Document ID: SEC-2014-0246-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2014-02-10T05:00Z

[Federal Register Volume 79, Number 27 (Monday, February 10, 2014)]
[Notices]
[Pages 7728-7731]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02746]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71473; File No. SR-NASDAQ-2014-009]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Proposed Rule Change Relating to the Listing and Trading of 
the Shares of the First Tactical High Yield ETF of First Trust 
Exchange-Traded Fund IV

February 4, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 22, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Nasdaq. 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

    Nasdaq proposes to list and trade the shares of the First Trust 
Tactical High Yield ETF (formerly known as the First Trust High Yield 
Long/Short ETF) (the ``Fund'') of First Trust Exchange-Traded Fund IV 
(the ``Trust'') under Nasdaq Rule 5735 (``Managed Fund Shares''). The 
shares of the Fund are collectively referred to herein as the 
``Shares.''
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at Nasdaq's principal office, 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, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to reflect changes to the means of achieving 
the investment objectives of the Fund.\3\ The Commission has approved 
the listing and trading of Shares under NASDAQ Rule 5735, which governs 
the listing and trading of Managed Fund Shares on the Exchange.\4\ The 
Exchange believes the proposed rule change reflects no significant 
issues not previously addressed in the Prior Release. The Fund is an 
actively managed exchange-traded fund (``ETF''). The Shares are offered 
by the Trust, which was organized as a Massachusetts business trust on 
September 15, 2010. The Trust, which is registered with the Commission 
as an investment company, has filed a registration statement on Form N-
1A (``Registration Statement'') relating to the Fund with the 
Commission.\5\ First Trust Advisors L.P. (``First Trust Advisors'') is 
the investment adviser (``Adviser'') to the Fund.
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    \3\ See Securities Exchange Act Release No. 68972 (February 22, 
2013), 78 FR 13721 (February 28, 2013) (SR-NASDAQ-2012-147) (order 
approving listing and trading of First Trust High Yield Long/Short 
ETF).
    \4\ The Commission approved NASDAQ Rule 5735 (formerly Nasdaq 
Rule 4420(o)) in Securities Exchange Act Release No. 57962 (June 13, 
2008), 73 FR 35175 (June 20, 2008) (SR-NASDAQ-2008-039). The 
Commission previously approved the listing and trading of the Shares 
of the Fund. See Securities Exchange Act Release No. 68972 (February 
22, 2013), 78 FR 13721 (February 28, 2013) (SR-NASDAQ-2012-147) 
(``Prior Order''). See also Securities Exchange Act Release No. 
68581 (January 4, 2013), 78 FR 2295 (January 10, 2013) (SR-NASDAQ-
2012-147) (``Prior Notice,'' and together with the Prior Order, the 
``Prior Release'').
    \5\ See Post-Effective Amendment No. 23 to Registration 
Statement on Form N-1A for the Trust, dated February 8, 2013 (File 
Nos. 333-174332 and 811-22559). On February 27, 2013, July 3, 2013 
and September 4, 2013, the Trust made filings under Rule 497 under 
the Securities Act of 1933 (collectively, the ``497 Filings'') for 
the Fund. The descriptions of the Shares and the Fund contained 
herein are based, in part, on information in the Registration 
Statement and the 497 Filings. In addition, the Commission has 
issued an order granting certain exemptive relief to the Trust under 
the Investment Company Act of 1940 (the ``1940 Act''). See 
Investment Company Act Release No. 30029 (April 10, 2012) (File No. 
812-13795) (the ``Exemptive Order'').
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    The Exchange now proposes two modifications to the description of 
the measures the Adviser would utilize to implement the Fund's 
investment objectives.\6\ The Adviser seeks to make the modifications 
described below to certain representations in the Prior Release.
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    \6\ The Adviser represents that it has managed and will continue 
to manage the Fund in the manner described in the Prior Release, and 
will not implement the changes, as described herein, until the 
instant proposed rule change is operative.
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    First, the Exchange proposes to modify a representation reflected 
in the Prior Release by increasing the percentage of the Fund's net 
assets that may be invested in bank loans. In

