Document ID: SEC-2014-1598-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2014-09-24T04:00Z

[Federal Register Volume 79, Number 185 (Wednesday, September 24, 2014)]
[Notices]
[Pages 57144-57150]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22670]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73140; File No. SR-NASDAQ-2014-073]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change, as Modified by Amendment No. 
1, To List and Trade Shares of the First Trust Emerging Markets Local 
Currency Bond ETF of First Trust Exchange-Traded Fund III

September 18, 2014.

I. Introduction

    On July 18, 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 shares (``Shares'') of the First 
Trust Emerging Markets Local Currency Bond ETF (``Fund'') under Nasdaq 
Rule 5735. The Exchange filed Amendment No. 1 to the proposal on July 
25, 2014.\3\ The proposed rule change, as modified by Amendment No. 1, 
was published for comment in the Federal Register on August 5, 2014.\4\ 
The Commission received no comments on the proposed rule change. This 
order grants approval of the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 clarified that reverse repurchase agreements 
will not be used by the Fund to enhance leverage.
    \4\ See Securities Exchange Act Release No. 72716 (July 30, 
2014), 79 FR 45535 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund pursuant 
to Nasdaq Rule 5735, which governs the listing and trading of Managed 
Fund Shares on the Exchange. The Shares will be offered by First Trust 
Exchange-Traded Fund III (``Trust''), which was established as a 
Massachusetts business trust on January 9, 2008.\5\ The Fund will

[[Page 57145]]

be a series of the Trust. First Trust Advisors L.P. will be the 
investment adviser (``Adviser'') to the Fund. First Trust Global 
Portfolios Ltd will serve as investment sub-adviser (``Sub-Adviser'') 
to the Fund and provide day-to-day portfolio management.\6\ First Trust 
Portfolios L.P. (``Distributor'') will be the principal underwriter and 
distributor of the Fund's Shares. Brown Brothers Harriman & Co. will 
act as the administrator, accounting agent, custodian, and transfer 
agent to the Fund.
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    \5\ According to the Exchange, the Trust is registered with the 
Commission as an investment company and has filed a registration 
statement on Form N-1A (``Registration Statement'') with the 
Commission. See Post-Effective Amendment No. 10 to Registration 
Statement on Form N-1A for the Trust, dated July 8, 2014 (File Nos. 
333-176976 and 811-22245). The Exchange states that the Commission 
has issued an order granting certain exemptive relief to the Trust 
under the Investment Company Act of 1940 (``1940 Act''). See 
Investment Company Act Release No. 30029 (April 10, 2012) (File No. 
812-13795) (``Exemptive Relief''). In addition, the Exchange states 
that the Commission has issued no-action relief pertaining to the 
Fund's ability to invest in derivatives, notwithstanding certain 
representations in the application for the Exemptive Relief. See 
Commission No-Action Letter (December 6, 2012).
    \6\ The Exchange states that neither the Adviser nor the Sub-
Adviser is a broker-dealer; however, both the Adviser and the Sub-
Adviser are affiliated with the Distributor (as defined herein), 
which is a broker-dealer. The Exchange represents that the Adviser 
and the Sub-Adviser have each implemented a fire wall with respect 
to their broker-dealer affiliate regarding access to information 
concerning the composition of or changes to the portfolio. The 
Exchange further represents that personnel who make decisions on the 
Fund's portfolio composition will be subject to procedures designed 
to prevent the use and dissemination of material non-public 
information regarding the Fund's portfolio. In addition, the 
Exchange represents that in the event (a) the Adviser or the Sub-
Adviser becomes, or 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 or Sub-Adviser or any new adviser or sub-
adviser, as applicable, will implement a fire wall with respect to 
its relevant personnel and/or such broker-dealer affiliate, as 
applicable, regarding access to information concerning the 
composition of or changes to the portfolio, and the Adviser or Sub-
Adviser or any new adviser or sub-adviser, as applicable, will be 
subject to procedures designed to prevent the use and dissemination 
of material non-public information regarding the portfolio.
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    The Exchange has made the following representations and statements 
in describing the Fund and its principal investments, investments in 
derivatives and foreign currencies, and other investments and 
investment restrictions.\7\
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    \7\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, creation and redemption procedures, calculation 
of net asset value (``NAV''), fees, portfolio holdings disclosure 
policies, distributions, and taxes, among other things, can be found 
in the Notice and Registration Statement, as applicable. See supra 
notes 4 and 5, respectively.
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Principal Investments

