
[Federal Register Volume 79, Number 139 (Monday, July 21, 2014)]
[Notices]
[Pages 42386-42391]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17034]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72607; File No. SR-NASDAQ-2014-057]


Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change Relating to the Listing and 
Trading of the Shares of the First Trust Low Duration Mortgage 
Opportunities ETF of First Trust Exchange-Traded Fund IV

July 15, 2014.

I. Introduction

    On May 20, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the First 
Trust Low Duration Mortgage Opportunities ETF (``Fund'') of First Trust 
Exchange-Traded Fund IV (``Trust'') under Nasdaq Rule 5735, which 
governs the listing and trading of Managed Fund Shares on the Exchange. 
The proposed rule change was published for comment in the Federal 
Register on June 5, 2014.\3\ The Commission received no comments on the 
proposed rule change. 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. 72281 (May 30, 
2014), 79 FR 32586 (``Notice'').
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II. Description of Proposed Rule Change

    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategies, including other 
portfolio holdings and investment restrictions.\4\
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    \4\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, net asset value (``NAV'') calculation, creation 
and redemption procedures, fees, Fund holdings disclosure policies, 
distributions, and taxes, among other information, is included in 
the Notice and the Registration Statement, as applicable. See Notice 
and Registration Statement, supra note 3 and infra note 5, 
respectively.
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General

    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. 
The Trust is registered with the Commission as an investment company 
and has filed a registration statement on Form N-1A (``Registration 
Statement'') with the Commission.\5\ The Fund will be a series of the 
Trust. First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund.\6\ First Trust

[[Page 42387]]

Portfolios L.P. (``Distributor'') will be 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.\7\
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    \5\ See Post-Effective Amendment No. 69 to Registration 
Statement on Form N-1A for the Trust, dated May 16, 2014 (File Nos. 
333-174332 and 811-22559). The Exchange states that the Commission 
has issued an order granting certain exemptive relief under the 
Investment Company Act of 1940 (``1940 Act''). See Investment 
Company Act Release No. 30029 (April 10, 2012) (File No. 812-13795) 
(``Exemptive Relief''). In addition, the Exchange states that on 
December 6, 2012, the staff of the Commission's Division of 
Investment Management (``Division'') issued a no-action letter 
(``No-Action Letter'') relating to the use of derivatives by 
actively-managed ETFs. See No-Action Letter dated December 6, 2012 
from Elizabeth G. Osterman, Associate Director, Office of Exemptive 
Applications, Division. The Exchange states that the No-Action 
Letter stated that the Division would not recommend enforcement 
action to the Commission under applicable provisions of and rules 
under the 1940 Act if actively-managed ETFs operating in reliance on 
specified orders (which include the Exemptive Relief) invest in 
options contracts, futures contracts, or swap agreements, provided 
that they comply with certain representations stated in the No-
Action Letter.
    \6\ The Exchange states that the Adviser is not a broker-dealer, 
but it is affiliated with the Distributor, a broker-dealer. The 
Exchange states that the Adviser has implemented a fire wall with 
respect to its broker-dealer affiliate regarding access to 
information concerning the composition of or changes to the 
portfolio, and that personnel who make decisions on the Fund's 
portfolio composition will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the Fund's portfolio. The Exchange further states that, in 
the event (a) the Adviser or any sub-adviser becomes, or becomes 
newly affiliated with, a broker-dealer, or (b) any new adviser or 
sub-adviser is a registered broker-dealer or becomes affiliated with 
a broker-dealer, the adviser or sub-adviser, as applicable, will 
implement a fire wall with respect to its relevant personnel or its 
broker-dealer affiliate, as applicable, regarding access to 
information concerning the composition of or changes to the 
portfolio and will be subject to procedures designed to prevent the 
use and dissemination of material non-public information regarding 
the portfolio.
    \7\ The Exchange states that the Fund currently does not intend 
to use a sub-adviser.
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Principal Investments

