
[Federal Register Volume 78, Number 40 (Thursday, February 28, 2013)]
[Notices]
[Pages 13721-13726]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04614]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68972; File No. SR-NASDAQ-2012-147]


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 High Yield Long/Short ETF of First Trust Exchange-Traded 
Fund IV

February 22, 2013.

I. Introduction

    On December 21, 2012, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade the shares (``Shares'') of the 
First Trust High Yield Long/Short ETF (``Fund'') of First Trust 
Exchange-Traded Fund IV (``Trust'') under Nasdaq Rule 5735. The 
proposed rule change was published for comment in the Federal Register 
on January 10, 2013.\3\ The Commission received no comments on the 
proposal. On February 20, 2013, the Exchange filed Amendment No. 1 to 
the proposed rule change.\4\ This order grants approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68581 (January 4, 
2013), 78 FR 2295 (``Notice'').
    \4\ In Amendment No. 1, the Exchange made a number of technical 
changes to the proposed rule change. In addition, the Exchange 
clarified that the pooled investment vehicles in which the Fund may 
invest would be exchange-traded. Because the changes made by 
Amendment No. 1 are technical in nature and do not materially alter 
the substance of the proposed rule change, and do not raise any 
novel or unique regulatory issues, Amendment No. 1 is not subject to 
notice and comment.
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II. Description of the Proposed Rule Change

    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 Fund will be an actively 
managed exchange-traded fund (``ETF''). The Shares will be offered by 
the Trust, which was established as a Massachusetts business trust on 
September 15, 2010.\5\ The Trust is registered with the Commission as 
an investment company and has filed a registration statement on Form N-
1A with the Commission.\6\
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    \5\ The Commission has issued an order granting certain 
exemptive relief to the Trust under the Investment Company Act of 
1940 (``1940 Act''). See Investment Company Act Release No. 30029 
(April 10, 2012) (File No. 812-13795) (``Exemptive Order''). In 
compliance with Nasdaq Rule 5735(b)(5), which applies to Managed 
Fund Shares based on a fixed income portfolio (including without 
limitation exchange-traded notes and senior loans) or a portfolio 
invested in a combination of equity securities and fixed income 
securities, the Trust's application for exemptive relief under the 
1940 Act states that the Fund will comply with the federal 
securities laws in accepting securities for deposits and satisfying 
redemptions with redemption securities, including that the 
securities accepted for deposits and the securities used to satisfy 
redemption requests are sold in transactions that would be exempt 
from registration under the Securities Act of 1933.
    \6\ See Post-Effective Amendment No. 6 to Registration Statement 
on Form N-1A for the Trust, dated October 11, 2012 (File Nos. 333-
174332 and 811-22559) (``Registration Statement'').
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    First Trust Advisors L.P. is the investment adviser (``Adviser'') 
to the Fund. First Trust Portfolios L.P. (``Distributor'') is the 
principal underwriter and distributor of the Fund's Shares. The Bank of 
New York Mellon Corporation will act as the administrator, accounting 
agent, custodian, and transfer agent to the Fund. The Adviser is 
affiliated with the Distributor, a broker-dealer. The Exchange 
represents that the Adviser has implemented a fire wall with respect to 
its broker-dealer affiliate.\7\
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    \7\ See Nasdaq Rule 5735(g). The Exchange represents that, in 
the event (a) the Adviser becomes newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser becomes affiliated 
with a broker-dealer, it will implement a fire wall with respect to 
such broker-dealer regarding access to information concerning the 
composition and/or changes to the portfolio, and will be subject to 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding such portfolio. In 
addition, Nasdaq Rule 5735(g) requires that Adviser personnel who 
make decisions regarding the Fund's portfolio 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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First Trust High Yield Long/Short ETF

    The Fund's primary investment objective is to provide current 
income. The Fund's secondary investment objective is capital 
appreciation. The Fund will pursue its objectives by seeking to invest 
in a broadly diversified portfolio composed principally of high-yield 
debt securities.

