Document ID: SEC-2020-0127-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2020-01-31T05:00Z

[Federal Register Volume 85, Number 21 (Friday, January 31, 2020)]
[Notices]
[Pages 5730-5742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01783]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88046; File No. SR-NASDAQ-2020-005]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding Certain Changes to Investments of the First Trust TCW 
Opportunistic Fixed Income ETF

January 27, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 15, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes certain changes regarding investments of the 
First Trust TCW Opportunistic Fixed Income ETF, shares of which are 
currently listed and traded on the Exchange under Nasdaq Rule 5735 
(``Managed Fund Shares'').
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes certain changes, described below under 
``Application of Generic Listing Requirements'', regarding investments 
of the First Trust TCW Opportunistic Fixed Income ETF (``Fund''), 
shares (``Shares'') of which are currently listed and traded on the 
Exchange under Nasdaq Rule 5735, which governs the listing and trading 
of Managed Fund Shares \3\ on the Exchange. Shares of the Fund 
commenced trading on the Exchange on February 15, 2017 in accordance 
with the generic listing standards in Nasdaq Rule 5735.
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    \3\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Index Fund Shares, listed 
and traded on the Exchange under Nasdaq Rule 5705, seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specific foreign or domestic stock index, fixed 
income securities index or combination thereof.
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    The Shares are offered by First Trust Exchange-Traded Fund VIII 
(the ``Trust''), which is registered with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') as an open-end management 
investment company.\4\ The Fund is a series of the Trust.
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    \4\ The Trust is registered under the 1940 Act. On December 30, 
2019, the Trust filed with the Commission its registration statement 
on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a), and 
under the 1940 Act relating to the Fund (File Nos. 333-210186 and 
811-23147) (``Registration Statement''). The description of the 
operation of the Trust and the Fund herein is based, in part, on the 
Registration Statement. In addition, the Commission has issued an 
order upon which the Trust may rely, granting certain exemptive 
relief under the 1940 Act. See Investment Company Act Release No. 
30029 (April 10, 2012) (File No. 812-13795).

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[[Page 5731]]

    First Trust Advisors L.P. is the investment adviser (``First 
Trust'' or ``Adviser'') to the Fund. TCW Investment Management Company 
LLC (``TCW'' or the ``Sub-Adviser''), serves as the Fund's investment 
sub-adviser. First Trust Portfolios L.P. is the distributor 
(``Distributor'') for the Fund's Shares. The Bank of New York Mellon 
acts as the administrator, custodian and transfer agent (``Custodian'' 
or ``Transfer Agent'') for the Fund.
    Paragraph (g) of Nasdaq Rule 5735 provides that if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall erect 
and maintain a ``fire wall'' between the investment adviser and the 
broker-dealer with respect to access to information concerning the 
composition and/or changes to such investment company portfolio.\5\ In 
addition, paragraph (g) further requires that personnel who make 
decisions on the open-end fund's portfolio composition must be subject 
to procedures designed to prevent the use and dissemination of material 
nonpublic information regarding the open-end fund's portfolio. The 
Adviser and Sub-Adviser are not registered as broker-dealers. The 
Adviser is affiliated with First Trust Portfolios L.P., a broker-
dealer, and has implemented and will maintain a fire wall with respect 
to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio. The Sub-
Adviser is affiliated with multiple broker-dealers and has implemented 
and will maintain a fire wall with respect to its broker-dealer 
affiliates regarding access to information concerning the composition 
and/or changes to the portfolio. In the event (a) the Adviser or the 
Sub-Adviser becomes registered as a broker-dealer or newly affiliated 
with a broker-dealer, or (b) any new adviser or sub-adviser is a 
registered broker-dealer or becomes affiliated with a broker-dealer, it 
will implement and maintain a fire wall with respect to relevant 
personnel and any broker-dealer affiliate 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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    \5\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``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.
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First Trust TCW Opportunistic Fixed Income ETF
Principal Investments
    According to the Registration Statement, the investment objective 
of the Fund is to seek to maximize long-term total return. Under normal 
market conditions,\6\ the Fund intends to invest at least 80% of its 
net assets (including investment borrowings) in a portfolio of ``Fixed 
Income Securities'' (described below).
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    \6\ The term ``normal market conditions'' is defined in Nasdaq 
Rule 5735(c)(5). On a temporary basis, including for defensive 
purposes, during the initial invest-up period (i.e., the six-week 
period following the commencement of trading of Shares on the 
Exchange) and during periods of high cash inflows or outflows (i.e., 
rolling periods of seven calendar days during which inflows or 
outflows of cash, in the aggregate, exceed 10% of the Fund's net 
assets as of the opening of business on the first day of such 
periods), the Fund may depart from its principal investment 
strategies; for example, it may hold a higher than normal proportion 
of its assets in cash. During such periods, the Fund may not be able 
to achieve its investment objective. The Fund may adopt a defensive 
strategy when the Adviser and/or the Sub-Adviser believes securities 
in which the Fund normally invests have elevated risks due to 
market, political or economic factors and in other extraordinary 
circumstances.
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    In managing the Fund's portfolio, the Sub-Adviser intends to 
attempt to focus the Fund's portfolio holdings in areas of the fixed 
income market (based on quality, sector, coupon or maturity) that the 
Sub-Adviser believes to be relatively undervalued. Pursuant to this 
investment strategy, the Fund may invest in the following Fixed Income 
Securities, which may be represented by derivatives relating to such 
securities, as discussed below:
     Securities issued or guaranteed by the U.S. government or 
its agencies, instrumentalities or U.S. government-sponsored entities 
(``U.S. government securities'');
     Treasury Inflation Protected Securities (``TIPS'');
     the following non-agency, non-government-sponsored entity 
(``GSE'') and privately-issued mortgage-related and other asset-backed 
securities: Residential mortgage-backed securities (``RMBS''), 
commercial mortgage-backed securities (``CMBS''), asset-backed 
securities (``ABS''), and collateralized loan obligations (``CLOs'' 
and, together with such RMBS, CMBS and ABS ``Private ABS/MBS''); \7\
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    \7\ For avoidance of doubt, ``Private ABS/MBS'' as referenced 
herein are non-agency, non-GSE and privately-issued mortgage-related 
and other asset-backed securities as stated in Nasdaq Rule 
5735(b)(1)(B)(v).
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     Agency RMBS, agency CMBS, and agency ABS;
     domestic corporate bonds;
     Fixed Income Securities issued by non-U.S. corporations 
and non-U.S. governments;
     bank loans, including first lien senior secured floating 
rate bank loans (``Senior Loans''), secured and unsecured loans, second 
lien or more junior loans, and bridge loans;
     fixed income convertible securities;
     fixed income preferred securities; and
     municipal bonds.
    The Fund may invest in agency RMBS and CMBS by investing in to-be-
announced transactions (``TBA Transactions'').
    The Fund may hold cash and cash equivalents.\8\ In addition, the 
Fund may hold the following short-term instruments with maturities of 
three months or more: Certificates of deposit; bankers' acceptances; 
repurchase agreements and reverse repurchase agreements; bank time 
deposits; and commercial paper.
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    \8\ For purposes of this filing, cash equivalents are the short-
term instruments with maturities of less than 3 months enumerated in 
Nasdaq Rule 5735(b)(1)(C).
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    The Fund may enter into short sales of any securities in which the 
Fund may invest.
    The Fund may utilize exchange-listed and over-the-counter (``OTC'') 
traded derivatives instruments for duration/yield curve management and/
or hedging purposes, for risk management purposes or as part of its 
investment strategies. The Fund will use derivative instruments 
primarily to hedge interest rate risk, actively manage interest rate 
exposure, hedge foreign currency risk and actively manage foreign 
currency exposure. The Fund may also use derivative instruments to 
enhance returns, as a substitute for, or to gain

