Document ID: SEC-2013-0838-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2013-05-02T04:00Z

[Federal Register Volume 78, Number 85 (Thursday, May 2, 2013)]
[Notices]
[Pages 25774-25777]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10345]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69464; File No. SR-NASDAQ-2013-036]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2 
Thereto, Relating to the Listing and Trading of the Shares of the First 
Trust Senior Loan Fund of First Trust Exchange-Traded Fund IV

April 26, 2013.

I. Introduction

    On February 21, 2013, 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'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the First 
Trust Senior Loan Fund of First Trust Exchange-Traded Fund IV 
(``Fund''). On March 7, 2013, the Exchange filed Amendment No. 2 to the 
proposed rule change, which superseded the original filing. The 
Commission published for comment in the Federal Register notice of the 
proposed rule change, as modified by Amendment No. 2, on March 13, 
2013.\3\ The Commission received no comments on the proposed rule 
change. This order approves the proposed rule change, as modified by 
Amendment No. 2.
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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. 69072 (March 7, 
2013), 78 FR 16006 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares pursuant to Nasdaq 
Rule 5735, which governs the listing and trading of Managed Fund 
Shares.\4\ The Exchange deems the Shares to be equity securities, 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.\5\
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    \4\ Under Nasdaq's Rules, a Managed Fund Share is a security 
that (a) represents an interest in a registered investment company 
(``Investment Company'') organized as an open-end management 
investment company or similar entity, that invests in a portfolio of 
securities selected by the Investment Company's investment adviser 
consistent with the Investment Company's investment objectives and 
policies; (b) is issued in a specified aggregate minimum number in 
return for a deposit of a specified portfolio of securities and/or a 
cash amount with a value equal to the next determined net asset 
value; and (c) when aggregated in the same specified minimum number, 
may be redeemed at a holder's request, which holder will be paid a 
specified portfolio of securities and/or cash with a value equal to 
the next determined net asset value. See Nasdaq Rule 5735(c)(1).
    \5\ See Notice, supra note 3, 78 FR at 16017.
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    The Shares will be offered by the First Trust Exchange Traded Fund 
IV (``Trust''), which is organized as a Massachusetts business trust 
and is registered with the Commission as an investment company.\6\ 
First Trust Advisors L.P. is the investment adviser (``Adviser'') to 
the Fund. First Trust Portfolios L.P. is the principal underwriter and 
distributor of the Shares (``Distributor''). The Bank of New York 
Mellon Corporation will act as the administrator, accounting agent, 
custodian and transfer agent to the Fund (``Custodian''). The Adviser 
is affiliated with the Distributor, a broker-dealer. As required by 
Nasdaq Rule 5735(g),\7\ the Adviser has implemented a firewall with 
respect to its broker-dealer affiliate

[[Page 25775]]

regarding access to information concerning the composition and/or 
changes to the portfolio.\8\
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    \6\ The Trust is registered under the Investment Company Act of 
1940 (``1940 Act''). See Post-Effective Amendment No. 15 to 
Registration Statement on Form N-1A for the Trust, dated December 
14, 2012 (File Nos. 333-174332 and 811-22559) (``Registration 
Statement''). In addition, the Exchange represents that the Trust 
has obtained certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 30029 (April 10, 2012) (File No. 
812-13795) (``Exemptive Order'').
    \7\ Nasdaq Rule 5735(g) also requires that Adviser personnel who 
make decisions regarding the Fund's portfolio be subject to 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Fund's portfolio.
    \8\ Additionally, the Exchange represents that, in the event (a) 
the Adviser becomes newly affiliated with a broker-dealer, or (b) 
any new adviser or sub-adviser becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to such broker-
dealer regarding access to information concerning the composition 
and/or changes to the portfolio, and will be subject to procedures 
designed to prevent the use and dissemination of material, non-
public information regarding such portfolio.
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Objectives of the Fund

    The Fund's primary investment objective is to provide high current 
income. The Fund's secondary investment objective is the preservation 
of capital.

