Document ID: SEC-2014-0803-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2014-05-15T04:00Z

[Federal Register Volume 79, Number 94 (Thursday, May 15, 2014)]
[Notices]
[Pages 27944-27950]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-11158]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72141; File No. SR-NASDAQ-2014-009]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment Nos. 2 and 3 and Order Granting 
Accelerated Approval of Proposed Rule Change, as Modified by Amendment 
Nos. 1, 2, and 3 Thereto, Relating to the Means of Achieving the 
Investment Objectives of the First Trust Tactical High Yield ETF of 
First Trust Exchange-Traded Fund IV

May 9, 2014.

I. Introduction

    On January 22, 2014, 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 First Trust Tactical High Yield 
ETF (``Fund'') of First Trust Exchange-Traded Fund IV (``Trust''). The 
proposed rule change was published for comment in the Federal Register 
on February 10, 2014.\3\ On March 11, 2014, the Exchange filed 
Amendment No. 1 to the proposed rule change, which amended and replaced 
the proposed rule change in its entirety.\4\ On April 1, 2014, the 
Commission published notice to solicit comments from interested persons 
on the proposed rule change, as modified by Amendment No. 1 thereto, 
and to designate a longer period for Commission action on the proposed 
rule change, as modified by Amendment No. 1 thereto.\5\ On May 7, 2014, 
the Exchange filed Amendment No. 2 to the proposed rule change, which 
amended and replaced the proposed rule change in its entirety.\6\ On 
May 8, 2014, the Exchange filed Amendment No. 3 to the proposed rule 
change, which amended and replaced the proposed rule change in its 
entirety.\7\ The Commission has received no comments on the proposal. 
The Commission is publishing this notice to solicit comments on 
Amendment Nos. 2 and 3 from interested persons, and is approving the 
proposed rule change, as modified by Amendment Nos. 1, 2, and 3 
thereto, on an accelerated basis.
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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. 71473 (Feb. 4, 
2014), 79 FR 7728 (``Notice'').
    \4\ In Amendment No. 1, the Exchange: (a) Clarified the types of 
Derivative Instruments (as defined herein) as proposed to be used by 
the Fund; (b) provided specific representations relating the use of 
these Derivative Instruments; (c) provided additional information as 
to the valuation of these Derivative Instruments for purposes of 
determining NAV (as defined herein); (d) provided additional 
information as to the availability of pricing for the Derivative 
Instruments to market participants, as well as information relating 
to the Derivative Instruments as part of the Disclosed Portfolio (as 
defined herein); and (e) provided additional details as to the 
Exchange's surveillance procedures with respect to the Derivative 
Instruments.
    \5\ See Securities Exchange Act Release No. 71813 (March 26, 
2014), 79 FR 18378. Pursuant to Section 19(b)(2) of the Act, the 
Commission determined that it was appropriate to designate a longer 
period within which to take action on the proposed rule change. 
Accordingly, the Commission designated May 9, 2014, as the date by 
which the Commission should either approve or disapprove or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ In Amendment No. 2, the Exchange: (a) Provided additional 
information regarding the bank loans in which the Fund would invest, 
including information relating to the senior loan market and 
valuation and price availability of bank loans; (b) noted that 
liquidity determinations would be made in accordance with Commission 
guidance; (c) clarified that the Fund's investments in Derivative 
Instruments would be limited in all cases to 30% of the Fund's net 
assets, regardless of whether Derivative Instruments would be used 
solely for hedging purposes; (d) represented that at least 90% of 
the Fund's net assets invested in Derivative Instruments would trade 
in markets that are members of the ISG (as defined herein) or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange; (e) provided additional information relating to valuation 
and price availability of Derivative Instruments; and (f) clarified 
in detail what information the Disclosed Portfolio (as defined 
herein) would provide as a result of the Fund's investments in bank 
loans and Derivative Instruments.
    \7\ In Amendment No. 3, the Exchange: (a) Clarified that at 
least 75% of the Fund's net assets that are invested in bank loans 
would be invested in tranches that have a minimum principal amount 
outstanding of $100 million or more with respect to U.S. borrowers 
and $200 million or more with respect to non-U.S. borrowers; (b) 
clarified that at least 90% of the Fund's net assets in Derivative 
Instruments would be invested in Derivative Instruments that trade 
in markets that are members of the ISG (as defined herein), which 
includes, among others, certain U.S. futures exchanges; and (c) 
replaced certain references to ``securities'' with ``assets'' for 
purposes of describing NAV valuation.
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II. Description of the Proposed Rule Change