[[Page 5732]]

exposure to, a position in an underlying asset, to reduce transaction 
costs, to maintain full market exposure, to manage cash flows or to 
preserve capital. Derivatives may also be used to hedge risks 
associated with the Fund's other portfolio investments. The Fund will 
not use derivative instruments to gain exposure to Private ABS/MBS, and 
derivative instruments linked to such securities will be used for 
hedging purposes only. Derivatives that the Fund may enter into are the 
following: Futures on interest rates, currencies, Fixed Income 
Securities and fixed income indices; exchange-traded and OTC options on 
interest rates, currencies, Fixed Income Securities and fixed income 
indices; swap agreements on interest rates, currencies, Fixed Income 
Securities and fixed income indices; credit default swaps (``CDX''); 
and currency forward contracts.
Other Investments
    While the Fund, under normal market conditions, invests at least 
80% of its net assets in the Principal Investments described above, the 
Fund may invest its remaining assets in the following ``Non-Principal 
Investments.''
    The Fund may invest in exchange-traded common stock, exchange-
traded preferred stock, and exchange-traded real estate investment 
trusts (``REITs'').
    The Fund may invest in the securities of other investment companies 
registered under the 1940 Act, including money market funds, exchange-
traded funds (``ETFs''), open-end funds (other than money market funds 
and other ETFs), and U.S. exchange-traded closed-end funds.\9\
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    \9\ For purposes of this filing, the term ``ETFs'' are Index 
Fund Shares (as described in Nasdaq Rule 5705(b)); Portfolio 
Depository Receipts (as described in Nasdaq Rule 5705(a)); and 
Managed Fund Shares (as described in Nasdaq Rule 5735). All ETFs 
will be listed and traded in the U.S. on a national securities 
exchange. While the Fund may invest in inverse ETFs, the Fund will 
not invest in leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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     The Fund may hold exchange-traded notes (``ETNs'').\10\
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    \10\ For purposes of this filing, ETNs are Linked Securities (as 
described in Nasdaq Rule 5710). While the Fund may invest in inverse 
ETNs, the Fund will not invest in leveraged or inverse leveraged 
ETNs (e.g., 2X or -3X).
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     The Fund may hold exchange-traded or OTC ``Work Out 
Securities.'' \11\
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    \11\ For purposes of this filing, Work Out Securities are U.S. 
or foreign equity securities of any type acquired in connection with 
restructurings related to issuers of Fixed Income Securities held by 
the Fund. Work Out Securities are generally traded OTC, but may be 
traded on a U.S. or foreign exchange.
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     The Fund may hold exchange-traded or OTC equity securities 
issued upon conversion of fixed income convertible securities.
Investment Restrictions
    The Fund may not invest more than 2% of its total assets in any one 
Fixed Income Security (excluding U.S. government securities and TIPS) 
on a per CUSIP basis. The Fund's holdings in derivative instruments for 
hedging purposes would be excluded from the determination of compliance 
with this 2% limitation. The total gross notional value of the Fund's 
holdings in derivative instruments used to gain exposure to a specific 
asset is limited to 2% of the Fund's total assets.
    The Fund may invest up to 50% of its total assets in the aggregate 
in Private ABS/MBS, provided that the Fund (1) may not invest more than 
30% of its total assets in non-agency RMBS; (2) may not invest more 
than 25% of its total assets in non-agency CMBS and CLOs; and (3) may 
not invest more than 25% of its total assets in non-agency ABS.
    With respect to the Fund's investments in up to 30% of its total 
assets in Private ABS/MBS that exceed the 20% of the weight of the 
Fund's portfolio \12\ that may be invested in Private ABS/MBS under 
Nasdaq Rule 5735(b)(1)(B)(v),\13\ the following restrictions will 
apply:
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    \12\ See Securities Exchange Act Release No. 86399 (July 17, 
2019), 84 FR 35446 (July 23, 2019) (SR-NASDAQ-2019-054) (approving 
an amendment to Nasdaq Rule 5735(b)(1)(B)(v) to delete the reference 
to the ``fixed income portion of the'' portfolio, such that non-
agency, non-GSE, and privately-issued mortgage-related and other 
asset-backed securities components of a portfolio may not account, 
in the aggregate, for more than 20% of the weight of the whole 
portfolio).
    \13\ Nasdaq Rule 5735(b)(1)(B)(v) provides that non-agency, non-
GSE and privately-issued mortgage-related and other asset-backed 
securities components of a portfolio shall not account, in the 
aggregate, for more than 20% of the weight of the portfolio.
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     Non-agency RMBS shall have a weighted average loan age of 
84 months or more;
     Non-agency CMBS and CLOs shall have a weighted average 
loan age of 60 months or more; and
     Non-agency ABS shall have a weighted average loan age of 
12 months or more.\14\
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    \14\ Information relating to weighted average loan age for non-
agency RMBS, non-agency CMBS, CLOs and non-agency ABS is widely 
available from major market data vendors such as Bloomberg.
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    The Exchange proposes that up to 25% of the Fund's assets may be 
invested in OTC derivatives that are used to reduce currency, interest 
rate or credit risk arising from the Fund's investments (that is, 
``hedge''). The Fund's investments in OTC derivatives other than OTC 
derivatives used to hedge the Fund's portfolio against currency, 
interest rate or credit risk will be limited to 20% of the assets in 
the Fund's portfolio. For purposes of these percentage limitations on 
OTC derivatives, the weight of such OTC derivatives will be calculated 
as the aggregate gross notional value of such OTC derivatives.
    The Fund's holdings of bank loans will not exceed 15% of the Fund's 
total assets, and the Fund's holdings of bank loans other than Senior 
Loans will not exceed 5% of the Fund's total assets.
    The Fund's holdings in fixed income convertible securities and in 
equity securities issued upon conversion of such convertible securities 
will not exceed 10% of the Fund's total assets.
    The Fund's holdings in Work Out Securities will not exceed 5% of 
the Fund's total assets.
    The Fund will not invest in securities or other financial 
instruments that have not been described in this proposed rule change.
Other Restrictions
    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and will not be used to enhance 
leverage (although certain derivatives and other investments may result 
in leverage). That is, the Fund's investments will not be used to seek 
performance that is the multiple or inverse multiple (e.g., 2X or -3X) 
of the Fund's primary broad-based securities benchmark index (as 
defined in Form N-1A).\15\
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    \15\ The Fund's broad-based securities benchmark index is the 
Bloomberg Barclays U.S. Aggregate Bond Index.
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Use of Derivatives by the Fund
    The Fund may invest in the types of derivatives described in the 
``Principal Investments'' section above for the purposes described in 
that section. Investments in derivative instruments will be made in 
accordance with the Fund's investment objective and policies.
    To limit the potential risk associated with such transactions, the 
Fund will enter into offsetting transactions or segregate or 
``earmark'' assets determined to be liquid by the Adviser in accordance 
with procedures established by the Trust's Board of Trustees (the 
``Trust Board''). In addition, the Fund has included appropriate risk 
disclosure in its offering documents, including leveraging risk. 
Leveraging risk is the risk that certain transactions of the Fund, 
including the Fund's use of derivatives, may give rise to leverage, 
causing the Fund to be more volatile than if it had not been leveraged.

[[Page 5733]]

Because the markets for certain assets, or the assets themselves, may 
be unavailable or cost prohibitive as compared to derivative 
instruments, suitable derivative transactions may be an efficient 
alternative for the Fund to obtain the desired asset exposure.
Impact on Arbitrage Mechanism
    The Adviser and the Sub-Adviser believe there will be minimal, if 
any, impact to the arbitrage mechanism as a result of the Fund's use of 
derivatives and Private ABS/MBS. The Adviser and the Sub-Adviser 
understand that market makers and participants should be able to value 
derivatives and Private ABS/MBS as long as the positions are disclosed 
with relevant information. The Adviser and the Sub-Adviser believe that 
the price at which Shares of the Fund trade will continue to be 
disciplined by arbitrage opportunities created by the ability to 
purchase or redeem Shares of the Fund at their net asset value 
(``NAV''), which should ensure that Shares of the Fund will not trade 
at a material discount or premium in relation to their NAV.
    The Adviser and Sub-Adviser do not believe there will be any 
significant impacts to the settlement or operational aspects of the 
Fund's arbitrage mechanism due to the use of derivatives and Private 
ABS/MBS.
Creation and Redemption of Shares
    The Fund will issue and redeem Shares on a continuous basis at NAV 
\16\ only in large blocks of Shares (``Creation Units'') in 
transactions with authorized participants, generally including broker-
dealers and large institutional investors (``Authorized 
Participants''). Creation Units generally will consist of 50,000 
Shares. The size of a Creation Unit is subject to change. As described 
in the Registration Statement, the Fund will issue and redeem Creation 
Units in exchange for an in-kind portfolio of instruments and/or cash 
in lieu of such instruments (the ``Creation Basket'').\17\ In addition, 
if there is a difference between the NAV attributable to a Creation 
Unit and the market value of the Creation Basket exchanged for the 
Creation Unit, the party conveying instruments (which may include cash-
in-lieu amounts) with the lower value will pay to the other an amount 
in cash equal to the difference (referred to as the ``Cash 
Component'').
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    \16\ The NAV of the Fund's Shares generally will be calculated 
once daily Monday through Friday as of the close of regular trading 
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m., 
Eastern Time (``E.T.'') (the ``NAV Calculation Time''). NAV per 
Share will be calculated by dividing the Fund's net assets by the 
number of Fund Shares outstanding.
    \17\ It is expected that the Fund will typically issue and 
redeem Creation Units on a cash basis; however, at times, the Fund 
may issue and redeem Creation Units on an in-kind (or partially in-
kind) (or partially cash) basis.
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    Creations and redemptions must be made by or through an Authorized 
Participant that has executed an agreement that has been agreed to by 
the Distributor and the Transfer Agent with respect to creations and 
redemptions of Creation Units. All standard orders to create Creation 
Units must be received by the Transfer Agent no later than the closing 
time of the regular trading session on the NYSE (ordinarily 4:00 p.m., 
E.T.) (the ``Closing Time'') in each case on the date such order is 
placed in order for the creation of Creation Units to be effected based 
on the NAV of Shares as next determined on such date after receipt of 
the order in proper form. Shares may be redeemed only in Creation Units 
at their NAV next determined after receipt not later than the Closing 
Time of a redemption request in proper form by the Fund through the 
Transfer Agent and only on a business day. The Custodian, through the 
National Securities Clearing Corporation (``NSCC''), will make 
available on each business day, prior to the opening of business of the 
Exchange, the list of the names and quantities of the instruments 
comprising the Creation Basket, as well as the estimated Cash Component 
(if any), for that day. The published Creation Basket will apply until 
a new Creation Basket is announced on the following business day prior 
to commencement of trading in the Shares.
Application of Generic Listing Requirements
    The Exchange is submitting this proposed rule change because the 
portfolio for the Fund will not meet all of the ``generic'' listing 
requirements of Nasdaq Rule 5735(b)(1) applicable to the listing of 
Managed Fund Shares. The Fund's portfolio will meet all such 
requirements except for those set forth in Nasdaq Rule 
5735(b)(1)(A)(i), (b)(1)(A)(ii), (b)(1)(B)(i), (b)(1)(B)(iv), 
(b)(1)(B)(v), and (b)(1)(E), as described below. The Exchange notes 
that the proposed rule change set forth in this filing is based on a 
very similar proposed rule change that was recently approved by the 
Commission with respect to another actively-managed ETF for which the 
Adviser serves as investment adviser and the Sub-Adviser serves as 
investment sub-adviser.\18\
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    \18\ See Securities Exchange Act Release No. 87410 (October 28, 
2019), 84 FR 58750 (November 1, 2019) (SR-NYSEArca-2019-33) (Notice 
of Filing of Amendment No. 2 and Order Granting Accelerated Approval 
of a Proposed Rule Change, as Modified by Amendment No. 2, Regarding 
Changes to Investments of the First Trust TCW Unconstrained Plus 
Bond ETF) (the ``Recent Approval'').
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    The Fund will not comply with the requirements set forth in Nasdaq 
Rule 5735(b)(1)(A)(i) \19\ and (b)(1)(A)(ii) \20\

