Document ID: SEC-2016-0687-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2016-04-20T04:00Z

[Federal Register Volume 81, Number 76 (Wednesday, April 20, 2016)]
[Notices]
[Pages 23334-23338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09061]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77619; File No. SR-NASDAQ-2016-021]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change, as Modified by Amendment No. 
1 Thereto, Relating to the Listing and Trading of the Shares of the 
First Trust Alternative Absolute Return Strategy ETF of First Trust 
Exchange-Traded Fund VII

April 14, 2016.

I. Introduction

    On February 16, 2016, The NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade the shares 
(``Shares'') of the First Trust Alternative Absolute Return Strategy 
ETF (``Fund'') of the First Trust Exchange-Traded Fund VII (``Trust''). 
The proposed rule change was published for comment in the Federal 
Register on March 2, 2016.\3\ On April 12, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change.\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 thereto.
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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. 77233 (Feb. 25, 
2016), 81 FR 10925 (``Notice'').
    \4\ In Amendment No. 1 to the proposed rule change, the Exchange 
clarified that: (a) All statements and representations made in the 
proposal regarding the description of the portfolio, limitations on 
portfolio holdings or reference assets, or the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange; (b) the issuer will advise the Exchange of any failure by 
the Fund to comply with the continued listing requirements; (c) 
pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will monitor for compliance with the continued listing 
requirements; and (d) if the Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence 
delisting procedures under the Nasdaq 5800 Series rules. In 
addition, the Exchange clarified the description of the Fund's 
investments in U.S. government and agency securities by deleting 
``short-term high-quality.'' Because Amendment No. 1 to the proposed 
rule change does not materially alter the substance of the proposed 
rule change or raise unique or novel regulatory issues, Amendment 
No. 1 is not subject to notice and comment (Amendment No. 1 is 
available at: http://www.sec.gov/comments/sr-nasdaq-2016-021/nasdaq2016021-1.pdf).
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II. Exchange's Description of the Proposal

    The Exchange proposes to list and trade the 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 the 
Trust, which was established as a Massachusetts business trust on 
November 6, 2012.\5\ 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.\6\ The Fund will be a 
series of the Trust.
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    \5\ According to the Exchange, the Trust has obtained an order 
from the Commission granting certain exemptive relief under the 
Investment Company Act of 1940 (``1940 Act''). See Investment 
Company Act Release No. 30029 (April 10, 2012) (File No. 812-13795) 
(``Exemptive Order'').
    \6\ See Post-Effective Amendment No. 6 to Registration Statement 
on Form N-1A for the Trust, dated January 28, 2016 (File Nos. 333-
184918 and 811-22767).
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    First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund. 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. According to the Exchange, the Adviser is not a broker-dealer, 
but it is affiliated with the Distributor, which is a broker-dealer. 
The Exchange represents 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.\7\ In addition, the Exchange states 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.
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    \7\ In the event (a) the Adviser or any sub-adviser registers as 
a broker-dealer or becomes newly affiliated with a broker-dealer, or 
(b) any new adviser or sub-adviser is a registered broker-dealer or 
becomes affiliated with another broker-dealer, it will implement a 
fire wall with respect to its relevant personnel or 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. The 
Exchange represents that the Fund does not currently intend to use a 
sub-adviser.
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    The Exchange has made the following representations and statements 
describing the Fund and the Fund's investment strategies, including the 
Fund's portfolio holdings and investment restrictions.\8\
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    \8\ Additional information regarding the Fund, the Trust, and 
the Shares, including investment strategies, risks, creation and 
redemption procedures, fees, portfolio holdings disclosure policies, 
calculation of net asset value (``NAV''), distributions, and taxes, 
among other things, can be found in the Notice, Amendment No. 1 to 
the proposed rule change, Exemptive Order, and the Registration 
Statement, as applicable. See Notice, Amendment No. 1, Exemptive 
Order, and Registration Statement, supra notes 3-6, respectively.
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A. Exchange's Description of the Fund

