Document ID: SEC-2016-1737-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2016-09-29T04:00Z

[Federal Register Volume 81, Number 189 (Thursday, September 29, 2016)]
[Notices]
[Pages 67033-67036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23496]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78918; File No. SR-NASDAQ-2016-104]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of a Proposed Rule Change To Amend Nasdaq Rule 5735 
To Adopt Generic Listing Standards for Managed Fund Shares

September 23, 2016.

I. Introduction

    On August 16, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') 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 amend Nasdaq Rule 5735 to, 
among other things, adopt generic listing standards for Managed Fund 
Shares. The proposed rule change was published for comment in the 
Federal Register on August 24, 2016.\3\ The Commission has 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. 78616 (Aug. 18, 
2016), 81 FR 57968 (``Notice'').
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II. Description of the Proposal

    Nasdaq Rule 5735 governs the listing and trading of Managed Fund 
Shares on the Exchange. Managed Fund Shares are issued by actively 
managed exchange-traded funds (``ETFs'') that do not seek to replicate 
the performance of a specified index of securities.
    Under its current rules, the Exchange must file separate proposals 
under Section 19(b) of the Act before listing a new series of Managed 
Fund Shares.\4\ The Exchange proposes to adopt ``generic'' listing 
standards so that the Exchange may list Managed Fund Shares that 
satisfy the applicable criteria by submitting notice pursuant to Rule 
19b-4(e) under the Act, rather than by filing a proposed rule change 
under Section 19(b) of the Act.\5\
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    \4\ See Nasdaq Rule 5735(b)(1).
    \5\ See 17 CFR 240.19b-4(e). Rule 19b-4(e) permits self-
regulatory organizations (``SROs'') to list and trade new derivative 
securities products that comply with existing SRO trading rules, 
procedures, surveillance programs, and listing standards, without 
submitting a proposed rule change under Section 19(b). See 
Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 
70952 (Dec. 22, 1998).
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A. Description of the Generic Listing Standards

    The Exchange's listing standards establish requirements for the 
various types of assets that may be held in the portfolio of a 
generically listed, actively managed ETF (``Portfolio'').
1. Equity Portfolio Components
    Nasdaq Rule 5735(b)(1)(A) establishes the criteria applicable to 
the equity securities included in a Portfolio. Equity securities 
include the following securities: U.S. Component Stocks, which are 
defined in Nasdaq Rule 5705; Non-U.S. Component Stocks, which are 
defined in Nasdaq Rule 5705; Exchange Traded Derivative Securities, 
which are defined in Nasdaq Rule 5735(c)(6); \6\ Linked Securities, 
which are defined in Nasdaq Rule 5710, and each of the equivalent 
security types listed on another national securities exchange. 
Additionally, Nasdaq Rule 5735(b)(1)(A) provides that no more than 25% 
of the equity weight of the Portfolio can include leveraged or inverse-
leveraged Exchange Traded Derivative Securities or Linked Securities 
and that, to the extent a Portfolio includes convertible securities, 
the equity securities into which such securities are converted must 
meet the criteria of Nasdaq Rule 5735(b)(1)(A) after converting.
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    \6\ Nasdaq Rule 5735(c)(6) defines ``Exchange Traded Derivative 
Securities'' as: ``the securities described in Nasdaq Rules 5705(a) 
(Portfolio Depository Receipts); 5705(b) (Index Fund Shares); 5720 
(Trust Issued Receipts); 5711(d) (Commodity-Based Trust Shares); 
5711(e) (Currency Trust Shares); 5711(f) (Commodity Index Trust 
Shares); 5711(g) (Commodity Futures Trust Shares); 5711(h) 
(Partnership Units); 5711(i) (Trust Units); 5735 (Managed Fund 
Shares); and 5711(j) (Managed Trust Securities).''
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    Nasdaq Rule 5735(b)(1)(A)(i) would require that U.S. Component 
Stocks (except as mentioned below) meet the following criteria 
initially and on a continuing basis:
    (1) Component stocks (excluding Exchange Traded Derivative 
Securities and Linked Securities) that in the aggregate account for at 
least 90% of the equity weight of the Portfolio (excluding Exchange 
Traded Derivative Securities and Linked Securities) each shall have a 
minimum market value of at least $75 million;