    The Exchange has made the following representations and statements 
in describing the Fund's investments, including information relating to 
certain proposed portfolio holdings, investment restrictions, valuation 
and price availability, portfolio disclosure, and surveillance, as well 
as other information.\8\
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    \8\ The Commission approved the listing and trading of shares 
(``Shares'') of the Fund under NASDAQ Rule 5735, which governs the 
listing and trading of Managed Fund Shares on the Exchange. See 
Securities Exchange Act Release No. 68972 (Feb. 22, 2013), 78 FR 
13721 (Feb. 28, 2013) (SR-NASDAQ-2012-147) (``Prior Order''). See 
also Securities Exchange Act Release No. 68581 (Jan. 4, 2013), 78 FR 
2295 (Jan. 10, 2013) (SR-NASDAQ-2012-147) (``Prior Notice,'' and 
together with the Prior Order, collectively, ``Prior Release''). The 
Commission notes that additional information regarding the Trust, 
Fund, Shares, investment strategies, risks, net asset value 
(``NAV'') calculation, creation and redemption procedures, fees, 
portfolio holdings, disclosure policies, distributions, and taxes, 
among other information, is included in the Prior Release and the 
Registration Statement (as defined herein), as applicable. See id.; 
see also Registration Statement, infra note 10.
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The Fund

    The Fund (formerly known as the First Trust High Yield Long/Short 
ETF) is an actively managed exchange-traded fund (``ETF''). The Shares 
are offered by the Trust, which was organized as a Massachusetts 
business trust on September 15, 2010. The Trust, which is registered 
with the Commission as an investment company, has filed a registration 
statement on Form N-1A (``Registration Statement'') relating to the 
Fund.\9\ First Trust Advisors L.P. is the investment adviser 
(``Adviser'') to the Fund.
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    \9\ See Post-Effective Amendment No. 60 to Registration 
Statement on Form N-1A for the Trust, dated February 28, 2014 (File 
Nos. 333-174332 and 811-22559). In addition, according to the 
Exchange, the Trust has obtained certain exemptive relief under the 
Investment Company Act of 1940 (``1940 Act''). See Investment 
Company Act Release No. 30029 (Apr. 10, 2012) (File No. 812-13795) 
(``Exemptive Order'').
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    The Exchange proposes to reflect changes to the means of achieving 
the

[[Page 27945]]

investment objectives of the Fund. Specifically, the Exchange proposes 
two modifications to the description of the measures the Adviser would 
utilize to implement the Fund's investment objectives.\10\ The Adviser 
also seeks to make the modifications described below to certain 
representations in the Prior Release. The Adviser represents that there 
is no change to the Fund's investment objectives. Except for the 
changes proposed herein, all other facts presented and representations 
made in the Prior Release remain unchanged. The Fund would continue to 
comply with all initial and continued listing requirements under NASDAQ 
Rule 5735.
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    \10\ According to the Exchange, the Adviser represents that it 
has managed and will continue to manage the Fund in the manner 
described in the Prior Release, and will not implement the changes, 
as described herein, until the instant proposed rule change is 
operative.
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The Fund's Investments in Bank Loans

