Document ID: SEC-2016-1362-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2016-08-04T04:00Z

[Federal Register Volume 81, Number 150 (Thursday, August 4, 2016)]
[Notices]
[Pages 51517-51521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18470]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78443; File No. SR-NASDAQ-2016-064]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change Relating to the Listing and 
Trading of the Shares of the First Trust Strategic Mortgage REIT ETF of 
First Trust Exchange-Traded Fund VIII

July 29, 2016.

I. Introduction

    On May 3, 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 First Trust Strategic Mortgage REIT ETF (``Fund'') 
of First Trust Exchange-Traded Fund VIII (``Trust'') under NASDAQ Rule 
5735. The proposed rule change was published for comment in the Federal 
Register on May 12, 2016.\3\ On June 15, 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\ The Commission received no 
comments on the proposed rule change. This order grants approval of the 
proposed rule change.
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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. 77781 (May 6, 2016), 
81 FR 29590 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 78078 (Jun. 21, 
2016), 81 FR 40377.
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II. Exchange's Description of the Proposal

    The Exchange proposes to list and trade the Shares under Nasdaq 
Rule 5735, which governs the listing and trading of Managed Fund Shares 
on the Exchange. The Fund will be an actively-managed exchange-traded 
fund (``ETF''). The Shares will be offered by the Trust, which was 
established as a Massachusetts business trust on February 22, 2016.\6\ 
The Fund will be a series of the Trust.
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    \6\ The Exchange represents that the Trust is registered under 
the Investment Company Act of 1940 (``1940 Act''). See Registration 
Statement on Form N-1A for the Trust dated March 14, 2016 (File Nos. 
333-210186 and 811-23147) (``Registration Statement''). The Exchange 
further states that the Trust has obtained certain exemptive relief 
under the 1940 Act. See Investment Company Act Release No. 28468 
(October 27, 2008) (File No. 812-13477).
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    First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund. First Trust Portfolios L.P. 
(``Distributor'') will be the principal underwriter and distributor of 
the Fund's Shares. The Bank of New York Mellon Corporation will act as 
the administrator, accounting agent, custodian, and transfer agent to 
the Fund. The Exchange states that the Adviser is not a broker-dealer, 
but it is affiliated with the Distributor, a broker-dealer.\7\ The 
Exchange represents that the Adviser has implemented a fire wall with 
respect to its broker-dealer affiliate regarding access to information 
concerning the composition of, and changes to, the portfolio.\8\ 
According to the Exchange, the Fund currently does not intend to use a 
sub-advisor.\9\
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    \7\ See Notice, supra note 3, 81 FR at 29591.
    \8\ See id. The Exchange further represents that, in the event 
(a) the Adviser or any sub-adviser registers as a broker-dealer, or 
becomes newly affiliated with a broker-dealer, or (b) any new 
adviser or sub-adviser registers is a registered broker-dealer or 
becomes affiliated with another broker-dealer, it will implement a 
fire wall with respect to its relevant personnel and such broker-
dealer affiliate, as applicable, regarding access to information 
concerning the composition of, and 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.
    \9\ See id.
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategy, including the 
Fund's portfolio holdings and investment restrictions.\10\
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    \10\ The Commission notes that additional information regarding 
the Fund, the Trust, and the Shares, including investment 
strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, calculation of net asset 
value (``NAV''), distributions, and taxes, among other things, can 
be found in the Notice and the Registration Statement, as 
applicable. See Notice and Registration Statement, supra notes 3 and 
6, respectively.
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A. Exchange's Description of the Fund's Principal Investments