    The Fund will be an actively-managed exchange-traded fund (``ETF'') 
that will seek to achieve long-term total return by using a long/short 
commodities strategy. Under normal market conditions,\9\ the Fund will 
invest in a combination of securities, exchange-traded commodity 
futures contracts, and other instruments, either directly or through a 
wholly-owned subsidiary controlled by the Fund and organized under the 
laws of the Cayman Islands (``First Trust Subsidiary''), as described 
herein.
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    \9\ 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 securities, commodities or 
futures 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. On a 
temporary basis, including for 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 
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 believes securities and other instruments 
in which the Fund normally may invest have elevated risks due to 
political or economic factors and in other extraordinary 
circumstances.
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    The Fund will invest in: (1) The First Trust Subsidiary; (2) U.S. 
government and agency securities; \10\ (3) short-term

[[Page 23335]]

repurchase agreements; \11\ (4) money market instruments; \12\ and (5) 
cash. The First Trust Subsidiary may also invest in the instruments 
described in the foregoing clauses (2) through (5) (collectively, 
``Other Investments''). Other Investments (except for cash and money 
market mutual funds) each will have a maturity of five years or less. 
The Fund (and, as applicable, the First Trust Subsidiary) will use the 
Other Investments for investment purposes, to provide liquidity, or to 
collateralize the First Trust Subsidiary's investments in exchange-
traded commodity futures contracts (``Commodities'').
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    \10\ These securities 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, which 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.
    \11\ The Fund intends to enter into repurchase agreements only 
with financial institutions and dealers believed by the Adviser to 
present minimal credit risks in accordance with criteria approved by 
the Trust's Board of Trustees (``Trust Board''). The Adviser will 
review and monitor the creditworthiness of these institutions. The 
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.
    \12\ For the Fund's purposes, money market instruments will 
include: (i) Short-term, high-quality securities issued or 
guaranteed by non-U.S. governments, agencies and instrumentalities; 
(ii) non-convertible high-quality corporate debt securities with 
remaining maturities of not more than 397 days; (iii) money market 
mutual funds; (iv) commercial paper; and (v) certificates of 
deposit, bank time deposits, bankers' acceptances, and short-term 
negotiable obligations of U.S. and non-U.S. banks and financial 
institutions.
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    The Fund expects to exclusively gain exposure to Commodities 
indirectly by investing directly in the First Trust Subsidiary. The 
Fund's investment in the First Trust Subsidiary may not exceed 25% of 
the Fund's total assets. The Fund will not invest directly in 
Commodities, and neither the Fund nor the First Trust Subsidiary will 
invest directly in physical commodities.

B. Exchange's Description of the First Trust Subsidiary

    The Fund's investment in the First Trust Subsidiary will be 
designed to provide the Fund with exposure to commodity markets within 
the limits of current federal income tax laws applicable to investment 
companies such as the Fund, which limit the ability of investment 
companies to invest directly in the derivative instruments.\13\
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    \13\ The First Trust Subsidiary, which will be advised by the 
Adviser, will not be registered under the 1940 Act. As an investor 
in the First Trust Subsidiary, the Fund, as the First Trust 
Subsidiary's sole shareholder, will not have the protections offered 
to investors in registered investment companies. However, because 
the Fund will wholly own and control the First Trust Subsidiary, and 
the Fund and the First Trust Subsidiary will be managed by the 
Adviser, the First Trust Subsidiary will not take action contrary to 
the interest of the Fund or the Fund's shareholders. The Trust Board 
will have oversight responsibility for the investment activities of 
the Fund, including its expected investment in the First Trust 
Subsidiary, and the Fund's role as the sole shareholder of the First 
Trust Subsidiary. The Adviser will receive no additional 
compensation for managing the assets of the First Trust Subsidiary. 
In addition, the First Trust Subsidiary will enter into separate 
contracts for the provision of custody, transfer agency, and 
accounting agent services with the same or with affiliates of the 
same service providers that provide those services to the Fund.
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    The First Trust Subsidiary will have the same investment objective 
as the Fund, but unlike the Fund, it may invest without limitation in 
Commodities. Eligible Commodities will be selected based on liquidity 
as measured by open interest (generally, the number of contracts that 
are outstanding at a particular time) and volume. The list of 
Commodities considered for inclusion can and will change over time. 
Through its investment process, the Adviser will seek to maximize the 
total return of a long/short commodity portfolio \14\ while managing 
overall portfolio risk, sector risk, liquidity risk, margin risk, and 
position size risk. As stated above, in addition to Commodities, the 
First Trust Subsidiary may invest in Other Investments.
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    \14\ To be ``long'' means to hold or be exposed to a security or 
instrument with the expectation that its value will increase over 
time. To be ``short'' means to sell or be exposed to a security or 
instrument with the expectation that it will fall in value. The 
Fund, through the First Trust Subsidiary, will benefit if it has a 
long position in a Commodity that increases in value or a short 
position in a Commodity that decreases in value.
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    The First Trust Subsidiary will initially consider investing in 
Commodities set forth in the following table, which also provides each 
instrument's trading hours, exchange, and ticker symbol:

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                                                                                                     Contract
                                                                                                      ticker
             Commodity               Bloomberg  exchange       Exchange name       Trading hours     (generic
                                           code\15\                                   (E.T.)         Bloomberg
                                                                                                      ticker)
----------------------------------------------------------------------------------------------------------------
Cattle, Live/Choice Average.......  CME..................  Chicago Mercantile        18:00-17:00  LC
                                                            Exchange.
Cocoa.............................  NYB..................  ICE Futures Exchange.     04:00-14:00  CC
Cotton/1-1/16''...................  NYB..................  ICE Futures Exchange.     21:00-14:30  CT
Feeder Cattle.....................  CME..................  Chicago Mercantile        18:00-17:00  FC
                                                            Exchange.
Coffee `C'/Colombian..............  NYB..................  ICE Futures Exchange.     03:30-14:00  KC
Soybeans/No. 2 Yellow.............  CBT..................  Chicago Board of          20:00-14:15  S
                                                            Trade.
Soybean Meal/48% Protein..........  CBT..................  Chicago Board of          20:00-14:15  SM
                                                            Trade.
Soybean Oil/Crude.................  CBT..................  Chicago Board of          20:00-14:15  BO
                                                            Trade.
Corn/No. 2 Yellow.................  CBT..................  Chicago Board of          20:00-14:15  C
                                                            Trade.
Wheat/No. 2 Hard Winter...........  CBT..................  Chicago Board of          20:00-14:15  KW
                                                            Trade.
Wheat/No. 2 Soft Red..............  CBT..................  Chicago Board of          20:00-14:15  W
                                                            Trade.
Sugar #11/World Raw...............  NYB..................  ICE Futures Exchange.     02:30-14:00  SB
Hogs, Lean/Average Iowa/S Minn....  CME..................  Chicago Mercantile        18:00-17:00  LH
                                                            Exchange.
Crude Oil, WTI/Global Spot........  NYM..................  New York Mercantile       18:00-17:15  CL
                                                            Exchange.
Crude Oil, Brent/Global Spot......  ICE..................  ICE Futures Exchange.     20:00-18:00  CO
NY Harb ULSD......................  NYM..................  New York Mercantile       18:00-17:15  HO
                                                            Exchange.
Gas-Oil-Petroleum.................  ICE..................  ICE Futures Exchange.     20:00-18:00  QS
Natural Gas, Henry Hub............  NYM..................  New York Mercantile       18:00-17:15  NG
                                                            Exchange.
Gasoline, Blendstock (RBOB).......  NYM..................  New York Mercantile       18:00-17:15  XB
                                                            Exchange.
Gold..............................  CMX..................  Commodity Exchange...     18:00-17:15  GC
Silver............................  CMX..................  Commodity Exchange...     18:00-17:15  SI
Platinum..........................  NYM..................  New York Mercantile       18:00-17:15  PL
                                                            Exchange.
Copper High Grade/Scrap No. 2 Wire  CMX..................  Commodity Exchange...     18:00-17:15  HG

[[Page 23336]]