The Fund's Principal Investments \9\
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    \9\ Additional information regarding the Fund, the Fund's 
portfolio, and the Shares, including investment strategies, risks, 
Senior Loan market, Primary and Secondary Indices, creation and 
redemption procedures, fees, portfolio holdings disclosure policies, 
distributions and taxes is included in the Notice and in the 
Registration Statement. See supra, notes 3 and 6, respectively.
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    In pursuing its investment objective, under normal market 
conditions,\10\ the Fund will seek to outperform a primary and 
secondary loan index (as described below) by investing at least 80% of 
its net assets (plus any borrowings for investment purposes) in 
``Senior Loans.'' \11\ It is anticipated that the Fund will invest 
approximately 50% to 75% of its net assets in Senior Loans that are 
eligible for inclusion in and meet the liquidity thresholds of the S&P/
LSTA U.S. Leveraged Loan 100 Index (``Primary Index'') or the Markit 
iBoxx USD Leveraged Loan Index (``Secondary Index'').\12\ Each of the 
Fund's Senior Loan investments is expected to have no less than $250 
million USD par outstanding.
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    \10\ In the Notice, the term ``under normal market conditions'' 
is defined and a description of what the Fund may hold during 
periods of extreme market disturbance is provided. See Notice, supra 
note 3, 78 FR at 16007, n.10.
    \11\ The Adviser considers Senior Loans to be first lien senior 
business loans that typically pay interest at a floating or 
adjusting rate that is determined periodically at a designated 
premium above a base lending rate, most commonly the London-
Interbank Offered Rate (``LIBOR''). See id. The Fund will invest in 
Senior Loans that are made predominantly to businesses operating in 
North America, but may also invest in Senior Loans made to 
businesses operating outside of North America. See id. Generally, 
each Senior Loan will be secured by collateral such as accounts 
receivable; inventory; equipment; real estate; intangible assets 
such as trademarks, copyrights and patents; and securities of 
subsidiaries or affiliates. See id. at 16008.
    \12\ The Primary Index comprises the 100 largest Senior Loans, 
as measured by the borrowed amounts outstanding; the Secondary Index 
selects the 100 most liquid Senior Loans in the market. In addition 
to size, liquidity is also measured, in part, based on the number of 
market makers who trade a specific Senior Loan and the number and 
size of transactions in the context of the prevailing bid/offer 
spread. Markit utilizes proprietary models for the Secondary Index 
composition and updates to the Secondary Index. The Fund will not 
seek to track either the Primary or Secondary Index but rather will 
seek to outperform those indices.
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    The Fund will primarily invest in securities (including Senior 
Loans) rated below investment grade.

The Fund's Other Investments

    In addition to the principal investments described above, the Fund 
may invest in: (1) Fixed-rate or floating-rate income-producing 
securities (including U.S. government debt securities and investment-
grade and below-investment-grade corporate debt securities); (2) 
preferred securities; and (3) securities of other investment companies 
registered under the 1940 Act.\13\ In addition, the Fund may invest a 
portion of its assets in exchange-traded pooled investment vehicles 
(other than investment companies) that invest primarily in securities 
of the types in which the Fund may invest directly. The Fund may 
receive equity, warrants, corporate bonds and other similar securities 
as a result of the restructuring of the debt of an issuer or a 
reorganization of a senior loan or bond or may acquire such securities 
together with a high yield bond or senior loan(s) of an issuer. Such 
investments will be subject to the Fund's investment objectives, 
restrictions and strategies.
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    \13\ The equity securities in which the Fund may invest, 
including securities of other investment companies registered under 
the 1940 Act, will be limited to securities that trade in markets 
that are members of the Intermarket Surveillance Group (``ISG''), 
which includes all U.S. national securities exchanges and certain 
foreign exchanges, or are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
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    The Fund may invest in secured loans that are not first lien loans 
or in loans that are unsecured. These loans have the same 
characteristics as Senior Loans except that such loans are not first in 
priority of repayment and/or may not be secured by collateral.