[[Page 67034]]

    (2) Component stocks (excluding Exchange Traded Derivative 
Securities and Linked Securities) that in the aggregate account for at 
least 70% of the equity weight of the Portfolio (excluding Exchange 
Traded Derivative Securities and Linked Securities) each shall have a 
minimum monthly trading volume of 250,000 shares, or minimum notional 
volume traded per month of $25,000,000, averaged over the previous six 
months;
    (3) The most heavily weighted component stock (excluding Exchange 
Traded Derivative Securities and Linked Securities) must not exceed 30% 
of the equity weight of the Portfolio, and, to the extent applicable, 
the five most heavily weighted component stocks (excluding Exchange 
Traded Derivative Securities and Linked Securities) must not exceed 65% 
of the equity weight of the Portfolio;
    (4) Where the equity portion of the Portfolio does not include Non-
U.S. Component Stocks, the equity portion of the Portfolio shall 
include a minimum of 13 component stocks; provided, however, that there 
would be no minimum number of component stocks if (a) one or more 
series of Exchange Traded Derivative Securities or Linked Securities 
constitute, at least in part, components underlying a series of Managed 
Fund Shares, or (b) one or more series of Exchange Traded Derivative 
Securities or Linked Securities account for 100% of the equity weight 
of the Portfolio of a series of Managed Fund Shares;
    (5) Except as provided in Nasdaq Rule 5735(b)(1)(A)(i), equity 
securities in the Portfolio must be U.S. Component Stocks listed on a 
national securities exchange and must be NMS Stocks as defined in Rule 
600 of Regulation NMS; and
    (6) American Depositary Receipts (``ADRs'') may be exchange traded 
or non-exchange traded, but no more than 10% of the equity weight of 
the Portfolio shall consist of non-exchange traded ADRs.
    Nasdaq Rule 5735(b)(1)(A)(ii) requires that Non-U.S. Component 
Stocks must meet the following criteria initially and on a continuing 
basis:
    (1) Non-U.S. Component Stocks each shall have a minimum market 
value of at least $100 million;
    (2) Non-U.S. Component Stocks each shall have a minimum global 
monthly trading volume of 250,000 shares, or minimum global notional 
volume traded per month of $25,000,000, averaged over the last six 
months;
    (3) The most heavily weighted Non-U.S. Component Stock shall not 
exceed 25% of the equity weight of the Portfolio, and, to the extent 
applicable, the five most heavily weighted Non-U.S. Component Stocks 
shall not exceed 60% of the equity weight of the Portfolio;
    (4) Where the equity portion of the Portfolio includes Non-U.S. 
Component Stocks, the equity portion of the Portfolio shall include a 
minimum of 20 component stocks; provided, however, that there shall be 
no minimum number of component stocks if (a) one or more series of 
Exchange Traded Derivative Securities or Linked Securities constitute, 
at least in part, components underlying a series of Managed Fund 
Shares, or (b) one or more series of Exchange Traded Derivative 
Securities or Linked Securities account for 100% of the equity weight 
of the Portfolio of a series of Managed Fund Shares; and
    (5) Each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting.
2. Fixed Income Portfolio Components
    Nasdaq Rule 5735(b)(1)(B) establishes criteria for fixed income 
securities that are included in a Portfolio. Fixed income securities 
are debt securities \7\ that are notes, bonds, debentures, or evidence 
of indebtedness that include, but are not limited to, U.S. Department 
of Treasury securities (``Treasury Securities''), government-sponsored 
entity securities (``GSE Securities''), municipal securities, trust 