[[Page 7729]]

accordance with the Prior Release, the Fund may invest up to 15% of its 
net assets in ``bank loans,'' which, as described in the Prior Release, 
may include loan interests that are not secured by any specific 
collateral of the borrower, loan interests that have a lower than first 
lien priority on collateral of the borrower, loans to foreign 
borrowers, loans in foreign currencies and other loans with 
characteristics that the Adviser believes qualify as bank loans. Going 
forward, the Exchange proposes that the Fund would be permitted to 
invest up to 40% of its net assets in bank loans.
    The proposed change is intended to provide greater flexibility to 
the Adviser as it tactically allocates proceeds across the high yield 
debt market and across the debt capital structure of select companies. 
Additionally, this proposed change would provide the Adviser with 
increased flexibility to manage the Fund's duration in periods of 
rising rates. The Adviser represents that the Fund would continue to 
invest 85% or more of the portfolio in securities that the Adviser 
deems to be sufficiently liquid at the time of investment. In addition, 
consistent with the Prior Release, the Adviser would continue to 
monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained.
    The Exchange also proposes to delete a representation reflected in 
the Prior Release, which states that consistent with the Exemptive 
Order, the Fund would not invest in options contracts, futures 
contracts or swap agreements (the ``Derivatives Representation'').
    On December 6, 2012, the staff of the Commission's Division of 
Investment Management (``Division'') issued a no-action letter (``No-
Action Letter'') relating to the use of derivatives by actively-managed 
ETFs.\7\ The No-Action Letter noted that, in March of 2010, the 
Commission announced in a press release that the staff was conducting a 
review to evaluate the use of derivatives by mutual funds, ETFs, and 
other investment companies and that, pending completion of this review, 
the staff would defer consideration of exemptive requests under the 
1940 Act relating to, among others, actively-managed ETFs that would 
make significant investments in derivatives.
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    \7\ See No-Action Letter dated December 6, 2012 from Elizabeth 
G. Osterman, Associate Director, Office of Exemptive Applications, 
Division of Investment Management.
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    The No-Action Letter stated that the Division staff will no longer 
defer consideration of exemptive requests under the 1940 Act relating 
to actively-managed ETFs that make use of derivatives provided that 
they include representations to address some of the concerns expressed 
in the Commission's March 2010 press release. These representations 
are: (i) That the ETF's board periodically will review and approve the 
ETF's use of derivatives and how the ETF's investment adviser assesses 
and manages risk with respect to the ETF's use of derivatives; and (ii) 
that the ETF's disclosure of its use of derivatives in its offering 
documents and periodic reports is consistent with relevant Commission 
and staff guidance. The No-Action Letter stated that the Division would 
not recommend enforcement action to the Commission under sections 
2(a)(32), 5(a)(1), 17(a), 22(d), and 22(e) of the 1940 Act, or rule 
22c-1 under the 1940 Act if actively-managed ETFs operating in reliance 
on specified orders (which include the Trust's Exemptive Order \8\) 
invest in options contracts, futures contracts or swap agreements 
provided that they comply with the representations stated in the No-
Action Letter, as noted above.
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    \8\ See footnote 5.
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    In view of the No-Action Letter, the Exchange is proposing to 
delete the Derivatives Representation and to permit the Fund to use 
``Derivative Instruments,'' as defined and described below.
    The Exchange now proposes that to pursue its investment objectives 
it be permitted to invest in interest rate swaps, total return swaps, 
credit default swaps, options, options on futures contracts, futures 
contracts, forward contracts, structured notes, non-U.S. currency 
