Document ID: SEC-2012-2134-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2012-12-26T05:00Z

[Federal Register Volume 77, Number 247 (Wednesday, December 26, 2012)]
[Notices]
[Pages 76148-76155]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30888]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68458; File No. SR-NYSEArca-2012-139]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To List and Trade First Trust Preferred 
Securities and Income ETF Under NYSE Arca Equities Rule 8.600

December 18, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that, on December 6, 2012, 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 
Exchange. 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\ 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 the following under NYSE 
Arca Equities Rule 8.600 (``Managed Fund Shares''): First Trust 
Preferred Securities and Income ETF. 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,

[[Page 76149]]

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 shares (``Shares'') of the 
First Trust Preferred Securities and Income ETF (``Fund'') under NYSE 
Arca Equities Rule 8.600,\3\ which governs the listing and trading of 
Managed Fund Shares.\4\ The Shares will be offered by First Trust 
Exchange-Traded Fund III (``Trust''), which is organized as a 
Massachusetts business trust and is registered with the Commission as 
an open-end management investment company.\5\ The investment adviser to 
the Fund is First Trust Advisors L.P. (``Adviser'' or ``First Trust''). 
Stonebridge Advisors LLC will serve as investment sub-adviser to the 
Fund (``Sub-Adviser'') and will provide day-to-day portfolio management 
of the Fund. First Trust Portfolios L.P. (``Distributor'') will be the 
principal underwriter and distributor of the Fund's Shares. Brown 
Brothers Harriman & Co. (``Administrator'' or ``Custodian'') will serve 
as administrator, custodian, and transfer agent for the Fund.
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    \3\ The Commission 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 AdviserShares WCM/
BNY Mellon Focused Growth ADR ETF); and 63076 (October 12, 2010), 75 
FR 63874 (October 18, 2010) (SR-NYSEArca-2010-79) (order approving 
listing of Cambria Global Tactical ETF).
    \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 Trust is registered under the 1940 Act. On September 23, 
2011, the Trust filed with the Commission a registration statement 
on Form N-1A under the Securities Act of 1933 and under the 1940 Act 
relating to the Fund (File Nos. 333-176976 and 811-22245) 
(``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. 30029 (April 10, 2012) (File No. 
812-13795) (``Exemptive Order'').
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    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.\6\ 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 affiliated with the Distributor, a broker-dealer, and the 
Sub-Adviser also is affiliated with a broker-dealer. The Adviser and 
Sub-Adviser each has implemented a fire wall with respect to its 
respective broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio. In the 
event (a) the Adviser or the Sub-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 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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    \6\ 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 and 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.
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    According to the Registration Statement, the Fund's objective will 
be to provide current income and total return. Under normal market 
conditions,\7\ the Fund will invest at least 80% of its net assets 
(including investment borrowings) in preferred securities (``Preferred 
Securities'') and income-producing debt securities (``Income 
Securities'').\8\ The Adviser represents that initially at least 50% of 
the Fund's net assets invested in Preferred Securities and 50% of the 
Income Securities held by the Fund will be exchange-listed.\9\ However, 
the Fund reserves the right to reduce the percentage of assets that are 
exchange-listed. Preferred Securities held by the Fund generally pay 
fixed or adjustable-rate distributions to investors and have preference 
over common stock in the payment of distributions and the

[[Page 76150]]