    The investment objective of the Fund will be to generate high 
current income. Under normal market conditions,\11\ the Fund will seek 
to achieve its investment objective by investing at least 80% of its 
net assets (including investment borrowings) in the exchange-traded 
common shares of U.S. exchange-traded mortgage real estate investment 
trusts (``mortgage REITs''). In general terms, a mortgage REIT makes 
loans to developers and owners of property and invests primarily in 
mortgages and similar real estate interests, and includes companies or 
trusts that are primarily engaged in the purchasing or servicing of 
commercial or residential mortgage loans or mortgage-related 
securities, which may include mortgage-backed securities issued by 
private issuers and those issued or guaranteed by U.S. Government 
agencies, instrumentalities, or sponsored entities.
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    \11\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the securities 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. On a temporary 
basis, including for 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. According to the Exchange, during such periods, the Fund 
may not be able to achieve its investment objective. The Fund may 
adopt a defensive strategy when the Adviser believes securities in 
which the Fund normally invests have elevated risks due to political 
or economic factors and in other extraordinary circumstances. See 
Notice, supra note 3, 81 FR at 29591 n.8.
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    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.

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

    The Fund may invest (in the aggregate) up to 20% of its net assets 
in

[[Page 51518]]

the following securities and instruments:
    (1) The Fund may invest in the exchange-traded preferred shares of 
U.S. exchange-traded mortgage REITs.
    (2) The Fund may invest in (a) U.S. exchange-traded equity and 
preferred securities and (b) domestic over-the-counter (``OTC'') 
preferred securities, in each case, of companies engaged in the U.S. 
real estate industry (other than mortgage REITs) (collectively, ``Real 
Estate Companies'').
    (3) The Fund may invest in mortgage-backed securities,\12\ and such 
investments may, from time to time, include investments in to-be-
announced transactions \13\ and mortgage dollar rolls \14\ 
(collectively, ``Mortgage-Related Instruments'').
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    \12\ Mortgage-backed securities, which are securities that 
directly or indirectly represent a participation in, or are secured 
by and payable from, mortgage loans on real property, will consist 
of: (1) Residential mortgage-backed securities; (2) commercial 
mortgage-backed securities; (3) stripped mortgage-backed securities, 
which are mortgage-backed securities where mortgage payments are 
divided between paying the loan's principal and paying the loan's 
interest; (4) collateralized mortgage obligations and real estate 
mortgage investment conduits, which are mortgage-backed securities 
that are divided into multiple classes, with each class being 
entitled to a different share of the principal and interest payments 
received from the pool of underlying assets.
    \13\ A to-be-announced (``TBA'') transaction is a method of 
trading mortgage-backed securities. In a TBA transaction, the buyer 
and seller agree upon general trade parameters such as agency, 
settlement date, par amount, and price. The actual pools delivered 
generally are determined two days prior to the settlement date.
    \14\ In a mortgage dollar roll, the Fund will sell (or buy) 
mortgage-backed securities for delivery on a specified date and 
simultaneously contract to repurchase (or sell) substantially 
similar (same type, coupon and maturity) securities on a future 
date. During the period between a sale and repurchase, the Fund will 
forgo principal and interest paid on the mortgage-backed securities. 
The Fund will earn or lose money on a mortgage dollar roll from any 
difference between the sale price and the future purchase price. In 
a sale and repurchase, the Fund will also earn money on the interest 
earned on the cash proceeds of the initial sale. According to the 
Exchange, the Fund intends to enter into mortgage dollar rolls only 
with high quality securities dealers and banks, as determined by the 
Adviser. See Notice, supra note 3, 81 FR at 29591 n.11.
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    (4) The Fund may invest in (a) exchange-traded and OTC options on 
mortgage REITs and Real Estate Companies; (b) OTC options on mortgage 
TBA transactions; (c) exchange-traded U.S. Treasury and Eurodollar 
futures contracts; (d) exchange-traded and OTC interest rate swap 
agreements; (e) exchange-traded options on U.S. Treasury and Eurodollar 
futures contracts; and (f) exchange-traded and OTC options on interest 
rate swap agreements. The use of these derivative transactions may 
allow the Fund to obtain net long or short exposures to selected 
