Document ID: SEC-2015-0327-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2015-02-25T05:00Z

[Federal Register Volume 80, Number 37 (Wednesday, February 25, 2015)]
[Notices]
[Pages 10189-10192]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-03812]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74303; File No. SR-NASDAQ-2014-127]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change Relating to the Listing and 
Trading of the Shares of the Tuttle Tactical Management U.S. Core ETF 
of ETFis Series Trust I

February 19, 2015.

I. Introduction

    On December 19, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade the shares (``Shares'') of the 
Tuttle Tactical Management U.S. Core ETF (``Fund'') under Nasdaq Rule 
5735. The proposed rule change was published for comment in the Federal 
Register on January 6, 2015.\3\ The Commission received no comments on 
the proposal. This order grants approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73960 (Dec. 30, 
2014), 80 FR 540 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund under 
Nasdaq Rule 5735, which governs the listing and trading of Managed Fund 
Shares on the Exchange. The Shares will be offered by ETFis Series 
Trust I (``Trust''), which is registered with the Commission as an 
investment company.\4\ The Fund is a series of the Trust.
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    \4\ According to the Exchange, the Trust has filed a 
registration statement on Form N-1A (``Registration Statement'') 
with the Commission. See Registration Statement on Form N-1A for the 
Trust filed on July 24, 2014 (File Nos. 333-187668 and 811-22819). 
In addition, the Exchange states that the Trust has obtained certain 
exemptive relief under the 1940 Act. See Investment Company Act 
Release No. 30607 (July 23, 2013) (``Exemptive Order'').
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    Etfis Capital LLC will be the investment adviser (``Adviser''), and 
Tuttle Tactical Management, LLC will be the investment sub-adviser 
(``Sub-Adviser''), to the Fund. ETF Distributors LLC will be the 
principal underwriter and distributor of the Fund's Shares, and Bank of 
New York Mellon will act as the administrator, accounting agent, 
custodian, and transfer agent to the Fund.
    The Exchange represents that the Adviser and Sub-Adviser are not 
registered as broker-dealers, and the Sub-Adviser it not affiliated 
with a broker-dealer; however, the Exchange represents that the Adviser 
is affiliated with a broker-dealer. The Exchange states that the 
Adviser has implemented a fire wall with respect to its broker dealer 
affiliate regarding access to information concerning the composition of 
or changes to the portfolio.\5\ The Exchange also represents that the 
Shares will be subject to Nasdaq Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares, and that for initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\6\
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    \5\ See Nasdaq Rule 5735(g). The Exchange states that, in the 
event (a) the Adviser or the Sub-Adviser becomes newly affiliated 
with a broker-dealer or registers as a broker-dealer, or (b) any new 
adviser or sub-adviser is a registered broker-dealer or becomes 
affiliated with a broker-dealer, the Adviser, the Sub-Adviser, or 
any new adviser or sub-adviser, as the case may be, will implement a 
fire wall with respect to its relevant personnel and its broker-
dealer affiliate, as applicable, regarding access to information 
concerning the composition of or changes to the portfolio, and will 
be subject to procedures designed to prevent the use and 
dissemination of material, non-public information regarding the 
portfolio.
    \6\ See 17 CFR 240.10A-3.
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategy, including, among 
other things, portfolio holdings and investment restrictions.

A. Principal Investments of the Fund

    According to the Exchange, the Fund's investment objective will be 
to provide long-term capital appreciation, while maintaining a 
secondary emphasis on capital preservation, primarily through 
investments in the U.S. equity market. The Sub-Adviser will employ four 
tactical models in seeking to achieve the Fund's investment objective: 
``S&P 500 Absolute Momentum,'' ``Relative Strength Equity,'' ``Beta 
Opportunities,'' and ``Short-Term S&P 500 Counter Trend.'' While the 
Sub-Adviser will generally seek to maintain an equal weighting among 
these four tactical models, market movements may result in the Fund 
being overweight or underweight one or more of the tactical models. The 
Fund will be an actively managed exchange-traded fund (``ETF'') that 
seeks to achieve its investment objective by utilizing a long-only, 
multi-strategy, tactically-managed exposure to the U.S. equity market. 
To obtain such exposure, the Sub-Adviser will invest, under normal 
circumstances, not less