preferred securities, supranational debt and debt of a foreign country 
or a subdivision thereof, investment grade and high yield corporate 
debt, bank loans, mortgage and asset backed securities, and commercial 
paper.\8\ To the extent that a Portfolio includes convertible 
securities, the fixed income securities into which such securities are 
converted shall meet the criteria of Nasdaq Rule 5735(b)(1)(B) after 
converting.\9\
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    \7\ Debt securities include a variety of fixed income 
obligations, including, but not limited to, corporate debt 
securities, government securities, municipal securities, convertible 
securities, and mortgage-backed securities. Debt securities include 
investment-grade securities, non-investment-grade securities, and 
unrated securities. Debt securities also include variable and 
floating rate securities. See Notice, supra note 3, 81 FR at 57971, 
n.29.
    \8\ See Nasdaq Rule 5735(b)(1)(B).
    \9\ See id.
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    Under Nasdaq Rule 5735(b)(1)(B), fixed income securities that are 
part of a Portfolio must satisfy the following criteria initially and 
on a continuing basis:
    (1) Components that in the aggregate account for at least 75% of 
the fixed income weight of the Portfolio must each have a minimum 
original principal amount outstanding of $100 million or more;
    (2) No component fixed-income security (excluding Treasury 
Securities and GSE Securities) shall represent more than 30% of the 
fixed income weight of the Portfolio, and the five most heavily 
weighted fixed income securities in the Portfolio (excluding Treasury 
Securities and GSE Securities) shall not in the aggregate account for 
more than 65% of the fixed income weight of the Portfolio;
    (3) A Portfolio that includes fixed income securities (excluding 
exempted securities) shall include a minimum of 13 non-affiliated 
issuers, provided, however, that there shall be no minimum number of 
non-affiliated issuers required for fixed income securities if at least 
70% of the weight of the Portfolio consists of equity securities as 
described in Nasdaq Rule 5735(b)(1)(A);
    (4) Component securities that in aggregate account for at least 90% 
of the fixed income weight of the Portfolio must be: (a) From issuers 
that are required to file reports pursuant to Sections 13 and 15(d) of 
the Act; (b) from issuers each of which has a worldwide market value of 
its outstanding common equity held by non-affiliates of $700 million or 
more; (c) from issuers each of which has outstanding securities that 
are notes, bonds, debentures, or evidence of indebtedness having a 
total remaining principal amount of at least $1 billion; (d) exempted 
securities as defined in Section 3(a)(12) of the Act; or (e) from 
issuers that are a government of a foreign country or a political 
subdivision of a foreign country; and
    (5) Non-agency, non-GSE, and privately issued mortgage-related and 
other asset-backed securities shall not account, in the aggregate, for 
more than 20% of the weight of the fixed income portion of the 
Portfolio.
3. Cash and Cash Equivalent Portfolio Components
    Nasdaq Rule 5735(b)(1)(C) provides that a Portfolio may include 
cash and cash equivalents. Cash equivalents are defined as short-term 
instruments with maturities of less than three months.\10\ The Exchange 
defines short-term instruments to include the following: (1) U.S. 
Government securities, including bills, notes, and bonds differing as 
to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. Government agencies or 
instrumentalities; (2) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (3) bankers'