    The primary investment objective of the Fund will be to generate 
current income, and its secondary objective will be capital 
appreciation. Under normal market conditions,\8\ the Fund will seek to 
achieve its investment objectives by investing at least 80% of its net 
assets (including investment borrowings) in the mortgage-related debt 
securities and other mortgage-related instruments (collectively, 
``Mortgage-Related Investments'') described below.
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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, labor 
disruption, or any similar intervening circumstance.
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    Under normal market conditions, the Fund will invest in Mortgage-
Related Investments tied to residential and commercial mortgages.\9\ 
Mortgage-Related Investments represent an interest in a pool of 
mortgage loans made by banks and other financial institutions to 
finance purchases of homes, commercial buildings, and other real 
estate. The individual mortgage loans are packaged or ``pooled'' 
together for sale to investors. As the underlying mortgage loans are 
paid off, investors receive principal and interest payments. Mortgage-
Related Investments may be fixed-rate instruments, or they may be 
adjustable-rate instruments (``ARMS'').
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    \9\ Mortgage-Related Investments consist of: (1) Residential 
mortgage-backed securities (``RMBS''); (2) commercial mortgage-
backed securities (``CMBS''); (3) stripped mortgage-backed 
securities (``SMBS''), which are mortgage-backed securities where 
mortgage payments are divided between paying the loan's principal 
and paying the loan's interest; and (4) collateralized mortgage 
obligations (``CMOs'') and real estate mortgage investment conduits 
(``REMICs''), which are mortgage-backed securities that are divided 
into multiple classes, with each class being entitled to a different 
share of the principal and interest payments received from the pool 
of underlying assets.
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    The Mortgage-Related Investments in which the Fund will invest may 
be, but are not required to be, issued or guaranteed by the U.S. 
government or by its agencies or instrumentalities, such as Ginnie Mae 
and U.S. government-sponsored entities, such as Fannie Mae and Freddie 
Mac (the U.S. government, its agencies and instrumentalities, and U.S. 
government-sponsored entities are referred to collectively as 
``Government Entities'').\10\ The Fund may invest in callable agency 
securities, which give the issuer (the U.S. government agency) the 
right to redeem the security prior to maturity. The Fund will limit its 
investments in Mortgage-Related Investments that are not issued or 
guaranteed by Government Entities to 20% of its net assets.\11\
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    \10\ Securities issued by Government Entities have different 
levels of credit support. For example, Ginnie Mae securities carry a 
guarantee as to the timely repayment of principal and interest that 
is backed by the full faith and credit of the U.S. government. 
However, the full faith and credit guarantee does not apply to the 
market prices and yields of the Ginnie Mae securities or to the NAV, 
trading price, or performance of the Fund, which will vary with 
changes in interest rates and other market conditions. Fannie Mae 
and Freddie Mac pass-through mortgage certificates are backed by the 
credit of the respective instrumentality and are not guaranteed by 
the U.S. government. Other securities issued by Government Entities 
may only be backed by the creditworthiness of the issuing 
institution, not the U.S. government, or the issuers may have the 
right to borrow from the U.S. Treasury to meet their obligations.
    \11\ For the avoidance of doubt, Mortgage-Related Investments 
that are not issued or guaranteed by Government Entities will be 
included for purposes of the 80% requirement described in the first 
paragraph under the heading ``Principal Investments.''
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    Many Mortgage-Related Investments are pass-through securities, 
which means they provide investors with monthly payments consisting of 
a pro rata share of both regular interest and principal payments as 
well as unscheduled prepayments on the underlying mortgage loans. 
Because prepayment rates of individual mortgage pools vary widely, the 
average life of a particular pool cannot be predicted accurately.
    The Fund currently targets an estimated effective duration \12\ of 
three years or less. The Adviser will calculate the duration of the 
portfolio by modeling the cash flows of all the individual holdings, 
including the impact of prepayment variability and coupon adjustments, 
where applicable, to determine the duration of each holding and then 
aggregating based on the size of the position. In performing this 
duration calculation, the Adviser will utilize third-party models.
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    \12\ In comparison to maturity (which is the date on which a 
debt instrument ceases and the issuer is obligated to repay the 
principal amount), duration is a measure of the expected price 
volatility of a debt instrument as a result of changes in market 
rates of interest, based on the weighted average timing of the 
instrument's expected principal and interest payments and other 
factors. Duration differs from maturity in that it considers a 
security's yield, coupon payments, principal payments, call 
features, and coupon adjustments in addition to the amount of time 
until the security finally matures. As the value of a security 
changes over time, so will its duration. Prices of securities with 
lower durations tend to be less sensitive to interest rate changes 
than securities with higher durations. In general, a portfolio of 
securities with a lower duration can be expected to be less 
sensitive to interest rate changes than a portfolio with a higher 
duration.
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    The Fund may invest, without limitation, in mortgage dollar 
rolls.\13\ The Fund intends to enter into mortgage dollar rolls only 
with high quality securities dealers and banks, as determined by the 
Adviser. The Fund may also invest in to-be-announced transactions 
(``TBA Transactions'').\14\ Further, the Fund may enter into short 
sales as part of its overall portfolio management strategies or to 
offset a potential decline in the value of a security; however, the 
Fund does not expect, under normal market conditions, to engage in 
short sales with respect to more than 30% of the value of its net 
assets. To the extent required under applicable federal securities 
laws, rules, and interpretations thereof, the Fund will set aside 
liquid assets or engage in other measures to cover open positions and 
short positions held in connection with the foregoing types of 
transactions.
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    \13\ In a mortgage dollar roll, the Fund will sell (or buy) 
mortgage-backed securities for delivery on a specified date and 
simultaneously contract to repurchase (or sell) substantially 
similar (same type, coupon, and maturity) securities on a future 
date. During the period between a sale and repurchase, the Fund will 
forgo principal and interest paid on the mortgage-backed securities. 
The Fund will earn or lose money on a mortgage dollar roll from any 
difference between the sale price and the future purchase price. In 
a sale and repurchase, the Fund will also earn money on the interest 
earned on the cash proceeds of the initial sale.
    \14\ A TBA Transaction is a method of trading mortgage-backed 
securities. TBA Transactions generally are conducted in accordance 
with widely-accepted guidelines that establish commonly observed 
terms and conditions for execution, settlement, and delivery. In a 
TBA Transaction, the buyer and the seller agree on general trade 
parameters such as agency, settlement date, par amount, and price. 
The actual pools delivered generally are determined two days prior 
to the settlement date. The mortgage TBA market is liquid, and 
positions can be easily added, rolled, or closed. According to the 
Financial Industry Regulatory Authority (``FINRA'') Trade Reporting 
and Compliance Engine (``TRACE'') data, TBA Transactions represented 
approximately 93% of total trading volume for agency mortgage-backed 
securities in the month of January 2014.
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    Although the Fund intends to invest primarily in investment grade 
securities,\15\ the Fund may invest up to

