Document ID: SEC-2016-1355-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market, LLC
Posted Date: 2016-08-03T04:00Z

[Federal Register Volume 81, Number 149 (Wednesday, August 3, 2016)]
[Notices]
[Pages 51251-51256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18319]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78437; File No. SR-NASDAQ-2016-056]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 3 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 3, To 
List and Trade Shares of the PowerShares Variable Rate Investment Grade 
Portfolio, a Series of the PowerShares Actively Managed Exchange-Traded 
Fund Trust

July 28, 2016.

I. Introduction

    On April 13, 2016, The NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the PowerShares Variable Rate Investment Grade 
Portfolio (``Fund''), a series of the PowerShares Actively Managed 
Exchange-Traded Fund Trust (``Trust'') under Nasdaq Rule 5735. The 
proposed rule change was published for comment in the Federal Register 
on May 2, 2016.\3\ On May 5, 2016, the Exchange filed Amendment No. 1 
to the proposed rule change. On June 14, 2016, pursuant to Section 
19(b)(2) of the Act,\4\ the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On June 29, 2016, the Exchange 
filed Amendment No. 2 to the proposed rule change.\6\ On July 15, 2016, 
the Exchange filed Amendment No. 3 to the proposed rule change.\7\ The 
Commission received no

[[Page 51252]]

comments on the proposal. The Commission is publishing this notice to 
solicit comments on Amendment No. 3 from interested persons, and is 
approving the proposed rule change, as modified by Amendment No. 3, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 77715 (April 26, 
2016), 81 FR 26285 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78063, 81 FR 39972 
(June 20, 2016). The Commission designated July 29, 2016, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ On July 15, 2016, the Exchange withdrew Amendment No. 2.
    \7\ In Amendment No. 3, which amended and replaced the original 
filing as modified by Amendment No. 1, the Exchange: (a) Clarified 
the scope of mortgage-backed securities (``MBS'') that could be held 
by the Fund; (b) clarified that the Fund will not invest (i) in 
commercial loans, (ii) in leveraged, inverse, or inverse leveraged 
exchange-traded funds (``ETFs''), or (iii) more than 20% of its net 
assets in the aggregate in asset-backed securities (``ABS'') or non-
agency MBS; (c) amended the quantitative standards applicable to the 
portfolio, including identifying the quantitative standards that 
must be met on a continuous basis; (d) clarified that the Fund may 
invest in non-exchange listed securities of money market mutual 
funds beyond the limits permitted under the Investment Company Act 
of 1940 (``1940 Act''); (e) clarified certain aspects of the net 
asset value (``NAV'') calculation and the availability of price 
information for certain holdings; and (f) made certain technical 
amendments. Amendment No. 3 is available at: https://www.sec.gov/comments/sr-nasdaq-2016-056/nasdaq2016056-3.pdf.
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II. Exchange's Description of the Proposed Rule Change