swaps, currency options, forward currency contracts and non-deliverable 
forward currency contracts (collectively, ``Derivative Instruments''). 
The use of Derivative Instruments may allow the Fund to seek to enhance 
return, to hedge some of the risks of its investments in securities, as 
a substitute for a position in an underlying asset, to reduce 
transaction costs, to maintain full market exposure (which means to 
adjust the characteristics of its investments to more closely 
approximate those of the markets in which it invests), to manage cash 
flows, to preserve capital or to manage its foreign currency 
exposures.\9\
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    \9\ In particular, the Adviser contemplates that the Fund would 
sell futures on U.S. Treasury obligations as an alternative to 
engaging in short sales to gain short exposure to the U.S. Treasury 
market.
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    The Fund generally expects that no more than 30% of the value of 
the Fund's net assets would be invested in Derivative Instruments; 
however, there would be no limitation on the Fund's investments in 
Derivative Instruments to be used by the Fund solely for hedging 
purposes.\10\
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    \10\ The Fund will limit its direct investments in futures, 
options on futures and swaps to the extent necessary for the Adviser 
to claim the exclusion from regulation as a ``commodity pool 
operator'' with respect to the Fund under Rule 4.5 promulgated by 
the Commodity Futures Trading Commission (``CFTC''), as such rule 
may be amended from time to time. Under Rule 4.5 as currently in 
effect, the Fund will limit its trading activity in futures, options 
on futures and swaps (excluding activity for ``bona fide hedging 
purposes,'' as defined by the CFTC) such that it will meet one of 
the following tests: (i) aggregate initial margin and premiums 
required to establish its futures, options on futures and swap 
positions will not exceed 5% of the liquidation value of the Fund's 
portfolio, after taking into account unrealized profits and losses 
on such positions; or (ii) aggregate net notional value of its 
futures, options on futures and swap positions will not exceed 100% 
of the liquidation value of the Fund's portfolio, after taking into 
account unrealized profits and losses on such positions.
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    The Prior Release stated that the Fund's investments would not be 
used to enhance leverage. In view of the Exchange's proposal to permit 
the Fund to use Derivative Instruments, the Fund's investments in 
Derivative Instruments could potentially be used to enhance leverage. 
However, the Fund's investments in Derivative Instruments would be 
consistent with the Fund's investment objectives and would not be used 
to seek to achieve a multiple or inverse multiple of an index.
    Further, the Fund's investments in Derivative Instruments would be 
valued at market value or, in the absence of market value with respect 
to any Derivative Instrument, at fair value in accordance with 
valuation procedures adopted by the Trust's Board of Trustees and in 
accordance with the 1940 Act.
    Investments in Derivative Instruments would be made in accordance 
with the 1940 Act and consistent with the Fund's investment objectives 
and policies. The Fund would comply with the regulatory requirements of 
the Commission to maintain assets as ``cover,'' maintain segregated 
accounts, and/or make margin payments when it takes positions in 
Derivative Instruments involving obligations to third parties (i.e., 
instruments other than purchase options). If the applicable guidelines 
prescribed under the 1940 Act so require, the Fund would earmark or set 
aside cash, U.S. government securities, high grade liquid debt 
securities and/or other liquid assets permitted by the Commission in a 
segregated custodial account in the amount prescribed.\11\
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    \11\ With respect to guidance under the 1940 Act, see 15 U.S.C. 
80a-18; Investment Company Act Release No. 10666 (April 18, 1979), 
44 FR 25128 (April 27, 1979); Dreyfus Strategic Investing, 
Commission No-Action Letter (June 22, 1987); Merrill Lynch Asset 
Management, L.P., Commission No-Action Letter (July 2, 1996).