[[Page 5734]]

with respect to the Fund's investments in equity securities.\21\ 
Instead, the Exchange proposes that the Fund's investments in equity 
securities will meet the requirements of Nasdaq Rule 5735(b)(1)(A) with 
the exception of Nasdaq Rule 5735(b)(1)(A)(i)(c) and (d) (with respect 
to U.S. Component Stocks) and Nasdaq Rule 5735(b)(1)(A)(ii)(c) and (d) 
(with respect to Non-U.S. Component Stocks). Any Fund investment in 
exchange-traded common stocks, preferred stocks, REITS, ETFs, ETNs, 
exchange-traded equity securities issued upon conversion of fixed 
income convertible securities, exchange-traded Work Out Securities and 
U.S. exchange-traded closed-end funds would provide for enhanced 
diversification of the Fund's portfolio and, in any case, would be Non-
Principal Investments and would not exceed 20% of the Fund's net assets 
in the aggregate. With respect to any Fund holdings of exchange-traded 
equity securities issued upon conversion of fixed income convertible 
securities and exchange-traded Work Out Securities, such securities 
will not exceed 10% and 5%, respectively, of the Fund's total assets.
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    \19\ Nasdaq Rule 5735(b)(1)(A)(i) provides that the component 
stocks of the equity portion of a portfolio that are U.S. Component 
Stocks shall meet the following criteria initially and on a 
continuing basis:
    (a) 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 such 
Exchange Traded Derivative Securities and Linked Securities) each 
shall have a minimum market value of at least $75 million;
    (b) 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 such 
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 last six months;
    (c) The most heavily weighted component stock (excluding 
Exchange Traded Derivative Securities and Linked Securities) shall 
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) shall not exceed 65% of the equity weight of the 
portfolio;
    (d) 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 shall be no minimum number of component stocks if (i) 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 (ii) 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;
    (e) Except as provided herein, equity securities in the 
portfolio shall be U.S. Component Stocks listed on a national 
securities exchange and shall be NMS Stocks as defined in Rule 600 
of Regulation NMS under the Securities Exchange Act of 1934; and
    (f) American Depositary Receipts (``ADRs'') in a portfolio may 
be exchange-traded or non-exchange-traded. However, no more than 10% 
of the equity weight of a portfolio shall consist of non-exchange-
traded ADRs.
    \20\ Nasdaq Rule 5735(b)(1)(A)(ii) provides that the component 
stocks of the equity portion of a portfolio that are Non-U.S. 
Component Stocks shall meet the following criteria initially and on 
a continuing basis:
    (a) Non-U.S. Component Stocks each shall have a minimum market 
value of at least $100 million;
    (b) 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;
    (c) 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;
    (d) 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 (i) 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 (ii) 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
    (e) Each Non-U.S. Component Stock shall be listed and traded on 
an exchange that has last-sale reporting.
    \21\ For purposes of these exceptions, investments in equity 
securities that are OTC Work Out Securities, OTC equity securities 
issued upon conversion of fixed income convertible securities, or 
non-exchange-traded securities of other open-end investment 
companies (e.g., mutual funds) are excluded and are discussed 
further below.
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    The Adviser and Sub-Adviser represent that the Fund generally will 
not actively invest in equity securities issued upon conversion of 
fixed income convertible securities or Work Out Securities, but may, at 
times, receive a distribution of such securities in connection with the 
Fund's holdings in other securities. Therefore, the Fund's holdings in 
equity securities issued upon conversion of fixed income convertible 
securities and Work Out Securities generally would not be acquired as 
the result of the Fund's voluntary investment decisions. The Adviser 
and Sub-Adviser represent that, under these circumstances, application 
of the weighting requirements of Nasdaq Rules 5735(b)(1)(A)(i)(c) and 
5735(b)(1)(A)(ii)(c) and the minimum number of components requirements 
of Nasdaq Rules 5735(b)(1)(A)(i)(d) and 5735(b)(1)(A)(ii)(d) would 
impose an unnecessary burden on the Fund's ability to hold such equity 
securities.
    The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(B)(i) that components that in the aggregate account for at 
least 75% of the fixed income weight of the portfolio each shall have a 
minimum original principal amount outstanding of $100 million or more. 
Instead, the Exchange proposes that components that in the aggregate 
account for at least 50% of the fixed income weight of the portfolio 
each shall have a minimum original principal amount outstanding of $50 
million or more. As noted above, the Fund may not invest more than 2% 
of its total assets in any one Fixed Income Security (excluding U.S. 
government securities and TIPS) on a per CUSIP basis. In addition, at 
least 50% of the weight of the Fund's portfolio would continue to be 
subject to a substantial minimum (i.e., $50 million) original principal 
amount outstanding. The Exchange believes this limitation would provide 
significant additional diversification to the Fund's investments in 
Fixed Income Securities, and reduce concerns that the Fund's 
investments in such securities would be readily susceptible to market 
manipulation.
    The Fund will not comply with the requirements in Nasdaq Rule 
5735(b)(1)(B)(iv) that component securities that in the aggregate 
account for at least 90% of the fixed income weight of the portfolio 
meet one of the criteria specified in Nasdaq Rule 5735(b)(1)(B)(iv), 
because certain Private ABS/MBS cannot satisfy the criteria in Nasdaq 
Rule 5735(b)(1)(B)(iv).\22\ Instead, the Exchange proposes that the 
Fund's investments in Fixed Income Securities other than Private ABS/
MBS will be required to comply with the requirements of Nasdaq Rule 
5735(b)(1)(B)(iv). As noted above, the Fund may not invest more than 2% 
of its total assets in any one Fixed Income Security (excluding U.S. 
government securities and TIPS) on a per CUSIP basis. The Exchange 
believes this limitation would provide additional diversification to 
the Fund's investments in Private ABS/MBS, and reduce concerns that the 
Fund's investment in such securities would be readily susceptible to 
market manipulation.
---------------------------------------------------------------------------

    \22\ Nasdaq Rule 5735(b)(1)(B)(iv) provides that component 
securities that in the aggregate account for at least 90% of the 
fixed income weight of the portfolio must be either: (a) From 
issuers that are required to file reports pursuant to Sections 13 
and 15(d) of the Act; (b) from issuers that have a worldwide market 
value of its outstanding common equity held by non-affiliates of 
$700 million or more; (c) from issuers that have outstanding 
securities that are notes, bonds debentures, or evidence of 
indebtedness having a total remaining principal amount of at least 
$1 billion; (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.
---------------------------------------------------------------------------

    The Exchange notes that the Commission has previously approved the 
listing of Managed Fund Shares with similar investment objectives and 
strategies without imposing requirements that a certain percentage of 
such funds' securities meet one of the criteria corresponding to those 
set forth in Nasdaq Rule 5735(b)(1)(B)(iv).\23\
---------------------------------------------------------------------------