[[Page 42388]]

20% of its net assets in securities of any credit quality, including 
securities that are below investment grade and securities that are 
unrated and have not been judged by the Adviser to be of comparable 
quality to rated investment grade securities.
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    \15\ Investment grade securities include securities with, at the 
time of investment, credit ratings within the four highest rating 
categories of a nationally recognized statistical rating 
organization such as Moody's Investors Service, Inc. (``Moody's''), 
Fitch Ratings (``Fitch''), Standard & Poor's Ratings Services, a 
division of The McGraw-Hill Companies, Inc. (``S&P Ratings''), or 
another nationally recognized statistical rating organization 
(``NRSRO''), and unrated securities judged to be of comparable 
quality by the Adviser. Comparable quality of unrated securities 
will be determined by the Adviser based on fundamental credit 
analysis of the unrated security and comparable NRSRO-rated 
securities. On a best-efforts basis, the Adviser will attempt to 
make a rating determination based on publicly available data. In 
making a ``comparable quality'' determination, the Adviser may 
consider, for example, whether the issuer of the security has issued 
other rated securities, the nature and provisions of the relevant 
security, whether the obligations under the relevant security are 
guaranteed by another entity and the rating of such guarantor (if 
any), relevant cash flows, macroeconomic analysis, and sector or 
industry analysis.
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Other Investments