    The Exchange proposes to modify a representation reflected in the 
Prior Release by increasing the percentage of the Fund's net assets 
that may be invested in bank loans. In accordance with the Prior 
Release, the Fund may invest up to 15% of its net assets in ``bank 
loans,'' which, as described in the Prior Release, may include loan 
interests that are not secured by any specific collateral of the 
borrower, loan interests that have a lower than first lien priority on 
collateral of the borrower, loans to foreign borrowers, loans in 
foreign currencies, and other loans with characteristics that the 
Adviser believes qualify as bank loans. The Fund may invest in bank 
loans by purchasing assignments or all or a portion of loans or loan 
participations from third parties. Bank loans are made by or issued to 
corporations primarily to finance acquisitions, refinance existing 
debt, support organic growth, or pay out dividends, and are typically 
originated by large banks and then syndicated out to institutional 
investors as well as to other banks. Bank loans typically bear interest 
at a floating rate, although some loans pay a fixed rate.
    Going forward, the Exchange proposes that the Fund be permitted to 
invest up to 40% of its net assets in bank loans, provided that the 
Fund invest no more than 15% of its net assets in ``junior loans'' (as 
defined and described below), and all other bank loans in which the 
Fund would invest would be ``senior loans'' (as defined and described 
below). In addition, at least 75% of the Fund's net assets that are 
invested in bank loans would be invested in tranches that have a 
minimum principal amount outstanding of $100 million or more with 
respect to U.S. borrowers and $200 million or more with respect to non-
U.S. borrowers.
    The term ``senior loans,'' as used with respect to the Fund, refers 
to first lien, senior, secured, floating rate bank loans. The Fund 
generally invests, and will continue to invest, in senior loans that 
the Adviser deems to be liquid with readily available prices. Although 
similar to high yield bonds in that they represent debt obligations of 
sub-investment grade corporate borrowers, senior loans differ from 
traditional high yield bonds in several important respects. First, 
senior loans are typically senior to other obligations of the borrower 
and secured by the assets of the borrower. Senior loans rank at the top 
of a borrower's capital structure in terms of priority of payment, 
ahead of any subordinated debt (high yield) or the borrower's common 
equity. Senior loans are also secured, as the holders of these loans 
have a lien on most, if not all, of the corporate borrower's plant, 
property, equipment, receivables, cash balances, licenses, trademarks, 
etc. Furthermore, the corporate borrower of senior loans executes a 
credit agreement that typically restricts what it can do (debt 
incurrence, asset dispositions, etc.) without the lenders' approval, 
and, in addition, may require the borrower to meet certain ongoing 
financial covenants (EBITDA, leverage tests, etc.). Finally, as noted 
above, senior loans are generally floating rate obligations.
    Institutional investors in senior loans access the market today 
primarily through commingled funds or separately managed accounts. 
Individual investors have gained exposure to senior loans primarily 
through registered open-end or closed-end funds and business 
development companies or occasionally through limited partnerships.\11\ 
According to the Exchange, the broad senior loan market--U.S. dollar-
denominated non-investment grade bank debt, including both non-
institutional (revolvers and pro-rata tranches) and institutional 
facilities, as measured by Credit Cuisse--in terms of total outstanding 
loans by dollar volume, is approximately $1.5 trillion (March 31, 
2014), nearly equal in size to the high yield corporate bond market in 
the U.S., also as measured by Credit Suisse, at $1.4 trillion (March 
31, 2014). The institutional leveraged loan market (which includes U.S. 
dollar-denominated non-investment grade fully-drawn institutional term 
loans and is a subset of the overall leveraged loan market) is 
approximately $819 billion (March 31, 2014). The market for senior 
loans is almost exclusively comprised of non-investment grade corporate 
borrowers. The Loan Syndication and Trading Association (``LSTA''), a 
trade group sponsored by both underwriters of and institutional 
investors in senior bank loans, has been tracking trading volumes and 
bid-offer spreads for the asset class since 2007. For the month ended 
February 28, 2014--a representative period--$41 billion of senior loans 
changed hands representing 1,350 individual transactions. (Source: 
LSTA.)
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    \11\ The Adviser believes that there are currently approximately 
28 closed-end funds and 60 open-end funds that invest primarily in 
the senior loan market, with many other funds allocating a portion 
of their investments to such market.
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    The Fund currently invests, and would continue to invest, primarily 
in the more liquid segment of the senior loan market. The most actively 
traded loans generally have a tranche size outstanding (or total float 
of the issue) in excess of $250 million. The borrowers of these broadly 
syndicated loans are typically followed by many ``buy-side'' and 
``sell-side'' credit analysts who, in turn, rely on the borrower to 
provide transparent financial information concerning its business 
performance and operating results. The Adviser represents that such 
borrowers typically provide significant financial transparency to the 
market through the delivery of financial statements on at least a 
quarterly basis as required by the executed credit agreements. 
Additionally, bids and offers in the senior loans are available 
throughout the trading day on larger issues of senior loans with 
multiple dealer quotes available. Dealers also update their ``trading 
runs'' of senior loans throughout the day and distribute these via 
electronic messaging to the institutional investor community. In 
addition, senior loan investors can obtain information on senior loans 
and their borrowers from numerous public sources, including Bloomberg, 
FactSet, public financial statement filings (Forms 10-K and 10-Q), and 
sell side research analysts.
    The Adviser has represented to the Exchange that the underwriters, 
or agent banks, that distribute, syndicate and trade senior loans are 
among the largest global financial institutions, including JPMorgan, 
Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo, 
Deutsche Bank, Barclays, Credit Suisse, and others. According to the 
Exchange, it is common for multiple firms to act as underwriters and 
market makers for a specific senior loan issue. For example, two 
underwriters may co-underwrite and fund a senior loan that

[[Page 27946]]

