Document ID: SEC-2013-1271-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2013-07-12T04:00Z

[Federal Register Volume 78, Number 134 (Friday, July 12, 2013)]
[Notices]
[Pages 41968-41971]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16689]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69944; File No. SR-NASDAQ-2013-079]

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 WisdomTree Global Corporate Bond Fund and 
the WisdomTree Emerging Markets Corporate Bond Fund

July 8, 2013.

I. Introduction

    On May 17, 2013, The NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to the WisdomTree Global Corporate Bond 
Fund (``Global Fund'') and the WisdomTree Emerging Markets Corporate 
Bond Fund (``Emerging Markets Fund,'' and collectively with the Global 
Fund, the ``Funds'') of the WisdomTree Trust (``Trust''). On May 20, 
2013, the Exchange filed Partial Amendment No. 1 to the proposed rule 
change. The Commission published for comment in the Federal Register 
notice of the proposed rule change, as modified by Amendment No. 1 
thereto, on June 4, 2013.\3\ The Commission received no comments on the 
proposed rule change. This order approves 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. 69657 (May 29, 
2013), 78 FR 33457 (``Notice'').
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II. Description of the Proposed Rule Change

    The Commission approved the listing and trading of Shares of each 
of the Funds under NASDAQ Rule 5735, which governs the listing and 
trading of Managed Fund Shares on the

[[Page 41969]]