    The Fund may invest in exchange-listed options on U.S. Treasury 
securities, exchange-listed options on U.S. Treasury futures contracts, 
and exchange-listed U.S. Treasury futures contracts.\16\ The use of 
these derivative transactions may allow the Fund to obtain net long or 
short exposures to selected interest rates or durations. These 
derivatives may also be used to hedge risks associated with the Fund's 
other portfolio investments.
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    \16\ At least 90% of the Fund's net assets that are invested in 
exchange-traded equity securities and exchange-traded derivatives 
(in the aggregate) will be invested in investments that trade in 
markets that are members of the Intermarket Surveillance Group 
(``ISG'') or are parties to a comprehensive surveillance sharing 
agreement with the Exchange.
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    Under normal market conditions, no more than 20% of the value of 
the Fund's net assets will be invested in derivative instruments.\17\ 
The Fund's investments in derivative instruments will be consistent 
with the Fund's investment objectives and the 1940 Act and will not be 
used to seek to achieve a multiple or inverse multiple of an index.
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    \17\ The Fund will 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 
will 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.
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    The Fund may invest up to 20% of its net assets in short-term debt 
securities, money market funds, 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, during the initial invest-up period 
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 these securities or it may hold cash. During such 
periods, the Fund may not be able to achieve its investment objectives. 
The Fund may adopt a defensive strategy when the Adviser believes that 
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 S&P Ratings, Moody's, or Fitch 
and having a maturity of one year or less. The use of temporary 
investments will not be a part of a principal investment strategy of 
the Fund.
    Short-term debt securities are defined to include, without 
limitation, the following: (1) Fixed rate and floating rate U.S. 
government securities, including bills, notes, and bonds differing as 
to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. government agencies or 
instrumentalities; (2) certificates of deposit issued against funds 
deposited in a bank or a savings and loan association; (3) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (4) repurchase agreements,\18\ 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 is short-term unsecured promissory notes. The Fund may 
only invest in commercial paper rated A-1 or higher by S&P Ratings, 
Prime-1 or higher by Moody's, or F1 or higher by Fitch.
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    \18\ 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 of Trustees of the Trust (``Trust 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 
transaction is entered into and at all times during the term of the 
repurchase agreement.
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    In addition to its investments in Mortgage-Related Investments 
issued or guaranteed by Government Entities (as described in Principal 
Investments above) and in the short-term debt securities described in 
clause (1) of the preceding paragraph, the Fund may also invest up to 
20% of its net assets in other direct obligations of the U.S. 
government and in other securities issued or guaranteed by Government 
Entities. Such investments may include, without limitation, U.S. 
government inflation-indexed securities.\19\
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    \19\ Inflation-indexed securities are fixed-income securities 
that are structured to provide protection against inflation. The 
value of the security's principal or the interest income paid on the 
security is adjusted to track changes in an official inflation 
measure. The U.S. Treasury uses the Consumer Price Index for Urban 
Consumers as the inflation measure.
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    The Fund may invest up to 20% of its net assets in the securities 
of other investment companies, including money market funds (as noted 
above) and other ETFs.\20\
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    \20\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. Many ETFs are designed to 
track the performance of a securities index, including industry, 
sector, country, and region indexes. ETFs included in the Fund will 
be listed and traded in the U.S. on registered exchanges. The Fund 
may invest in the securities of ETFs in excess of the limits imposed 
under the 1940 Act pursuant to exemptive orders obtained by other 
ETFs and their sponsors from the Commission. In addition, the Fund 
may invest in the securities of certain other investment companies 
in excess of the limits imposed under the 1940 Act pursuant to an 
exemptive order that the Trust has obtained from the Commission. The 
ETFs in which the Fund may invest include Index Fund Shares (as 
described in Nasdaq Rule 5705), Portfolio Depository Receipts (as 
described in Nasdaq Rule 5705), and Managed Fund Shares (as 
described in Nasdaq Rule 5735). While the Fund may invest in inverse 
ETFs, the Fund will not invest in leveraged or inverse leveraged 
(e.g., 2X or -3X) ETFs.
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including securities deemed illiquid by the Adviser.\21\ 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

[[Page 42389]]