[[Page 10190]]

than 80% of the Fund's assets in: (1) Other ETFs; \7\ (2) exchange-
traded notes (``ETNs''); \8\ (3) exchange-traded trusts that hold 
commodities (``ETTs,'' and together with ETFs and ETNs, collectively, 
``ETPs''); (4) individually selected U.S. exchange-traded common stocks 
(when the Sub-Adviser determines that it is more efficient or otherwise 
advantageous to do so); (5) money market funds; (6) U.S. treasuries; or 
(7) money market instruments.\9\ To the extent that the Fund invests in 
ETFs or money market funds to gain domestic exposure, the Fund is 
considered, in part, a ``fund of funds.''
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    \7\ The Exchange states that ETFs included in the Fund will be 
listed and traded in the U.S. on registered exchanges. The Fund may 
invest in the securities of ETFs in excess of the limits imposed 
under the 1940 Act pursuant to exemptive orders obtained by other 
ETFs and their sponsors from the Commission. The ETFs in which the 
Fund may invest include Index Fund Shares (as described in Nasdaq 
Rule 5705), Portfolio Depositary Receipts (as described in Nasdaq 
Rule 5705), and Managed Fund Shares (as described in Nasdaq Rule 
5735). While the Fund may invest in leveraged ETFs (e.g., 2X or 3X), 
the Fund will not invest in inverse or inverse leveraged ETFs. The 
shares of ETFs in which a Fund may invest will be limited to 
securities that trade in markets that are members of the Intermarket 
Surveillance Group (``ISG''), which includes all U.S. national 
securities exchanges, or are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
    \8\ The Exchange represents that ETNs will be limited to those 
described in Nasdaq Rule 5710.
    \9\ According to the Exchange, money market instruments will 
include securities that are issued or guaranteed by the U.S. 
Treasury, by various agencies of the U.S. government, or by various 
instrumentalities that have been established or sponsored by the 
U.S. government. U.S. Treasury obligations are backed by the ``full 
faith and credit'' of the U.S. government. Securities issued or 
guaranteed by federal agencies and U.S. government-sponsored 
instrumentalities may or may not be backed by the full faith and 
credit of the U.S. government.
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B. Other Investments of the Fund

    In order to seek its investment objective, the Fund will not employ 
other strategies outside of the above-described ``Principal 
Investments.'' However, the Fund may, from time to time, take temporary 
defensive positions that are inconsistent with the Fund's principal 
investment strategies in an attempt to respond to adverse market, 
economic, political, or other conditions. In such circumstances, the 
Fund may also hold up to 100% of its portfolio in cash or other short-
term, highly liquid investments, such as money market instruments, U.S. 
government obligations, commercial paper, repurchase agreements, or 
other cash equivalents. When the Fund takes a temporary defensive 
position, the Fund may not be able to achieve its investment objective.

C. Investment Restrictions of the Fund

    As stated above, the Fund will invest not less than 80% of its 
total assets in shares of ETPs, individually selected U.S. exchange-
traded common stocks (when the Sub-Adviser determines that it is more 
efficient or otherwise advantageous to do so), money market funds, U.S. 
treasuries, or money market instruments. The Fund will not purchase 
securities of open-end or closed-end investment companies except in 
compliance with the 1940 Act. In addition, the Fund will not use 
derivative instruments, including options, swaps, forwards, and futures 
contracts, either listed or over-the-counter. Under normal 
circumstances, the Fund will not invest more than 25% of its total 
assets in leveraged ETPs. The Fund does not presently intend to engage 
in any form of borrowing for investment purposes, and will not be 
operated as a ``leveraged ETF,'' i.e., it will not be operated in a 
manner designed to seek a multiple of the performance of an underlying 
reference index.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities and other illiquid assets (calculated at 
the time of investment). The Fund will monitor its portfolio liquidity 
on an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid securities or other illiquid assets. Illiquid securities and 
other illiquid assets include securities subject to contractual or 
other restrictions on resale and other instruments that lack readily 
available markets, as determined in accordance with Commission staff 
guidance.
    Additional information regarding the Trust, Fund, and Shares, 
including investment strategies and restrictions, risks, creation and 
redemption procedures, fees, portfolio holdings disclosure policies, 
distributions and taxes, calculation of net asset value per share 
(``NAV''), availability of information, trading rules and halts, and 
surveillance procedures, among other things, can be found in the 
Notice, Registration Statement, and Exemptive Order, as applicable.\10\
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    \10\ See Notice, supra note 3; see also Registration Statement 
and Exemptive Order, supra note 4.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \11\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\12\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act,\13\ which requires, among other things, that the 
Exchange's rules be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \11\ 15 U.S.C. 78(f).
    \12\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\14\ which sets forth the finding of Congress that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via Nasdaq 
proprietary quote and trade services, as well as in accordance with the 
Unlisted Trading Privileges and the Consolidated Tape Association plans 
for the Shares and any underlying ETPs.\15\ In addition, the Intraday 
Indicative Value (as defined in Nasdaq Rule 5735(c)(3)), which will be 
based upon the current value of the components of the Disclosed 
Portfolio (as defined in Nasdaq Rule 5735(c)(2)), will be available on 
the NASDAQ OMX Information LLC proprietary index data service \16\ and 
will be updated and widely disseminated and broadly displayed at least 
every 15 seconds during the Regular Market Session.\17\ On each 
business day, before