    The investment objective of the Fund will be to seek maximum total 
return and current income. Under normal market conditions,\8\ the Fund 
will invest at least 80% of its net assets (including investment 
borrowings) in bonds, notes, bills, certificates of deposit, time 
deposits, commercial paper, and loans issued by issuers in emerging 
market \9\ countries (``Debt Instruments'') that are denominated in the 
local currency of the issuer. Debt Instruments will be issued or 
guaranteed (as applicable) by: (i) Foreign governments (which may be 
local foreign governments); (ii) instrumentalities, agencies, or other 
political subdivisions of foreign governments (which may be local 
foreign governments); (iii) central banks, sovereign entities, 
supranational issuers, or development agencies; or (iv) entities or 
enterprises organized, owned, backed, or sponsored by any of the 
entities set forth in the foregoing clauses (i)-(iii).\10\ The Fund 
will invest in Debt Instruments issued by at least 13 non-affiliated 
issuers.
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    \8\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the fixed income markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance.
    \9\ According to the Adviser and the Sub-Adviser, while there is 
no universally accepted definition of what constitutes an ``emerging 
market,'' in general, emerging market countries are characterized by 
developing commercial and financial infrastructure with significant 
potential for economic growth and increased capital market 
participation by foreign investors. The Adviser and Sub-Adviser will 
look at a variety of commonly-used factors when determining whether 
a country is an ``emerging'' market. In general, the Adviser and 
Sub-Adviser will consider a country to be an emerging market if it 
is classified by the World Bank in the lower, lower middle, or upper 
middle income designation for one of the past three years. This 
definition could be expanded or exceptions could be made depending 
on the evolution of market and economic conditions.
    \10\ Debt Instruments include fixed rate, floating rate, and 
index-linked debt obligations. In addition, Debt Instruments include 
inflation-linked bonds. Inflation-linked bonds are fixed income 
securities that are structured to provide protection against 
inflation. The value of the inflation-linked bond's principal or the 
interest income paid on the bond is adjusted to track changes in an 
official inflation measure. The value of inflation-linked bonds is 
expected to change in response to changes in real interest rates. 
Real interest rates are tied to the relationship between nominal 
interest rates and the rate of inflation. If nominal interest rates 
increase at a faster rate than inflation, real interest rates may 
rise, leading to a decrease in the value of inflation-linked bonds.
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    In implementing the Fund's investment strategy, the Sub-Adviser 
will seek to provide current income and enhance capital, while 
minimizing volatility. The Sub-Adviser will continually review 
fundamental economic and structural themes that impact long- and 
medium-term asset returns in emerging markets. The Sub-Adviser will 
also consider shorter-term market drivers such as valuations, liquidity 
conditions, and sentiment to determine the appropriate positioning of 
the Fund's investments. The Sub-Adviser will adjust the portfolio's 
country allocations, duration, and individual security positioning to 
reflect the most attractive opportunities on a continuous basis.
    The Fund's exposure to any single country generally will be limited 
to 20% of the Fund's net assets (although this percentage may change 
from time to time in response to economic events). The percentage of 
Fund assets invested in a specific region, country, or issuer will 
change from time to time. The Fund intends, initially, to invest in 
Debt Instruments of issuers in the following countries: Brazil, Chile, 
Colombia, Hungary, Indonesia, Israel, Malaysia, Mexico, Nigeria, Peru, 
Philippines, Poland, Romania, Russia, South Africa, South Korea, 
Thailand, Turkey, and Uruguay. This list may change as market 
developments occur and may include additional issuers. The Fund will 
invest only in Debt Instruments that, at the time of purchase, are 
performing, and not in default or distressed; however, the Debt 
Instruments in which the Fund invests may become non-performing, 
distressed, or defaulted subsequent to purchase and the Fund may 
continue to hold such Debt Instruments. The Fund may invest in Debt 
Instruments of any credit quality,\11\ including unrated securities, 
and with effective or final maturities of any length.
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    \11\ The universe of emerging markets local currency debt 
currently includes securities that are rated ``investment grade'' as 
well as ``non-investment grade'' securities. The Fund will invest in 
both investment-grade and non-investment-grade securities, as well 
as unrated securities. There is no limit on the amount of the Fund's 
assets that may be invested in non-investment grade and unrated 
securities.
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    Liquidity will be a substantial factor in the Fund's security 
selection process.\12\ Under normal market conditions, at least 80% of 
the Fund's net assets that are invested in Debt