    The Exchange proposes to list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares on the Exchange. The Fund is a series of the Trust 
and will be an actively-managed ETF. The Trust, which was established 
as a Delaware statutory trust on November 6, 2007 and is registered 
with the Commission as an investment company, has filed with the 
Commission a post-effective amendment to its registration statement on 
Form N-1A (``Registration Statement'').\8\ Invesco PowerShares Capital 
Management LLC will serve as the investment adviser (``Adviser'') to 
the Fund, and Invesco Advisers, Inc. will serve as the sub-adviser to 
the Fund (``Sub-Adviser''). Invesco Distributors, Inc. will serve as 
the principal underwriter and distributor (``Distributor'') of the 
Fund's Shares.\9\ The Bank of New York Mellon will act as the 
administrator, accounting agent, custodian (``Custodian'') and transfer 
agent for the Fund.
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    \8\ See Registration Statement for the Trust, filed on September 
4, 2015 (File Nos. 333-147622 and 811-22148). The Exchange 
represents that the Trust has obtained certain exemptive relief from 
the Commission under the 1940 Act. See Investment Company Act 
Release No. 28171 (February 27, 2008) (File No. 812-13386).
    \9\ The Exchange represents that, while the Adviser and the Sub-
Adviser are not broker-dealers, they are affiliated with the 
Distributor, a broker-dealer. The Exchange states that the Adviser 
and the Sub-Adviser have implemented and will maintain a fire wall 
between themselves and the Distributor with respect to access to 
information concerning the composition of, and changes to, the 
Fund's portfolio. In the event (a) the Adviser or Sub-Adviser 
becomes newly affiliated with a different broker-dealer (or becomes 
a registered broker-dealer), or (b) any new adviser or sub-adviser 
to the Fund is a registered broker-dealer or becomes affiliated with 
a broker-dealer, each will implement and maintain a fire wall with 
respect to its relevant personnel and/or such broker-dealer 
affiliate, if applicable, regarding access to information concerning 
the composition of, and changes to, the Fund's portfolio, and will 
be subject to procedures designed to prevent the use and 
dissemination of material, non-public information regarding such 
portfolio.
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategies, including the 
Fund's portfolio holdings and investment restrictions.\10\
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    \10\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, NAV calculation, creation and redemption 
procedures, fees, Fund holdings disclosure policies, distributions, 
and taxes, among other information, is included in the Notice, as 
modified by Amendment No. 3, and the Registration Statement, as 
applicable. See Amendment No. 3 and Registration Statement, supra 
notes 7 and 8, respectively, and accompanying text.
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A. Exchange's Description of the Fund's Principal Investments

    The Fund's investment objectives are to seek to generate current 
income while maintaining low portfolio duration, as a primary 
objective, and capital appreciation, as a secondary objective. The Fund 
will seek to achieve its investment objectives by investing, under 
normal market conditions,\11\ at least 80% of its net assets (plus any 
borrowings for investment purposes) in a portfolio of investment-grade, 
variable rate \12\ debt securities that are denominated in U.S. dollars 
and are issued by U.S. private sector entities or U.S. government 
agencies and instrumentalities. The Adviser or Sub-Adviser will select 
the following types of securities for the Fund: (i) Floating rate non-
agency commercial MBS,\13\ variable rate non-agency residential MBS, 
variable rate agency MBS,\14\ and floating rate non-agency ABS; \15\ 
(ii) floating rate corporate debt securities, which will be comprised 
of corporate notes, bonds, or debentures, and 144A securities; \16\ 
(iii) floating rate government sponsored enterprise credit risk 
transfers; (iv) variable rate preferred stock; \17\ (v) floating rate 
U.S. government securities, including floating rate agency debt 
securities; and (vi) ETFs that invest primarily in any or all of the 
foregoing securities, to the extent permitted by the 1940 Act \18\ (any 
or all of the foregoing securities, excluding variable rate preferred 
stock and ETFs, collectively, ``Variable Rate Debt Instruments''; 
Variable Rate Debt Instruments, variable rate preferred stock, and 
ETFs, collectively, ``Variable Rate Investments'').
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    \11\ According to the Exchange, the term ``under normal market 
conditions'' includes, but is not limited to, the absence of adverse 
market, economic, political or other conditions, including extreme 
volatility or trading halts in the fixed income markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption, or any similar intervening circumstance. The Exchange 
states that, for temporary defensive purposes, during the initial 
invest-up period and during periods of high cash inflows or 
outflows, the Fund may depart from its principal investment 
strategies; for example, it may hold a higher than normal proportion 
of its assets in cash. During such periods, the Fund may not be able 
to achieve its investment objectives. The Fund may adopt a defensive 
strategy when the Adviser or Sub-Adviser believes securities in 
which the Fund normally invests have elevated risks due to political 
or economic factors and in other extraordinary circumstances.
    \12\ According to the Exchange, with respect to this filing, the 
term ``variable-rate'' includes similar terms, such as ``floating 
rate'' and ``adjustable rate.''
    \13\ For purposes of this filing, MBS will consist of: (1) 
Residential MBS; (2) commercial MBS; (3) stripped MBS; and (4) 
collateralized mortgage obligations and real estate mortgage 
investment conduits.
    \14\ Agency securities for these purposes generally includes 
securities issued by the following entities: Government National 
Mortgage Association; Federal National Mortgage Association; Federal 
Home Loan Banks; Federal Home Loan Mortgage Corporation; Farm Credit 
System (``FCS''); Farm Credit Banks; Student Loan Marketing 
Association; Resolution Funding Corporation; Financing Corporation; 
and the FCS Financial Assistance Corporation. Agency securities can 
include, but are not limited to, MBS.
    \15\ The Fund currently intends to invest in ABS that are 
consumer and corporate ABS. According to the Exchange, floating rate 
non-agency ABS also include floating rate non-agency commercial real 
estate collateralized loan obligations (``CLOs'').
    \16\ The Fund will invest in floating rate corporate securities 
that have interest rates that reset periodically. The interest rates 
are based on a percentage above the London Interbank Offered Rate, a 
U.S. bank's prime or base rate, the overnight federal funds rate, or 
another rate. Corporate securities in which the Fund invests may be 
senior or subordinate obligations of the borrower. The Fund will not 
invest in senior or junior commercial loans. The Fund will generally 
invest in floating rate corporate securities that the Adviser or 
Sub-Adviser (as applicable) deems to be liquid with readily 
available prices. Notwithstanding the foregoing, the Fund may invest 
in corporate securities that are deemed illiquid so long as the Fund 
complies with the 15% limitation on investments of its net assets in 
illiquid assets described below.
    \17\ The variable rate preferred stock in which the Fund may 
invest will be limited to securities that trade in markets that are 
members of the Intermarket Surveillance Group (``ISG'') or exchanges 
that are parties to a comprehensive surveillance sharing agreement 
with the Exchange.
    \18\ ETFs in which the Fund invests will be listed and traded in 
the U.S. on registered exchanges. The ETFs in which the Fund will 
invest include Index Fund Shares (as described in Nasdaq Rule 5705), 
Portfolio Depositary Receipts (as described in Nasdaq Rule 5705), 
and Managed Fund Shares (as described in Nasdaq Rule 5735). The 
shares of ETFs in which the Fund may invest will be limited to 
securities that trade in markets that are members of the ISG or 
exchanges that are parties to a comprehensive surveillance sharing 
agreement with the Exchange. The Fund will not invest in leveraged 
ETFs, inverse ETFs, or inverse leveraged ETFs.
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    At least 80% of the Fund's net assets will be invested in Variable 
Rate Debt Instruments or variable rate preferred