[[Page 67035]]

acceptances, which are short-term credit instruments used to finance 
commercial transactions; (4) repurchase agreements and reverse 
repurchase agreements; (5) bank time deposits, which are monies kept on 
deposit with banks or savings and loan associations for a stated period 
of time at a fixed rate of interest; (6) commercial paper, which are 
short-term unsecured promissory notes; and (7) money market funds.\11\ 
The Exchange does not propose to limit to the amount of cash or cash 
equivalents that may be held in a Portfolio.\12\
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    \10\ See Nasdaq Rule 5735(b)(1)(C).
    \11\ See Nasdaq Rule 5735(b)(1)(C)(ii).
    \12\ See Nasdaq Rule 5735(b)(1)(C)(i).
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4. Derivatives in the Portfolio
    Nasdaq Rule 5735(b)(1)(D) establishes listing criteria for the 
portion of a Portfolio that consists of listed derivatives such as 
futures, options, and swaps overlying commodities, currencies, 
financial instruments (e.g., stocks, fixed income securities, interest 
rates, and volatility), or a basket or index of any of the foregoing. 
The Exchange does not propose to limit the percentage of a Portfolio 
that may be composed of such holdings, provided that, in the aggregate, 
at least 90% of the weight of holdings in listed derivatives 
(calculated using the aggregate gross notional value) must, on both an 
initial and continuing basis, consist of futures, options, and swaps 
for which the Exchange may obtain information via the ISG from other 
members or affiliates or for which the principal market is a market 
with which the Exchange has a comprehensive surveillance sharing 
agreement (``CSSA'').\13\ Additionally, the aggregate gross notional 
value of listed derivatives based on any five or fewer underlying 
reference assets shall not exceed 65% of the weight of the Portfolio 
(including gross notional exposures), and the aggregate gross notional 
value of listed derivatives based on any single underlying reference 
asset shall not exceed 30% of the weight of the Portfolio (including 
gross notional exposures).\14\
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    \13\ See Nasdaq Rule 5735(b)(1)(D)(i).
    \14\ See Nasdaq Rule 5735(b)(1)(D)(ii).
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    Nasdaq Rule 5735(b)(1)(E) establishes a limit on over-the-counter 
(``OTC'') derivatives: No more than 20% of the weight of the Portfolio 
may be invested in OTC derivatives.\15\ The Exchange notes that, for 
purposes of calculating this limitation, a Portfolio's investment in 
OTC derivatives will be calculated as the aggregate gross notional 
value of the OTC derivatives.
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    \15\ OTC derivatives include: Forwards, options, and swaps 
overlying commodities, currencies, financial instruments (e.g., 
stocks, fixed income securities, interest rates, and volatility), or 
a basket or index of any of the foregoing. See Nasdaq Rule 
5735(b)(1)(E).
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    Nasdaq Rule 5735(b)(1)(E) provides that, to the extent that listed 
or OTC derivatives are used to gain exposure to individual equities 
and/or fixed income securities, or to indexes of equities and/or fixed 
income securities, the aggregate gross notional value of such exposure 
shall meet the criteria set forth in Nasdaq Rules 5735(b)(1)(A) and 
5735(b)(1)(B), respectively.

B. Other Aspects of the Proposal

1. Disclosed Portfolio
    The daily dissemination of a Disclosed Portfolio \16\ is required 
under current Nasdaq Rule 5735(d)(2)(B)(i), but its contents are not 
specified. The Exchange proposes to amend the definition of ``Disclosed 
Portfolio'' to require that the Web site for each series of Managed 
Fund Shares listed on the Exchange, including all Managed Fund Shares 
currently listed and traded on the Exchange, disclose the following 
information in the Disclosed Portfolio, to the extent applicable: 
Ticker symbol, CUSIP or other identifier, a description of the holding, 
identity of the asset upon which the derivative is based, the strike 
price for any options, the quantity of each security or other asset 
held as measured by select metrics, maturity date, coupon rate, 
effective date, market value, and percentage weight of the holding in 
the portfolio.
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    \16\ Nasdaq defines ``Disclosed Portfolio'' for purposes of its 
Managed Fund Shares listing rule as the identities and quantities of 
the securities and other assets held by the Investment Company that 
will form the basis for the Investment Company's calculation of net 
asset value at the end of the business day. See Nasdaq Rule 
5735(c)(2).
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2. Investment Objective
    The Exchange proposes to add as an initial listing criterion 
applicable to all Managed Fund Shares (including those that are 
generically listed) the requirement that Managed Fund Shares have a 
stated investment objective, which shall be adhered to under ``Normal 
Market Conditions.'' \17\ The Exchange would define ``Normal Market 
Conditions'' as circumstances including, but not limited to, the 
absence of: Trading halts in the applicable financial markets 
generally; operational issues causing dissemination of inaccurate 
market information or systems failure; or force majeure type events 
such as natural or man-made disaster, act of God, armed conflict, act 
of terrorism, riot or labor disruption, or any similar intervening 
circumstance.\18\
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    \17\ See Nasdaq Rule 5735(d)(1)(C).
    \18\ See Nasdaq Rule 5735(c)(5).
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3. Intraday Indicative Value (``IIV'')
    The Exchange proposes to modify a continued listing criterion for 
all Managed Fund Shares to require that the IIV be widely disseminated 
by one or more major market data vendors at least every 15 seconds 
during its Regular Market Session, as defined in Nasdaq Rule 
4120(b),\19\ rather than during all times that Managed Fund Shares 
trade on the Exchange.
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    \19\ See Nasdaq Rule 5735(d)(2)(A).
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C. Additional Representations of the Exchange Applicable to the Listing 
and Trading of Managed Fund Shares