[[Page 57146]]

Instruments will be invested in Debt Instruments that are issued by 
issuers with outstanding debt of at least $200 million (or the foreign 
currency equivalent thereof).
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    \12\ In reaching liquidity decisions, the Adviser and/or the 
Sub-Adviser may consider the following factors: the frequency of 
trades and quotes for the security; the number of dealers wishing to 
purchase or sell the security and the number of other potential 
purchasers; dealer undertakings to make a market in the security; 
and the nature of the security and the nature of the marketplace in 
which it trades (e.g., the time needed to dispose of the security, 
the method of soliciting offers, and the mechanics of transfer).
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Investments in Derivative Instruments and Foreign Currencies

    The Fund's investments in derivative instruments will be made in 
accordance with the 1940 Act and consistent with the Fund's investment 
objective and policies. Under normal market conditions, no more than 
20% of the value of the Fund's net assets will be invested in 
derivative instruments. Derivatives are financial contracts whose value 
depends upon, or is derived from, the value of an underlying asset, 
reference rate, or index, and may relate to, among other things, 
interest rates, currencies, or currency exchange rates. The Fund may, 
but is not required to, use derivative instruments for risk management 
purposes or as part of its investment strategies. The Fund may invest 
in exchange-listed futures contracts,\13\ exchange-listed options,\14\ 
exchange-listed options on futures contracts, forward currency 
contracts, non-deliverable forward currency contracts, and exchange-
listed currency options.\15\
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    \13\ The Fund will use futures contracts to hedge interest rate 
risk and to actively manage interest rate exposure.
    \14\ Option purchases and sales can be used to help manage 
exposures (i.e., exposures to interest rates and/or currencies) more 
efficiently in the portfolio, while limiting downside.
    \15\ At least 90% of the Fund's net assets that are invested in 
exchange-traded derivative instruments will be invested in 
instruments that trade in markets that are members of the 
Intermarket Surveillance Group (``ISG'') or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.
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    The Fund will use derivative instruments primarily to hedge 
interest rate and foreign currency risk and to actively manage interest 
rate and foreign currency exposure. The Fund may also use derivative 
instruments to enhance returns, as a substitute for, or to gain 
exposure to, a position in an underlying asset, to reduce transaction 
costs, to maintain full market exposure (i.e., to adjust the 
characteristics of its investments to more closely approximate those of 
the markets in which it invests), to manage cash flows, or to preserve 
capital.\16\ The Fund's investments in derivative instruments will not 
be used to seek to achieve a multiple or inverse multiple of an index.
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    \16\ The Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced; 
however, the risk of losses resulting from default is still 
possible. The Adviser and/or the Sub-Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, the Adviser's and/or the 
Sub-Adviser's analysis will evaluate each approved counterparty 
using various methods of analysis and may consider such factors as 
the counterparty's liquidity, its reputation, the Adviser's and/or 
Sub-Adviser's past experience with the counterparty, its known 
disciplinary history, and its share of market participation.
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    The Fund will invest in foreign currencies and Debt Instruments 
denominated in foreign (non-U.S.) currencies, and will receive revenues 
in foreign currencies. In addition, the Fund may engage in foreign 
currency transactions on a spot (cash) basis and, as indicated above, 
enter into forward currency contracts.\17\ A forward currency contract, 
which involves an obligation to purchase or sell a specific currency at 
a future date at a price set at the time of the contract, reduces the 
Fund's exposure to changes in the value of the currency it will deliver 
and increases its exposure to changes in the value of the currency it 
will receive for the duration of the contract. Certain foreign currency 
transactions (i.e., non-deliverable forward currency contracts) may 
also be settled in cash rather than the actual delivery of the relevant 
currency. The effect on the value of the Fund is similar to selling 
securities denominated in one currency and purchasing securities 
denominated in another currency. A contract to sell foreign currency 
would limit any potential gain which might be realized if the value of 
the hedged currency increases. The Fund may enter into these contracts 
to hedge against foreign exchange risk, to increase exposure to a 
foreign currency, or to shift exposure to foreign currency fluctuations 
from one currency to another. Suitable hedging transactions may not be 
available in all circumstances and there can be no assurance that the 
Fund will engage in such transactions at any given time or from time to 
time.
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    \17\ At least 90% of the Fund's net assets that are invested in 
foreign currencies will be invested in currencies with a minimum 
average daily foreign exchange turnover of USD $1 billion as 
determined by the Bank for International Settlements (``BIS'') 
Triennial Central Bank Survey. As of the most recent BIS Triennial 
Central Bank Survey, at least 52 separate currencies had minimum 
average daily foreign exchange turnover of USD $1 billion. For a 
list of eligible BIS currencies, see www.bis.org.
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    The Fund will comply with the regulatory requirements of the 
Commission to maintain assets as ``cover,'' maintain segregated 
accounts, and/or make margin payments when it takes positions in 
derivative instruments involving obligations to third parties (i.e., 
instruments other than purchase options). If the applicable guidelines 
prescribed under the 1940 Act so require, the Fund will earmark or set 
aside cash, U.S. government securities, high grade liquid debt 
securities, and/or other liquid assets permitted by the Commission in a 
segregated custodial account in the amount prescribed.