[[Page 51253]]

stock that are, at the time of purchase, investment grade, or in ETFs 
that invest primarily in any or all of the foregoing securities. Under 
normal market conditions, Variable Rate Debt Instruments or variable 
rate preferred stock will be investment grade if, at the time of 
purchase, they have a rating in one of the highest four rating 
categories of at least one nationally recognized statistical ratings 
organization (``NRSRO'').\19\ Unrated securities may be considered 
investment grade if, at the time of purchase, and under normal market 
conditions, the Adviser or Sub-Adviser determines that such securities 
are of comparable quality based on a fundamental credit analysis of the 
unrated security and comparable NRSRO-rated securities.
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    \19\ According to the Exchange, if a security is rated by 
multiple NRSROs and receives different ratings, the Fund will treat 
the security as being rated in the highest rating category received 
from any one NRSRO.
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    The Fund will not invest more than 20% of its net assets in the 
aggregate in ABS or non-agency MBS.
    Under normal market conditions, the Fund will satisfy the following 
requirements, with respect to (i) and (iii) on a continuous basis, and 
with respect to (ii) and (iv) on a continuous basis measured at the 
time of purchase: (i) At least 75% of the investments in corporate debt 
securities shall have a minimum original principal amount outstanding 
of $100 million or more; (ii) no Variable Rate Investment (excluding 
U.S. government securities) will represent more than 30% of the weight 
of the Variable Rate Debt Instrument component of the Fund's portfolio, 
and the five most heavily weighted portfolio securities will not in the 
aggregate account for more than 65% of the weight of the Variable Rate 
Debt Instrument component of the Fund's portfolio; (iii) the portfolio 
will include a minimum of 13 non-affiliated issuers; and (iv) portfolio 
securities that in aggregate account for at least 90% of the weight of 
the portfolio will be (a) from issuers that are required to file 
reports pursuant to Sections 13 and 15(d) of the Exchange Act, (b) from 
issuers that have a worldwide market value of outstanding common equity 
held by non-affiliates of $700 million or more, (c) from issuers that 
have outstanding securities that are notes, bonds, debentures, or 
evidence of indebtedness having a total remaining principal amount of 
at least $1 billion, or (d) exempted securities as defined in Section 
3(a)(12) of the Exchange Act.
    Under normal market conditions, the Fund will have investment 
exposure to a wide variety of Variable Rate Investments. During periods 
of market volatility, however, the Fund may allocate a significant 
portion of its net assets to floating rate U.S. Treasury debt 
securities and agency MBS.