    \23\ See the Recent Approval, supra note 18. In addition, see, 
e.g., Exchange Act Release Nos. 67894 (September 20, 2012), 77 FR 
59227 (September 26, 2012) (SR-BATS-2012-033) (order approving the 
listing and trading of shares of the iShares Short Maturity Bond 
Fund); 70342 (September 6, 2013), 78 FR 56256 (September 12, 2013) 
(SR-NYSEArca-2013-71) (order approving the listing and trading of 
shares of the SPDR SSgA Ultra Short Term Bond ETF, SPDR SSgA 
Conservative Ultra Short Term Bond ETF and SPDR SSgA Aggressive 
Ultra Short Term Bond ETF).
---------------------------------------------------------------------------

    The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(B)(v) that Private ABS/MBS in the Fund's portfolio account, 
in the aggregate, for no more than 20% of the weight of the Fund's 
portfolio.\24\ Instead, the Exchange proposes that, in order to enable 
the portfolio to be more diversified and provide the Fund with an 
opportunity to earn higher returns, the Fund may invest up to 50% of 
its total assets in the aggregate in Private ABS/MBS, provided that the 
Fund (1) may not invest more than 30% of its total assets in non-agency 
RMBS; (2) may not invest more than 25% of its total assets in non-
agency CMBS and CLOs; and (3) may not invest more than 25% of its total 
assets in non-agency ABS.\25\
---------------------------------------------------------------------------

    \24\ See note 13, supra.
    \25\ The Exchange notes that substantially the same proposal was 
set forth in the Recent Approval.
---------------------------------------------------------------------------

    With respect to the Fund's investments in up to 30% of its total 
assets in Private ABS/MBS that exceed the 20% of the weight of the 
Fund's portfolio that may be invested in Private ABS/MBS under Nasdaq 
Rule 5735(b)(1)(B)(v),\26\ the following restrictions (which are 
identical to those set forth in the Recent Approval) will apply:
---------------------------------------------------------------------------

    \26\ See note 13, supra.
---------------------------------------------------------------------------

     Non-agency RMBS shall have a weighted average loan age of 
84 months or more;
     Non-agency CMBS and CLOs shall have a weighted average 
loan age of 60 months or more; and

[[Page 5735]]

     Non-agency ABS shall have a weighted average loan age of 
12 months or more.
    In addition, as noted above, the Fund may not invest more than 2% 
of its total assets in any one Fixed Income Security (excluding U.S. 
government securities and TIPS) on a per CUSIP basis.\27\ The Exchange 
believes these limitations would provide additional diversification to 
the Fund's Private ABS/MBS investments and reduce concerns that the 
Fund's investment in such securities would be readily susceptible to 
market manipulation.
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    \27\ As noted above, the Fund's holdings in derivative 
instruments for hedging purposes would be excluded from the 
determination of compliance with this 2% limitation. The total gross 
notional value of the Fund's holdings in derivative instruments used 
to gain exposure to a specific asset is limited to 2% of the Fund's 
total assets.
---------------------------------------------------------------------------

    The Adviser and Sub-Adviser represent that the RMBS sector can be 
an important component of the Fund's investment strategy because of the 
potential for attractive risk-adjusted returns relative to other fixed 
income sectors and the potential to add significantly to the 
diversification in the Fund's portfolio. Similarly, the Private ABS/MBS 
sectors also have the potential for attractive risk-adjusted returns 
and added portfolio diversification.
    The Fund's portfolio will not comply with the requirements set 
forth in Nasdaq Rule 5735(b)(1)(E).\28\ Specifically, the Fund's 
investments in OTC derivatives may exceed 20% of Fund assets, 
calculated as the aggregate gross notional value of such OTC 
derivatives. The Exchange proposes that up to 25% of the Fund's assets 
(calculated as the aggregate gross notional value) may be invested in 
OTC derivatives that are used to reduce currency, interest rate or 
credit risk arising from the Fund's investments (that is, ``hedge''). 
The Fund's investments in OTC derivatives other than OTC derivatives 
used to hedge the Fund's portfolio against currency, interest rate or 
credit risk will be limited to 20% of the assets in the Fund's 
portfolio, calculated as the aggregate gross notional value of such OTC 
derivatives.
---------------------------------------------------------------------------

    \28\ Nasdaq Rule 5735(b)(1)(E) provides that the portfolio may 
hold OTC derivatives, including forwards, options and swaps on 
commodities, currencies and financial instruments (e.g., stocks, 
fixed income, interest rates, and volatility) or a basket or index 
of any of the foregoing; however, on both an initial and continuing 
basis, no more than 20% of the assets in the portfolio may be 
invested in OTC derivatives. 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.
---------------------------------------------------------------------------

    The Adviser and Sub-Adviser believe that it is important to provide 
the Fund with additional flexibility to manage risk associated with its 
investments. Depending on market conditions, it may be critical that 
the Fund be able to utilize available OTC derivatives for this purpose 
to attempt to reduce impact of currency, interest rate or credit 
fluctuations on Fund assets. Therefore, the Exchange believes it is 
appropriate to apply a limit of up to 25% of the Fund's assets to the 
Fund's investments in OTC derivatives (calculated as the aggregate 
gross notional value of such OTC derivatives), including forwards, 
options and swaps, that are used for hedging purposes, as described 
above.\29\
---------------------------------------------------------------------------

    \29\ In the Recent Approval, supra note 18, the Commission 
approved an exception to the applicable generic listing requirements 
relating to investments in OTC derivatives that was substantially 
the same as that proposed in this filing. See also Securities 
Exchange Act Release No. 80657 (May 11, 2017), 82 FR 22702 (May 17, 
2017) (SR-NYSEArca-2017-09) (Notice of Filing of Amendment No. 2 and 
Order Granting Accelerated Approval of a Proposed Rule Change, as 
Modified by Amendment No. 2, Regarding Investments of the Janus 
Short Duration Income ETF Listed Under NYSE Arca Equities Rule 
8.600).
---------------------------------------------------------------------------

    As noted above, the Fund may hold equity securities that are Work 
Out Securities, which generally are traded OTC (but that may be traded 
on a U.S. or foreign exchange), exchange-traded or OTC equity 
securities issued upon conversion of fixed income convertible 
securities, and non-exchange-traded securities of other open-end 
investment company (e.g., mutual funds). The Exchange believes that it 
is appropriate and in the public interest to approve listing and 
trading of Shares of the Fund on the Exchange notwithstanding that the 
Fund would not meet the requirements of Nasdaq Rule 5735(b)(1)(A)(i)(a) 
through (e) with respect to the Fund's investments in non-exchange-
traded securities of open-end investment companies,\30\ and 
notwithstanding that the Fund's holdings of OTC equity securities 
issued upon conversion of fixed income convertible securities and OTC 
Work Out Securities would not meet the requirements of Nasdaq Rule 
5735(b)(1)(A)(i)(a) through (e) and Nasdaq Rule 5735(b)(1)(A)(ii)(a) 
through (e). Investments in non-exchange-traded securities of open-end 
investment companies will not be principal investments of the Fund.\31\ 
Such investments, which may include mutual funds that invest, for 
example, principally in fixed income securities, would be utilized to 
help the Fund meet its investment objective and to equitize cash in the 
short term. With respect to any Fund holdings of OTC equity securities 
issued upon conversion of fixed income convertible securities and OTC 
Work Out Securities, such securities will not exceed 10% and 5%, 
respectively, of the Fund's total assets. The Adviser and Sub-Adviser 
represent that the Fund generally will not actively invest in OTC 
equity securities issued upon conversion of fixed income convertible 
securities or OTC Work Out Securities, but may, at times, receive a 
distribution of such securities in connection with the Fund's holdings 
in other securities. Therefore, the Fund's holdings in equity 
securities issued upon conversion of fixed income convertible 
securities and Work Out Securities generally would not be acquired as 
the result of the Fund's voluntary investment decisions.
---------------------------------------------------------------------------

    \30\ Nasdaq Rule 5735(b)(1)(A) specifies the equity securities 
accommodated by the generic criteria in Nasdaq Rule 5735(b)(1)(A), 
namely, U.S. Component Stocks (as described in Nasdaq Rule 5705); 
Non-U.S. Component Stocks (as described in Nasdaq Rule 5705); 
Exchange Traded Derivative Securities (as described in Nasdaq Rule 
5735(c)(6)); and Linked Securities (as described in Nasdaq Rule 
5710).
    \31\ For purposes of this section of the filing, non-exchange-
traded securities of other registered investment companies do not 
include money market funds, which are cash equivalents under Nasdaq 
Rule 5735(b)(1)(C) and for which there is no limitation in the 
percentage of the portfolio invested in such securities.
---------------------------------------------------------------------------

    With respect to investments in non-exchange-traded investment 
company securities, because such securities have a net asset value 
based on the value of securities and financial assets the investment 
company holds, the Exchange believes it is both unnecessary and 
inappropriate to apply to such investment company securities the 
criteria in Nasdaq Rule 5735(b)(1)(A)(i).\32\
---------------------------------------------------------------------------