[[Page 10191]]

commencement of trading in Shares in the Regular Market Session on the 
Exchange, the Fund will disclose on its Web site the Disclosed 
Portfolio, which will form the basis for the Fund's calculation of NAV 
at the end of the business day.\18\ The NAV of the Fund will be 
determined once each business day, normally as of the close of trading 
on the New York Stock Exchange (normally 4:00 p.m. Eastern time or 
``E.T.'').\19\ Information regarding market price and volume of the 
Shares will be continually available on a real-time basis throughout 
the day on brokers' computer screens and other electronic services.\20\ 
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.\21\ Price information regarding the 
ETPs, equity securities, U.S. treasuries, money market instruments, and 
money market funds held by the Fund will be available through the U.S. 
exchanges trading such assets, in the case of exchange-traded 
securities, as well as automated quotation systems, published or other 
public sources, or on-line information services such as Bloomberg or 
Reuters.\22\ Intra-day price information will also be available through 
subscription services, such as Bloomberg, Markit, and Thomson Reuters, 
which can be accessed by authorized participants and other 
investors.\23\ In addition, BNY Mellon, through the National Securities 
Clearing Corporation, will also make available on each business day, 
prior to the opening of business of the Exchange (currently 9:30 a.m., 
E.T.), the list of the names and the quantity of each security to be 
included (based on information at the end of the previous business 
day), subject to any adjustments as described below, in order to effect 
redemptions of Creation Unit aggregations of the Fund until such time 
as the next-announced composition of the Fund Securities is made 
available.\24\ The Fund's Web site will include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information.\25\
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    \14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \15\ See Notice, supra note 3, 80 FR at 544.
    \16\ According to the Exchange, the NASDAQ OMX Global Index Data 
Service offers real-time updates, daily summary messages, and access 
to widely followed indexes and Intraday Indicative Values for ETFs. 
See id., 80 FR at 543.
    \17\ See id.
    \18\ On a daily basis, the Disclosed Portfolio will include each 
portfolio security and other financial instruments of the Fund with 
the following information on the Fund's Web site: (1) ticker symbol 
(if applicable); (2) name of security and financial instrument; (3) 
number of shares (if applicable); (4) dollar value of securities and 
financial instruments held in the Fund; and (5) percentage weighting 
of the security and financial instrument in the Fund. The Web site 
information will be publicly available at no charge. See id.
    \19\ See id., 80 FR at 542. The Exchange notes that, for 
purposes of calculating NAV, the Fund's investments will be valued 
at market value (i.e., the price at which a security is trading and 
could presumably be purchased or sold) or, in the absence of market 
value with respect to any investment, at fair value in accordance 
with valuation procedures adopted by the Board and in accordance 
with the 1940 Act. Common stocks and equity securities (including 
shares of ETPs) will be valued at the last sales price on that 
exchange. Portfolio securities traded on more than one securities 
exchange will be valued at the last sale price or, if so 
disseminated by an exchange, the official closing price, as 
applicable, at the close of the exchange representing the principal 
exchange or market for such securities on the business day as of 
which such value is being determined. U.S. Treasuries are valued 
using quoted market prices, and money market funds are valued at the 
net asset value reported by the funds. For all security types in 
which the Fund may invest, the Fund's primary pricing source is IDC; 
its secondary source is Reuters; and its tertiary source is 
Bloomberg.
    \20\ See id., 80 FR at 544.
    \21\ See id.
    \22\ See id., 80 FR at 543.
    \23\ See id.
    \24\ See id., 80 FR at 542.
    \25\ See id., 80 FR at 543.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV will be 
calculated daily and that the NAV and the Disclosed Portfolio will be 
made available to all market participants at the same time.\26\ 
Further, trading in the Shares will be subject to Nasdaq 5735(d)(2)(D), 
which sets forth circumstances under which trading in the Shares may be 
halted.\27\ The Exchange also may halt trading in the Shares if trading 
is not occurring in the securities or the financial instruments 
constituting the Disclosed Portfolio or if other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.\28\ Further, the Commission notes that the 
Reporting Authority that provides the Disclosed Portfolio must 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material, non-public information 
regarding the actual components of the portfolio.\29\ The Exchange 
states that it has a general policy prohibiting the distribution of 
material, non-public information by its employees.\30\ The Exchange 
also states that the Adviser is affiliated with a broker-dealer, and 
that the Adviser has implemented a fire wall with respect to its 
broker-dealer affiliate regarding access to information concerning the 
composition of or changes to the portfolio.\31\ The Financial Industry 
Regulatory Authority (``FINRA''), on behalf of the Exchange, will 
communicate as needed regarding trading in the Shares and other 
exchange-traded securities and instruments held by the Fund with other 
markets and other entities that are ISG members, and FINRA, on behalf 
of the Exchange, may obtain trading information regarding trading in 
the Shares and other exchange-traded securities and instruments held by 
the Fund from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares and 
other exchange-traded securities and instruments held by the Fund from 
markets and other entities that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing 
agreement.\32\
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    \26\ See id. at 544.
    \27\ See id.
    \28\ See id. See also Nasdaq Rule 5735(d)(2)(C) (providing 
additional considerations for the suspension of trading in or 
removal from listing of Managed Fund Shares on the Exchange). 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 or pause trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rules 4120(a)(11) and 
(12). Trading also may be halted because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the 
Shares inadvisable. See Notice, supra note 3, 80 FR at 544.
    \29\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \30\ See Notice, supra note 3, 80 FR at 544.
    \31\ See supra note 5 and accompanying text. The Exchange 
further represents that an investment adviser to an open-end fund is 
required to be registered under the Investment Advisers Act of 1940 
(``Advisers Act''). As a result, the Adviser, the Sub-Adviser, and 
their related personnel are subject to the provisions of Rule 204A-1 
under the Advisers Act relating to codes of ethics. This Rule 
requires investment advisers to adopt a code of ethics that reflects 
the fiduciary nature of the relationship to clients as well as 
compliance with applicable federal securities laws as defined in 
Rule 204A-1(e)(4). Accordingly, procedures designed to prevent the 
communication and misuse of nonpublic 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.
    \32\ For a list of the current members of ISG, see 
www.isgportal.org.
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    The Exchange represents that it deems the Shares to be equity 
securities, thus rendering trading in the Shares subject