Fund Investment Limitations

    Under normal market conditions, up to 10% of the net assets of the 
Fund may be denominated in currencies other than the U.S. dollar. The 
Fund intends to hedge its non-U.S. dollar holdings.\14\
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    \14\ See Notice, supra note 3, 78 FR at 16009.
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    The Fund will not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry.\15\
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    \15\ See id. at 16010.
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities, junior subordinated loans, and 
unsecured loans deemed illiquid by the Adviser.\16\ 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 the Fund will consider taking 
appropriate steps in order to maintain adequate liquidity if, through a 
change in values, net assets, or other circumstances, more than 15% of 
the Fund's net assets are held in illiquid securities. Illiquid 
securities include securities subject to contractual or other 
restrictions on resale and other instruments that lack readily 
available markets as determined in accordance with Commission staff 
guidance.
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    \16\ See id.
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    Except for investments in ETFs that may hold non-U.S. issues, the 
Fund will not otherwise invest in non-U.S. equity issues.\17\ The Fund 
will not invest in options contracts, futures contracts, or swap 
agreements.\18\
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    \17\ See id.
    \18\ See id.
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    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.\19\
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    \19\ See id.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \20\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\21\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the 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. The Commission notes that the Shares will be listed and 
traded on the Exchange pursuant to the initial and continued listing 
criteria in Nasdaq's Rule 5735.
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    \20\ 15 U.S.C. 78f.
    \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\ 17 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\23\ which sets

[[Page 25776]]

forth Congress' finding 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. Information regarding market price and 
trading volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other 
electronic services, and quotation and last-sale information will be 
available via Nasdaq proprietary quote and trade services, as well as 
in accordance with the Unlisted Trading Privileges (``UTP'') and the 
Consolidated Tape Association ``CTA'') plans for the Shares and any 
underlying exchange-traded product.\24\ Intra-day, executable price 
quotations of the Senior Loans, fixed income securities, and other 
assets held by the Fund will be available from major broker-dealer 
firms or on the exchange on which they are traded, if applicable. 
Intra-day price information is also 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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    \23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \24\ See email from Jonathan F. Cayne, Associate General 
Counsel, The NASDAQ OMX Group, to Christopher Chow, Special Counsel, 
and Kristie Diemer, Special Counsel, Division of Trading and 
Markets, Commission, dated April 25, 2013, stating that quotation 
and last-sale information will be available in accordance with the 
UTP and the CTA plans for the Shares and any underlying exchange-
traded products, as well as via Nasdaq proprietary quote and trade 
services.
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    The Commission 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 
NAV of the Fund will be calculated by the Custodian and determined at 
the close of the regular trading session on the New York Stock Exchange 
(ordinarily 4:00 p.m., E.T.) on each day that such exchange is open, 
provided that fixed-income assets (and, accordingly, the Fund's NAV) 
may be valued as of the announced closing time for trading in fixed-
income instruments on any day that the Securities Industry and 
Financial Markets Association (or the applicable exchange or market on 
which the Fund's investments are traded) announces an early closing 
time. On each business day, before commencement of trading in Shares in 
the Regular Market Session \25\ on the Exchange, the Fund will disclose 
on the Distributor's Web site the identities and quantities of the 
portfolio of securities and other held by the Fund that will form the 
basis for the Fund's calculation of NAV at the end of the business day 
assets (``Disclosed Portfolio,'' as defined in Nasdaq Rule 
5735(c)(2)).\26\ 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. Additionally, 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 and broadly displayed at least every 15 
seconds during the Regular Market Session.
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    \25\ 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. E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 
4:15 p.m. E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 p.m. 
to 8 p.m. E.T.).
    \26\ 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''). 
Notwithstanding the foregoing, portfolio trades that are executed 
prior to the opening of the Exchange on any business day may be 
booked and reflected in NAV on such business day. Accordingly, the 
Fund will be able to disclose at the beginning of the business day 
the portfolio that will form the basis for the NAV calculation at 
the end of the business day.
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    Trading in Shares will be halted if the circuit breaker parameters 
in Nasdaq Rule 4120(a)(11) have been reached or because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable, and trading in the Shares will be 
subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances 
under which trading in the Shares 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 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.\27\ The Adviser is 
affiliated with a broker-dealer and has implemented a firewall with 
respect to that broker-dealer regarding access to information 
concerning the composition and/or changes to the Fund's portfolio.\28\ 
The Exchange has represented that S&P and Markit are not broker-dealers 
or affiliated with a broker-dealer and that each has implemented 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the Primary Index and Secondary Index, 
respectively.\29\
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    \27\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \28\ See note 7, supra and accompanying text. The Commission 
notes 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 Sub-Adviser and their related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above
    \29\ See Notice, supra note 3, 78 FR at 16018.
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    Under normal market conditions, the Fund generally will satisfy the 
generic fixed income listing requirements in Nasdaq Rule 5705(b)(4) on 
a continuous basis measured at the time of purchase. The Exchange 
states that trading in the Shares will be subject to the existing 
trading surveillances, administered by FINRA on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws. Further, the Exchange represents 
that these procedures are adequate to properly monitor Exchange trading 
of the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities 
laws.\30\ The Commission believes that the Exchange's procedures, 
combined with the Fund's general adherence to the generic fixed income 
listing requirements in Nasdaq Rule 5705(b)(4) on a continuous basis 
measured at the time of purchase are designed to mitigate the potential 
for price manipulation of the Shares.
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    \30\ See id. at 16017.
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    In support of this proposal, the Exchange has made representations, 
including:
    (1) The Shares will conform to the initial and continued listing 
criteria under Nasdaq Rule 5735.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.\31\
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    \31\ See id.