    \32\ The Commission has previously approved proposed rule 
changes under Section 19(b) of the Act for series of Managed Fund 
Shares that may invest in non-exchange traded investment company 
securities. See, e.g., the Recent Approval, supra note 18; 
Securities Exchange Act Release No. 78414 (July 26, 2016), 81 FR 
50576 (August 1, 2016) (SR-NYSEArca-2016-79) (order approving 
listing and trading of shares of the Virtus Japan Alpha ETF under 
NYSE Arca Equities Rule 8.600).
---------------------------------------------------------------------------

    The Exchange notes that Nasdaq Rule 5735(b)(1)(A)(i)(a) through (d) 
exclude application of those provisions to certain ``Exchange Traded 
Derivative Securities'' that are exchange-traded investment company 
securities, including Portfolio Depository Receipts (as described in 
Nasdaq Rule 5705(a)), Index Fund Shares (as described in Nasdaq Rule 
5705(b)) and Managed Fund Shares (as described in Nasdaq Rule 
5735).\33\ In the 2008 NYSEArca

[[Page 5736]]

Approval Order, the Commission stated that ``based on the trading 
characteristics of Derivative Securities Products, it may be difficult 
for component Derivative Securities Products to satisfy certain 
quantitative index criteria, such as the minimum market value and 
trading volume limitations.'' The Exchange notes that it would be 
difficult or impossible to apply to non-exchange-traded investment 
company securities the generic quantitative criteria (e.g., market 
capitalization, trading volume, or portfolio criteria) in Nasdaq Rule 
5735(b)(1)(A)(i)(a) through (d) applicable to U.S. Component Stocks. 
For example, the requirement for U.S. Component Stocks in Nasdaq Rule 
5735(b)(1)(A)(i)(b) that there be a minimum monthly trading volume of 
250,000 shares, or minimum notional volume traded per month of 
$25,000,000, averaged over the last six months, is tailored to 
exchange-traded securities (e.g., U.S. Component Stocks) and not to 
mutual fund shares, which do not trade in the secondary market. 
Moreover, application of such criteria would not serve the purpose 
served with respect to U.S. Component Stocks, namely, to establish 
minimum liquidity and diversification criteria for U.S. Component 
Stocks held by series of Managed Fund Shares.
---------------------------------------------------------------------------

    \33\ The Commission initially approved the Exchange's proposed 
rule change to provide exclusions for ``Derivative Securities 
Products'' (e.g., Index Fund Shares, Portfolio Depository Receipts 
and Managed Fund Shares) in Nasdaq Rules 5705(b)(3)(A)(i)(a) through 
(d) and 5705(b)(3)(A)(ii)(a) through (d). See Securities Exchange 
Act Release No. 69928 (July 3, 2013), 78 FR 41489 (July 10, 2013) 
(SR-NASDAQ-2013-094) (Notice of Filing and Immediate Effectiveness 
to Conform Rule 5705 Governing Exchange Traded Funds to the Listing 
Requirements of Another Market) (the ``2013 Approval''). The 2013 
Approval was intended to conform provisions of Nasdaq Rule 5705 to 
the comparable provisions of the corresponding NYSE Arca rule, as 
amended in 2008. See Securities Exchange Act Release No. 57751 (May 
1, 2008), 73 FR 25818 (May 7, 2008) (SR-NYSEArca-2008-29) (Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, to Amend the Eligibility Criteria for 
Components of an Index Underlying Investment Company Units) (``2008 
NYSEArca Approval Order''). The Commission subsequently approved 
generic criteria applicable to the listing and trading of Managed 
Fund Shares, including exclusions for Exchange Traded Derivative 
Securities and Linked Securities in Nasdaq Rule 5735(b)(1)(A)(i)(a) 
through (d) in Securities Exchange Act Release No. 78918 (September 
23, 2016), 81 FR 67033 (September 29, 2016) (SR-NASDAQ-2016-104) 
(Order Granting Approval of a Proposed Rule Change To Amend Nasdaq 
Rule 5735 To Adopt Generic Listing Standards for Managed Fund 
Shares). See also Securities Exchange Release No. 78616 (August 18, 
2016), 81 FR 57968 (August 24, 2016) (Notice of Filing of Proposed 
Rule Change to Amend Nasdaq Rule 5735 To Adopt Generic Listing 
Standards for Managed Fund Shares).
---------------------------------------------------------------------------

    The Exchange notes that the Commission has previously approved 
listing and trading of issues of Managed Fund Shares that may invest in 
equity securities that are non-exchange-traded securities of other 
open-end investment companies notwithstanding that a fund would not 
meet requirements corresponding to those of Nasdaq Rule 
5735(b)(1)(A)(i)(a) through (e) with respect to such fund's investments 
in such securities.\34\ Thus, the Exchange believes that it is 
appropriate to permit the Fund to invest in non-exchange-traded open-
end management investment company securities, as described above.
---------------------------------------------------------------------------

    \34\ See, e.g., the Recent Approval, supra note 18; Securities 
Exchange Act Release No. 83319 (May 24, 2018) (SR-NYSEArca-2018-15) 
(Order Approving a Proposed Rule Change, as Modified by Amendment 
No. 1 Thereto, to Continue Listing and Trading Shares of the PGIM 
Ultra Short Bond ETF Under NYSE Arca Rule 8.600-E).
---------------------------------------------------------------------------

    Deviations from the generic requirements are necessary for the Fund 
to achieve its investment objective in a manner that is cost-effective 
and that maximizes investors' returns. Further, the proposed 
alternative requirements are narrowly tailored to allow the Fund to 
achieve its investment objective in manner that is consistent with the 
principles of Section 6(b)(5) of the Act. In addition, the proposed 
deviations from the generic requirements and proposed alternative 
requirements set forth in this filing are consistent with those set 
forth in the Recent Approval. As a result, it is in the public interest 
to approve listing and trading of Shares of the Fund on the Exchange 
pursuant to the requirements set forth herein.
    The Exchange notes that, other than Nasdaq Rule 5735(b)(1)(A)(i), 
(b)(1)(A)(ii), (b)(1)(B)(i), (b)(1)(B)(iv), (b)(1)(B)(v), and 
(b)(1)(E), as described above, the Fund's portfolio will meet all other 
requirements of Nasdaq Rule 5735.
Availability of Information
    The Fund's website (www.ftportfolios.com) will include the 
prospectus for the Fund that may be downloaded. The Fund's website will 
include additional quantitative information updated on a daily basis 
including, for the Fund, (1) daily trading volume, the prior business 
day's reported closing price, NAV and midpoint of the bid/ask spread at 
the time of calculation of such NAV (the ``Bid/Ask Price''),\35\ and a 
calculation of the premium and discount of the Bid/Ask Price against 
the NAV, and (2) data in chart format displaying the frequency 
distribution of discounts and premiums of the daily Bid/Ask Price 
against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Regular Market Session on the Exchange, the 
Fund will disclose on its website the Disclosed Portfolio as defined in 
Nasdaq Rule 5735(c)(2) that forms the basis for the Fund's calculation 
of NAV at the end of the business day.\36\
---------------------------------------------------------------------------

    \35\ The Bid/Ask Price of the Fund's Shares will be determined 
using the mid-point of the highest bid and the lowest offer on the 
Exchange as of the time of calculation of the Fund's NAV. The 
records relating to Bid/Ask Prices will be retained by the Fund and 
its service providers.
    \36\ Under accounting procedures 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.
---------------------------------------------------------------------------

    On a daily basis, the Fund will disclose the information required 
under Nasdaq Rule 5735(c)(2) to the extent applicable. The website 
information will be publicly available at no charge.
    In addition, a basket composition file, which includes the security 
names and share quantities, if applicable, required to be delivered in 
exchange for the Fund's Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the Exchange via the NSCC. The basket represents one Creation Unit of 
the Fund. Authorized Participants may refer to the basket composition 
file for information regarding Fixed Income Securities, and any other 
instrument that may comprise the Fund's basket on a given day.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI'') and Form N-CEN and the Fund's Shareholder Reports 
and Form N-CSR. The SAI and the Fund's Shareholder Reports will be 
available free upon request from the Trust, and those documents and the 
Form N-CSR and Form N-CEN may be viewed on-screen or downloaded from 
the Commission's website at www.sec.gov.
    Intra-day and closing price information regarding exchange-traded 
options will be available from the exchange on which such instruments 
are traded. Intra-day and closing price information regarding Fixed 
Income Securities will be available from major market data vendors. 
Price information relating to OTC options, forwards and swaps will be 
available from major market data vendors. Intra-day price information 
for exchange-traded derivative instruments will be available from the 
applicable exchange and from major market data vendors. Intra-day and 
other price information for the Fixed Income Securities in which the

[[Page 5737]]