has a $1 billion institutional tranche. One of the underwriters, acting 
as syndication agent for the financing, will then draft an offering 
memorandum (similar to a prospectus for an initial public offering of 
equity securities), distribute it to potential investors, schedule 
management meetings with the largest loan investors and arrange a bank 
meeting that includes management presentations along with a question 
and answer session. The investor audience attends in person as well as 
via telephone with both live and recorded conference call options. 
After a syndication process, which is often two weeks in length, where 
investors can complete their due diligence work with access to company 
management and underwriter bankers to answer credit questions, 
investors' commitments are collected by the underwriter. The 
underwriter will typically allocate the loan to 80-120 investors within 
the following week, with the largest position representing 3-5% of the 
tranche size in a successful syndication. Banks also have senior loan 
trading desks that make secondary bid/ask markets in the loans after 
they are allocated.
    Under the proposed rule change, the Fund would be permitted to 
invest up to 15% of its net assets (in the aggregate) in loan interests 
that are not secured by any specific collateral of the borrower and 
loan interests that have a lower than first lien priority on collateral 
of the borrower (collectively, ``junior loans'').\12\ Junior loans have 
the same characteristics as senior loans except that junior loans are 
not first in priority of repayment and/or may not be secured by 
collateral. In this respect, they are similar to a high yield bond. 
Accordingly, due to their subordination in the borrower's capital 
structure, junior loans involve a higher degree of overall risk than 
senior loans of the same borrower.
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    \12\ As a point of clarification, under its current investment 
restrictions, the Fund may invest up to 15% of its net assets in 
junior loans; however, if the Fund invested 15% of its net assets in 
junior loans, it would not be able to invest in any additional bank 
loans.
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    According to the Exchange, this proposed change is intended to 
provide greater flexibility to the Adviser as it tactically allocates 
proceeds across the high yield debt market and across the debt capital 
structure of select companies. Additionally, this proposed change would 
provide the Adviser with increased flexibility to manage the Fund's 
duration in periods of rising rates. The Adviser represents that the 
Fund would continue to invest 85% or more of the portfolio in 
securities that the Adviser deems to be sufficiently liquid at the time 
of investment in accordance with Commission guidance. In addition, 
consistent with the Prior Release, the Adviser would continue to 
monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained.

The Fund's Use of Derivative Instruments

    The Exchange also proposes to delete a representation reflected in 
the Prior Release, which states that, consistent with the Exemptive 
Order, the Fund would not invest in options contracts, futures 
contracts, or swap agreements (``Derivatives Representation'').
    According to the Exchange, in view of the no-action letter issued 
by the Commission's Division of Investment Management on December 6, 
2012,\13\ the Exchange is proposing to delete the Derivatives 
Representation. The Exchange proposes that, to pursue its investment 
objectives, the Fund be permitted to invest in U.S. exchange-traded 
options on futures contracts and U.S. exchange-traded futures contracts 
(collectively, ``Derivative Instruments''). According to the Exchange, 
the use of Derivative Instruments may allow the Fund to seek to enhance 
return, to hedge some of the risks of its investments in securities, to 
substitute Derivative Instruments for a position in an underlying 
asset, to reduce transaction costs, to maintain full market exposure 
(which means to adjust the characteristics of its investments to more 
closely approximate those of the markets in which it invests), to 
manage cash flows, to preserve capital, or to manage its foreign 
currency exposures.\14\ Under normal market conditions, no more than 
30% of the value of the Fund's net assets would be invested in 
Derivative Instruments.\15\ In addition, at least 90% of the Fund's net 
assets that would be invested in Derivative Instruments would be 
invested in Derivative Instruments that trade in markets that are 
members of the Intermarket Surveillance Group (``ISG''), which includes 
all U.S. national securities exchanges, certain U.S. futures exchanges, 
and certain foreign exchanges, or that are parties to a comprehensive 
surveillance sharing agreement with the Exchange.\16\
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    \13\ See No-Action Letter dated December 6, 2012 from Elizabeth 
G. Osterman, Associate Director, Office of Exemptive Applications, 
Division, Commission.
    \14\ According to the Exchange, the Adviser currently expects 
that, initially, all of the futures contracts and options on futures 
contracts that the Fund buys or sells would be futures and options 
on futures, respectively, on U.S. Treasury obligations. In 
particular, the Adviser contemplates that the Fund would sell 
futures on U.S. Treasury obligations as an alternative to engaging 
in short sales to gain short exposure to the U.S. Treasury market.
    \15\ According to the Exchange, the Fund would limit its direct 
investments in futures and options on futures to the extent 
necessary for the Adviser to claim the exclusion from regulation as 
a ``commodity pool operator'' with respect to the Fund under Rule 
4.5 promulgated by the Commodity Futures Trading Commission 
(``CFTC''), as such rule may be amended from time to time. Under 
Rule 4.5 as currently in effect, the Fund would limit its trading 
activity in futures and options on futures (excluding activity for 
``bona fide hedging purposes,'' as defined by the CFTC) such that it 
will meet one of the following tests: (i) Aggregate initial margin 
and premiums required to establish its futures and options on 
futures positions will not exceed 5% of the liquidation value of the 
Fund's portfolio, after taking into account unrealized profits and 
losses on such positions; or (ii) aggregate net notional value of 
its futures and options on futures positions will not exceed 100% of 
the liquidation value of the Fund's portfolio, after taking into 
account unrealized profits and losses on such positions.
    \16\ See infra note 20.
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    The Prior Release stated that the Fund's investments would not be 
used to enhance leverage. In view of the Exchange's proposal to permit 
the Fund to use Derivative Instruments, the Fund's investments in 
Derivative Instruments could potentially be used to enhance leverage. 
However, according to the Exchange, the Fund's investments in 
Derivative Instruments would be consistent with the Fund's investment 
objectives and would not be used to seek to achieve a multiple or 
inverse multiple of an index.
    Investments in Derivative Instruments would be made in accordance 
with the 1940 Act and consistent with the Fund's investment objectives 
and policies. The Fund would 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 would earmark or set 
aside cash, U.S. government securities, high-grade liquid debt 
securities, and/or other liquid assets in a segregated custodial 
account in the amount prescribed. The Fund would include appropriate 
risk disclosure in its offering documents, including leveraging risk. 
Leveraging risk is the risk that certain transactions of the Fund, 
including the Fund's use of Derivative Instruments, may give rise to 
leverage, causing the Fund to be more