liquidation of a company's assets, but are generally junior to all 
forms of the company's debt, including both senior and subordinated 
debt. For purposes of the 80% test set forth above, Income Securities 
consist of both foreign and domestic debt instruments, including 
corporate bonds, high yield bonds, convertible securities, and 
contingent convertible capital securities. In addition, for purposes of 
the 80% test set forth above, securities of other open-end funds, 
closed-end funds, or exchange-traded funds (``ETFs'') registered under 
the 1940 Act \10\ that invest primarily in Preferred Securities or 
Income Securities will be deemed to be Preferred Securities or Income 
Securities, respectively. The Adviser represents that at least 80% of 
the Preferred Securities and Income Securities held by the Fund will 
have a minimum original principal amount outstanding of $100 million or 
more. In addition, the Fund's portfolio will be comprised of a minimum 
of 13 non-affiliated issuers.
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    \7\ 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.
    \8\ The risks and potential rewards of investing in the Fund may 
at times be similar to the risks and potential rewards of investing 
in both equity funds and bond funds. Certain of the Preferred 
Securities in which the Fund will invest will be traditional 
preferred stocks which issue dividends that qualify for the dividend 
received deduction under which ``qualified'' domestic corporations 
are able to exclude a percentage of the dividends received from 
their taxable income. Certain of the Preferred Securities in which 
the Fund will invest will be preferred stock that does not issue 
dividends that qualify for the dividends received deduction for 
eligible investors (``non-DRD preferred stock'') that do not qualify 
for the dividends received deduction or issue qualified dividend 
income. As described in the Registration Statement, hybrid preferred 
securities, another type of Preferred Securities, are typically 
junior and fully subordinated liabilities of an issuer or the 
beneficiary of a guarantee that is junior and fully subordinated to 
the other liabilities of the guarantor.
    \9\ The foreign equity securities, including preferred, hybrid-
preferred, and contingent convertible capital, securities in which 
the Fund may invest will be limited to securities that trade in 
markets that are members of the Intermarket Surveillance Group 
(``ISG''), which includes all U.S. national securities exchanges and 
certain foreign exchanges, or are parties to a comprehensive 
surveillance sharing agreement with the Exchange. See note 25, 
infra.
    \10\ For purposes of this filing, ETFs, which will be listed on 
a national securities exchange, include the following: 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); and Managed Fund Shares (as described in NYSE Arca 
Equities Rule 8.600). The Fund may invest in the securities of ETFs 
in excess of the limits imposed under the 1940 Act pursuant to 
exemptive orders obtained by certain ETFs and their sponsors from 
the Commission. The Fund will not invest in leveraged, inverse, or 
leveraged inverse ETFs.
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    As stated above, the Fund may invest in a variety of debt 
securities, including corporate debt securities.\11\ The broad category 
of corporate debt securities includes debt issued by U.S. and non-U.S. 
companies of all kinds, including those with small-, mid-, and large-
capitalizations.\12\ Corporate debt may carry fixed or floating rates 
of interest.
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    \11\ As described in the Registration Statement, 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. Certain debt securities held by the Fund may 
include debt instruments that are similar in many respects to 
preferred securities.
    \12\ Under normal market conditions, at least 80% of the Fund's 
investments in U.S. corporate bonds must have $100 million or more 
par amount outstanding to be considered as an eligible investment 
and a non-U.S. corporate bond must have $200 million or more par 
amount outstanding and significant par value traded to be considered 
as an eligible investment. Economic and other conditions may, from 
time to time, lead to a decrease in the average par amount 
outstanding of bond issuances.
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    Initially, the Fund will invest at least 80% of the Fund's net 
assets in Income Securities of an issuing firm when the issuing firm 
(``issuer'') has a long-term issuer credit rating of investment grade 
at the time of the investment. However, the Fund reserves the right to 
reduce the percentage of assets invested in investment grade issuers. 
``Investment grade'' is defined as those issuers that have a long-term 
credit rating of ``BBB-'' or higher by Standard & Poor's Rating Group, 
a division of McGraw Hill Companies, Inc. (``S&P''), or ``Baa3'' or 
higher by Moody's Investors Service, Inc. (``Moody's''), or comparably 
rated by another nationally recognized statistical rating organization 
(``NRSRO''). The Fund may also invest in securities that are unrated by 
an NRSRO if such securities are of comparable credit quality. 
Comparable credit quality of securities that are unrated by an NRSRO 
will be determined by the Sub-Adviser based on fundamental credit 
analysis of the unrated issuer and comparable NRSRO rated peer issuers 
of the same industry sector. On a best efforts basis, the Sub-Adviser 
will attempt to make a rating determination based on publicly available 
data. Factors taken into consideration in determining the comparable 
credit quality of the unrated issuer will be company leverage, capital 
structure, liquidity, funding, sustainability of cash flows, earnings 
quality, market position, and asset quality. In the event that a 
security is rated by multiple NRSROs and receives divergent ratings, 
the Fund will treat the issuing firm as being rated in the highest 
rating category received from an NRSRO.
    Initially, the Fund may invest up to 20% of the Fund's net assets 
in Income Securities issued by below-investment grade issuers if that 
security has acceptable credit quality and attractive relative value. 
However, the Fund reserves the right to increase the percentage of 
assets invested in below-investment grade securities. ``Below 
investment grade'' is defined as those issuers that have a long-term 
credit rating of ``BBB-'' or lower by ``S&P,'' or ``Baa3'' or lower by 
Moody's, or comparably rated by another NRSRO. The Fund may also invest 
in securities that are unrated by an NRSRO if such securities are of 
comparable credit quality as determined by the Sub-Adviser.
    The Fund intends to invest at least 25% of its assets in securities 
of financial companies. Financial companies include, but are not 
limited to, companies involved in activities such as banking, mortgage 
finance, consumer finance, specialized finance, investment banking and 
brokerage, asset management and custody, corporate lending, insurance 
and financial investment, and real estate, including but not limited to 
real estate investment trusts (``REITs'').
Other Investments
    While the Fund, under normal market conditions, will invest at 
least 80% of its net assets (including investment borrowings) in 
Preferred Securities and Income Securities, the Fund also may invest 
the remainder of its assets in other investments, as described below.
    Normally, the Fund may invest up to 15% of its net 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 will 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. During such periods, the Fund may not 
be able to achieve its investment objective. The Fund may adopt a 
defensive strategy when the Sub-Adviser or the Adviser believes 
securities in which the Fund normally invests have elevated risks due 
to political or economic factors and in other extraordinary 
circumstances.
    The Fund may also invest in U.S. government securities \13\ or 
short-term debt securities \14\ to keep cash on hand