Fund will invest will be available through subscription services, such 
as Bloomberg, Markit and Thomson Reuters, which can be accessed by 
Authorized Participants and other market participants. Additionally, 
the Trade Reporting and Compliance Engine (``TRACE'') of the Financial 
Industry Regulatory Authority (``FINRA'') will be a source of price 
information for corporate bonds, and Private ABS/MBS, to the extent 
transactions in such securities are reported to TRACE.\37\ Trade price 
and other information relating to municipal bonds is available through 
the Municipal Securities Rulemaking Board's Electronic Municipal Market 
Access (``EMMA'') system. Non-exchange-traded open-end investment 
company securities are typically priced once each business day and 
their prices will be available through the applicable fund's website or 
from major market data vendors. Price information regarding U.S. 
government securities, bank loans, Private ABS/MBS, cash equivalents 
and short-term instruments with maturities of three months or more 
generally may be obtained from brokers and dealers who make markets in 
such securities or through nationally recognized pricing services 
through subscription agreements. Information relating to weighted 
average loan age for Private ABS/MBS is widely available from major 
market data vendors such as Bloomberg.
---------------------------------------------------------------------------

    \37\ Broker-dealers that are FINRA member firms have an 
obligation to report transactions in specified debt securities to 
TRACE to the extent required under applicable FINRA rules. 
Generally, such debt securities will have at issuance a maturity 
that exceeds one calendar year. For Fixed Income Securities that are 
not reported to TRACE, (i) intra-day price quotations will generally 
be available from broker-dealers and trading platforms (as 
applicable) and (ii) price information will be available from feeds 
from market data vendors, published or other public sources, or 
online information services, as described above.
---------------------------------------------------------------------------

    Information regarding market price and trading volume of the 
Shares, ETFs, ETNs, common stocks, preferred stocks, REITs, equity 
securities issued upon conversion of fixed income convertible 
securities, Work Out Securities and closed-end funds 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.
    Quotation and last sale information for the Shares, ETFs, ETNs, 
closed-end funds, REITs, certain common stocks, certain preferred 
stocks, certain equity securities issued upon conversion of fixed 
income convertible securities, and certain Work Out Securities will be 
available via the Consolidated Tape Association (``CTA'') high-speed 
line. Exchange-traded options quotation and last sale information for 
options cleared via the Options Clearing Corporation (``OCC'') are 
available via the Options Price Reporting Authority (``OPRA''). In 
addition, the Intraday Indicative Value (``IIV''), as defined in Nasdaq 
Rule 5735(c)(3), will be widely disseminated by one or more major 
market data vendors at least every 15 seconds during the Regular Market 
Session.
Trading Halts
    With respect to trading halts, 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 Rule 4120(a)(12). Trading 
also may be halted because of market conditions or for reasons that, in 
the view of the Exchange, make trading in the Shares inadvisable. These 
may include: (1) The extent to which trading is not occurring in the 
securities and/or the other assets constituting the Disclosed Portfolio 
of the Fund; or (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present. Trading in the Fund's Shares also will be subject to Nasdaq 
Rule 5735(d)(2)(D), which sets forth circumstances under which Shares 
of the Fund may be halted.
Trading Rules
    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. Nasdaq will allow trading in the Shares 
from 4:00 a.m. until 8:00 p.m., E.T. The Exchange has appropriate rules 
to facilitate transactions in the Shares during all trading sessions.
    With the exception of the requirements of Nasdaq Rule 
5735(b)(1)(A)(i), (b)(1)(A)(ii), (b)(1)(B)(i), (b)(1)(B)(iv), 
(b)(1)(B)(v), and (b)(1)(E), as described above in ``Application of 
Generic Listing Requirements,'' the Shares of the Fund will conform to 
the initial and continued listing criteria under Nasdaq Rule 5735. 
Consistent with Nasdaq Rule 5735(d)(2)(B)(ii), the Adviser and Sub-
Adviser will 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 Fund's portfolio.
    The Exchange represents that, for continued listing, the Fund will 
be in compliance with Rule 10A-3 \38\ under the Act. 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. The Fund's investments will be consistent with its investment 
goal and will not be used to provide multiple returns of a benchmark or 
to produce leveraged returns.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will continue to 
be subject to the existing trading surveillances, administered by the 
Exchange and also by FINRA, on behalf of the Exchange, which are 
designed to detect violations of Exchange rules and applicable federal 
securities laws. The Exchange represents that these procedures are 
adequate to properly monitor Exchange trading in the Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and federal securities laws applicable to trading on the Exchange. \39\
---------------------------------------------------------------------------

    \39\ FINRA conducts cross-market surveillance on the Exchange 
pursuant to a regulatory services agreement. The Exchange is 
responsible for FINRA's performance under this regulatory services 
agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares, certain 
exchange-traded options and certain exchange-traded futures, ETFs, 
ETNs, closed-end funds, certain common stocks, certain preferred 
stocks, certain REITs, certain equity securities issued upon conversion 
of fixed income convertible securities and certain Work Out Securities 
with other markets and other entities that are members of the 
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on 
behalf of the Exchange, or both, may obtain trading information 
regarding trading in such securities and financial instruments from 
such markets and

[[Page 5738]]

other entities.\40\ In addition, the Exchange may obtain information 
regarding trading in such securities and financial instruments from 
markets and other entities that are members of ISG or with which the 
Exchange has in place a CSSA. In addition, FINRA, on behalf of the 
Exchange, is able to access, as needed, trade information for certain 
fixed income securities held by the Fund reported to TRACE. FINRA also 
can access data obtained from the Municipal Securities Rulemaking Board 
relating to municipal bond trading activity for surveillance purposes 
in connection with trading in the Shares.
---------------------------------------------------------------------------

    \40\ 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 (``CSSA'').
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    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(a) the description of the portfolio or reference asset, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange listing rules specified in this rule filing 
shall constitute continued listing requirements for listing the Shares 
of the Fund on the Exchange.
    The issuer must notify 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. If the 
Fund is not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under the Nasdaq 5800 
Series.
Information Circular
    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: (1) The procedures for purchases and redemptions of Shares 
in Creation Units (and that Shares are not individually redeemable); 
(2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq 
members with respect to recommending transactions in the Shares to 
customers; (3) how information regarding the Intraday Indicative Value 
and the Disclosed Portfolio is disseminated; (4) 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; (5) the requirement that members deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (6) trading information. The 
Information Circular will also discuss any exemptive, no-action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV Calculation Time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the Fund's 
website.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \41\ that an exchange have rules that 
are 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, in general, to protect investors and the public interest.
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    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares are listed and traded on the Exchange pursuant to the initial 
and continued listing criteria in Nasdaq Rule 5735. The Exchange has in 
place surveillance procedures that are adequate to properly monitor 
Exchange trading in the Shares in all trading sessions and to deter and 
detect violations of Exchange rules and federal securities laws 
applicable to trading on the Exchange. The Exchange or FINRA, on behalf 
of the Exchange, or both, will communicate as needed regarding trading 
in the Shares, certain exchange-traded options and certain exchange-
traded futures, ETFs, ETNs, closed-end funds, certain common stocks, 
certain preferred stocks, certain REITs, certain equity securities 
issued upon conversion of fixed income convertible securities and 
certain Work Out Securities with other markets and other entities that 
are members of ISG, and the Exchange or FINRA, on behalf of the 
Exchange, or both, may obtain trading information regarding trading in 
such securities and financial instruments from such markets and other 
entities. The Exchange may obtain information regarding trading in such 
securities and financial instruments from markets and other entities 
that are members of ISG or with which the Exchange has in place a CSSA. 
In addition, FINRA, on behalf of the Exchange, is able to access, as 
needed, trade information for certain fixed income securities held by 
the Fund reported to TRACE. FINRA also can access data obtained from 
the Municipal Securities Rulemaking Board relating to municipal bond 
trading activity for surveillance purposes in connection with trading 
in the Shares. The Adviser and Sub-Adviser are not registered as 
broker-dealers. The Adviser is affiliated with First Trust Portfolios 
L.P., a broker-dealer, and has implemented and will maintain a fire 
wall with respect to its broker-dealer affiliate regarding access to 
information concerning the composition and/or changes to the portfolio. 
The Sub-Adviser is affiliated with multiple broker-dealers and has 
implemented and will maintain a fire wall with respect to its broker-
dealer affiliates regarding access to information concerning the 
composition and/or changes to the portfolio.
    The Exchange notes that, other than Nasdaq Rule 5735(b)(1)(A)(i), 
(b)(1)(A)(ii), (b)(1)(B)(i), (b)(1)(B)(iv), (b)(1)(B)(v), and 
(b)(1)(E), as described above, the Fund's portfolio will meet all other 
requirements of Nasdaq Rule 5735. Additionally, the Exchange notes that 
the proposed rule change set forth in this filing is based on a very 
similar proposed rule change that was recently approved by the 
Commission with respect to another actively-managed ETF for which the 
Adviser serves as investment adviser and the Sub-Adviser serves as 
investment sub-adviser.\42\
---------------------------------------------------------------------------