[[Page 27947]]

volatile than if it had not been leveraged.\17\
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    \17\ To mitigate leveraging risk, the Fund would segregate or 
``earmark'' liquid assets or otherwise cover the transactions that 
may give rise to such risk.
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    Based on the representations above, the Exchange seeks to modify 
the current restriction on the Fund's use of Derivative Instruments. 
According to the Exchange, the Adviser believes that the ability to 
invest in U.S. exchange-traded options on futures contracts and U.S. 
exchange-traded futures contracts would provide it with additional 
flexibility to meet the Fund's investment objectives.

Valuation for Purposes of Calculating Net Asset Value

    As indicated in the Prior Release, the NAV of the Fund's Shares 
generally is calculated once daily Monday through Friday as of the 
close of regular trading on the New York Stock Exchange, generally 4 
p.m. Eastern time. The NAV per Share is calculated by dividing the 
Fund's net assets by the number of Shares outstanding.
    For purposes of calculating NAV, the Fund's investments are valued 
daily at market value or, in the absence of market value with respect 
to any such 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. All valuations are subject to review by the Trust Board 
or its delegate. 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). The 
information summarized below is based on the Valuation Procedures as 
currently in effect; however, as noted above, the Valuation Procedures 
are amended from time to time and, therefore, such information is 
subject to change.
    The Derivative Instruments held by the Fund would consist of U.S. 
exchange-traded futures contracts and U.S. exchange-traded options on 
futures contracts and, as such, would typically be valued at the 
closing price in the market where such instruments are principally 
traded.
    Typically, bank loans are valued using information provided by a 
Pricing Service. The Pricing Service primarily uses over-the-counter 
pricing from dealer runs and broker quotes from indicative sheets to 
value the bank loans. In addition, with respect to the valuation of 
bank loans, as part of its review, the Adviser's pricing committee 
(``Pricing Committee'') may, in certain limited circumstances, override 
a value provided by the Pricing Service. If the Pricing Service does 
not provide a valuation for a particular bank loan, or if the Pricing 
Committee overrides a value of the bank loan, the bank loan is valued 
using fair value pricing, as described below.
    Certain assets may not be able to be priced by pre-established 
pricing methods. Such assets may be valued by the Trust Board or its 
delegate at fair value. The use of fair value pricing by the Fund is 
governed by the Valuation Procedures and conducted in accordance with 
the provisions of the 1940 Act. As a general principle, the current 
``fair value'' of an asset is the amount that the owner might 
reasonably expect to receive for the asset upon its current sale. The 
use of fair value prices by the Fund generally results in prices used 
by the Fund that may differ from current market valuations or official 
closing prices on the applicable exchange. A variety of factors may be 
considered in determining the fair value of such assets.
    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. The valuations of bank loans 
denominated in foreign currencies are converted into U.S. dollars at 
the exchange rate of those currencies against the U.S. dollar as 
provided by a Pricing Service. The value of bank loans denominated in 
foreign currencies is converted into U.S. dollars at the exchange rates 
in effect at the time of valuation.

Availability of Information

    As described in the Prior Release, the ``Intraday Indicative 
Value'' (defined in NASDAQ Rule 5735(c)(3)), based on the current value 
for the components of the Disclosed Portfolio, is updated and widely 
disseminated and broadly displayed at least every 15 seconds during the 
Regular Market session. For the purposes of determining the Intraday 
Indicative Value, the Fund's holdings in Derivative Instruments, which 
would be exchange-traded derivatives, would be valued intraday using 
the relevant exchange data.
    The Prior Release stated that intraday, executable price quotations 
of the fixed income securities and other assets held by the Fund would 
be available from major broker-dealer firms or on the exchange on which 
they are traded, if applicable. The Prior Release also stated that 
intra-day price information would be available through subscription 
services, such as Bloomberg and Thomson Reuters, which can be accessed 
by authorized participants and other investors.
    The Derivative Instruments in which the Fund proposes to invest 
would be U.S. exchange-traded. Accordingly, pricing information for the 
Derivative Instruments would be available from major broker-dealer 
firms, on the exchanges on which they are traded, and through 
subscription services. Further, pricing information for the bank loans 
in which the Fund invests would continue to be available from major 
broker-dealer firms and subscription services.