Exchange.\4\ The Funds are actively managed exchange-traded funds 
(``ETFs''). The Shares are offered by the Trust, which was established 
as a Delaware statutory trust on December 15, 2005.\5\ The Trust, which 
is registered with the Commission as an investment company, filed a 
registration statement on Form N-1A with the Commission on behalf of 
each of the Funds (each, a ``Registration Statement'').\6\ WisdomTree 
Asset Management, Inc. is the investment adviser (``Adviser'') to the 
Funds. Western Asset Management Company serves as sub-adviser for the 
Funds (``Sub-Adviser'').
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    \4\ See Securities Exchange Act Release Nos. 66489 (February 29, 
2012), 77 FR 13379 (March 6, 2012) (SR-NASDAQ-2012-004) (order 
approving listing and trading of WisdomTree Emerging Markets 
Corporate Bond Fund) (``Emerging Markets Fund Order''); and 68073 
(October 19, 2012), 77 FR 65237 (October 25, 2012) (SR-NASDAQ-2012-
98) (order approving listing and trading of WisdomTree Global 
Corporate Bond Fund) (``Global Fund Order,'' and collectively the 
``Prior Approval Orders'').
    \5\ The Commission 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. 28171 (October 27, 
2008) (File No. 812-13458) (``Exemptive Order'').
    \6\ See Post-Effective Amendment Nos. 99 to Registration 
Statement on Form N-1A for the Trust, dated February 8, 2012 (File 
Nos. 333-132380 and 811-21864) (relating to the Emerging Markets 
Fund) and 139 to Registration Statement on Form N-1A for the Trust, 
dated October 26, 2012 (relating to the Global Fund).
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    The proposed rule change seeks to: (i) Allow each Fund to invest up 
to 40% of its net assets (calculated at the time of investment) in Rule 
144A securities that have been deemed liquid by the Adviser or Sub-
Adviser, in addition to the 15% investment limitation on illiquid 
securities (which limitation, following approval of this proposal, 
would include Rule 144A securities deemed illiquid by the Adviser or 
Sub-Adviser); (ii) permit the Global Fund to invest up to 20% of its 
net assets in sovereign debt; \7\ and (iii) amend the definitions of 
Global Corporate Debt in the Global Fund and Corporate and Quasi-
Sovereign Debt in the Emerging Markets Fund to include both (a) 
inflation-protected debt, fixed income securities and other debt 
obligations linked to inflation rates of local economies, and (b) 
variable rate or floating rate securities which are readjusted on set 
dates (such as the last day of the month or calendar quarter) in the 
case of variable rates or whenever a specified interest rate change 
occurs in the case of a floating rate instrument.\8\
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    \7\ Sovereign debt does not fall within the definition of Global 
Corporate Debt in the Global Fund Order, and it therefore would not 
be considered as part of the 80% minimum investment in fixed income 
securities that are Global Corporate Debt within the Global Fund 
Order. The Registration Statement defines ``sovereign debt'' as 
``debt securities of foreign governments,'' for purposes of the 
Global Fund.
    \8\ Variable or floating interest rates generally reduce changes 
in the market price of securities from their original purchase price 
because, upon readjustment, such rates approximate market rates. 
Accordingly, as interest rates decrease or increase, the potential 
for capital appreciation or depreciation is less for variable or 
floating rate securities than for fixed rate obligations.
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    Under the Prior Approval Orders, the Funds are permitted to hold up 
to 15% of their respective net assets in illiquid securities 
(calculated at the time of investment), including (i) Rule 144A 
securities and (ii) loan interests (such as loan participations and 
assignments, but not including LPNs). Under the 1940 Act and rules 
thereunder, the Funds are required to monitor their respective 
portfolio's liquidity on an ongoing basis to determine whether, in 
light of current circumstances, an adequate level of liquidity is being 
maintained, and to consider taking appropriate steps in order to 
maintain adequate liquidity if through a change in values, net assets 
or other circumstances, more than 15% of the Fund's net assets are held 
in illiquid securities.\9\
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    \9\ Illiquid securities were defined in the Emerging Markets 
Fund Order to include securities that cannot be sold or disposed of 
within seven days in the ordinary course of business at 
approximately the amount at which a fund has valued such securities. 
Illiquid securities were defined in the Global Fund Order to 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. See Prior 
Approval Orders, supra note 4.
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    The Exchange seeks to modify the Advisor's representations in the 
Prior Approval Orders to increase the percentage of Rule 144A 
securities that each Fund may hold. Under the proposed amendment, each 
Fund may continue to hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including (i) Rule 144A securities deemed illiquid by the Adviser or 
Sub-Adviser, and (ii) loan interests (including loan participations and 
assignments, but not including LPNs).\10\ In addition, each Fund would 
be permitted under the proposal to hold up to an additional 40% of its 
net assets (calculated at the time of investment) in Rule 144A 
securities, so long as those Rule 144A securities are not deemed 
illiquid by the Adviser or Sub-Adviser. The proposed rule change would, 
therefore, exclude liquid Rule 144A securities from the 15% limitation 
on investments in illiquid securities and limit each Fund's investment 
in liquid Rule 144A securities to 40% of the Fund's net assets. The 
Adviser represents that each Fund's holdings in Rule 144A securities 
not deemed illiquid by it or the Sub-Adviser will be comprised of 
issuances with more than $100 million principal outstanding.
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    \10\ While the ultimate responsibility for determination of 
liquidity of securities (including Rule 144A securities) lies with 
each Fund's Board of Directors, the Funds' Sub-Adviser is 
responsible for complying with each Fund's restrictions on investing 
in illiquid securities on a day-to-day basis. In doing that, the 
Sub-Adviser makes ongoing determinations about the liquidity of Rule 
144A securities in which the respective Fund may invest. In reaching 
liquidity decisions, the Adviser represents that 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 of the marketplace trades (e.g., the time needed to 
dispose of the security, the method of soliciting offers, and the 
mechanics of transfer). See Securities Act Release No. 6862 (April 
23, 1990), 55 FR 17933, 17940 (April 30, 1990) (Resale of Restricted 
Securities; Changes to Method of Determining Holding Period of 
Restricted Securities Under Rules 144 and 145). See also Notice, 
supra note 3.
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    The Adviser represents that the purpose of this aspect of the 
proposed change is to provide the Sub-Adviser greater flexibility to 
meet each Fund's investment objectives. Rule 144A securities are 
securities that are not registered under the Securities Act and which 
can only be offered and sold to ``qualified institutional buyers'' 
under Rule 144A of the Securities Act.\11\ The Exchange notes that Rule 
144A was adopted, in part, to promote a more liquid resale market in 
unregistered securities among institutional investors,\12\ and the 
Adviser represents that liquid institutional markets for Rule 144A 
securities, including those Rule 144A securities generally held by the 
Funds, have developed. The Adviser represents that, for example, most 
reference benchmarks for non-investment grade corporate bonds include 
more than 25% Rule 144A securities.\13\ The Adviser does not expect a 
materially different result for the Funds since the market for 
investment grade bonds,\14\ which the

[[Page 41970]]