[[Page 76151]]

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 Ratings, Moody's, or Fitch, Inc. and having a 
maturity of one year or less. The use of temporary investments is not a 
part of the principal investment strategy of the Fund.
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    \13\ U.S. government securities include U.S. Treasury 
obligations and securities issued or guaranteed by various agencies 
of the U.S. government, or by various instrumentalities which have 
been established or sponsored by the U.S. government. U.S. Treasury 
obligations are backed by the ``full faith and credit'' of the U.S. 
government. Securities issued or guaranteed by federal agencies and 
U.S. government sponsored instrumentalities may or may not be backed 
by the full faith and credit of the U.S. government.
    \14\ 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. Such certificates are for a 
definite period of time, earn a specified rate of return, and are 
normally negotiable. If such certificates of deposit are non-
negotiable, they will be considered illiquid securities and be 
subject to the Fund's 15% restriction on investments in illiquid 
securities.
    (3) Bankers' acceptances, which are short-term credit 
instruments used to finance commercial transactions.
    (4) Repurchase agreements, which involve purchases of debt 
securities. In such an action, at the time the Fund purchases the 
security, it simultaneously agrees to resell and redeliver the 
security to the seller, who also simultaneously agrees to buy back 
the security at a fixed price and time.
    (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. There is no secondary market for the notes, and they 
will be considered illiquid securities and be subject to the Fund's 
15% restriction on investments in illiquid securities. However, they 
are redeemable by the Fund at any time. The Fund's Sub-Adviser will 
consider the financial condition of the corporation (e.g., earning 
power, cash flow, and other liquidity ratios) and will continuously 
monitor the corporation's ability to meet all of its financial 
obligations, because the Fund's liquidity might be impaired if the 
corporation were unable to pay principal and interest on demand. The 
Fund may only invest in commercial paper rated A-2 or higher by S&P 
Ratings, Prime-2 or higher by Moody's, or F2 or higher by Fitch, 
Inc.
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    The Fund may also invest in senior loans, second lien loans, loan 
participations, payment-in-kind securities, zero coupon bonds, bank 
certificates of deposit, fixed-time deposits, bankers' acceptances, 
U.S. government securities, or fixed income securities issued by non-
U.S. governments denominated in U.S. dollars.
    The Fund may invest in warrants. Warrants acquired by the Fund 
entitle it to buy common stock from the issuer at a specified price and 
time. They do not represent ownership of the securities but only the 
right to buy them. Warrants are subject to the same market risks as 
stocks, but may be more volatile in price. The Fund's investment in 
warrants will not entitle it to receive dividends or exercise voting 
rights and will become worthless if the warrants cannot be profitably 
exercised before their expiration date.
    The Fund may invest in other pooled investment vehicles and 
business development companies that are exchange listed and that invest 
primarily in securities of the types in which the Fund may invest 
directly.
    Consistent with the Exemptive Order, the Fund will not invest in 
options contracts, futures contracts, or swap agreements.
    The Fund will not take short positions in securities (``short 
sales'').
    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 (1) non-negotiable certificates of deposit and master demand 
notes,\15\ (2) Rule 144A securities, and (3) senior loans, second lien 
loans, and loan participation interests. 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.\16\
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    \15\ See note 14, supra.
    \16\ 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); and Investment Company Act Release No. 17452 
(April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A 
under the Securities Act of 1933).
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    The Fund will be classified as ``non-diversified'' under the 1940 
Act and as a result may invest a relatively high percentage of its 
assets in a limited number of issuers. The Fund will only be limited as 
to the percentage of its assets which may be invested in the securities 
of any one issuer by the diversification requirements imposed by the 
Internal Revenue Code of 1986, as amended (``Code'').\17\
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    \17\ See 26 U.S.C. 851.
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    Other than financial companies, 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.\18\