order to maintain adequate liquidity if, through a change in values, 
net assets, or other circumstances, more than 15% of the Fund's net 
assets are held in illiquid assets. Illiquid assets include securities 
subject to contractual or other restrictions on resale and other 
instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
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    \21\ In reaching liquidity decisions, the Adviser may consider 
the following factors: the frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers, and the mechanics of transfer).
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    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to obligations issued or guaranteed by the U.S. 
government, or by its agencies or instrumentalities, or to securities 
of other investment companies.
    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \22\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\23\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\24\ 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 initial and continued listing criteria in Nasdaq Rule 5735 for 
the Shares to be listed and traded on the Exchange.
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    \22\ 15 U.S.C. 78f.
    \23\ 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).
    \24\ 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,\25\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last 
sale information for the Shares will be available via Nasdaq 
proprietary quote and trade services, as well as in accordance with the 
Unlisted Trading Privileges and the Consolidated Tape Association 
(``CTA'') plans for the Shares. In addition, the Intraday Indicative 
Value,\26\ as defined in Nasdaq Rule 5735(c)(3), available on the 
NASDAQ OMX Information LLC proprietary index data service, will be 
widely disseminated by one or more major market data vendors and 
broadly displayed at least every 15 seconds during the Regular Market 
Session.\27\ On each business day, before commencement of trading in 
Shares in the Regular Market Session \28\ on the Exchange, the Fund 
will disclose on its Web site the identities and quantities of the 
portfolio of securities and other assets (the ``Disclosed Portfolio'' 
as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that will form 
the basis for the Fund's calculation of NAV at the end of the business 
day.\29\ The Fund's custodian, through the National Securities Clearing 
Corporation (``NSCC''), will make available on each business day, prior 
to the opening of business of the Exchange, the list of the names and 
quantities of the instruments, as well as amount of cash (if any), 
constituting the creation basket for that day. The NAV of the Fund will 
be determined as of the close of trading (normally 4:00 p.m., Eastern 
Time) on each day the New York Stock Exchange is open for business.\30\ 
Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Intraday executable price information for fixed 
income securities, exchange-traded equity securities, and derivatives 
held by the Fund will be available from major broker-dealer firms and 
major market data vendors. Additionally, FINRA's TRACE will be a source 
of price information for certain of the Mortgage-Related Investments 
held by the Fund. For exchange-traded assets, intraday price 
information will be available directly from the applicable listing 
exchanges. Intraday price information will also generally be available 
through subscription services, which can be accessed by authorized 
participants and other investors. Registered open-end management 
investment companies (other than ETFs) are generally priced once each 
business day, and these prices are available through the applicable 
fund's Web site or major market data vendors. The Fund's Web site will 
include a form of the prospectus for the Fund and additional data 
relating to NAV and other applicable quantitative information.
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    \25\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \26\ According to the Exchange, the Intraday Indicative Value 
reflects an estimated intraday value of the Fund's Disclosed 
Portfolio. The Intraday Indicative Value will be based upon the 
current value for the components of the Disclosed Portfolio. The 
Intraday Indicative Value will be based on quotes and closing prices 
from the securities' local market and may not reflect events that 
occur subsequent to the local market's close. Premiums and discounts 
between the Intraday Indicative Value and the market price may 
occur. The Intraday Indicative Value should not be viewed as a 
``real time'' update of the NAV per Share of the Fund, which is 
calculated only once a day.
    \27\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the NASDAQ OMX global index data feed service. The 
Exchange represents that GIDS offers real-time updates, daily 
summary messages, and access to widely followed indexes and Intraday 
Indicative Values for ETFs and that GIDS provides investment 
professionals with the daily information needed to track or trade 
NASDAQ OMX indexes, listed ETFs, or third-party partner indexes and 
ETFs.
    \28\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to 
4:00 p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session 
from 4:00 p.m. or 4:15 p.m. to 8:00 p.m., Eastern Time).
    \29\ The Fund's disclosure of derivative positions in the 
Disclosed Portfolio will include information that market 
participants can use to value these positions intraday. On a daily 
basis, the Fund will disclose on the Fund's Web site the following 
information regarding each portfolio holding, 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.
    \30\ NAV will be calculated for the Fund by taking the market 
price of the Fund's total assets, including interest or dividends 
accrued but not yet collected, less all liabilities, and dividing 
this amount by the total number of Shares outstanding.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange will obtain a representation from the issuer of 
the Shares that the NAV per Share will be calculated daily and that the 
NAV and the Disclosed Portfolio will be made available to all market 
participants at the same time. Trading in Shares of the Fund will be 
halted under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pause provisions under

[[Page 42390]]