Other Investments and Investment Restrictions

    Under normal market conditions, the Fund will invest substantially 
all of its assets to meet its investment objective and, as described 
above, the Fund may invest in derivative instruments and foreign 
currencies. In addition, the Fund may invest its remaining assets as 
described below.
    The Fund may invest up to 20% of its net assets in non-U.S. 
corporate bonds that are not included within the meaning of the term 
``Debt Instruments'' (referred to as ``Corporate Bonds''). The Fund 
will invest only in Corporate Bonds that the Adviser and/or the Sub-
Adviser deems to be sufficiently liquid.\18\ Under normal market 
conditions, a Corporate Bond must have $200 million (or the foreign 
currency equivalent thereof) or more par amount outstanding and 
significant par value traded to be considered as an eligible 
investment. Economic and other conditions may, from time to time, lead 
to a decrease in the average par amount outstanding of non-U.S. 
corporate bond issuances. Therefore, although the Fund does not intend 
to do so, the Fund may invest up to 5% of its net assets in Corporate 
Bonds with less than $200 million (or the foreign currency equivalent 
thereof) par amount outstanding if (i) the Adviser and/or the Sub-
Adviser deems such securities to be sufficiently liquid and (ii) such 
investment is deemed by the Adviser and/or the Sub-Adviser to be in the 
best interest of the Fund.
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    \18\ See supra note 12.
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    The Fund may invest up to 20% of its net assets in short-term debt 
securities (as described in the following paragraph) that are not 
included within the meaning of the term ``Debt Instruments,'' \19\ 
money market funds, and other cash equivalents, or it may hold cash. 
For temporary defensive purposes, during the initial invest-up period, 
and during periods of high cash inflows or outflows, the Fund may 
depart from its principal investment

[[Page 57147]]