[[Page 10192]]

to the Exchange's existing rules governing the trading of equity 
securities. In support of this proposal, the Exchange has also made the 
following representations:
    (1) The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how information regarding 
the Intraday Indicative Value and Disclosed Portfolio is disseminated; 
(d) the risks involved in trading the Shares during the Pre-Market and 
Post-Market Sessions when an updated Intraday Indicative Value will not 
be calculated or publicly disseminated; (e) the requirement that 
members deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction; 
and (f) trading information.
    (4) Trading in the Shares will be subject to the existing trading 
surveillances, administered by both Nasdaq and FINRA,\33\ on behalf of 
the Exchange. The trading surveillance procedures are designed to 
detect violations of Exchange rules and applicable federal securities 
laws. These procedures are adequate to properly monitor Exchange 
trading of the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws.
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    \33\ According to the Exchange, FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement. See Notice, supra note 3, 80 FR at 544.
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    (5) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\34\
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    \34\ 17 CFR 240.10A-3.
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    (6) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    (7) The Fund will invest at least 80% of its assets under normal 
market conditions in shares of ETPs, individually selected U.S. 
exchange-traded common stocks (when the Sub-Adviser determines that it 
is more efficient or otherwise advantageous to do so), money market 
funds, U.S. treasuries, or money market instruments. In order to seek 
its investment objective, the Fund will not employ other strategies 
outside of the above-described ``Principal Investments.''
    (8) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) and 
will monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained. The Fund will consider taking 
appropriate steps in order to maintain adequate liquidity if, through a 
change in values, net assets, or other circumstances, more than 15% of 
the Fund's net assets are held in illiquid assets.
    (9) While the Fund may invest in leveraged ETFs (e.g., 2X or 3X), 
the Fund will not invest in inverse or inverse leveraged ETFs. Under 
normal circumstances, the Fund will not invest more than 25% of its 
total assets in leveraged ETPs. The Fund will not be operated in a 
manner designed to seek a multiple of the performance of an underlying 
reference index.
    (10) The Fund will not use derivative instruments, including 
options, swaps, forwards, and futures contracts.
    (11) The Fund's investments will be consistent with the Fund's 
investment objective.
    The Commission notes that the Fund and the Shares must comply with 
the requirements of Nasdaq Rule 5735 to be initially and continuously 
listed and traded on the Exchange. This approval order is based on all 
of the Exchange's representations and description of the Fund, 
including those set forth above and in the Notice.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\35\ that the proposed rule change (SR-NASDAQ-2014-127), be, and it 
hereby is, approved.
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    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-03812 Filed 2-24-15; 8:45 am]
BILLING CODE 8011-01-P