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    \18\ 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 intends to qualify annually and to elect to be treated as 
a regulated investment company (``RIC'') under the Code.\19\
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    \19\ 26 U.S.C. 851.
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    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.
    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 under the Exchange Act,\20\ as provided by 
NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares will be 
outstanding at the commencement of trading on the Exchange. The 
Exchange will obtain a representation from the issuer of the Shares 
that the net asset value (``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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    \20\ 17 CFR 240.10A-3.
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Creation and Redemption of Shares
    The Fund will issue and redeem Shares on a continuous basis, at 
NAV, only in large specified blocks each consisting of 50,000 Shares 
(each such block of Shares, a ``Creation Unit''). The consideration for 
purchase of Creation Unit aggregations of the Fund may consist of (i) 
cash in lieu of all or a portion of the Deposit Securities, as defined 
below, and/or (ii) a designated portfolio of securities determined by 
First Trust (``Deposit Securities'') per Creation Unit aggregation 
generally conforming to holdings of the Fund (``Fund Securities'') and 
generally an amount of cash (``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 aggregation of the 
Fund.
    The Custodian, 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.
    Such Fund Deposit will be applicable, subject to any adjustments as 
described below, in order to effect creations of Creation Unit 
aggregations of the Fund until such time as the next-announced

[[Page 76152]]

composition of the Deposit Securities is made available.
    In order to be eligible to place orders with the Distributor and to 
create or redeem a Creation Unit aggregation of the Fund, an entity 
must be an authorized participant, and must have executed an agreement 
with the Distributor and transfer agent, with respect to creations and 
redemptions of Creation Unit aggregations, and have international 
operational capabilities.
    Fund Shares may be redeemed only in Creation Unit aggregations 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 
Creation Unit aggregations.
    The Custodian, 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 Unit aggregations.
    All orders to create or redeem Creation Unit aggregations 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 Unit aggregations 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.
    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 and in accordance with the 1940 Act.
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''),\21\ 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 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.\22\
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    \21\ 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.
    \22\ 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.
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    On a daily basis, the Adviser 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 or 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 includes 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 represents one Creation Unit of the Fund.
    Information regarding the intra-day value of the Shares of the Fund 
(the ``indicative optimized portfolio value'' or ``IOPV''), which is 
the Portfolio Indicative Value (``PIV'') as defined in NYSE Arca 
Equities Rule 8.600 (c)(3), will be widely disseminated by one or more 
major market data vendors at least every 15 seconds during the Core 
Trading Session.\23\ The dissemination of the IOPV, together with the 
Disclosed Portfolio, will allow investors to determine the value of the 
underlying portfolio of the Fund on a daily basis and to provide a 
close estimate of that value throughout the trading day. The IOPV 
should not be viewed as a ``real-time'' update of the NAV per Share of 
the Fund because the IOPV 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 IOPV of the Fund's Shares, exchange rates may be used 
throughout the day (9:00 a.m. to 4:15 p.m., E.T.) 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 IOPV.
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    \23\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available IOPVs 
taken from the Consolidated Tape Association (``CTA'') or other data 
feeds.
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    The Adviser represents that the Trust, First Trust, and BNY will 
not disseminate non-public information concerning the Trust and the 
Fund.
    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 and other 
instruments will be also readily available from the national securities 
exchanges trading such securities,