interest rates. These derivatives may also be used to hedge risks, 
including interest rate risks and credit risks, associated with the 
Fund's portfolio investments. The Exchange represents that the Fund's 
investments in derivative instruments will be consistent with the 
Fund's investment objective and the 1940 Act and will not be used to 
seek to achieve a multiple or inverse multiple of an index. The Fund 
will only enter into transactions in OTC derivatives (including OTC 
options on mortgage REITs, Real Estate Companies, and mortgage TBA 
transactions; OTC interest rate swap agreements; and OTC options on 
interest rate swap agreements) with counterparties that the Adviser 
reasonably believes are capable of performing under the applicable 
contract or agreement.\15\
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    \15\ According to the Exchange, the Fund will seek, where 
possible, to use counterparties, as applicable, whose financial 
status is such that the risk of default is reduced; however, the 
risk of losses resulting from default is still possible. The Adviser 
will evaluate the creditworthiness of counterparties on an ongoing 
basis. In addition to information provided by credit agencies, the 
Adviser's analysis will evaluate each approved counterparty using 
various methods of analysis and may consider the Adviser's past 
experience with the counterparty, its known disciplinary history and 
its share of market participation. See id. at 29591 n.12.
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    (5) The Fund may invest in short-term debt securities and other 
short-term debt instruments (described below), as well as cash 
equivalents, or it may hold cash. The percentage of the Fund invested 
in such holdings or held in cash will vary and will depend on several 
factors, including market conditions. The Fund may invest in the 
following short-term debt instruments: \16\ (a) Fixed rate and floating 
rate 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; (b) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (c) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (d) repurchase agreements,\17\ which involve 
purchases of debt securities; (e) 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; and (f) commercial 
paper, which is short-term unsecured promissory notes.\18\
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    \16\ Short-term debt instruments are issued by issuers having a 
long-term debt rating of at least A by Standard & Poor's Ratings 
Services, a Division of The McGraw-Hill Companies, Inc. (``S&P 
Ratings''), Moody's Investors Service, Inc. (``Moody's'') or Fitch 
Ratings (``Fitch'') and have a maturity of one year or less.
    \17\ The Exchange represents that the Fund intends to enter into 
repurchase agreements only with financial institutions and dealers 
believed by the Adviser to present minimal credit risks in 
accordance with criteria approved by the Board of Trustees of the 
Trust (``Trust Board''). According to the Exchange, the Adviser will 
review and monitor the creditworthiness of such institutions, and 
the Adviser will monitor the value of the collateral at the time the 
transaction is entered into and at all times during the term of the 
repurchase agreement. See id. at 29592 n.14.
    \18\ The Exchange states that the Fund may only invest in 
commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or 
higher by Moody's or F1 or higher by Fitch. See id. at 29592 n.15.
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    (6) The Fund may invest (but only, in the aggregate, up to 10% of 
its net assets) in the securities of money market funds and other ETFs 
that, in each case, will be investment companies registered under the 
1940 Act.\19\
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    \19\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. Many ETFs are designed to 
track the performance of a securities index, including industry, 
sector, country and region indexes. ETFs included in the Fund will 
be listed and traded in the U.S. on registered exchanges. 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 other 
ETFs and their sponsors from the Commission. In addition, the Fund 
may invest in the securities of certain other investment companies 
in excess of the limits imposed under the 1940 Act pursuant to an 
exemptive order that the Trust has obtained from the Commission. See 
Investment Company Act Release No. 30377 (February 5, 2013) (File 
No. 812-13895). The ETFs in which the Fund may invest include Index 
Fund Shares (as described in Nasdaq Rule 5705), Portfolio Depository 
Receipts (as described in Nasdaq Rule 5705), and Managed Fund Shares 
(as described in Nasdaq Rule 5735). The Exchange represents that 
while the Fund may invest in inverse ETFs, the Fund will not invest 
in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs. See id. at 
29592 n.16.
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C. Exchange's Description of the Fund's Investment Restrictions