Disclosed Portfolio

    As described in the Prior Release, on each business day, before 
commencement of trading in the Regular Market Session on the Exchange, 
the Trust discloses on its Web site \18\ the identities and quantities 
of the portfolio of securities and other assets (``Disclosed 
Portfolio'') held by the Fund that will form the basis for the Fund's 
calculation of NAV at the end of the business day. The Fund's 
disclosure of derivative positions in the Disclosed Portfolio would 
include information that market participants can use to value these 
positions intraday. On a daily basis, the Fund would 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.
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    \18\ The Trust and the Fund have the same Web site 
(www.ftportfolios.com).
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Surveillance

    The Exchange represents that trading in the Shares would continue 
to be subject to the existing trading surveillances, administered by 
both NASDAQ and also the Financial Industry Regulatory Authority

[[Page 27948]]

(``FINRA'') on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\19\ 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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    \19\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
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    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the Derivative Instruments with 
other markets or other entities that are members of ISG, and FINRA may 
obtain trading information regarding trading in the Shares and the 
Derivative Instruments from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and the Derivative Instruments from markets and other entities 
that are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.\20\ Moreover, FINRA, on 
behalf of the Exchange, is able to access, as needed, trade information 
for certain fixed income securities held by the Fund reported to 
FINRA's Trade Reporting and Compliance Engine (``TRACE''). In addition, 
the Exchange also has a general policy prohibiting the distribution of 
material, non-public information by its employees.
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    \20\ See www.isgportal.org (providing a list of the current 
members of ISG). As stated in the Prior Release, 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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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\21\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\22\ 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. The 
Commission notes that the Fund and the Shares must comply with the 
requirements of NASDAQ Rule 5735 for the Shares to continue to be 
listed and traded on the Exchange.
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    \21\ 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).
    \22\ 15 U.S.C. 78f(b)(5).
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    The Exchange proposes that the Fund be permitted to invest up to 
40% of its net assets in bank loans. The Exchange represents that the 
bank loans would primarily be senior loans, which, for purposes of the 
Fund, refers to first lien, senior, secured, floating rate bank loans. 
The Fund would be permitted to invest up to 25% of its assets in these 
senior loans. The Commission notes that it has approved the listing and 
trading of shares of certain actively managed ETFs investing primarily 
in these senior loans.\23\
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    \23\ The Commission previously has approved listing and trading 
of Managed Fund Shares that primarily hold senior loans. See, e.g., 
Securities Exchange Act Release Nos. 69464 (Apr. 26, 2013), 78 FR 
25774 (May 2, 2013) (SR-NASDAQ-2013-036) (order approving listing 
and trading of shares of the First Trust Senior Loan Fund under 
NASDAQ Rule 5735); and 69244 (Mar. 27, 2013), 78 FR 19766 (Apr. 2, 
2013) (SR-NYSEArca-2013-08) (order approving listing and trading of 
shares of the SPDR Blackstone/GSO Senior Loan ETF under NYSE Arca 
Equities Rule 8.600).
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    The Exchange further proposes that the Fund be able to invest up to 
15% of its net assets in bank loans that are ``junior loans,'' which, 
for purposes of the Fund, refers to loan interests that are not secured 
by any specific collateral of the borrower and loan interests that have 
a lower than first lien priority on collateral of the borrower. While 
having many of the same characteristics as senior loans, junior loans 
are not first in priority of repayment and/or may not be secured by 
collateral. Accordingly, the Exchange states that junior loans involve 
a higher degree of overall risk than senior loans of the same borrower, 
due to their subordination in the borrower's capital structure. The 
Commission notes, however, that the Fund's investments in junior loans 
would be limited to 15% of its net assets.
    In addition, the Exchange represents that at least 75% of the 
Fund's net assets that are invested in bank loans would be invested in 
tranches that have a minimum principal amount outstanding of $100 
million or more with respect to U.S. borrowers and $200 million or more 
with respect to non-U.S. borrowers. The Commission notes that ETFs 
based on fixed income component indexes are subject to a minimum 
principal amount outstanding that is set at the same dollar amount.\24\ 
The Commission further notes that, as stated in the Prior Release, 
pursuant to the 1940 Act and rules thereunder, the Fund will monitor 
its portfolio's liquidity on an ongoing basis to determine whether, in 
light of current circumstances, an adequate level of liquidity is being 
maintained and will consider taking appropriate steps in order to 
maintain adequate liquidity if through a change in values, net assets, 
or other circumstances, more than 15% of the Fund's net assets are held 
in illiquid securities.\25\
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    \24\ See NASDAQ Rule 5705(b)(4)(A)(i) (with respect to an index 
or portfolio consisting of Fixed Income Securities (as such term is 
defined therein) underlying an ETF, components that in the aggregate 
account for at least 75% of the weight of the index or portfolio 
must have a minimum original principal amount outstanding of $100 
million or more).
    \25\ According to the Exchange, the Adviser represents that the 
Fund would continue to invest 85% or more of the portfolio in 
securities that the Adviser deems to be sufficiently liquid at the 
time of investment in accordance with Commission guidance. See Prior 
Release, supra note 8.
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    The Commission believes that the restrictions placed on junior 
loans would not only help to mitigate the credit risks associated with 
junior loans, but would also help to mitigate liquidity risk associated 
with these loans by requiring that at least 75% of the Fund's net 
assets in bank loans would be invested in tranches that have a minimum 
principal amount outstanding of $100 million or more with respect to 
U.S. borrowers and $200 million or more with respect to non-U.S. 
borrowers. As a result, the Commission finds that the Exchange's 
proposal to permit the Fund to invest up to 40% of its assets in bank 
loans, including up to 15% of its assets in junior loans, is consistent 
with the Act.
    The Exchange also proposes that the Fund, to pursue its investment 
objectives, be permitted to invest in Derivative Instruments. According 
to the Exchange, the Adviser currently expects that, initially, all of 
the futures contracts and options on futures contracts that the Fund 
buys and/or sells would be futures and options on futures, 
respectively, on U.S. Treasury obligations. In particular, the Adviser 
contemplates that the Fund would sell futures on U.S. Treasury 
obligations as an alternative to engaging in short sales to gain short 
exposure to the U.S. Treasury market. Under normal market