B. Exchange's Description of the Fund's Other Investments

    According to the Exchange, under normal market conditions, the Fund 
will invest primarily in the Variable Rate Investments described above 
to meet its investment objectives. In addition, the Fund may invest up 
to 20% of its net assets in Variable Rate Debt Instruments or variable 
rate preferred stock rated below investment grade, and in fixed-rate 
debt instruments that are rated either investment grade or below 
investment grade.
    The Fund may invest in the following fixed-rate debt instruments: 
(i) Fixed-rate MBS and ABS (which includes fixed-rate commercial real 
estate CLOs); \20\ (ii) fixed-rate U.S. government and agency 
securities; (iii) fixed-rate corporate debt securities, which will be 
comprised of corporate notes, bonds, or debentures, and 144A corporate 
securities; \21\ (iv) fixed-rate exchange traded preferred stock; \22\ 
and (v) ETFs that invest primarily in any or all of the foregoing 
securities \23\ (any or all of the foregoing securities, excluding 
fixed-rate exchange-traded preferred stock and ETFs, collectively, 
``Fixed Rate Debt Instruments''; Fixed Rate Debt Instruments, fixed-
rate exchange traded preferred stock, and ETFs, collectively, ``Fixed 
Rate Investments'').
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    \20\ As noted above, the Fund will not invest more than 20% of 
its net assets in the aggregate in ABS or non-agency MBS.
    \21\ The Fund will generally invest in fixed-rate corporate 
securities that the Adviser or Sub-Adviser (as applicable) deems to 
be liquid with readily available prices. Notwithstanding the 
foregoing, the Fund may invest in corporate securities that are 
deemed illiquid so long as the Fund complies with the 15% limitation 
on investments of its net assets in illiquid assets described below.
    \22\ The fixed-rate preferred stock in which the Fund may invest 
will be limited to securities that trade in markets that are members 
of the ISG or that are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
    \23\ The shares of ETFs in which the Fund may invest will be 
limited to securities that trade in markets that are members of the 
ISG or that are parties to a comprehensive surveillance sharing 
agreement with the Exchange.
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    The Fund may invest in non-exchange listed securities of money 
market mutual funds beyond the limits permitted under the 1940 Act, 
subject to certain terms and conditions set forth in a Commission 
exemptive order issued to the Trust pursuant to Section 12(d)(1)(J) of 
the 1940 Act, or other Commission relief.\24\
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    \24\ See Investment Company Act Release No. 30238 (October 23, 
2012) (File No. 812-13820).
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    The Fund may also take a temporary defensive position and hold a 
portion of its assets in cash and cash equivalents and money market 
instruments \25\ if there are inadequate investment opportunities 
available due to adverse market, economic, political or other 
conditions, or atypical circumstances such as unusually large cash 
inflows or redemptions.\26\
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    \25\ For the Fund's purposes, money market instruments will 
include: short-term, high quality securities issued or guaranteed by 
non-U.S. governments, agencies, and instrumentalities; non-
convertible corporate debt securities with remaining maturities of 
not more than 397 days that satisfy ratings requirements under Rule 
2a-7 of the 1940 Act; money market mutual funds; and deposits and 
other obligations of U.S. and non-U.S. banks and financial 
institutions.
    \26\ See supra note 11.
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C. Exchange's Description of the Fund's Investment Restrictions

    The Fund may not concentrate its investments (i.e., invest more 
than 25% of the value of its net assets) in securities of issuers in 
any one industry or group of industries. This restriction will not 
apply to obligations issued or guaranteed by the U.S. government, its 
agencies, or instrumentalities.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A corporate debt securities deemed illiquid by the 
Adviser.\27\ 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 or 
other illiquid assets. Illiquid securities and other illiquid assets 
include those subject to contractual or other restrictions on resale 
and other instruments or assets that lack readily available markets as 
determined in accordance with Commission staff guidance.
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    \27\ 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 in which it trades.
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    The Fund will not invest in futures, options, forwards, swaps, or 
other derivatives.