    In support of the proposed rule change, the Exchange represents 
that:
    (1) Managed Fund Shares will conform to the initial and continued 
listing criteria under Nasdaq Rule 5735.\20\
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    \20\ See Notice, supra note 3, 81 FR at 57973.
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    (2) The Exchange's surveillance procedures are adequate to continue 
to properly monitor the trading of the Managed Fund Shares in all 
trading sessions and to deter and detect violations of Exchange rules. 
Specifically, the Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products, which will include 
Managed Fund Shares, to monitor trading in the Managed Fund Shares.\21\
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    \21\ See id.
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    (3) Prior to the commencement of trading of a particular series of 
Managed Fund Shares, the Exchange will inform its Members in an 
information circular of the special characteristics and risks 
associated with trading the Managed Fund Shares, including procedures 
for purchases and redemptions of Managed Fund Shares, suitability 
requirements under Nasdaq Rules 2090A and 2111A, the risks involved in 
trading the Managed Fund Shares during the Pre-Market and Post-Market 
Sessions when an updated IIV will not be calculated or publicly 
disseminated, information regarding the IIV and Disclosed Portfolio, 
prospectus delivery requirements, and other trading information. In 
addition, the information circular will disclose that the Managed Fund 
Shares are subject to various fees and expenses, as described in the 
registration statement, and will discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act. Finally, the information circular will disclose that the NAV for 
the Managed Fund Shares will be calculated

[[Page 67036]]

after 4:00 p.m. Eastern Time each trading day.\22\
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    \22\ See id.
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    (4) The issuer of a series of Managed Fund Shares will be required 
to comply with Rule 10A-3 under the Act for the initial and continued 
listing of Managed Fund Shares, as provided under the Nasdaq Rule 5600 
Series.\23\
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    \23\ See id.
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    (5) On a periodic basis, and no less than annually, the Exchange 
will review the Managed Fund Shares generically listed and traded on 
the Exchange under Nasdaq Rule 5735 for compliance with that rule and 
will provide a report to its Regulatory Oversight Committee presenting 
the findings of its review.
    (6) On a quarterly basis, the Exchange will provide a report to the 
Commission staff that contains, for each ETF whose shares are 
generically listed and traded under Nasdaq Rule 5735(b)(1): (a) Symbol 
and date of listing; (b) the number of active authorized participants 
(``APs'') and a description of any failure by either a fund or an AP to 
deliver promised baskets of shares, cash, or cash and instruments in 
connection with creation or redemption orders; and (c) a description of 
any failure by a fund to comply with Nasdaq Rule 5735.\24\
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    \24\ See id.
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    (7) Prior to listing pursuant to amended Rule 5735(b)(1), an issuer 
would be required to represent to the Exchange that it will advise the 
Exchange of any failure by a series of Managed Fund Shares to comply 
with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Exchange Act, the Exchange 
will surveil for compliance with the continued listing requirements. If 
a series of Managed Fund Shares is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under the Nasdaq Rule 5800 Series.\25\
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    \25\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to amend Nasdaq Rule 5735 to, among other things, adopt 
generic listing criteria, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\26\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\27\ which 
requires, among other things, that the Exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \26\ 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).
    \27\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that Nasdaq's proposal is substantively 
identical to proposals that the Commission recently approved.\28\ 
Accordingly, for the reasons discussed in the Prior MFS Generics 
Orders, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act \29\ and the rules and 
regulations thereunder applicable to a national securities exchange.
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    \28\ See Securities Exchange Act Release Nos. 78396 (Jul. 22, 
2016), 81 FR 49698 (Jul. 28, 2016) (SR-BATS-2015-100); and 78397 
(Jul. 22, 2016), 81 FR 49320 (Jul. 27, 2016) (SR-NYSEArca-2015-110). 
These releases are referred to collectively as the ``Prior MFS 
Generics Orders.''
    \29\ 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 
Act,\30\ that the proposed rule change (SR-NASDAQ-2016-104) be, and it 
hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-23496 Filed 9-28-16; 8:45 am]
 BILLING CODE 8011-01-P