    \42\ See note 18, supra.
---------------------------------------------------------------------------

    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that 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. In addition, a large amount of 
information will be publicly available regarding the Fund and the 
Shares, thereby promoting market transparency. Quotation and last sale 
information for the Shares, ETFs, ETNs, closed-end funds, certain 
REITs, certain common stocks, certain preferred stocks, certain equity 
securities issued upon conversion of

[[Page 5739]]

fixed income convertible securities, and certain Work Out Securities 
will be available via the CTA high-speed line. Exchange-traded options 
quotation and last sale information for options cleared via the OCC are 
available via OPRA. The Exchange will inform its members in an 
Information Circular of the special characteristics and risks 
associated with trading the Shares. Trading in Shares of the Fund will 
be halted under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rule 4120(a)(12), or because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. Trading in the Fund's Shares 
also will be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth 
circumstances under which Shares of the Fund may be halted. In 
addition, as noted above, investors will have ready access to 
information regarding the Fund's holdings, NAV, the IIV, the Disclosed 
Portfolio, and quotation and last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
generally will principally hold fixed income securities and that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information from markets and other entities that are members of 
ISG or with which the Exchange has in place a CSSA. In addition, as 
noted above, investors will have ready access to information regarding 
the Fund's holdings, NAV, the IIV, the Disclosed Portfolio, and 
quotation and last sale information for the Shares.
    Deviations from the generic requirements, as described above, are 
necessary for the Fund to achieve its investment objective in a manner 
that is cost-effective and that maximizes investors' returns. Further, 
the proposed alternative requirements are narrowly tailored to allow 
the Fund to achieve its investment objective in a manner that is 
consistent with the principles of Section 6(b)(5) of the Act. In 
addition, the proposed deviations from the generic requirements and 
proposed alternative requirements set forth in this filing are 
consistent with those set forth in the Recent Approval. As a result, it 
is in the public interest to approve listing and trading of Shares of 
the Fund on the Exchange pursuant to the requirements set forth herein.
    As noted above, the Fund will not comply with the requirements set 
forth in Nasdaq Rule 5735(b)(1)(A)(i) and (b)(1)(A)(ii) with respect to 
the Fund's investments in equity securities. Instead, the Exchange 
proposes that the Fund's investments in equity securities will meet the 
requirements of Nasdaq Rule 5735(b)(1)(A) with the exception of Nasdaq 
Rule 5735(b)(1)(A)(i)(c) and (d) (with respect to U.S. Component 
Stocks) and Nasdaq Rule 5735(b)(1)(A)(ii)(c) and (d) (with respect to 
Non-U.S. Component Stocks).\43\ The Exchange believes it is appropriate 
and in the public interest to approve listing and trading of Shares of 
the Fund notwithstanding that the Fund's holdings in such equity 
securities do not comply with the requirements set forth in Nasdaq 
Rules 5735(b)(1)(A)(i) and 5735(b)(1)(A)(ii) in that any Fund 
investment in exchange-traded common stocks, preferred stocks, REITS, 
ETFs, ETNs, U.S. exchange-traded closed-end funds, exchange-traded 
equity securities issued upon conversion of fixed income convertible 
securities, and exchange-traded Work Out Securities would provide for 
enhanced diversification of the Fund's portfolio. Such securities would 
be Non-Principal Investments, not exceeding 20% of the Fund's net 
assets in the aggregate.
---------------------------------------------------------------------------

    \43\ See notes 19 and 20, supra. See also note 21, supra.
---------------------------------------------------------------------------

    The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(B)(i) that components that in the aggregate account for at 
least 75% of the fixed income weight of the portfolio each shall have a 
minimum original principal amount outstanding of $100 million or more. 
Instead, the Exchange proposes that components that in the aggregate 
account for at least 50% of the fixed income weight of the portfolio 
each shall have a minimum original principal amount outstanding of $50 
million or more. As noted above, the Fund may not invest more than 2% 
of its total assets in any one Fixed Income Security (excluding U.S. 
government securities and TIPS) on a per CUSIP basis. In addition, at 
least 50% of the weight of the Fund's portfolio would continue to be 
subject to a substantial minimum (i.e., $50 million) original principal 
amount outstanding. The Exchange believes this limitation would provide 
significant additional diversification to the Fund's investments in 
Fixed Income Securities, and reduce concerns that the Fund's 
investments in such securities would be readily susceptible to market 
manipulation.
    The Exchange proposes that Private ABS/MBS will not be required to 
comply with the requirements of Nasdaq Rule 5735(b)(1)(B)(iv) because 
certain Private ABS/MBS cannot satisfy the criteria in Nasdaq Rule 
5735(b)(1)(B)(iv). Instead, the Exchange proposes that the Fund's 
investments in Fixed Income Securities other than Private ABS/MBS will 
be required to comply with the requirements of Nasdaq Rule 
5735(b)(1)(B)(iv). The Exchange believes that this is appropriate 
because Nasdaq Rule 5735(b)(1)(B)(iv) does not appear to be designed 
for structured finance vehicles such as Private ABS/MBS. As noted 
above, the Fund may not invest more than 2% of its total assets in any 
one Fixed Income Security (excluding U.S. government securities and 
TIPS) on a per CUSIP basis. The Exchange believes this limitation would 
provide additional diversification to the Fund's investments in Private 
ABS/MBS, and reduce concerns that the Fund's investment in such 
securities would be readily susceptible to market manipulation.
    As noted above, the Fund will not comply with the requirement in 
Nasdaq Rule 5735(b)(1)(B)(v) that Private ABS/MBS in the Fund's 
portfolio account, in the aggregate, for no more than 20% of the weight 
of the Fund's portfolio. Instead, the Exchange proposes that, in order 
to enable the portfolio to be more diversified and provide the Fund 
with an opportunity to earn higher returns, the Fund may invest up to 
50% of its total assets in the aggregate in Private ABS/MBS, provided 
that the Fund (1) may not invest more than 25% of its total assets in 
non-agency ABS; (2) may not invest more than 30% of its total assets in 
non-agency RMBS; and (3) may not invest more than 25% of its total 
assets in non-agency CMBS and CLOs. With respect to the Fund's 
investments in up to 30% of its total assets in Private ABS/MBS that 
exceed the 20% of the weight of the Fund's portfolio that may be 
invested in Private ABS/MBS under Nasdaq Rule 5735(b)(1)(B)(v), the 
Fund's holdings in Private ABS/MBS will be subject to minimum weighted 
average loan age restrictions described above.\44\ In addition, as 
noted above, the Fund may not invest more than 2% of its total assets 
in any one Fixed Income Security (excluding U.S. government securities 
and TIPS) on a per CUSIP basis.\45\ The Exchange believes these

[[Page 5740]]

limitations would provide additional diversification to the Fund's 
Private ABS/MBS investments and reduce concerns that the Fund's 
investment in such securities would be readily susceptible to market 
manipulation.
---------------------------------------------------------------------------

    \44\ See note 13 [sic] and accompanying text, supra.
    \45\ See note 27, supra.
---------------------------------------------------------------------------