[[Page 27949]]

conditions, no more than 30% of the value of the Fund's net assets 
would be invested in Derivative Instruments. The Exchange further 
represents that at least 90% of the Fund's net assets that would be 
invested in Derivative Instruments would be invested in Derivative 
Instruments that trade in markets that are members of ISG, which 
includes all U.S. national securities exchanges, certain U.S. futures 
exchanges, and certain foreign exchanges, or are parties to a 
comprehensive surveillance sharing agreement with the Exchange. The 
Commission notes that all Derivative Instruments would be U.S. 
exchange-traded. The Commission finds that this aspect of the proposal 
is also consistent with the Act.
    The Commission further notes that, with respect to information 
relating to bank loans and Derivative Instruments, the Exchange has 
made the following additional representations:
    (1) As described in the Prior Release, on each business day, before 
commencement of trading in the Regular Market Session on the Exchange, 
the Trust discloses on its Web site the Disclosed Portfolio that will 
form the basis for the Fund's calculation of NAV at the end of the 
business day. The Fund's disclosure of derivative positions in the 
Disclosed Portfolio would include information that market participants 
can use to value these positions intraday. On a daily basis, the Fund 
would 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.
    (2) In addition, as described in the Prior Release, the ``Intraday 
Indicative Value'' (defined in NASDAQ Rule 5735(c)(3)), based on the 
current value for the components of the Disclosed Portfolio, is updated 
and widely disseminated and broadly displayed at least every 15 seconds 
during the Regular Market session. For the purposes of determining the 
Intraday Indicative Value, the Fund's holdings in Derivative 
Instruments, which would be exchange-traded derivatives, would be 
valued intraday using the relevant exchange data.
    (3) The Prior Release states that intraday, executable price 
quotations of the fixed income securities and other assets held by the 
Fund would be available from major broker-dealer firms or on the 
exchange on which they are traded, if applicable. The Prior Release 
also states that intraday price information would be available through 
subscription services, such as Bloomberg and Thomson Reuters, which can 
be accessed by authorized participants and other investors. Pricing 
information for the Derivative Instruments would be available from 
major broker-dealer firms, on the exchanges on which they are traded, 
and through subscription services. Further, pricing information for the 
bank loans in which the Fund invests would continue to be available 
from major broker-dealer firms and subscription services.
    (4) The Exchange represents that trading in the Shares would 
continue to 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. 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.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the Derivative Instruments with 
other markets or other entities that are members of ISG, and FINRA may 
obtain trading information regarding trading in the Shares and the 
Derivative Instruments from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and the Derivative Instruments from markets and other entities 
that are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. Moreover, FINRA, on 
behalf of the Exchange, is able to access, as needed, trade information 
for certain fixed income securities held by the Fund reported to 
FINRA's TRACE.
    In conclusion, the Commission notes that, according to the 
Exchange: There is no change to the Fund's investment objectives; 
except for the changes proposed herein, all other facts presented and 
representations made in the Prior Release remain unchanged; and the 
Fund would continue to comply with all initial and continued listing 
requirements under NASDAQ Rule 5735.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, is 
consistent with Section 6(b)(5) of the Act \26\ and the rules and 
regulations thereunder applicable to a national securities exchange.
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    \26\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendment Nos. 2 and 3