[[Page 13722]]

    The Adviser will combine a fundamental credit selection process 
with top down relative value analysis when selecting investment 
opportunities. The Adviser believes that an evolving investment 
environment offers varying degrees of investment risk opportunities in 
the high-yield, bank loan, and fixed-income instrument markets. In 
order to capitalize on investments and effectively manage potential 
risk, the Adviser believes that the combination of thorough and 
continuous credit risk analysis, market evaluation, diversification, 
and the ability to reallocate investments is critical to achieving 
higher risk-adjusted returns.

Primary Investments

    The Fund, under normal market conditions,\8\ will invest at least 
80% of its net assets (plus the amount of any borrowing for investment 
purposes) in high-yield debt securities that are rated below investment 
grade at the time of purchase, commonly referred to as ``junk'' bonds, 
or unrated securities deemed by the Adviser to be of comparable 
quality. Such securities may include U.S. and non-U.S. corporate debt 
obligations, bank loans, and convertible bonds. For purposes of 
determining whether a security is below investment grade, the lowest 
available rating will be considered. At least 75% of the Fund's net 
assets invested in high-yield debt securities will be invested in 
issuers that have a minimum principal amount outstanding of $100 
million or more with respect to U.S. corporate issuers and $200 million 
or more with respect to non-U.S. corporate issuers, and the portfolio, 
once fully invested, will include a minimum of 13 non-affiliated 
issuers.\9\
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    \8\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the fixed income markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance.
    \9\ If a downgrade occurs, the Adviser will consider what 
action, including the sale of such security, is in the best interest 
of the Fund and its shareholders.
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    High-yield debt may be issued by companies without long track 
records of sales and earnings, or by issuers that have questionable 
credit strength. High-yield debt and comparable unrated debt 
securities: (a) Will likely have some quality and protective 
characteristics that, in the judgment of the rating agency evaluating 
the instrument, are outweighed by large uncertainties or major risk 
exposures to adverse conditions; and (b) are predominantly speculative 
with respect to the issuer's capacity to pay dividends or interest and 
repay principal in accordance with the terms of the obligation. Many 
below-investment-grade debt securities are subject to legal or 
contractual restrictions limiting the Fund's ability to resell the 
securities to the general public.
    The Fund may invest in corporate debt securities issued by U.S. and 
non-U.S. companies of all kinds, including those with small, mid, and 
large capitalizations. Notes, bonds, debentures, and commercial paper 
are the most common types of corporate debt securities, with the 
primary difference being their maturities and secured or unsecured 
status. Corporate debt may carry fixed or floating rates of interest.
    The Fund may invest up to 15% of its net assets in bank loans, 
which may also 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 such loans by purchasing assignments or all or a 
portion of loans or loan participations from third parties. These 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 are 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. Due to their subordination in the borrower's 
capital structure, unsecured and/or subordinated loans involve a higher 
degree of overall risk than senior bank loans of the same borrower. 
Unfunded contracts are commitments by lenders to loan an amount in the 
future or that is due to be contractually funded in the future. The 
Fund will invest 85% or more of the portfolio in securities that the 
Adviser deems to be sufficiently liquid at the time of investment.
    The Fund may invest in non-income-producing securities, including 
defaulted securities and common stocks \10\ and companies whose 
financial condition is troubled or uncertain and that may be involved 
in bankruptcy proceedings, reorganizations, or financial 
restructurings. The Fund may also invest in investment-grade \11\ debt 
securities. The Fund does not have any portfolio maturity limitation 
and may invest its assets in securities with short-term, medium-term, 
or long-term maturities. The Fund will not invest more than 15% of the 
portfolio in such distressed securities, as determined at the time of 
the investment.
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    \10\ The equity securities in which the Fund may invest 
(including any that have converted from convertible debt) will be 
limited to securities that trade in markets that are members of the 
Intermarket Surveillance Group (``ISG''), which includes all U.S. 
national securities exchanges and certain foreign exchanges, or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange.
    \11\ According to the Adviser, ``investment grade'' means 
securities rated in the Baa/BBB categories or above by one or more 
nationally recognized securities rating organizations (``NRSROs''). 
If a security is rated by multiple NRSROs and receives different 
ratings, the 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.
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    Non-U.S. debt securities in which the Fund may invest include debt 
securities issued or guaranteed by companies organized under the laws 
of countries other than the United States (including emerging markets), 
debt securities issued or guaranteed by foreign, national, provincial, 
state, municipal, or other governments with taxing authority or by 
their agencies or instrumentalities, and debt obligations of 
supranational governmental entities such as the World Bank or European 
Union. These debt securities may be U.S. dollar-denominated or non-U.S. 
dollar-denominated. Non-U.S. debt securities also include U.S. dollar-
denominated debt obligations, such as ``Yankee Dollar'' obligations, of 
foreign issuers and of supranational government entities. Yankee Dollar 
obligations are U.S. dollar-denominated obligations issued in the U.S. 
capital markets by foreign corporations, banks, and governments. 
Foreign debt securities also may be traded on foreign securities 
exchanges or in over-the-counter capital markets. Under normal market 
conditions, up to 10% of the net assets of the Fund's investment in 
foreign securities may be denominated in currencies other than the U.S. 
dollar. To the extent the Fund invests in such instruments, the value 
of the assets of the Fund as measured in U.S. dollars will be affected 
by changes in exchange rates.
    The Fund may invest in preferred securities and convertible 
securities. Preferred securities, which generally pay fixed or 
adjustable-rate dividends or interest to investors, have preference 
over common stock in the payment of dividends or interest and the 
liquidation of a company's assets, which means that