    The Exchange believes it is appropriate and in the public interest 
to approve listing and trading of Shares of the Fund notwithstanding 
that the Fund's holdings in such Private ABS/MBS do not comply with the 
requirements set forth in Nasdaq Rule 5735(b)(1)(B)(v) in that the 
Fund's investment in Private ABS/MBS is expected to provide the Fund 
with benefits associated with increased diversification, as Private 
ABS/MBS investments tend to be less correlated to interest rates than 
many other fixed income securities. The Fund's investment in Private 
ABS/MBS will be subject to the Fund's liquidity procedures as adopted 
by the Trust Board, and the Adviser and Sub-Adviser do not expect that 
investments in Private ABS/MBS of up to 50% of the total assets of the 
Fund will have any material impact on the liquidity of the Fund's 
investments.
    The Adviser and Sub-Adviser represent that the RMBS sector can be 
an important component of the Fund's investment strategy because of the 
potential for attractive risk-adjusted returns relative to other fixed 
income sectors and the potential to add significantly to the 
diversification in the Fund's portfolio. Similarly, the Private ABS/MBS 
sectors also have the potential for attractive risk-adjusted returns 
and added portfolio diversification.
    The Exchange believes the loan age parameters described above are 
appropriate for the corresponding Private ABS/MBS; the 84, 60 and 12 
month time frames take into account that the longer Private ABS/MBS 
continue to trade, the more price discovery has occurred in the market 
and the more opportunity there has been for market participants to 
perform due diligence in understanding and evaluating the underlying 
loans for such securities.
    With respect to non-agency RMBS, a weighted average loan age of 84 
months accommodates investment in well-seasoned securities that are 
continuing to trade with resilient pricing notwithstanding events 
during the market crisis of 2008-2010, during which loan defaults 
drastically impacted pricing in non-agency RMBS. Pricing in such 
securities is generally more reliable than RMBS with a lower loan age 
in that pricing is no longer reliant on market expectations but on 
actual post-crisis loan performance.
    With respect to non-agency CMBS, a weighted average loan age of 60 
months would include securities for which there is a known track record 
regarding cash flows and default rates for loans underlying real estate 
and other assets underlying CMBS. A five year loan age facilitates 
pricing based on actual loan performance rather than default 
projections. Similarly, for non-agency CLOs, a weighted average loan 
age of 60 months provides the opportunity for market participants to 
evaluate data regarding the bank loans underlying the CLOs and to 
assess how the loans are actually being used--for example, to implement 
corporate strategy or for capital usage--rather than relying on pro 
forma statements regarding the loans.
    With respect to non-agency ABS, a weighted average loan age of 12 
months provides an appropriately limited time frame for market 
participants to assess the likely trajectory of expected defaults (for 
example, for sub-prime auto loans). The loans underlying non-agency ABS 
are typically of much shorter duration than other Private ABS/MBS. 
Because such loans are more likely to default within a short time after 
issuance, a one-year minimum loan age can be expected to provide a 
sufficient time frame for market participants to assess the reliability 
of loan pricing for loans underlying non-agency ABS.
    As noted above, the Fund's portfolio will not comply with the 
requirements set forth in Nasdaq Rule 5735(b)(1)(E). The Exchange 
proposes that up to 25% of the Fund's assets (calculated as the 
aggregate gross notional value) may be invested in OTC derivatives that 
are used to reduce currency, interest rate or credit risk arising from 
the Fund's investments (that is, ``hedge''), and that the Fund's 
investments in OTC derivatives other than OTC derivatives used to hedge 
the Fund's portfolio against currency, interest rate or credit risk 
will be limited to 20% of the assets in the Fund's portfolio, 
calculated as the aggregate gross notional value of such OTC 
derivatives. As noted above, the Fund will not use derivative 
instruments to gain exposure to Private ABS/MBS, and derivative 
instruments linked to such securities will be used for hedging purposes 
only.
    The Exchange believes it is appropriate and in the public interest 
to approve listing and trading of Shares of the Fund notwithstanding 
that the Fund's holdings in OTC derivatives do not comply with the 
requirements set forth in Nasdaq Rule 5735(b)(1)(E) in that, depending 
on market conditions, it may be critical that the Fund be able to 
utilize available OTC derivatives to attempt to reduce impact of 
currency, interest rate or credit fluctuations on Fund assets. 
Therefore, the Exchange believes it is appropriate to apply a limit of 
up to 25% of the Fund's assets to the Fund's investments in OTC 
derivatives (calculated as the aggregate gross notional value of such 
OTC derivatives), including forwards, options and swaps, that are used 
for hedging purposes, as described above.
    The Adviser and Sub-Adviser represent that OTC derivatives can be 
tailored to hedge the specific risk arising from the Fund's investments 
and frequently may be a more efficient hedging vehicle than listed 
derivatives. For example, the Fund could obtain an OTC foreign currency 
derivative in a notional amount that exactly matches the notional 
amount of the Fund's investments. If the Fund were limited to investing 
up to 20% of assets in OTC derivatives, the Fund might have to ``over 
hedge'' or ``under hedge'' if round lot sizes in listed derivatives 
were not available. In addition, for example, an OTC CDX option can be 
structured to provide protection tailored to the Fund's credit exposure 
and can be a more efficient way to hedge credit risk with respect to 
specific exposures than listed derivatives. Similarly, OTC interest 
rate derivatives can be more effective hedges of interest rate exposure 
because they can be customized to match the basis risk arising from the 
term of the investments held by the Fund.
    Because the Fund, in furtherance of its investment objective, may 
invest a substantial percentage of its investments in foreign currency 
denominated Fixed Income Securities, the 20% limit in Nasdaq Rule 
5735(b)(1)(E) could result in the Fund being unable to fully pursue its 
investment objective while attempting to sufficiently mitigate 
investment risks. The inability of the Fund to adequately hedge its 
holdings would effectively limit the Fund's ability to invest in 
certain instruments, or could expose the Fund to additional investment 
risk. For example, if the Fund's assets (on a gross notional value 
basis) were $100 million and no listed derivative were suitable to 
hedge the Fund's risk, under the generic standards the Fund would be 
limited to holding up to $20 million gross notional value in OTC 
derivatives ($100 million * 20%). Accordingly, the maximum amount the 
Fund would be able to invest in foreign currency denominated Fixed 
Income Securities while remaining adequately hedged would be $20 
million. The Fund then would hold

[[Page 5741]]

$60 million in assets that could not be hedged, other than with listed 
derivatives, which, as noted above, might not be sufficiently tailored 
to the specific instruments to be hedged.
    In addition, by applying the 20% limitation in Nasdaq Rule 
5735(b)(1)(E), the Fund would be less able to protect its holdings from 
more than one risk simultaneously. For example, if the Fund's assets 
(on a gross notional basis) were $100 million and the Fund held $20 
million in foreign currency denominated Fixed Income Instruments with 
two types of risks (e.g., currency and credit risk) which could not be 
hedged using listed derivatives, the Fund would be faced with the 
choice of either holding $20 million aggregate gross notional value in 
OTC derivatives to mitigate one of the risks while passing the other 
risk to its shareholders, or, for example, holding $10 million 
aggregate gross notional value in OTC derivatives on each of the risks 
while passing the remaining portion of each risk to the Fund's 
shareholders.
    The Adviser and Sub-Adviser believe that it is in the best 
interests of the Fund's shareholders for the Fund to be allowed to 
reduce the currency, interest rate or credit risk arising from the 
Fund's investments using the most efficient financial instrument. While 
certain risks can be hedged via listed derivatives, OTC derivatives 
(such as forwards, options and swaps) can be customized to hedge 
against precise risks. Accordingly, the Adviser and Sub-Adviser believe 
that OTC derivatives may frequently be a more efficient hedging vehicle 
than listed derivatives. Therefore, the Exchange believes that 
increasing the percentage limit in Nasdaq Rule 5735(b)(1)(E), as 
described above, to the Fund's investments in OTC derivatives, 
including forwards, options and swaps, that are used specifically for 
hedging purposes would help protect investors and the public interest.
    As noted above, the Fund's portfolio will not meet the requirements 
of Nasdaq Rule 5735(b)(1)(A)(i)(a) through (e) with respect to the 
Fund's investments in non-exchange-traded securities of open-end 
investment companies, and, with respect to the Fund's holdings of OTC 
equity securities issued upon conversion of fixed income convertible 
securities and OTC Work Out Securities, will not meet the requirements 
of Nasdaq Rule 5735(b)(1)(A)(i)(a) through (e) and Nasdaq Rule 
5735(b)(1)(A)(ii)(a) through (e). The Exchange believes that it is 
appropriate and in the public interest to approve listing and trading 
of Shares of the Fund on the Exchange notwithstanding that the Fund 
would not meet the requirements of Nasdaq Rule 5735(b)(1)(A)(i)(a) 
through (e) with respect to the Fund's investments in non-exchange-
traded securities of open-end investment companies,and notwithstanding 
that the Fund's holdings of OTC equity securities issued upon 
conversion of fixed income convertible securities and OTC Work Out 
Securities would not meet the requirements of Nasdaq Rule 
5735(b)(1)(A)(i)(a) through (e) and Nasdaq Rule 5735(b)(1)(A)(ii)(a) 
through (e). Investments in non-exchange-traded securities of open-end 
investment companies will not be principal investments of the Fund.\46\ 
Such investments, which may include mutual funds that invest, for 
example, principally in fixed income securities, would be utilized to 
help the Fund meet its investment objective and to equitize cash in the 
short term.
---------------------------------------------------------------------------

    \46\ See note 31, supra.
---------------------------------------------------------------------------

    With respect to any Fund holdings of exchange-traded or OTC equity 
securities issued upon conversion of fixed income convertible 
securities and Work Out Securities, such securities will not exceed 10% 
and 5%, respectively, of the Fund's total assets. The Adviser and Sub-
Adviser represent that the Fund generally will not actively invest in 
equity securities issued upon conversion of fixed income convertible 
securities or Work Out Securities, but may, at times, receive a 
distribution of such securities in connection with the Fund's holdings 
in other securities. Therefore, the Fund's holdings in equity 
securities issued upon conversion of fixed income convertible 
securities and Work Out Securities generally would not be acquired as 
the result of the Fund's voluntary investment decisions.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
shares of an additional type of actively-managed exchange-traded 
product that will enhance competition among market participants, to the 
benefit of investors and the marketplace.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded product that 
generally will principally hold fixed income securities and that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \47\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\48\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \48\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2020-005 on the subject line.

Paper Comments

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

[[Page 5742]]

All submissions should refer to File Number SR-NASDAQ-2020-005. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2020-005 and should be submitted 
on or before February 21, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
---------------------------------------------------------------------------

    \49\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01783 Filed 1-30-20; 8:45 am]
 BILLING CODE 8011-01-P