strategies and invest part or all of its assets in these securities or 
it may hold 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 Sub-Adviser believes that securities 
in which the Fund normally invests have elevated risks due to political 
or economic factors and in other extraordinary circumstances. The use 
of temporary investments will not be a part of a principal investment 
strategy of the Fund.
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    \19\ Short-term debt securities are securities from issuers 
having a long-term debt rating of at least A by Standard & Poor's 
Ratings Services (``S&P Ratings''), Moody's Investors Service, Inc. 
(``Moody's''), or Fitch Ratings (``Fitch'') and having a maturity of 
one year or less. For the sake of clarity, the foregoing parameters 
do not apply to Debt Instruments.
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    Short-term debt securities are the following: (1) Fixed rate and 
floating rate U.S. government securities, including bills, notes, and 
bonds differing as to maturity and rates of interest, which are either 
issued or guaranteed by the U.S. Treasury or by U.S. government 
agencies or instrumentalities; (2) short-term securities issued or 
guaranteed by non-U.S. governments or by their agencies or 
instrumentalities; \20\ (3) certificates of deposit issued against 
funds deposited in a bank or savings and loan association; (4) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (5) repurchase agreements,\21\ which involve 
purchases of debt securities; (6) bank time deposits, which are monies 
kept on deposit with banks or savings and loan associations for a 
stated period of time at a fixed rate of interest; (7) commercial 
paper, which is short-term unsecured promissory notes; \22\ and (8) 
other securities that are similar to the foregoing.
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    \20\ The relevant non-U.S. government, agency, or 
instrumentality must have a long-term debt rating of at least A by 
S&P Ratings, Moody's, or Fitch. For the sake of clarity, the 
foregoing ratings requirement does not apply to Debt Instruments.
    \21\ The Fund intends to enter into repurchase agreements only 
with financial institutions and dealers believed by the Sub-Adviser 
to present minimal credit risks in accordance with criteria approved 
by the Board of Trustees of the Trust (``Trust Board''). The Sub-
Adviser will review and monitor the creditworthiness of such 
institutions. The Sub-Adviser will monitor the value of the 
collateral at the time the transaction is entered into and at all 
times during the term of the repurchase agreement.
    \22\ Except for commercial paper that is included within the 
meaning of the term ``Debt Instruments,'' the Fund will only invest 
in commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or 
higher by Moody's, or F1 or higher by Fitch.
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    The Fund may invest up to 20% of its net assets in the securities 
of money market funds (as noted above) and other exchange-traded funds 
(``ETFs'') \23\ that invest primarily in short-term debt securities or 
Debt Instruments. Except for these investments in other investment 
companies, the Fund will not invest directly in equity securities.\24\ 
The ETFs in which the Fund will invest will be exchange-listed and 
trade in markets that are members of ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.
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    \23\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. Many ETFs are designed to 
track the performance of a securities index, including industry, 
sector, country, and region indexes. ETFs included in the Fund will 
be listed and traded in the U.S. on registered exchanges. The Fund 
may invest in the securities of ETFs in excess of the limits imposed 
under the 1940 Act pursuant to exemptive orders obtained by other 
ETFs and their sponsors from the Commission. In addition, the Fund 
may invest in the securities of certain other investment companies 
(including without limitation ETFs) in excess of the limits imposed 
under the 1940 Act pursuant to an exemptive order that the Trust has 
obtained from the Commission. See Investment Company Act Release No. 
30377 (February 5, 2013) (File No. 812-13895). The ETFs in which the 
Fund may invest include Index Fund Shares (as described in Nasdaq 
Rule 5705), Portfolio Depository Receipts (as described in Nasdaq 
Rule 5705), and Managed Fund Shares (as described in Nasdaq Rule 
5735). While the Fund may invest in inverse ETFs, the Fund will not 
invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs.
    \24\ It is possible, however, that an investment company in 
which the Fund invests will invest a portion of its assets in 
foreign and/or domestic equity securities.
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser and/or 
the Sub-Adviser.\25\ 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 assets. Illiquid assets include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
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    \25\ See supra note 12.
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    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to (a) obligations issued or guaranteed by the U.S. 
government, its agencies, or instrumentalities, or (b) securities of 
other investment companies.
    The Fund may purchase securities on a when-issued or other delayed 
delivery basis and may enter into reverse repurchase agreements. 
Reverse repurchase agreements will not be used by the Fund to enhance 
leverage.
    The Fund will seek to qualify for treatment as a Regulated 
Investment Company under Subchapter M of the Internal Revenue Code of 
1986, as amended.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\26\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 6(b)(5) of the Act,\27\ which requires, among other 
things, that the Exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to 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. The Commission notes that the Fund and the Shares must 
comply with the requirements of Nasdaq Rule 5735 to be listed and 
traded on the Exchange.
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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78f(b)(5).
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    The Commission 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,\28\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. 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. In addition, the Intraday Indicative Value,\29\ as 
defined in Nasdaq Rule

[[Page 57148]]