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[[Page 7730]]

    The Fund would include appropriate risk disclosure in its offering 
documents, including leveraging risk. Leveraging risk is the risk that 
certain transactions of the Fund, including the Fund's use of 
Derivative Instruments, may give rise to leverage, causing the Fund to 
be more volatile than if it had not been leveraged.\12\
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    \12\ To mitigate leveraging risk, the Fund will segregate or 
``earmark'' liquid assets or otherwise cover the transactions that 
may give rise to such risk.
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    Based on the above, the Exchange seeks this modification to reflect 
the No-Action Letter. The Adviser believes that the ability to invest 
in Derivative Instruments would provide it with additional flexibility 
to meet the Fund's investment objectives.
    The Fund would continue to comply with all initial and continued 
listing requirements under NASDAQ Rule 5735.
    The Adviser represents that there is no change to the Fund's 
investment objectives. Except for the changes proposed herein, all 
other facts presented and representations made in the Rule 19b-4 \13\ 
filings underlying the Prior Release remain unchanged.
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    \13\ 17 CFR 240.19b-4.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \14\ in general and Section 6(b)(5) of the Act \15\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule changes are designed 
to prevent fraudulent and manipulative acts and practices in that the 
Shares would continue to be listed and traded on the Exchange pursuant 
to the initial and continued listing criteria in NASDAQ Rule 5735. The 
first proposed rule change would permit the Fund to invest up to 40% 
(rather than up to 15%) of its net assets in bank loans, however, the 
Adviser represents that the Fund would continue to invest 85% or more 
of its portfolio in securities that the Adviser deems to be 
sufficiently liquid at the time of investment and would continue to 
monitor portfolio liquidity on an ongoing basis.
    The second proposed rule change is consistent with the No-Action 
Letter and would permit the Fund to invest in Derivative Instruments. 
The Fund generally expects that no more than 30% of the value of the 
Fund's net assets would be invested in Derivative Instruments; however, 
there would be no limitation on the Fund's investments in Derivative 
Instruments to be used by the Fund solely for hedging purposes. The 
Fund's investments in Derivative Instruments would be consistent with 
the Fund's investment objectives and would not be used to seek to 
achieve a multiple or inverse multiple of an index. Investments in 
Derivative Instruments would be made in accordance with the 1940 Act 
and would be consistent with the Fund's investment objectives and 
policies.
    The proposed rule changes are designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest in that the Adviser represents that there is no change to the 
Fund's investment objectives. The Adviser represents that the purpose 
of the proposed changes is to provide it with greater flexibility in 
meeting the Fund's investment objectives by permitting (1) the Fund to 
invest a greater portion of its net assets in bank loans and (2) the 
Fund to invest a portion of its net assets in Derivative Instruments. 
In addition, consistent with the Prior Release, the net asset value 
(``NAV'') per Share would continue to be calculated daily and the NAV 
and ``Disclosed Portfolio'' (as defined in the Prior Release) would be 
made available to all market participants at the same time.
    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 actively managed exchange-traded product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.
    As noted above, the additional flexibility to be afforded to the 
Adviser under the proposed rule change is intended to enhance the 
Adviser's ability to meet the Fund's investment objectives. Further, as 
noted in the Prior Release, the Exchange has in place surveillance 
procedures relating to trading in the Shares and may obtain information 
via the Intermarket Surveillance Group (``ISG'') from other exchanges 
that are members of the ISG or with which the Exchange has entered into 
a comprehensive surveillance sharing agreement. In addition, as 
indicated in the Prior Release, investors will have ready access to 
information regarding the Fund's holdings, the Intraday Indicative 
Value (as defined in the Prior Release), the Disclosed Portfolio (as 
defined in the Prior Release), and quotation and last sale information 
for the Shares.
    For the above reasons, the Exchange believes the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq 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.\16\
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    \16\ The Commission notes that Nasdaq included the following 
additional statement in its Form 19b-4: ``The Exchange believes the 
proposed rule change will permit the Adviser additional flexibility 
in achieving the Fund's investment objectives, thereby offering 
investors additional investment options.''
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days after 
publication (i) as the Commission may designate if it finds such longer 
period to be appropriate and publishes its reasons for so finding or 
(ii) as to which the Exchange consents, the Commission shall: (a) by 
order approve or disapprove such proposed rule change, or (b) institute 
proceedings to determine whether the proposed rule change should be 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic 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-NASDAQ-2014-009 on the subject line.

[[Page 7731]]

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASDAQ-2014-009. 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 Nasdaq. 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-NASDAQ-2014-009 and should be submitted 
on or before March 3, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02746 Filed 2-7-14; 8:45 am]
BILLING CODE 8011-01-P