[[Page 13723]]

a company typically must pay dividends or interest on its preferred 
securities before paying any dividends on its common stock. Preferred 
securities are generally junior to all forms of the company's debt, 
including both senior and subordinated debt.
    As part of its investment strategy, the Fund intends to maintain 
both long and short positions in securities under normal market 
conditions. The Fund will take long positions in securities that the 
Adviser believes in the aggregate to have the potential to outperform 
the Fund's benchmark, the Bank of America Merrill Lynch U.S. High Yield 
Master II Constrained Index (``Index''). The Fund's long positions may 
total up to 130% of the Fund's Managed Assets. ``Managed Assets'' means 
the average daily gross asset value of the Fund (which includes the 
principal amount of any borrowings), minus the sum of the Fund's 
liabilities. The Fund will take short positions in securities that the 
Adviser believes in the aggregate will underperform the Index. These 
securities may consist of securities included in the Index or other 
securities, including U.S. Treasury securities and/or corporate debt 
obligations that may be rated investment grade or non-investment grade, 
which the Adviser believes in the aggregate will underperform the 
Index. The Fund's short positions may total up to 30% of the Fund's 
Managed Assets. A ``short sale'' is a transaction in which the Fund 
sells a security that it does not own (and borrows the security to 
deliver it to the buyer) in anticipation that the market price of the 
security will decline. The proceeds received from the Fund's short 
sales of securities will generally be used to purchase all or a portion 
of the Fund's additional long positions in securities.
    The Fund will use short sales for investment and risk management 
purposes, including when the Adviser anticipates that the market price 
of securities will decline or will underperform the Index in the 
aggregate. Short selling allows the Fund to profit from a decline in 
market price to the extent such decline exceeds the transaction costs 
and the costs of borrowing the securities. In times of unusual or 
adverse market, economic, regulatory, or political conditions, the Fund 
may not be able, fully or partially, to implement its short-selling 
strategy. If a security sold short increases in price, the Fund may 
have to cover its short position at a higher price than the short sale 
price, resulting in a loss. The Fund will have substantial short 
positions and must borrow those securities to make delivery to the 
buyer.