 
Aluminum, LME Primary 3 Month       LME..................  London Metal Exchange     15:00-14:45  LA
 Rolling Forward.
Lead, LME Primary 3 Month Rolling   LME..................  London Metal Exchange     15:00-14:45  LL
 Forward.
Nickel, LME Primary 3 Month         LME..................  London Metal Exchange     15:00-14:45  LN
 Rolling Forward.
Tin, LME Primary 3 Month Rolling    LME..................  London Metal Exchange     15:00-14:45  LT
 Forward.
Zinc, LME Primary 3 Month Rolling   LME..................  London Metal Exchange     15:00-14:45  LX
 Forward.
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    As the exchanges referenced above list additional Commodities, as 
currently listed Commodities on those exchanges that are not included 
above meet the Adviser's selection criteria, or as other exchanges list 
Commodities that meet the Adviser's selection criteria, the Adviser 
will include those Commodities in the list of possible investments of 
the First Trust Subsidiary. The list of Commodities and commodities 
markets considered for investment can and will change over time.
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    \15\ The exchange codes listed are Bloomberg shorthand codes for 
the corresponding exchanges. The New York Board of Trade is 
currently owned by the ICE Futures Exchange. Bloomberg continues to 
use NYB as its shorthand code for certain contracts formerly traded 
on the New York Board of Trade.
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    With respect to the Commodities held indirectly through the First 
Trust Subsidiary, not more than 10% of the weight \16\ of such 
instruments (in the aggregate) shall consist of instruments whose 
principal trading market (a) is not a member of the Intermarket 
Surveillance Group (``ISG'') or (b) is a market with which the Exchange 
does not have a comprehensive surveillance sharing agreement.\17\
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    \16\ To be calculated as the value of the Commodity divided by 
the total absolute notional value of the First Trust Subsidiary's 
Commodities.
    \17\ The Exchange states that the Commodity Futures Trading 
Commission (``CFTC'') has adopted substantial amendments to CFTC 
Rule 4.5 relating to the permissible exemptions, and conditions for 
reliance on exemptions, from registration as a commodity pool 
operator. As a result of the instruments that will be indirectly 
held by the Fund, the Fund and the First Trust Subsidiary will be 
subject to regulation by the CFTC and National Futures Association 
(``NFA'') as well as additional disclosure, reporting, and 
recordkeeping rules imposed upon commodity pools. The Adviser has 
previously registered as a commodity pool operator and is also a 
member of the NFA.
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C. Exchange's Description of the Investment Restrictions

    The Fund may not invest more than 25% of the value of its total 
assets in securities of issuers in any one industry. This restriction 
will 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 First Trust Subsidiary's shares will be offered only to the 
Fund, and the Fund will not sell shares of the First Trust Subsidiary 
to other investors. The Fund and the First Trust Subsidiary will not 
invest in any non-U.S. equity securities (other than shares of the 
First Trust Subsidiary).
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
deemed illiquid by the Adviser.\18\ 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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    \18\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security or other instrument; the number of dealers wishing to 
purchase or sell the security or other instrument and the number of 
other potential purchasers; dealer undertakings to make a market in 
the security or other instrument; and the nature of the security or 
other instrument and the nature of the marketplace in which it 
trades (e.g., the time needed to dispose of the security or other 
instrument, the method of soliciting offers and the mechanics of 
transfer).
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    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1 thereto, is consistent with 
Section 6(b)(5) of the Exchange Act,\20\ which requires, among other 
things, that the Exchange's rules be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Exchange Act,\21\ 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.
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    \21\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    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 (``CTA'') plans for the Shares. On each business day, 
before commencement of trading in Shares in the Regular Market Session 
\22\ on the Exchange, the Fund will disclose on its Web site the 
identities and quantities of the portfolio of securities, Commodities, 
and other assets (``Disclosed Portfolio,'' as defined in Nasdaq Rule 
5735(c)(2)) held by the Fund and the First Trust Subsidiary that will 
form the basis for the Fund's calculation of NAV at the end of the 
business day.\23\ The NAV of the Fund's

[[Page 23337]]