5735(c)(3), for the Fund will be available on the NASDAQ OMX 
Information LLC proprietary index data service, and will be updated and 
widely disseminated by one or more major market data vendors and 
broadly displayed at least every 15 seconds during the Regular Market 
Session.\30\ On each business day, before commencement of trading in 
Shares in the Regular Market Session \31\ on the Exchange, the Fund 
will disclose on its Web site the identities and quantities of the 
portfolio of securities and other assets (``Disclosed Portfolio'' as 
defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form the 
basis for the Fund's calculation of NAV at the end of the business 
day.\32\ The Fund's custodian, through the National Securities Clearing 
Corporation, 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, as well as the estimated amount of cash 
(if any), constituting the creation basket for the Fund for that day. 
The NAV of the Fund will be determined as of the close of trading 
(normally 4:00 p.m., Eastern Time) on each day the New York Stock 
Exchange is open for business.\33\ Information regarding market price 
and trading volume of the Shares will be continually available on a 
real-time basis throughout the day on brokers' computer screens and 
other electronic services. Information regarding the previous day's 
closing price and trading volume information for the Shares will be 
published daily in the financial section of newspapers. Quotation and 
last sale information for ETFs will be available via the CTA high-speed 
line, and will be available from the national securities exchange on 
which they are listed. Pricing information for ETFs and exchange-traded 
derivative instruments will be available from the exchanges on which 
they trade and from major market data vendors. Pricing information for 
Debt Instruments, forward currency contracts, non-deliverable forward 
currency contracts, and other debt securities in which the Fund may 
invest will be available from major broker-dealer firms, major market 
data vendors and/or Pricing Services. Money market funds are typically 
priced once each business day and their prices will be available 
through the applicable fund's Web site or major market data vendors. 
The Fund's Web site, which will be publicly available prior to the 
public offering of Shares, will include a form of the prospectus for 
the Fund and additional data relating to NAV and other applicable 
quantitative information.
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    \28\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \29\ According to the Exchange, the Intraday Indicative Value 
reflects an estimated intraday value of the Fund's Disclosed 
Portfolio and will be based upon the current value for the 
components of a Disclosed Portfolio. The Exchange states that the 
Intraday Indicative Value will be based on quotes and closing prices 
from the securities' local market and may not reflect events that 
occur subsequent to the local market's close, that premiums and 
discounts between the Intraday Indicative Value and the market price 
may occur, and that the Intraday Indicative Value should not be 
viewed as a ``real time'' update of the NAV per Share of the Fund, 
which is calculated only once a day.
    \30\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the NASDAQ OMX global index data feed service. The 
Exchange represents that GIDS offers real-time updates, daily 
summary messages, and access to widely followed indexes and Intraday 
Indicative Values for ETFs and that GIDS provides investment 
professionals with the daily information needed to track or trade 
NASDAQ OMX indexes, listed ETFs, or third-party partner indexes and 
ETFs.
    \31\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to 
4:00 p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session 
from 4:00 p.m. or 4:15 p.m. to 8:00 p.m., Eastern Time).
    \32\ On a daily basis, the Fund will disclose on the Fund's Web 
site the following information regarding each portfolio holding, as 
applicable to the type of holding: ticker symbol, CUSIP number or 
other identifier, if any; a description of the holding (including 
the type of holding); the identity of the security or other asset or 
instrument underlying the holding, if any; for options, the option 
strike price; quantity held (as measured by, for example, par value, 
notional value or number of shares, contracts or units); maturity 
date, if any; coupon rate, if any; effective date, if any; market 
value of the holding; and the percentage weighting of the holding in 
the Fund's portfolio. The Fund's disclosure of derivative positions 
in the Disclosed Portfolio will include information that market 
participants can use to value these positions intraday. This Web 
site information will be publicly available at no charge.
    \33\ NAV per Share will be calculated for the Fund by taking the 
market price of the Fund's total assets, including interest or 
dividends accrued but not yet collected, less all liabilities, 
dividing such amount by the total number of Shares outstanding, and 
rounding to the nearest cent. The Fund's investments will be valued 
daily at market value or, in the absence of market value with 
respect to any investment, at fair value, in each case in accordance 
with valuation procedures, which may be revised from time to time, 
adopted by the Trust Board (``Valuation Procedures'') and in 
accordance with the 1940 Act. A market valuation generally means a 
valuation (i) obtained from an exchange, an independent pricing 
service (``Pricing Service''), or a major market maker or dealer, or 
(ii) based on a price quotation or other equivalent indication of 
value supplied by an exchange, a Pricing Service, or a major market 
maker or dealer. Certain securities, including Debt Instruments, in 
which the Fund will invest will not be listed on any securities 
exchange or board of trade. Such securities will typically be bought 
and sold by institutional investors in individually negotiated 
private transactions that function in many respects like an over-
the-counter secondary market, although typically no formal market 
makers will exist. Certain securities, particularly debt securities, 
will have few or no trades, or trade infrequently, and information 
regarding a specific security may not be widely available or may be 
incomplete. Accordingly, determinations of the fair value of debt 
securities may be based on infrequent and dated information. Because 
there is less reliable, objective data available, elements of 
judgment may play a greater role in valuation of debt securities 
than for other types of securities. Typically, Debt Instruments and 
other debt securities in which the Fund may invest will be valued 
using information provided by a Pricing Service. To the extent debt 
securities have a remaining maturity of 60 days or less when 
purchased, they will be valued at cost adjusted for amortization of 
premiums and accretion of discounts. Overnight repurchase agreements 
will be valued at cost. Term repurchase agreements (i.e., those 
whose maturity exceeds seven days) will be valued at the average of 
the bid quotations obtained daily from at least two recognized 
dealers. ETFs listed on any exchange other than the Exchange will be 
valued at the last sale price on the exchange on which they are 
principally traded on the business day as of which such value is 
being determined. ETFs listed on the Exchange will be valued at the 
official closing price on the business day as of which such value is 
being determined. If there has been no sale on such day, or no 
official closing price in the case of ETFs traded on the Exchange, 
the ETFs will be valued using fair value pricing. ETFs traded on 
more than one securities exchange will be valued at the last sale 
price or official closing price, as applicable, on the business day 
as of which such value is being determined at the close of the 
exchange representing the principal market for such ETFs. Shares of 
money market funds will be valued at their net asset values as 
reported by such funds to Pricing Services. Exchange-traded options 
and futures contracts will be valued at the closing price in the 
market where such contracts are principally traded. Forward currency 
contracts and non-deliverable forward currency contracts will be 
valued at the current day's interpolated foreign exchange rate, as 
calculated using the current day's spot rate, and the thirty, sixty, 
ninety, and one-hundred-eighty day forward rates provided by a 
Pricing Service or by certain independent dealers in such contracts. 
Certain securities may not be able to be priced by pre-established 
pricing methods. Such securities may be valued by the Trust Board or 
its delegate at fair value. The use of fair value pricing by the 
Fund will be governed by the Valuation Procedures and conducted in 
accordance with the provisions of the 1940 Act. Valuing the Fund's 
securities using fair value pricing will result in using prices for 
those securities that may differ from current market valuations or 
official closing prices on the applicable exchange. Because foreign 
securities exchanges may be open on different days than the days 
during which an investor may purchase or sell Shares, the value of 
the Fund's securities may change on days when investors are not able 
to purchase or sell Shares. Assets denominated in foreign currencies 
will be translated into U.S. dollars at the exchange rate of such 
currencies against the U.S. dollar as provided by a Pricing Service. 
The value of assets denominated in foreign currencies will be 
converted into U.S. dollars at the exchange rates in effect at the 
time of valuation.
---------------------------------------------------------------------------