Other Investments

    The Fund may invest in U.S. government securities. U.S. government 
securities include U.S. Treasury obligations and securities issued or 
guaranteed 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.
    The Fund may invest in U.S. agency mortgage-backed securities and 
collateralized mortgage securities issued by the Government National 
Mortgage Association, the Federal National Mortgage Association, and 
the Federal Home Loan Mortgage Corporation.
    Under normal market conditions, the Fund may invest up to 10% of 
its net assets in short-term debt securities and other cash 
equivalents, or it may hold cash. The percentage of the Fund invested 
in such holdings will vary and will depend on several factors, 
including market conditions. For temporary defensive purposes and 
during periods of high cash inflows or outflows, the Fund may depart 
from its principal investment strategies and invest part or all of its 
assets in short-term debt securities or cash equivalents or it may hold 
cash. During such periods, the Fund may not be able to achieve its 
investment objective. The Fund may adopt a defensive strategy when the 
portfolio managers believe securities in which the Fund normally 
invests have elevated risks due to political or economic factors and in 
other extraordinary circumstances.
    Short-term debt securities are securities from issuers having a 
long-term debt rating of at least A by Standard & Poor's Ratings Group 
(``S&P Ratings''), Moody's Investors Service, Inc. (``Moody's''), or 
Fitch, Inc. (``Fitch'') and having a maturity of one year or less. The 
use of temporary investments is not a part of a principal investment 
strategy of the Fund.
    Short-term debt securities are defined to include, without 
limitation, the following: (1) U.S. Government securities, including 
bills, notes, and bonds differing as to maturity and rates of interest, 
which are either issued or guaranteed by the U.S. Treasury or by U.S. 
Government agencies or instrumentalities; (2) certificates of deposit 
issued against funds deposited in a bank or savings and loan 
association; (3) bankers' acceptances, which are short-term credit 
instruments used to finance commercial transactions; (4) repurchase 
agreements,\12\ which involve purchases of debt securities; (5) bank 
time deposits, which are monies kept on deposit with banks or savings 
and loan associations for a stated period of time at a fixed rate of 
interest; and (6) commercial paper, which are short-term unsecured 
promissory notes, including variable rate master demand notes issued by 
corporations to finance their current operations. The Fund may only 
invest in commercial paper rated A-2 or higher by S&P Ratings, Prime-2 
or higher by Moody's, or F2 or higher by Fitch.
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    \12\ 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 Board. The Adviser will review and monitor the creditworthiness 
of such institutions. The Adviser will monitor the value of the 
collateral at the time the action is entered into and at all times 
during the term of the repurchase agreement.
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    The Fund intends to hedge its non-U.S. dollar holdings. Generally, 
the Fund's currency exchange transactions will be conducted on a spot 
(i.e., cash) basis at the spot rate prevailing in the currency exchange 
market. The cost of the Fund's currency exchange transactions will 
generally be the difference between the bid and offer spot rate of the 
currency being purchased or sold. In order to protect against 
uncertainty in the level of future currency exchange rates, the Fund is 
authorized to enter into various currency exchange transactions.
    The Fund may invest up to 10% of its net assets in securities of 
other open-end or closed-end investment companies, including ETFs \13\ 
that invest primarily in securities of the types in which the Fund may 
invest directly. In addition, the Fund may invest a portion of its 
assets in exchange-traded pooled investment vehicles (other than 
investment companies) that invest primarily in securities of the types 
in which the Fund may invest directly. The Fund

[[Page 13724]]