Funds each hold, is typically more liquid than the market for similar 
non-investment grade bonds. The Adviser further notes that the average 
issue size for Rule 144A securities is comparable to the average issue 
size for registered securities within most high yield bond indices. 
Finally, the Adviser represents that currently-listed high yield bond 
ETFs typically include a significant percentage of Rule 144A securities 
within their respective portfolios.\15\ Based on these representations, 
the Exchange believes there is ample existing precedent, and that its 
proposal is consistent with such precedent, to permit each Fund to 
invest up to 40% of its net assets (calculated at the time of 
investment) in liquid Rule 144A securities, in addition to the 15% 
limitation on illiquid securities, including illiquid Rule 144A 
securities.
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    \11\ The term ``qualified institutional buyer'' (QIB) is defined 
in Rule 144A(a)(1). 17 CFR 230.144A(a)(1).
    \12\ See Securities Act Release No. 6862 (April 23, 1990), 55 FR 
17933 (April 30, 1990).
    \13\ See, e.g., Merrill Lynch High Yield Master II index 
(``Master II index''), which as of November 6, 2012, was comprised 
of 32% Rule 144A securities. The Master II index is the benchmark 
index for the American Century High-Yield Inv ETF (ABHIX). Also, as 
of March 6, 2013, Barclays High Yield Very Liquid Index was 
comprised of 43% Rule 144A securities. That index is the benchmark 
for the SPDR Barclays High Yield Bond ETF (JNK).
    \14\ The Global Fund intends to have 55% or more of its assets 
invested in investment grade securities, though this percentage may 
change from time to time in response to economic events and changes 
in the credit ratings of such issuers. See Global Fund Order at 
65238. The Emerging Markets Fund expects to have 65% or more of its 
assets invested in investment grade securities, though this 
percentage may change in response to economic events and changes to 
the ratings of such issuers. See Emerging Markets Order at 13380.
    The Global Fund Order defines the term ``investment grade'' to 
mean securities rated in the Baa/BBB categories or above by one or 
more nationally recognized statistical rating organizations 
(``NRSROs''). If a security is rated by multiple NRSROs, each Fund 
will treat the security as being rated in the highest rating 
category received from an NRSRO. Rating categories may include sub-
categories or gradations indicating relative standing. See Global 
Fund Order at note 11. The Emerging Markets Fund Order does not 
define the term ``investment grade.'' However, the Adviser 
represents that it intends to apply the definition of ``investment'' 
grade'' in the Global Fund Order to the Emerging Markets Fund. See 
Notice, supra note 3; see also, Prior Approval Orders, supra note 4.
    \15\ For example, the Adviser represents that as of November 6, 
2012, more than 30% of the investment portfolio of the actively-
managed Peritus High Yield ETF was comprised of Rule 144A 
securities. See Securities Exchange Act Release Nos. 63329 (November 
17, 2010), 75 FR 71760 (November 24, 2010) (SR-NYSEArca-2010-86) 
(order approving proposed rule change relating to listing and 
trading of Peritus High Yield ETF); and 63041 (October 5, 2010), 75 
FR 62905 (October 13, 2010) (SR-NYSEArca-2010-86) (notice of filing 
of proposed rule change to list the Peritus High Yield ETF). See 
also Securities Exchange Act Release No. 66818 (April 17, 2012), 77 
FR 24233 (April 23, 2012) (SR-NYSEArca-2012-33) (notice of filing 
and immediate effectiveness of proposed rule change regarding 
Peritus High Yield ETF). The Adviser also represents that the 
investment strategies of various index-based high yield ETFs permit 
active use of Rule 144A securities, provided such securities are 
deemed liquid. See, e.g., prospectus for SPDR Barclays Capital High 
Yield Bond ETF, https://www.spdrs.com/library-content/public/SPDR_SERIES%20TRUST_SAI.pdf, which explicitly permits the fund to invest 
in Rule 144A securities deemed liquid. The Adviser represents that 
as of November 6, 2012, the portfolio of the SPDR Barclays High 
Yield Bond ETF included approximately 37% Rule 144A securities.