    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 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. Trading in Shares of the Fund will be 
halted under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pause provisions under Nasdaq Rules 4120(a)(11) 
and (12). Trading in the Shares may be halted because of market 
conditions or for reasons that, in the view of the

[[Page 57149]]

Exchange, make trading in the Shares inadvisable,\34\ and trading in 
the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets 
forth circumstances under which trading in Shares of the Fund may be 
halted. The Exchange states that it has a general policy prohibiting 
the distribution of material, non-public information by its employees. 
Further, the Commission notes that the Reporting Authority that 
provides the Disclosed Portfolio must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the actual components of the 
portfolio.\35\ In addition, the Exchange states that, while neither the 
Adviser nor the Sub-Adviser is registered as a broker-dealer, each of 
the Adviser and the Sub-Adviser is affiliated with a broker-dealer and 
has implemented a fire wall with respect to that broker-dealer 
regarding access to information concerning the composition of, or 
changes to, the portfolio, and that personnel who make decisions on the 
Fund's portfolio composition will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the Fund's portfolio.\36\ The Exchange represents that 
trading in the Shares will be subject to the existing trading 
surveillances, administered by both Nasdaq and also the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\37\ The Exchange further represents 
that these procedures are adequate to properly monitor Exchange trading 
of the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws. 
Prior to the commencement of trading, the Exchange states that it will 
inform its members in an Information Circular of the special 
characteristics and risks associated with trading the Shares.
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    \34\ These reasons may include: (1) the extent to which trading 
is not occurring in the securities or 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. 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.
    \35\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \36\ See supra note 6. The Exchange states 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 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.
    \37\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has 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) Trading in the Shares will be subject to the existing trading 
surveillances, administered by both Nasdaq and FINRA, on behalf of the 
Exchange, which are designed to detect violations of Exchange rules and 
applicable federal securities laws, and that these procedures are 
adequate to properly monitor Exchange trading of the Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and applicable federal securities laws. FINRA, on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares 
and the exchange-traded securities and instruments held by the Fund 
with other markets and other entities that are members of ISG, and 
FINRA may obtain trading information regarding trading in the Shares 
and the exchange-traded securities and instruments held by the Fund 
from such markets and other entities. In addition, the Exchange may 
obtain information regarding trading in the Shares and the exchange-
traded securities and instruments held by the Fund from markets and 
other entities that are members of ISG, which includes securities and 
futures exchanges, or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. Moreover, FINRA, on 
behalf of the Exchange, will be able to access, as needed, trade 
information for certain fixed income securities held by the Fund 
reported to FINRA's Trade Reporting and Compliance Engine.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) the procedures for 
purchases and redemptions of Shares in creation units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how and by whom 
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.
    (5) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\38\
---------------------------------------------------------------------------