Nasdaq Rules 4120(a)(11) and (12). Trading in the Shares may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable,\31\ and trading in 
the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), which sets 
forth circumstances under which trading in Shares of the Fund may be 
halted. The Exchange states that it has a general policy prohibiting 
the distribution of material, non-public information by its employees. 
Further, the Commission notes that the Reporting Authority that 
provides the Disclosed Portfolio must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the actual components of the 
portfolio.\32\ In addition, the Exchange states that the Adviser is not 
a broker-dealer, but it is affiliated with a broker-dealer and has 
implemented a fire wall with respect to its broker-dealer affiliate 
regarding access to information concerning the composition or for 
changes to the portfolio, and personnel who make decisions on the 
Fund's portfolio composition will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the Fund's portfolio.\33\ The Exchange represents that 
trading in the Shares will be subject to the existing trading 
surveillances, administered by both Nasdaq and also FINRA on behalf of 
the Exchange, which are designed to detect violations of Exchange rules 
and applicable federal securities laws.\34\ The Exchange further 
represents that these procedures are adequate to properly monitor 
Exchange trading of the Shares in all trading sessions and to deter and 
detect violations of Exchange rules and applicable federal securities 
laws. Moreover, prior to the commencement of trading, the Exchange 
states that it will inform its members in an Information Circular of 
the special characteristics and risks associated with trading the 
Shares.
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    \31\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities and/or the other assets 
constituting the Disclosed Portfolio of the Fund; or (2) whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. With respect 
to trading halts, the Exchange may consider all relevant factors in 
exercising its discretion to halt or suspend trading in the Shares 
of the Fund.
    \32\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \33\ See supra note 6. The Exchange states that an investment 
adviser to an open-end fund is required to be registered under the 
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the 
Adviser and its related personnel are subject to the provisions of 
Rule 204A-1 under the Advisers Act relating to codes of ethics. This 
Rule requires investment advisers to adopt a code of ethics that 
reflects the fiduciary nature of the relationship to clients, as 
well as compliance with other applicable securities laws. 
Accordingly, procedures designed to prevent the communication and 
misuse of non-public information by an investment adviser must be 
consistent with Rule 204A-1 under the Advisers Act. In addition, 
Rule 206(4)-7 under the Advisers Act makes it unlawful for an 
investment adviser to provide investment advice to clients unless 
such investment adviser has (i) adopted and implemented written 
policies and procedures reasonably designed to prevent violation, by 
the investment adviser and its supervised persons, of the Advisers 
Act and the Commission rules adopted thereunder; (ii) implemented, 
at a minimum, an annual review regarding the adequacy of the 
policies and procedures established pursuant to subparagraph (i) 
above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
    \34\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including the following:
    (1) The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the other exchange-traded assets 
with other markets and other entities that are members of ISG,\35\ and 
FINRA may obtain trading information regarding trading in the Shares 
and the other exchange-traded assets from such markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares and the other exchange-traded assets from markets 
and other entities that are members of ISG, which includes securities 
and futures exchanges, or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. Moreover, FINRA, on 
behalf of the Exchange, will be able to access, as needed, trade 
information for certain fixed income securities held by the Fund 
reported to FINRA's TRACE.
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    \35\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
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    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in creation units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how 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 continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\36\
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    \36\ See 17 CFR 240.10A-3.
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    (6) At least 90% of the Fund's net assets that are invested in 
exchange-traded equity securities and exchange-traded derivatives (in 
the aggregate) will be invested in investments that trade in markets 
that are members of ISG or are parties to a comprehensive surveillance 
sharing agreement with the Exchange.
    (7) 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 securities deemed illiquid by the Adviser. The Fund will 
monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets.
    (8) Under normal market conditions, the Fund will seek to achieve 
its investment objectives by investing at least 80% of its net assets 
(including investment borrowings) in Mortgage-Related Investments. The 
Fund will limit its investments in Mortgage-Related Investments that 
are not issued or guaranteed by Government Entities to 20% of its net 
assets.
    (9) Under normal market conditions, no more than 20% of the value 
of the Fund's net assets will be invested in

[[Page 42391]]

derivative instruments. The Fund's investments in derivative 
instruments will be consistent with the Fund's investment objectives 
and the 1940 Act and will not be used to seek to achieve a multiple or 
inverse multiple of an index.
    (10) The Fund intends to invest primarily in investment grade 
securities and will limit investments in securities of any credit 
quality, including securities that are below investment grade and 
securities that are unrated and have not been judged by the Adviser to 
be of comparable quality to rated investment grade securities, to 20% 
of its net assets.
    (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 \37\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \37\ 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,\38\ that the proposed rule change (SR-NASDAQ-2014-057) be, and it 
hereby is, approved.
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    \38\ 15 U.S.C. 78s(b)(2).
    \39\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17034 Filed 7-18-14; 8:45 am]
BILLING CODE 8011-01-P