[[Page 51254]]

    The Fund intends to qualify for and to elect to be treated as a 
regulated investment company under Subchapter M of the Internal Revenue 
Code.
    The Fund's investments will be consistent with the Fund's 
investment objectives. Additionally, the Fund may engage in frequent 
and active trading of portfolio securities to achieve its investment 
objectives. The Fund does not presently intend to engage in any form of 
borrowing for investment purposes and will not be operated as a 
``leveraged ETF,'' i.e., it will not be operated in a manner designed 
to seek a multiple or inverse multiple of the performance of an 
underlying reference index.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\28\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\29\ which requires, among other things, 
that the Exchange's rules be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \28\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \29\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\30\ which sets forth the finding 
of Congress that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for, and transactions in, 
securities. Quotation and last-sale information for the Shares will be 
available via Nasdaq proprietary quote and trade services, as well as 
in accordance with the Unlisted Trading Privileges and the Consolidated 
Tape Association plans for the Shares. The Intraday Indicative Value, 
available on the NASDAQ OMX Information LLC proprietary index data 
service, will be widely disseminated by one or more major market data 
vendors at least every 15 seconds during the Exchange's Regular Market 
Session.\31\ On each business day, before commencement of trading in 
Shares in the Regular Market Session on the Exchange, the Fund will 
disclose on its Web site the identities and quantities of the portfolio 
of securities and other assets (``Disclosed Portfolio'' as defined in 
Nasdaq Rule 5735(c)(2)) held by the Fund that will form the basis for 
the Fund's calculation of NAV at the end of the business day.\32\ The 
Fund's Web site will also include a form of the prospectus for the Fund 
and additional data relating to NAV and other applicable quantitative 
information.
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    \30\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \31\ See Nasdaq Rule 4120(b)(4) (describing the trading sessions 
on the Exchange).
    \32\ In addition to disclosing the identities and quantities of 
the portfolio of securities and other assets in the Disclosed 
Portfolio, the Fund also will disclose on a daily basis on its Web 
site the following information, as applicable to the type of 
holding: Ticker symbol, if any; CUSIP number or other identifier, if 
any; a description of the holding (including the type of holding); 
quantity held (as measured by, for example, par value, number of 
shares or units); maturity date, if any; coupon rate, if any; market 
value of the holding; and percentage weighting of the holding in the 
Fund's portfolio. The Web site and information will be publicly 
available at no charge. The Fund's administrator will calculate the 
Fund's NAV per Share as of the close of regular trading (normally 
4:00 p.m. E.T.) on each day the New York Stock Exchange is open for 
business.
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    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Intraday, executable price quotations, as well 
as closing price information on exchange-listed securities, Variable 
Rate Debt Instruments, Fixed Rate Debt Instruments, and other assets 
not traded on an exchange will be available from major broker-dealer 
firms or market data vendors or from the exchange on which they are 
traded, as well as from automated quotation systems, published or other 
public sources, or online information services.\33\ Additionally, the 
Financial Industry Regulatory Authority's (``FINRA'') Trade Reporting 
and Compliance Engine (``TRACE'') will be a source of price information 
for corporate bonds, privately-issued securities, MBS, and ABS to the 
extent transactions in such securities are reported to TRACE. Intraday 
and closing price information related to U.S. government securities, 
money market mutual funds, and other short-term investments held by the 
Fund also will be available through subscription services, such as 
Bloomberg, Markit, and Thomson Reuters, which can be accessed by 
authorized participants and other investors.
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    \33\ Quotation and last-sale information for any exchange-traded 
instruments (including preferred stocks and ETFs) also will be 
available in accordance with the Unlisted Trading Privileges and the 
Consolidated Tape Association plans.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange 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. Nasdaq will halt trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). 
In addition, trading 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 
constituting 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 also will be 
subject to Nasdaq Rule 5735(d)(2)(D), which sets forth additional 
circumstances under which Shares of the Fund may be halted.
    The Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. 
Further, the Commission notes that the Reporting Authority \34\ that 
provides the Disclosed Portfolio must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the actual components of the 
portfolio.\35\