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    The Adviser represents that it does not believe that the ability of 
the Funds' agent to calculate Net Asset Value (``NAV'') and an 
indicative intra-day value (``IIV'') for each Fund, and disseminate 
such IIV every 15 seconds throughout the trading day, has been impeded 
by the Funds' current Rule 144A holdings limited to 15% of net assets, 
and the Adviser does not expect that permitting each Fund to increase 
its liquid Rule 144A holdings as set forth above will impede the 
ability of the Funds' agent to calculate an NAV and an IIV and 
disseminate such IIV every 15 seconds throughout the trading day.
    In addition to modifying the percentage of Rule 144A holdings in 
which the Funds may invest, the Exchange also proposes that the 
requirements of the Global Fund Order be modified to permit the Global 
Fund to invest up to 20% of its net assets in sovereign debt, which 
regarding the Global Fund, is defined as ``debt securities of foreign 
governments.'' \16\
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    \16\ See supra, note 7.
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    Finally, the Exchange proposes to modify the definition of Global 
Corporate Debt with respect to the Global Fund and Corporate and Quasi-
Sovereign Debt with respect to the Emerging Markets Fund to include 
inflation protected debt and certain variable rate or floating rate 
securities.
    The Global Fund Order defined Global Corporate Debt to include 
fixed income securities, such as bonds, notes, or other debt 
obligations, including LPNs, as well as debt instruments denominated in 
U.S. dollars or local currencies. Global Corporate Debt also included 
fixed income securities or debt obligations issued by companies or 
agencies that may receive financial support or backing from local 
governments, as well as money market securities as defined therein.\17\
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    \17\ See Global Fund Order, supra note 4.
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    The Emerging Markets Fund Order defined Corporate and Quasi-
Sovereign Debt as fixed income securities of emerging market countries, 
such as bonds, notes or other debt obligations, including LPNs, as well 
as other instruments, such as derivative instruments, collateralized by 
money market securities, as defined therein. Quasi-Sovereign Debt 
referred specifically to fixed income securities or debt obligations 
that are issued by companies or agencies that may receive financial 
support or backing from a local government.
    The Exchange proposes that the Prior Approval Orders be modified to 
amend the definitions of Global Corporate Debt with respect to the 
Global Fund and Corporate and Quasi-Sovereign Debt with respect to the 
Emerging Markets Fund, to include (i) inflation-protected debt, 
including fixed income securities and other debt obligations linked to 
inflation rates of local economies, and (ii) variable rate or floating 
rate securities which are readjusted on set dates (such as the last day 
of the month or calendar quarter) in the case of variable rates or 
whenever a specified interest rate change occurs in the case of a 
floating rate instrument. The Adviser represents that these proposed 
changes regarding permitted investments would allow the Funds to invest 
in a broader range of market sectors and thus would help further the 
Funds' investment objectives to obtain both income and capital 
appreciation through direct and indirect investments in Global 
Corporate Debt or Corporate and Quasi-Sovereign Debt, as applicable, 
and other investments.
    Additional information regarding the Funds, such as pricing and 
valuation, including NAV, can be found in the Notice and Prior Approval 
Orders.
    Except for the changes discussed herein, all other facts presented 
and representations made in the Rule 19b-4 \18\ filings underlying the 
Prior Approval Orders remain unchanged. The Exchange represents that 
the changes proposed would be consistent with the Exemptive Order \19\ 
and the 1940 Act and rules thereunder.
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    \18\ 17 CFR 240.19b-4.
    \19\ See supra, note 5.
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III. Discussion and Commission's Findings