    The Fund may enter into short sales as part of its overall 
portfolio management strategies or to offset a potential decline in the 
value of a security; however, the Fund will not engage in short sales 
with respect to more than 30% of the value of its net assets. To the 
extent required under applicable federal securities laws, rules, and 
interpretations thereof, the Fund will ``set aside'' liquid assets or 
engage in other measures to ``cover'' open positions and short 
positions held in connection with the foregoing types of transactions.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser.\20\ The 
Fund will monitor its

[[Page 51519]]

portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of the Fund's net assets are held 
in illiquid assets. Illiquid assets include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
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    \20\ 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 (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers and the mechanics of transfer).
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    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to securities of issuers in the real estate sector, 
including real estate investment trusts; obligations issued or 
guaranteed by the U.S. government, its agencies or instrumentalities; 
or securities of other investment companies. The Fund will be 
concentrated in the real estate sector.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\21\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act,\22\ 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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    \21\ 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).
    \22\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal to list and trade the 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Exchange Act,\23\ 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 
(``CTA'') plans for the Shares. Quotation and last-sale information for 
U.S. exchange-traded equity securities (including mortgage REITs, ETFs, 
and exchange-traded Real Estate Companies) will be available from the 
exchanges on which they are traded as well as in accordance with any 
applicable CTA plans. Quotation and last-sale information for U.S. 
exchange-traded options will be available via the Options Price 
Reporting Authority. On each business day, before commencement of 
trading in Shares in the Regular Market Session \24\ 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.\25\ An estimated value, defined in Nasdaq Rule 5735(c)(3) as the 
``Intraday Indicative Value,'' that reflects an estimated intraday 
value of the Fund's Disclosed Portfolio, will be disseminated. The 
Intraday Indicative Value, available on the NASDAQ OMX Information LLC 
proprietary index data service,\26\ will be based upon the current 
value for the components of the Disclosed Portfolio and will be updated 
and widely disseminated by one or more major market data vendors and 
broadly displayed at least every 15 seconds during the Regular Market 
Session.\27\
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    \23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \24\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to 4 
p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m., Eastern Time).
    \25\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day. The Fund's disclosure of derivative 
positions in the Disclosed Portfolio will include sufficient 
information for market participants to use to value these positions 
intraday. On a daily basis, the Fund will disclose on the Fund's Web 
site the following information regarding each portfolio holding, as 
applicable to the type of holding: ticker symbol, CUSIP number or 
other identifier, if any; a description of the holding (including 
the type of holding, such as the type of swap); the identity of the 
security or other asset or instrument underlying the holding, if 
any; for options, the option strike price; quantity held (as 
measured by, for example, par value, notional value or number of 
shares, contracts or units); maturity date, if any; coupon rate, if 
any; effective date, if any; market value of the holding; and 
percentage weighting of the holding in the Fund's portfolio. The Web 
site information will be publicly available at no charge.
    \26\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the Nasdaq global index data feed service, offering 
real-time updates, daily summary messages, and access to widely 
followed indexes and Intraday Indicative Values for ETFs. According 
to the Exchange, GIDS provides investment professionals with the 
daily information needed to track or trade Nasdaq indexes, listed 
ETFs, or third-party partner indexes and ETFs.
    \27\ According to the Exchange, the Intraday Indicative Value 
will be based on quotes and closing prices from the securities' 
local market and may not reflect events that occur subsequent to the 
local market's close. The Exchange states that premiums and 
discounts between the Intraday Indicative Value and the market price 
may occur. The Exchange states that this should not be viewed as a 
``real time'' update of the NAV per Share of the Fund, which is 
calculated only once a day. See Notice, supra note 3, 81 FR at 29594
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    The Fund's NAV will be determined as of the close of trading 
(normally 4:00 p.m. Eastern time) on each day the New York Stock 
Exchange LLC is open for business.\28\ Additionally, 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. Pricing information for Mortgage-Related 
Instruments, OTC Real Estate Companies, Short-Term Debt Instruments, 
repurchase agreements, certificates of deposit, bank time deposits, OTC 
options on mortgage REITs, Real Estate Companies and mortgage TBA 
transactions, OTC interest rate swap agreements, and OTC options on 
interest rate swap agreements will be available from major broker-
dealer firms, major market data vendors, and/or Pricing Services. 
Pricing information for mortgage REITs (both common and preferred 
shares), exchange-traded Real Estate Companies, ETFs, exchange-traded 
options on mortgage REITs and Real Estate Companies, exchange-traded 
U.S. Treasury and Eurodollar futures contracts, exchange-traded 
interest rate swap agreements, exchange-traded options on U.S. Treasury 
and Eurodollar futures contracts, and exchange-traded