[[Page 51255]]

In addition, the Exchange states that the Adviser and the Sub-Adviser 
are affiliated with the Distributor, a broker-dealer, and that the 
Adviser and the Sub-Adviser have implemented, and will maintain, a fire 
wall between themselves and the Distributor with respect to access to 
information concerning the composition of, and changes to, the Fund's 
portfolio.\36\ Moreover, Nasdaq Rule 5735(g) requires that personnel 
who make decisions on the Fund's portfolio composition must be subject 
to procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Fund's portfolio.
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    \34\ Nasdaq Rule 5735(c)(4) defines ``Reporting Authority.''
    \35\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \36\ See supra note 9. The Exchange states 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 the Sub-Adviser and their related personnel are subject 
to the provisions of Rule 204A-1 under the Advisers Act relating to 
codes of ethics. This Rule requires investment advisers to adopt a 
code of ethics that reflects the fiduciary nature of the 
relationship to clients as well as compliance with other applicable 
securities laws. Accordingly, procedures designed to prevent the 
communication and misuse of non-public information by an investment 
adviser must be consistent with the Advisers Act and Rule 204A-1 
thereunder. 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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    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both the 
Exchange and FINRA, on behalf of the Exchange, which are designed to 
detect violations of Exchange rules and applicable federal securities 
laws.\37\ The Exchange further 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. Moreover, the Exchange states 
that, prior to the commencement of trading, it will inform its members 
in an Information Circular of the special characteristics and risks 
associated with trading the Shares.
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    \37\ The Exchange states that 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.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including the following:
    (1) The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and other exchange-traded securities 
(including ETFs and preferred stock) and instruments held by the Fund 
with other markets and other entities that are members of the ISG,\38\ 
and FINRA may obtain trading information regarding trading in the 
Shares and other exchange-traded securities (including ETFs and 
preferred stock) and instruments held by the Fund from such markets and 
other entities. Moreover, FINRA, on behalf of the Exchange, will be 
able to access, as needed, trade information for certain Variable Rate 
Debt Instruments, Fixed Rate Debt Instruments, and other debt 
securities held by the Fund reported to FINRA's TRACE. In addition, the 
Exchange may obtain information regarding trading in the Shares and 
other exchange-traded securities (including ETFs and preferred stock) 
and instruments held by the Fund from markets and other entities that 
are members of ISG, or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
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    \38\ For a list of the current members of ISG, see 
www.isgportal.org.
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    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how information regarding 
the Intraday Indicative Value and the Disclosed Portfolio is 
disseminated; (d) the risks involved in trading the Shares during the 
Pre-Market and Post-Market Sessions when an updated Intraday Indicative 
Value will not be calculated or publicly disseminated; (e) the 
requirement that members purchasing Shares from the Fund for resale to 
investors deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction; 
and (f) trading information.
    (5) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\39\
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    \39\ See 17 CFR 240.10A-3.
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    (6) The Fund will not invest more than 20% of its net assets in the 
aggregate in ABS or non-agency MBS. In addition, the Fund will not 
invest in senior or junior commercial loans.
    (7) The variable and fixed-rate preferred stock in which the Fund 
may invest will be limited to securities that trade in markets that are 
members of the ISG, or that are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
    (8) The shares of ETFs in which the Fund may invest will be limited 
to securities that trade in markets that are members of the ISG, or 
that are parties to a comprehensive surveillance sharing agreement with 
the Exchange. In addition, the Fund will not invest in leveraged ETFs, 
inverse ETFs, or inverse leveraged ETFs.
    (9) Under normal market conditions, the Fund will satisfy the 
following requirements, with respect to (i) and (iii) on a continuous 
basis, and with respect to (ii) and (iv) on a continuous basis measured 
at the time of purchase: (i) At least 75% of the investments in 
corporate debt securities shall have a minimum original principal 
amount outstanding of $100 million or more; (ii) no Variable Rate 
Investment (excluding U.S. government securities) will represent more 
than 30% of the weight of the Variable Rate Debt Instrument component 
of the Fund's portfolio, and the five most heavily weighted portfolio 
securities will not in the aggregate account for more than 65% of the 
weight of the Variable Rate Debt Instrument component of the Fund's 
portfolio; (iii) the portfolio will include a minimum of 13 non-
affiliated issuers; and (iv) portfolio securities that in aggregate 
account for at least 90% of the weight of the portfolio will be (a) 
from issuers that are required to file reports pursuant to Sections 13 
and 15(d) of the Exchange Act; (b) from issuers that have a worldwide 
market value of outstanding common equity held by non-affiliates of 
$700 million or more; (c) from issuers that have outstanding securities 
that are notes, bonds, debentures, or evidence of indebtedness having a 
total remaining principal amount of at least $1 billion; or (d)