may invest in other investment companies to the extent permitted by the 
1940 Act.
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    \13\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities generally designed to track 
the performance of a securities index, including industry, sector, 
country, and region indexes. Such ETFs all will be listed and traded 
in the U.S. on registered exchanges. The Fund may invest in the 
securities of ETFs in excess of the limits imposed under the 1940 
Act pursuant to exemptive orders obtained by such ETFs and their 
sponsors from the Commission. The ETFs in which the Fund may invest 
include Index Fund Shares and Portfolio Depositary Receipts (as 
described in NASDAQ Rule 5705); and Managed Fund Shares (as 
described in Nasdaq Rule 5735). While the Fund may invest in inverse 
ETFs, the Fund will not invest in leveraged (e.g., 2X or 3X) ETFs.
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    The Fund may receive equity, warrants, corporate bonds, and other 
such securities as a result of the restructuring of the debt of an 
issuer, reorganization of a bank loan or bond, or as part of a package 
of securities acquired together with a high-yield bond or senior 
loan(s) of an issuer. Such investments will be subject to the Fund's 
investment objectives, restrictions, and strategies as described 
herein.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including variable rate master demand notes and 144A securities from 
issues with less than $100 million original principal amount 
outstanding. The Fund will monitor its portfolio liquidity on an 
ongoing basis to determine whether, in light of current circumstances, 
an adequate level of liquidity is being maintained, and will consider 
taking appropriate steps in order to maintain adequate liquidity if, 
through a change in values, net assets, or other circumstances, more 
than 15% of the Fund's net assets are held in illiquid securities. 
Illiquid securities 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.
    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry or group of 
industries. This restriction does not apply to obligations issued or 
guaranteed by the U.S. Government, its agencies or instrumentalities, 
or securities of other investment companies. In addition, the Fund may 
not, as to 75% of its total assets, (a) invest more than 5% of the 
value of its total assets in the securities of any one issuer or (b) 
hold more than 10% of the outstanding voting securities of that issuer 
(other than securities of other investment companies and obligations 
issued or guaranteed by the U.S. government or any agency or 
instrumentality thereof).
    Consistent with the Exemptive Order, the Fund will not invest in 
options contracts, futures contracts, or swap agreements. The Fund's 
investments will be consistent with the investment objectives and 
strategies described in the Registration Statement. The Fund will not 
invest to enhance leverage. The Fund intends to qualify each year as a 
regulated investment company under Subchapter M of the Internal Revenue 
Code of 1986, as amended.
    Additional information regarding the Shares and the Fund, including 
investment strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, availability of Fund values and 
other information, and distributions and taxes, among other things, can 
be found in the Notice and/or Registration Statement, as 
applicable.\14\
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    \14\ See supra notes 3 and 6 and respective accompanying text.
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III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \15\ and the rules and regulations thereunder applicable to a 
national securities exchange.\16\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\17\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. The Commission notes that 
the Fund and the Shares must comply with the requirements of Nasdaq 
Rule 5735 to be listed and traded on the Exchange.
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    \15\ 15 U.S.C. 78f.
    \16\ 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\18\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via UTP Level 1, as 
well as Nasdaq proprietary quote and trade services. On each business 
day, before commencement of trading in Shares in the Regular Market 
Session \19\ on the Exchange, the Trust will disclose on its Web site 
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 net asset value (``NAV'') at the 
end of the business day.\20\ The NAV of the Fund's Shares generally 
will be calculated once daily Monday through Friday as of the close of 
regular trading on the New York Stock Exchange, generally 4:00 p.m. 
Eastern time.\21\ Moreover, the Intraday Indicative Value, available on 
the NASDAQ OMX Information LLC proprietary index data service,\22\ will 
be based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated and broadly 
displayed at least every 15 seconds during the Regular Market Session. 
During hours when the markets for local debt in the Fund's portfolio 
are closed, the Intraday Indicative Value will be updated at least 
every 15 seconds during the Regular Market Session to reflect currency 
exchange fluctuations.
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    \18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \19\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 7:00 a.m. to 
9:30 a.m.; (2) Regular Market Session from 9:30 a.m. to 4:00 p.m. or 
4:15 p.m.; and (3) Post-Market Session from 4:00 p.m. or 4:15 p.m. 
to 8:00 p.m.).
    \20\ The Disclosed Portfolio will include, as applicable, the 
names, quantity, percentage weighting, and market value of fixed-
income securities and other assets held by the Fund and the 
characteristics of such assets. The Web site and information will be 
publicly available at no charge.
    \21\ 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''). 
Notwithstanding the foregoing, portfolio trades that are executed 
prior to the opening of the Exchange on any business day may be 
booked and reflected in NAV on such business day. 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.
    \22\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the NASDAQ OMX global index data feed service, 
offering 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 OMX indexes, listed ETFs, or third-
party partner indexes and ETFs.
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    In addition, 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, and the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Intra-day, executable price quotations of the 
fixed-income securities and other assets held by the Fund are available 
from major broker-dealer firms or on the exchange on which they are 
traded, if applicable. Intra-day price information is also available 
through subscription services,

