of the 
ISG and FINRA, on behalf of the Exchange, may obtain trading 
information regarding trading in the Shares, equity securities, futures 
contracts and options contracts from such markets and other entities. 
In addition, the Exchange may obtain information regarding trading in 
the Shares, equity securities, futures contracts and options contracts 
from markets and other entities that are members of ISG or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement. The equity securities in which the Fund will invest, 
including Underlying ETPs, Depositary Receipts, REITs, common stocks, 
preferred securities, warrants, convertible securities, and U.S. 
dollar-denominated foreign securities, will trade in markets that are 
ISG members or are parties to comprehensive surveillance sharing 
agreements with the Exchange. The Fund may invest up to 10% of its net 
assets in inverse Underlying ETPs, but it will not invest in leveraged 
or inverse leveraged Underlying ETPs. The Fund may hold up to an 
aggregate amount of 15% of its net assets in illiquid securities 
(calculated at the time of investment), including Rule 144A securities 
deemed illiquid by the Adviser and master demand notes. The Fund may 
invest up to 15% of its net assets in U.S. exchange-listed futures, 
interest rate swaps, total return swaps, non-U.S. currency swaps, 
credit default swaps, U.S. exchange-listed options and certain other 
derivative instruments, as described above. The Fund, through 
investments in Underlying ETPs, will invest primarily in investment 
grade debt securities with respect to the bond portion of its portfolio 
and may invest up to 15% of its net assets in high yield debt 
securities, including leveraged loans, that are rated below-investment 
grade at the time of purchase, or unrated

[[Page 45009]]

securities deemed by the Fund's Adviser to be of comparable quality. 
The Fund's investments will be consistent with the Fund's investment 
objectives and will not be used to enhance leverage.
    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 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 is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. Moreover, the PIV will be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Exchange's Core Trading Session. On each business 
day, before commencement of trading in Shares in the Core Trading 
Session on the Exchange, the Fund will disclose on its Web site the 
Disclosed Portfolio that will form the basis for the Fund's calculation 
of NAV at the end of the business day. 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, and quotation and last sale information will 
be available via the CTA high-speed line. The Web site for the Fund 
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 ETP Holders in a Bulletin of the special characteristics and 
risks associated with trading the Shares. Trading in Shares of the Fund 
will be halted if the circuit breaker parameters in NYSE Arca Equities 
Rule 7.12 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 NYSE Arca 
Equities Rule 8.600(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 PIV, 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 exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the Fund's holdings, 
the PIV, the Disclosed Portfolio, and quotation and last sale 
information for the Shares.

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 purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded product that holds 
equity, debt and commodity-related securities, which 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 solicited or received with respect to the 
proposed rule change.

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 (i) as the Commission may 
designate up to 90 days of such date 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 the 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 Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2013-70 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2013-70. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2013-70 and should 
be submitted on or before August 15, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-17856 Filed 7-24-13; 8:45 am]
BILLING CODE 8011-01-P