[[Page 51520]]

options on interest rate swap agreements will be available from the 
applicable listing exchange and from major market data vendors. Money 
market funds are typically priced once each business day, and their 
prices will be available through the applicable fund's Web site or from 
major market data vendors. The Fund's Web site, which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund and additional data relating to NAV and 
other applicable quantitative information that may be downloaded.
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    \28\ NAV per Share will be calculated for the Fund by taking the 
value of the Fund's total assets, including interest or dividends 
accrued but not yet collected, less all liabilities, including 
accrued expenses and dividends declared but unpaid, and dividing 
such amount by the total number of Shares outstanding. See Notice, 
supra note 3, 81 FR at 29593-29594 (providing more detailed 
information on the NAV valuation methodology for each of the Fund's 
holdings).
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    The Commission also 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 states that it 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.\29\ The Exchange 
also represents that the Exchange may consider all relevant factors in 
exercising its discretion to halt or suspend trading in the Shares of 
the Fund. 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). Trading may be halted because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable.\30\ Trading in the Shares also 
will be subject to Rule 5735(d)(2)(D), which sets forth circumstances 
under which trading of Shares of the Fund may be halted.\31\ The 
Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees.\32\ 
The Exchange also represents that the Adviser is not a broker-dealer, 
although it is affiliated with the Distributor, a broker-dealer, and 
that the Adviser has implemented a fire wall with respect to its 
broker-dealer affiliate regarding access to information concerning the 
composition and/or changes to the portfolio.\33\ 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\ The Exchange represents that trading in the Shares will 
be subject to the existing trading surveillances, administered by both 
Nasdaq and also the Financial Industry Regulatory Authority (``FINRA'') 
on behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws.\36\
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    \29\ See id. at 29595.
    \30\ 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. See id.
    \31\ See id.
    \32\ See id.
    \33\ See id. at 29591. See also supra note 8. The Exchange 
further represents that 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 its related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
    \34\ Nasdaq Rule 5730(c)(4) defines ``Reporting Authority.''
    \35\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \36\ 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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    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity securities. In support of this proposal, the Exchange 
represented that:
    (1) The Shares will be subject to Nasdaq Rule 5735, which sets 
forth the initial and continued listing criteria applicable to Managed 
Fund Shares.
    (2) Trading in the Shares will be subject to the existing trading 
surveillances administered by both Nasdaq and FINRA on behalf of the 
Exchange, which are designed to detect violations of Exchange rules and 
applicable federal securities laws, and these procedures are adequate 
to properly monitor Exchange trading of the Shares in all trading 
sessions and to detect and help deter violations of Exchange rules and 
applicable federal securities laws.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-traded securities and 
instruments held by the Fund (including mortgage REITs (both common and 
preferred shares); exchange-traded Real Estate Companies; ETFs; 
exchange-traded options on mortgage REITs and Real Estate Companies; 
exchange-traded U.S. Treasury and Eurodollar futures contracts; 
exchange-traded interest rate swap agreements; exchange-traded options 
on U.S. Treasury and Eurodollar futures contracts; and exchange-traded 
options on interest rate swap agreements) with other markets and other 
entities that are members of the Intermarket Surveillance Group 
(``ISG''),\37\ and FINRA may obtain trading information regarding 
trading in the Shares and such exchange-traded securities and 
instruments held by the Fund from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and the exchange-traded securities and instruments held by the 
Fund from markets and other entities that are members of ISG, which 
includes securities and futures exchanges, or with which the Exchange 
has in place a comprehensive surveillance sharing agreement. FINRA, on 
behalf of the Exchange, will be able to access, as needed, trade 
information for certain fixed income securities held by the Fund 
reported to FINRA's Trade Reporting and Compliance Engine.
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    \37\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
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    (4) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (5) 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