[[Page 13725]]

such as Bloomberg and Thomson Reuters, which can be accessed by 
authorized participants and other investors. The Web site for the Fund 
will include a form of the prospectus for the Fund, additional data 
relating to NAV, and other applicable quantitative information.
    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV 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. In 
addition, the Exchange will halt trading in the Shares under the 
conditions specified in Nasdaq Rules 4120 and 4121. Trading may be 
halted because of market conditions or for reasons that, in the view of 
the Exchange, make trading in the Shares inadvisable. These may 
include: (1) The extent to which trading is not occurring in the 
securities and/or the financial instruments comprising the Disclosed 
Portfolio of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. 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. The Exchange will consider the suspension of 
trading in or removal from listing of the Shares if the Intraday 
Indicative Value is no longer calculated or available or the Disclosed 
Portfolio is not made available to all market participants at the same 
time.\23\ The Exchange states that the Adviser is affiliated with the 
Distributor, a broker-dealer. The Exchange represents that the Adviser 
has implemented a fire wall with respect to its broker-dealer 
affiliate.\24\ The Commission notes that the Reporting Authority that 
provides the Disclosed Portfolio must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the actual components of the 
portfolio.\25\ The Exchange states that trading of the Shares through 
Nasdaq will be subject to FINRA's surveillance procedures for 
derivative products, including Managed Fund Shares.\26\ The Exchange 
may obtain information via the ISG from other exchanges who are members 
or affiliates of the ISG. Further, the Exchange states that it 
prohibits the distribution of material, non-public information by its 
employees.
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    \23\ See Nasdaq Rule 5735(d)(2)(C)(ii).
    \24\ See Nasdaq Rule 5735(g), supra note 6 and accompanying 
text. The Commission notes 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 Sub-Adviser 
and their related personnel are subject to the provisions of Rule 
204A-1 under the Advisers Act relating to codes of ethics. This Rule 
requires investment advisers to adopt a code of ethics that reflects 
the fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) Adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
    \25\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \26\ The Exchange states that FINRA surveils trading on Nasdaq 
pursuant to a regulatory services agreement and that it is 
responsible for FINRA's performance under this regulatory services 
agreement.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (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) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance procedures are adequate to properly 
monitor the trading of the Shares on Nasdaq during all trading sessions 
and to deter and detect violations of Exchange rules and the applicable 
federal securities laws.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2310, 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 is disseminated; (d) the risks involved 
in trading the Shares during the Pre-Market and Post-Market Sessions 
when an updated Intraday Indicative Value will not be calculated or 
publicly disseminated; (e) the requirement that members deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (f) trading 
information.
    (5) For initial and/or continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\27\
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    \27\ See 17 CFR 240.10A-3.
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    (6) At least 75% of the Fund's net assets invested in high yield 
debt securities will be invested in issuers that have a minimum 
principal amount outstanding of $100 million or more with respect to 
U.S. corporate issuers and $200 million or more with respect to non-
U.S. corporate issuers, and the portfolio, once fully invested, will 
include a minimum of 13 non-affiliated issuers.
    (7) The Fund will invest 85% or more of the portfolio in securities 
that the Adviser deems to be sufficiently liquid at the time of 
investment. The Fund may hold up to an aggregate amount of 15% of its 
net assets in illiquid securities (calculated at the time of 
investment), including: (a) Rule 144A securities with less than $100 
million original principal amount outstanding; and (b) variable rate 
master demand notes. The Fund will monitor its portfolio liquidity on 
an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid securities.
    (8) The Fund will not invest more than 15% of the portfolio in 
distressed securities, as described herein, as determined at the time 
of the investment.
    (9) The equity securities in which the Fund may invest (including 
any that have converted from convertible debt) will be limited to 
securities that trade in markets that are members of the ISG, which 
includes all U.S. national securities exchanges and certain foreign 
exchanges, or are parties to a

[[Page 13726]]

comprehensive surveillance sharing agreement with the Exchange.
    (10) Consistent with the Exemptive Order, the Fund will not invest 
in options contracts, futures contracts, or swap agreements. The Fund's 
investments will be consistent with the investment objectives and 
strategies described in the Registration Statement. The Fund will not 
invest to enhance leverage.
    (11) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.

This approval order is based on all of the Exchange's representations, 
including those set forth above and in the Notice, and the Exchange's 
description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change 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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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASDAQ-2012-147), 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).
    \30\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04614 Filed 2-27-13; 8:45 am]
BILLING CODE 8011-01-P