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 2 
and 3 are consistent with the Act.\27\ Comments may be submitted by any 
of the following methods:
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    \27\ On April 1, 2014, the Commission published notice to 
solicit comments from interested persons on the proposed rule 
change, as modified by Amendment No. 1 thereto, and to designate a 
longer period for Commission action on the proposed rule change, as 
modified by Amendment No. 1 thereto. The Commission received no 
comments on the proposed rule change, as modified by Amendment No. 1 
thereto. See supra notes 4 and 5 and accompanying text.
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Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-009 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-009. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site http://www.sec.gov/rules/sro.shtml. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE.,

[[Page 27950]]

Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-NASDAQ-2014-009 and 
should be submitted on or before June 5, 2014.

V. Accelerated Approval of Proposed Rule Change, As Modified by 
Amendment Nos. 1, 2, and 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment Nos. 1, 2, and 3 thereto, prior to the 
thirtieth day after the date of publication of notice in the Federal 
Register. The proposed Amendment No. 1 amended and replaced the 
proposed rule change in its entirety and supplemented the proposed rule 
change by: (a) Clarifying the types of Derivative Instruments (as 
defined above) proposed to be used by the Fund; (b) providing specific 
representations relating the use of these Derivative Instruments; (c) 
providing additional information as to the valuation of these 
Derivative Instruments for purposes of determining NAV (as defined 
herein); (d) providing additional information as to the availability of 
pricing for the Derivative Instruments to market participants, as well 
as information relating to the Derivative Instruments as part of the 
Disclosed Portfolio (as defined herein); and (e) providing additional 
details as to the Exchange's surveillance procedures with respect to 
the Derivative Instruments.\28\
---------------------------------------------------------------------------

    \28\ See supra note 4 and accompanying text.
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    The proposed Amendment No. 2 amended and replaced the proposed rule 
change, as modified by Amendment No. 1 thereto, in its entirety, and 
supplemented the proposed rule change by: (a) Providing additional 
information regarding the bank loans in which the Fund would invest, 
including information relating to the senior loan market and valuation 
and price availability of bank loans; (b) noting that liquidity 
determinations would be made in accordance with Commission guidance; 
(c) clarifying that the Fund's investments in Derivative Instruments 
would be limited in all cases to 30% of the Fund's net assets, 
regardless of whether Derivative Instruments would be used solely for 
hedging purposes; (d) representing that at least 90% of the Fund's net 
assets invested in Derivative Instruments would trade in markets that 
are members of the ISG (as defined herein) or are parties to a 
comprehensive surveillance sharing agreement with the Exchange; (e) 
providing additional information relating to valuation and price 
availability of Derivative Instruments; and (f) clarifying in detail 
what information the Disclosed Portfolio (as defined herein) would 
provide as a result of the Fund's investments in bank loans and 
Derivative Instruments.\29\
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    \29\ See supra note 6 and accompanying text.
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    The proposed Amendment No. 3 amended and replaced the proposed rule 
change, as modified by Amendment No. 2 thereto, in its entirety, and 
supplemented the proposed rule change by: (a) Clarifying that at least 
75% of the Fund's net assets that are invested in bank loans would be 
invested in tranches that have a minimum principal amount outstanding 
of $100 million or more with respect to U.S. borrowers and $200 million 
or more with respect to non-U.S. borrowers; (b) clarifying that at 
least 90% of the Fund's net assets in Derivative Instruments would be 
invested in Derivative Instruments that trade in markets that are 
members of the ISG (as defined herein), which includes, among others, 
certain U.S. futures exchanges; and (c) replacing certain references to 
``securities'' with ``assets'' for purposes of describing NAV 
valuation.\30\
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    \30\ See supra note 7 and accompanying text.
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    The Commission believes that the additional information and 
clarifications reflected in the proposed rule change, as modified by 
Amendment Nos. 1, 2 and 3 thereto, regarding the Fund's investments in 
bank loans and Derivative Instruments, will benefit investors and other 
market participants. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\31\ to approve the proposed 
rule change, as modified by Amendment Nos. 1, 2, and 3, on an 
accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the proposed rule change (SR-NASDAQ-2014-009), as 
modified by Amendment Nos. 1, 2, and 3 thereto, be, and it hereby is, 
approved on an accelerated basis.
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    \32\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11158 Filed 5-14-14; 8:45 am]
BILLING CODE 8011-01-P