[[Page 76153]]

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.\24\ 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.
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    \24\ See NYSE Arca Equities Rule 7.12, Commentary .04.
---------------------------------------------------------------------------

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 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 intends to utilize its existing surveillance 
procedures applicable to derivative products (which include Managed 
Fund Shares) to monitor trading in the Shares. 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.
    The Exchange's current trading surveillance focuses on detecting 
securities trading outside their normal patterns. 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.
    The Exchange may obtain information via the ISG from other 
exchanges that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.\25\ Initially, at 
least 50% of the Fund's net assets invested in Preferred Securities and 
Income Securities will be exchange-listed and such exchanges will be 
members of ISG or parties to a comprehensive surveillance sharing 
agreement with the Exchange.
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    \25\ 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 the Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. See note 9, supra.
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    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 Unit aggregations (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 is 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 Exchange 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 Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(5) \26\ 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.
---------------------------------------------------------------------------

    \26\ 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 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. The Exchange 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. Under normal market conditions, the Fund will invest at 
least 80% of its net assets (including investment borrowings) in 
Preferred Securities and Income Securities. The Adviser represents that 
initially at least 50% of the Fund's net assets invested in Preferred 
Securities and 50% of the Income Securities held by the Fund will be 
exchange-listed. The foreign equity securities, including preferred, 
hybrid-preferred, and contingent convertible capital, securities in 
which the Fund may invest will be limited to securities that trade in 
markets that are members of the ISG. Initially, the Fund will invest at 
least 80% of the Fund's net assets in Income Securities of an issuing 
firm when the issuer has a long-term issuer credit rating of investment 
grade at the time of the investment. Under normal

[[Page 76154]]

market conditions, at least 80% of the Fund's investments in US 
corporate bonds must have $100 million or more par amount outstanding 
to be considered as an eligible investment and a non-U.S. corporate 
bond must have $200 million or more par amount outstanding and 
significant par value traded to be considered as an eligible 
investment. The intra-day, closing, and settlement prices of the 
portfolio securities and other instruments will be also readily 
available from the national securities exchanges trading such 
securities, automated quotation systems, published or other public 
sources, or on-line information services. The Fund may hold, in the 
aggregate, up to 15% of its net assets in: (1) Illiquid securities, 
including non-negotiable certificates of deposit and master demand 
notes,\27\ (2) Rule 144A securities, and (3) senior loans, second lien 
loans, and loan participation interests. Consistent with the Exemptive 
Order, the Fund will not invest in options contracts, futures 
contracts, or swap agreements. The Fund's investments will be 
consistent with the Fund's investment objective and will not be used to 
enhance leverage. The PIV will be widely disseminated by one or more 
major market data vendors at least every 15 seconds during the Core 
Trading Session.
---------------------------------------------------------------------------

    \27\ See note 14, supra.
---------------------------------------------------------------------------

    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 an Information 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 purposes of the Act.

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-2012-139 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-2012-139. 
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

[[Page 76155]]

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-2012-139 and should be submitted on or before 
January 14, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30888 Filed 12-21-12; 8:45 am]
BILLING CODE 8011-01-P