Shares generally will be calculated once daily Monday through Friday as 
of the close of regular trading on Nasdaq, generally 4:00 p.m., Eastern 
Time.\24\ In addition, for the Fund, an estimated value, defined in 
Rule 5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's Disclosed Portfolio, (including 
the First Trust Subsidiary's portfolio), will be disseminated. The 
Intraday Indicative Value, available on the NASDAQ OMX Information LLC 
proprietary index data service \25\ will be based upon the current 
value for the components of the Disclosed Portfolio 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. The Intraday Indicative Value will be based on quotes and 
closing prices from the instruments' local market and may not reflect 
events that occur subsequent to the local market's close.
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    \22\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4:00 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 p.m., Eastern Time).
    \23\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). 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. The Exchange represents that the 
Fund's disclosure of derivative positions in the Disclosed Portfolio 
will include sufficient information for market participants to use 
to value these positions intraday. On a daily basis, the Fund will 
disclose on the Fund's Web site the following information regarding 
each portfolio holding of the Fund and the First Trust Subsidiary, 
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, commodity, or 
other asset or instrument underlying the holding, if any; 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 percentage weighting of the holding in the portfolio. The Web 
site information will be publicly available at no charge.
    \24\ According to the Exchange, the Fund's and the First Trust 
Subsidiary's investments will be valued daily. As described more 
specifically below, investments traded on an exchange (i.e., a 
regulated market), will generally be valued at market value prices 
that represent last sale or official closing prices. In addition, 
non-exchange traded investments will generally be valued using 
prices obtained from third-party pricing services (``Pricing 
Service''). Specifically, money market instruments (other than money 
market mutual funds, certificates of deposit, and bank time 
deposits) and U.S. government and agency securities (collectively, 
``Fixed-Income Instruments'') will typically be valued using 
information provided by a Pricing Service. In addition, debt 
instruments may be valued at evaluated mean prices, as provided by 
Pricing Services. Fixed-Income Instruments having a remaining 
maturity of 60 days or less when purchased will typically be valued 
at cost adjusted for amortization of premiums and accretion of 
discounts. Overnight repurchase agreements will be valued at 
amortized cost when it represents the best estimate of value. 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. Certificates of deposit 
and bank time deposits will typically be valued at cost. Money 
market mutual funds will typically be valued at their NAVs as 
reported by those funds to Pricing Services. Commodities will 
typically be valued at the closing price in the market where those 
instruments are principally traded. Because foreign 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 assets 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.
    \25\ According to the Exchange, the NASDAQ OMX Global Index Data 
Service (``GIDS'') is the Nasdaq global index data feed service that 
offers real-time updates, daily summary messages, and access to 
widely followed indexes and Intraday Indicative Values for ETFs. 
GIDS provides investment professionals with the daily information 
needed to track or trade Nasdaq indexes, listed ETFs, or third-party 
partner indexes and ETFs.
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    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. Pricing information for Fixed-Income 
Instruments, certificates of deposit, bank time deposits, and 
repurchase agreements will be available from major broker-dealer firms, 
major market data vendors, and Pricing Services. Pricing information 
for Commodities will be available from the applicable listing exchange 
and from major market data vendors. Money market mutual funds are 
typically priced once each business day and their prices will be 
available through the applicable fund's Web site or from major market 
data vendors. In addition, the Exchange notes that 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.
    The Commission also 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 states that it 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 Exchange 
also represents that it may consider all relevant factors in exercising 
its discretion to halt or suspend trading in the Shares of the Fund. 
The Exchange will halt 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 may be halted because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable.\26\ Trading in the Shares also 
will be subject to Rule 5735(d)(2)(D), which sets forth circumstances 
under which Shares of the Fund may be halted.
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    \26\ These may include: (1) The extent to which trading is not 
occurring in the securities, Commodities, or the other assets 
constituting the Disclosed Portfolio of the Fund and the First Trust 
Subsidiary; or (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.
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    The Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. The 
Exchange further states that the Adviser is not a broker-dealer, but 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, and changes to, the 
Fund's portfolio.\27\ Further, the Commission notes that the Reporting 
Authority \28\ 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\
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    \27\ See supra note 7 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 and its 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.
    \28\ Nasdaq Rule 5735(c)(4) defines ``Reporting Authority.''
    \29\ See Nasdaq Rule 5735(d)(2)(B)(ii).
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    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules

[[Page 23338]]

governing the trading of equity securities. In support of this 
proposal, the Exchange represented that:
    (1) The Shares will be subject to Nasdaq Rule 5735, which sets 
forth the initial and continued listing criteria applicable to Managed 
Fund Shares.
    (2) Trading in the Shares will be subject to the existing trading 
surveillances, administered by both Nasdaq and the Financial Industry 
Regulatory Authority (``FINRA'') on behalf of the Exchange,\30\ 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 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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    \30\ The Exchange represents 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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    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the Commodities with other markets 
and other entities that are members of ISG,\31\ and FINRA may obtain 
trading information regarding trading in the Shares and in the 
Commodities held by the First Trust Subsidiary from such markets and 
other entities. In addition, the Exchange may obtain information 
regarding trading in the Shares and in the Commodities held by the 
First Trust Subsidiary 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 and the First Trust Subsidiary reported to 
FINRA's Trade Reporting and Compliance Engine (``TRACE'').
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    \31\ 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.
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    (4) With respect to the Commodities held indirectly through the 
First Trust Subsidiary, not more than 10% of the weight \32\ of such 
instruments (in the aggregate) shall consist of instruments whose 
principal trading market (a) is not a member of ISG or (b) is a market 
with which the Exchange does not have a comprehensive surveillance 
sharing agreement.
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    \32\ To be calculated as the value of the Commodity divided by 
the total absolute notional value of the First Trust Subsidiary's 
Commodities.
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    (5) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (6) 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 for the Fund 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 the 
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.
    (7) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\33\
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    \33\ See 17 CFR 240.10A-3.
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    (8) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets.
    (9) The Fund's investment in the First Trust Subsidiary may not 
exceed 25% of the Fund's total assets. In addition, the Fund will not 
invest directly in Commodities, and neither the Fund nor the First 
Trust Subsidiary will invest directly in physical commodities.
    (10) The First Trust Subsidiary's shares will be offered only to 
the Fund, and the Fund will not sell shares of the First Trust 
Subsidiary to other investors. In addition, the Fund and the First 
Trust Subsidiary will not invest in any non-U.S. equity securities 
(other than shares of the First Trust Subsidiary).
    (11) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    The Exchange represents that all statements and representations 
made in the filing regarding (a) the description of the portfolio, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules and surveillance procedures shall 
constitute continued listing requirements for listing the Shares on the 
Exchange. In addition, the issuer has represented to the Exchange that 
it will advise 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.\34\ If the Fund is 
not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under the Nasdaq 5800 
Series. This approval order is based on all of the Exchange's 
representations, including those set forth above, in the Notice, and in 
Amendment No. 1 to the proposed rule change. The Commission notes that 
the Fund and the Shares must comply with the requirements of Nasdaq 
Rule 5735, including those set forth in this proposed rule change, as 
modified by Amendment No. 1 thereto, to be listed and traded on the 
Exchange on an initial and continuing basis.
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    \34\ The Commission notes that certain other proposals for the 
listing and trading of Managed Fund Shares include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Amendment No. 2 to SR-BATS-2016-04, 
available at: http://www.sec.gov/comments/sr-bats-2016-04/bats201604-2.pdf. In the context of this representation, it is the 
Commission's view that ``monitor'' and ``surveil'' both mean ongoing 
oversight of the Fund's compliance with the continued listing 
requirements. Therefore, the Commission does not view ``monitor'' as 
a more or less stringent obligation than ``surveil'' with respect to 
the continued listing requirements.
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    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 \35\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \35\ 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 
Exchange Act,\36\ that the proposed rule change (SR-NASDAQ-2016-021), 
as modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-09061 Filed 4-19-16; 8:45 am]
 BILLING CODE 8011-01-P