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[[Page 25777]]

    (3) The Exchange represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by FINRA on 
behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws and 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.
    (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 2310, 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 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 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 will be in 
compliance with Rule 10A-3 under the Act.\32\
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    \32\ See 17 CFR 240.10A-3.
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    (6) It is anticipated that the Fund, in accordance with its 
principal investment strategy, will invest approximately 50% to 75% of 
its net assets in Senior Loans that are eligible for inclusion in and 
meet the liquidity thresholds of the Primary or the Secondary Indices. 
Each of the Fund's Senior Loan investments is expected to have no less 
than $250 million USD par outstanding. While the Fund may hold a Senior 
Loan that has defaulted subsequent to its purchase by the Fund, the 
Adviser does not intend to purchase Senior Loans that are in default.
    (7) Under normal market conditions, the Fund would generally 
satisfy the generic fixed income listing requirements in Nasdaq Rule 
5705(b)(4) on a continuous basis measured at the time of purchase.
    (8) The Fund will not invest in non-U.S.-registered equity issues 
(except for underlying ETFs that may hold non-U.S. issues). The Fund 
may hold up to an aggregate amount of 15% of its net assets in illiquid 
securities (calculated at the time of investment), including Rule 144A 
securities, junior subordinated loans, and unsecured loans deemed 
illiquid by the Adviser. The Fund will not invest in options contracts, 
futures contracts, or swap agreements.
    (9) The Fund's investments will be consistent with the Fund's 
investment objectives and will not be used to enhance leverage.
    (10) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading. This approval order is based on all of the 
Exchange's representations, including those set forth in the Notice.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \33\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \33\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-NASDAQ-2013-036), as 
modified by Amendment No. 2, be, and it hereby is, approved.
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    \34\ 15 U.S.C. 78s(b)(2).
    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10345 Filed 5-1-13; 8:45 am]
BILLING CODE 8011-01-P