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

    (6) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser and/or 
the Sub-Adviser. 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 assets.
    (7) Under normal market conditions, the Fund will invest at least 
80% of its net assets (including investment borrowings) in Debt 
Instruments. The Fund will invest in Debt Instruments issued by at 
least 13 non-affiliated issuers. The Fund's exposure to any single 
country generally will be limited to 20% of the Fund's net assets 
(although this percentage may change from time to time in response to 
economic events). The Fund will invest

[[Page 57150]]

only in Debt Instruments that, at the time of purchase, are performing.
    (8) Under normal market conditions, at least 80% of the Fund's net 
assets that are invested in Debt Instruments will be invested in Debt 
Instruments that are issued by issuers with outstanding debt of at 
least $200 million (or the foreign currency equivalent thereof).
    (9) Under normal market conditions, no more than 20% of the value 
of the Fund's net assets will be invested in derivative instruments. 
The Fund's investments in derivative instruments will be made in 
accordance with the 1940 Act and consistent with the Fund's investment 
objective and policies. The Fund's investments in derivative 
instruments will not be used to seek to achieve a multiple or inverse 
multiple of an index.
    (10) At least 90% of the Fund's net assets that are invested in 
exchange-traded derivative instruments will be invested in instruments 
that trade in markets that are members of ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.
    (11) The Fund will seek, where possible, to use counterparties 
whose financial status is such that the risk of default is reduced. The 
Adviser and/or the Sub-Adviser will evaluate the creditworthiness of 
counterparties on an ongoing basis.
    (12) At least 90% of the Fund's net assets that are invested in 
foreign currencies will be invested in currencies with a minimum 
average daily foreign exchange turnover of USD $1 billion as determined 
by the BIS Triennial Central Bank Survey.
    (13) The Fund will comply with the regulatory requirements of the 
Commission to maintain assets as ``cover,'' maintain segregated 
accounts, and/or make margin payments when it takes positions in 
derivative instruments involving obligations to third parties (i.e., 
instruments other than purchase options). If the applicable guidelines 
prescribed under the 1940 Act so require, the Fund will earmark or set 
aside cash, U.S. government securities, high grade liquid debt 
securities, and/or other liquid assets permitted by the Commission in a 
segregated custodial account in the amount prescribed.
    (14) The Fund may invest up to 20% of its net assets in Corporate 
Bonds. Under normal market conditions, a Corporate Bond must have $200 
million (or the foreign currency equivalent thereof) or more par amount 
outstanding and significant par value traded to be considered as an 
eligible investment. Although the Fund does not intend to do so, the 
Fund may invest up to 5% of its net assets in Corporate Bonds with less 
than $200 million (or the foreign currency equivalent thereof) par 
amount outstanding if (i) the Adviser and/or the Sub-Adviser deems such 
securities to be sufficiently liquid and (ii) such investment is deemed 
by the Adviser and/or the Sub-Adviser to be in the best interest of the 
Fund.
    (15) The Fund intends to enter into repurchase agreements only with 
financial institutions and dealers believed by the Sub-Adviser to 
present minimal credit risks in accordance with criteria approved by 
the Trust Board. The Sub-Adviser will review and monitor the 
creditworthiness of such institutions. The Sub-Adviser will monitor the 
value of the collateral at the time the transaction is entered into and 
at all times during the term of the repurchase agreement.
    (16) The ETFs in which the Fund will invest will be exchange-listed 
and trade in markets that are members of ISG or are parties to a 
comprehensive surveillance sharing agreement with the Exchange.
    (17) Reverse repurchase agreements will not be used by the Fund to 
enhance leverage.
    (18) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1 thereto, is consistent with 
Section 6(b)(5) of the Act \39\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \39\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\40\ that the proposed rule change (SR-NASDAQ-2014-073), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \40\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-22670 Filed 9-23-14; 8:45 am]
BILLING CODE 8011-01-P