[[Page 51256]]

exempted securities as defined in Section 3(a)(12) of the Exchange Act.
    (10) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A corporate debt securities deemed illiquid by the 
Adviser.
    (11) The Fund's investments will be consistent with the Fund's 
investment objectives. The Fund does not presently intend to engage in 
any form of borrowing for investment purposes, and will not be operated 
as a ``leveraged ETF,'' i.e., it will not be operated in a manner 
designed to seek a multiple or inverse multiple of the performance of 
an underlying reference index.
    (12) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.

The Exchange represents that all statements and representations made in 
the filing regarding (a) the description of the portfolio, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules and surveillance procedures shall 
constitute continued listing requirements for listing the Shares on the 
Exchange. In addition, the issuer has represented to the Exchange that 
it will advise the Exchange of any failure by the Fund to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Act, the Exchange will monitor for 
compliance with the continued listing requirements.\40\ If the Fund is 
not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under the Nasdaq 5800 
Series.
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    \40\ The Commission notes that certain other proposals for the 
listing and trading of Managed Fund Shares include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Securities Exchange Act Release No. 
77499 (April 1, 2016), 81 FR 20428 (April 7, 2016) (SR-BATS-2016-
04). In the context of this representation, it is the Commission's 
view that ``monitor'' and ``surveil'' both mean ongoing oversight of 
a fund's compliance with the continued listing requirements. 
Therefore, the Commission does not view ``monitor'' as a more or 
less stringent obligation than ``surveil'' with respect to the 
continued listing requirements.
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    This order is based on all of the Exchange's representations, 
including those set forth above and in the Notice, as modified by 
Amendment No. 3. The Commission notes that the Fund and the Shares must 
comply with the requirements of Nasdaq Rule 5735 for the Shares to be 
listed and traded on the Exchange.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 3, is consistent with Section 
6(b)(5) of the Act \41\ and Section 11A(a)(1)(C)(iii) of the Act \42\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.
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    \41\ 15 U.S.C. 78f(b)(5).
    \42\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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IV. Solicitation of Comments on Amendment No. 3

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 3 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 No. SR-NASDAQ-2016-056 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-NASDAQ-2016-056. 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 such 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 No. SR-NASDAQ-2016-056, and should be 
submitted on or before August 24, 2016.

V. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 3, prior to the thirtieth day 
after the date of publication of Amendment No. 3 in the Federal 
Register. The changes and additional information in Amendment No. 3 
helped the Commission to evaluate the Shares' susceptibility to 
manipulation and whether the listing and trading of the Shares would be 
consistent with the protection of investors and the public interest. 
Amendment No. 3 also provided clarifications and additional details to 
the proposed rule change. Accordingly, the Commission finds good cause 
for approving the proposed rule change, as modified by Amendment No. 3, 
on an accelerated basis, pursuant to Section 19(b)(2) of the Act.\43\
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    \43\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-NASDAQ-2016-056), as 
modified by Amendment No. 3, be, and it hereby is, approved on an 
accelerated basis.
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    \44\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18319 Filed 8-2-16; 8:45 am]
 BILLING CODE 8011-01-P