[[Page 51521]]

involved in trading the Shares during the Pre-Market and Post-Market 
Sessions when an updated Intraday Indicative Value will not be 
calculated or publicly disseminated; (e) the requirement that members 
deliver a prospectus to investors purchasing newly issued Shares prior 
to or concurrently with the confirmation of a transaction; and (f) 
trading information.
    (6) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\38\
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    \38\ See 17 CFR 240.10A-3.
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    (7) The Fund's investments in derivative instruments will be 
consistent with the Fund's investment objective and the 1940 Act and 
will not be used to seek to achieve a multiple or inverse multiple of 
an index, and the Fund will only enter into transactions in OTC 
derivatives (including OTC options on mortgage REITs, Real Estate 
Companies and mortgage TBA transactions; OTC interest rate swap 
agreements; and OTC options on interest rate swap agreements) with 
counterparties that the Adviser reasonably believes are capable of 
performing under the applicable contract or agreement.
    (8) The Fund may invest (but only, in the aggregate, up to 10% of 
its net assets) in the securities of money market funds and other ETFs 
that, in each case, will be investment companies registered under the 
1940 Act, and ETFs included in the Fund will be listed and traded in 
the U.S. on registered exchanges.
    (9) The Fund will not invest in leveraged or inverse leveraged 
(e.g., 2X or -3X) ETFs.
    (10) The Fund will not engage in short sales with respect to more 
than 30% of the value of its net assets. To the extent required under 
applicable federal securities laws, rules, and interpretations thereof, 
the Fund will ``set aside'' liquid assets or engage in other measures 
to ``cover'' open positions and short positions held in connection with 
the foregoing types of transactions.
    (11) 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 securities deemed illiquid by the Adviser.
    (12) At least 90% of the Fund's net assets that are invested in 
exchange-traded derivatives (including exchange-traded options on 
mortgage REITs and Real Estate Companies; exchange-traded U.S. Treasury 
and Eurodollar futures contracts; exchange-traded interest rate swap 
agreements; exchange-traded options on U.S. Treasury and Eurodollar 
futures contracts; and exchange-traded options on interest rate swap 
agreements) (in the aggregate) will be invested in instruments that 
trade in markets that are members of ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.
    (13) All of the Fund's net assets that are invested in exchange-
traded equity securities (including mortgage REITs (both common and 
preferred shares); ETFs; and exchange-traded Real Estate Companies) (in 
the aggregate) will be invested in securities that trade in markets 
that are members of ISG or are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
    (14) 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 
this 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.\39\ 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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    \39\ 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) (Notice of Filing 
of Amendment No. 2, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 2, to List and 
Trade Shares of the SPDR DoubleLine Short Duration Total Return 
Tactical ETF of the SSgA Active Trust), available at: http://www.sec.gov/rules/sro/bats/2016/34-77499.pdf. In the context of this 
representation, it is the Commission's view that ``monitor'' and 
``surveil'' both mean ongoing oversight of the 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 approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice. The 
Commission notes that the Fund and the Shares must comply with the 
requirements of Nasdaq Rule 5735 to be listed and traded on the 
Exchange on an initial and continuing basis.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \40\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \40\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\41\ that the proposed rule change (SR-NASDAQ-2016-064) 
be, and it hereby is, approved.
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    \41\ 15 U.S.C. 78s(b)(2).
    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18470 Filed 8-3-16; 8:45 am]
 BILLING CODE 8011-01-P