    The Commission believes that the proposal is consistent with 
Section 6(b) of the Act,\20\ in general, and Section 6(b)(5) of the 
Act,\21\ in particular, in that it is 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, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.\22\
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    \20\ 15 U.S.C. 78f.
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 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).
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    The Commission understands that, while one aspect of this proposal 
will allow each Fund to invest up to 40% of its net assets (calculated 
at the time of investment) in liquid Rule 144A securities, the Funds 
will continue to be capped at 15% of their respective net assets 
(calculated at the time of investment) in illiquid securities, 
including illiquid Rule 144A securities and loan participations or 
assignments (but not including LPNs). The Sub-Adviser, who is 
responsible for day-to-

[[Page 41971]]

day decisions regarding liquidity of securities, may consider the 
following factors regarding liquidity: 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 of the marketplace trades (e.g., the time needed to 
dispose of the security, the method of soliciting offers, and the 
mechanics of transfer).\23\ Ultimately, however, each Fund's Board of 
Directors has responsibility for determining the liquidity of 
securities (including Rule 144A securities) held by the Funds. The 
Commission notes that the Adviser represents that each Fund's holdings 
in Rule 144A securities deemed liquid by the Sub-Adviser will be part 
of an issuance with more than $100 million in principal outstanding. 
Finally, the Exchange has stated that the Adviser represents it does 
not expect that the proposed rule change will impede the ability of the 
Funds' agent to calculate an NAV and an IIV and disseminate such IIV 
every 15 seconds throughout the trading day.
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    \23\ See Securities Act Release No. 6862 (April 23, 1990), 55 FR 
17933, 17940 (April 30, 1990) (Resale of Restricted Securities; 
Changes to Method of Determining Holding Period of Restricted 
Securities Under Rules 144 and 145). See also supra, note 10.
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    The Commission further notes that pursuant to the 1940 Act and 
rules thereunder, the Funds are required to monitor their respective 
portfolio's liquidity on an ongoing basis to determine whether, in 
light of current circumstances, an adequate level of liquidity is being 
maintained, and to consider taking appropriate steps in order to 
maintain adequate liquidity if through a change in values, net assets 
or other circumstances, more than 15% of the Fund's net assets are held 
in illiquid securities.
    Thus, the Commission finds that providing the Adviser and Sub-
Adviser additional flexibility with respect to investing in a larger 
percentage of investments in Rule 144A Securities, given the 
protections discussed above, is consistent with the Act.
    The Exchange also proposes to allow the Global Fund to invest up to 
20% of its net assets in sovereign debt, which is defined as ``debt 
securities of foreign governments.'' \24\ Given that the Global Fund 
will continue to have at least 80% of its net assets in Global 
Corporate Debt that are fixed income securities and the Fund's 
limitation regarding non-investment grade securities, the Commission 
believes it is consistent with the Act for the Exchange to allow up to 
20% of net assets of the Global Fund in sovereign debt.
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    \24\ Sovereign debt, according to the Exchange, enjoys a 
relationship to foreign governments that is not unlike that of 
Treasury debt securities and the U.S. government. See Notice, supra 
note 3.
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    Finally, the Commission believes that it is consistent with the Act 
for the Exchange to amend the definition of Global Corporate Debt in 
the Global Fund and Corporate and Quasi-Sovereign Debt in the Emerging 
Markets Fund, as set forth in the Prior Approval Orders, to include (i) 
inflation-protected debt, fixed income securities and other debt 
obligations linked to inflation rates of local economies, and (ii) 
variable rate or floating rate securities which are readjusted on set 
dates (such as the last day of the month or calendar quarter) in the 
case of variable rates or whenever a specified interest rate change 
occurs in the case of a floating rate instrument. The Commission 
believes that this expansion of the definition is reasonable, given the 
characteristics of these securities, and would permit the Funds to 
invest in a broader range of market sectors, and thereby help further 
the Fund's objectives to obtain both income and capital appreciation 
through direct and indirect investments in Global Corporate Debt or 
Corporate and Quasi-Sovereign Debt, as applicable, and other 
investments. Thus, the Commission finds this aspect of the proposal is 
consistent with the Act.\25\
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    \25\ See, e.g., Securities Act Release Nos. 65458 (September 30, 
2011), 76 FR 62112 (October 6, 2011) (SR-NYSEArca-2011-54) and 64935 
(July 20, 2011), 76 FR 44966 (July 27, 2011) (SR-NYSEArca-2011-31).
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    Importantly, the Commission notes that the Shares will continue to 
be listed and traded on the Exchange pursuant to the initial and 
continued listing criteria in NASDAQ Rule 5735. In addition, the 
Adviser represents there is no change to either Fund's investment 
objective, and except for the limited changes discussed herein, all 
other facts represented and representations made in the Rule 19b-4 \26\ 
filings underlying the Prior Approval Orders, and representations and 
findings set forth in the Prior Approval Orders, remain unchanged. The 
Exchange represents that the changes proposed would be consistent with 
the Exemptive Order \27\ and the 1940 Act and rules thereunder.
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    \26\ 17 CFR 240.19b-4.
    \27\ See supra, note 5.
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    This approval order is based on the Exchange's representations.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \28\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \28\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASDAQ-2013-079), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-16689 Filed 7-11-13; 8:45 am]
BILLING CODE 8011-01-P