
[Federal Register Volume 79, Number 158 (Friday, August 15, 2014)]
[Notices]
[Pages 48264-48269]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19335]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72809; File No. SR-NASDAQ-2014-063]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to the Listing and Trading of the Shares of the Arrow 
DWA Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield 
ETF of Arrow Investments Trust

August 11, 2014.

I. Introduction

    On June 23, 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 Arrow 
DWA Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield 
ETF (each a ``Fund'' and, collectively, ``Funds'') under Nasdaq Rule 
5735. On June 26, 2014, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
July 3, 2014.\4\ The Commission received no comments on the proposed 
rule change. This order approves the proposed rule change, as modified 
by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange clarified that the Arrow 
Investments Trust will issue and sell shares of the Arrow DWA 
Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield 
ETF only in aggregations of 100,000 shares.
    \4\ See Securities Exchange Act Release No. 72493 (June 27, 
2014), 79 FR 38088 (``Notice'').
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II. Description of the Proposal

    The Exchange has made the following representations and statements 
in describing the Funds and their respective investment strategies, 
including other portfolio holdings and investment restrictions.\5\
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    \5\ The Commission notes that additional information regarding 
the Trust, the Funds, and the Shares, including 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 Notice and the Registration Statement, as 
applicable. See Notice and Registration Statement, supra note 4 and 
infra note 6, respectively.
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    The Exchange proposes to list and trade the Shares under Nasdaq 
Rule 5735 (``Managed Fund Shares''), which governs the listing and 
trading of Managed Fund Shares. Each Fund is a series of the Arrow 
Investments Trust (``Trust'').\6\ Arrow Investment Advisors, LLC is the 
investment adviser (``Adviser'') to the Funds.\7\ Gemini Fund Services, 
LLC will act as the administrator and transfer agent to the Funds. 
Brown Brothers Harriman & Co. (``Custodian'') will act as the custodian 
and transfer agent to the Funds. Northern Lights Distributors, LLC is 
the principal underwriter and distributor of each Fund's Shares.
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    \6\ See Post-Effective Amendment No. 7 to Registration Statement 
on Form N-1A for the Trust (File Nos. 333-178164 and 811-22638) 
(``Registration Statement'').
    \7\ The Exchange states that the Adviser is not a broker-dealer, 
but it is affiliated with 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. The Exchange further 
states that, in the event (a) the Adviser becomes newly affiliated 
with a broker-dealer or registers as 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.
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Arrow DWA Balanced ETF

    The Exchange represents that the Fund's primary investment 
objective is to seek to achieve an appropriate balance between long-
term capital appreciation and capital preservation. In pursuing its 
investment objective, the Fund will invest in other ETFs \8\ that each 
invests primarily in domestic and foreign (including emerging markets) 
(i) equity securities \9\ of any market capitalization, (ii) fixed 
income securities \10\ of any credit quality, or (iii) alternative 
assets.\11\ In addition, the Fund will invest in commodity futures 
through a wholly-owned and controlled Cayman subsidiary (``Balanced 
Subsidiary''). The Fund's fixed income securities may be rated below 
investment grade (rated BB+ or lower by Standard & Poor's Ratings 
Services (``S&P'') or comparably rated by another nationally recognized 
statistical rating organization (``NRSRO''), also known as ``high 
yield'' or ``junk'' bonds, and in unrated debt securities determined by 
the Adviser to be of comparable quality.
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    \8\ The ETFs in which the Fund may invest include Index Fund 
Shares and Portfolio Depositary Receipts (as described in Nasdaq 
Rule 5705(a) and (b)) and Managed Fund Shares (as described in 
Nasdaq Rule 5735).
    \9\ The Fund defines ``equity securities'' to be exchange-traded 
common and preferred stocks.
    \10\ The Fund defines ``fixed income securities'' to be bonds, 
notes or debentures.
    \11\ The Fund defines ``alternative assets'' to be investments 
that are historically uncorrelated to either equity or fixed income 
investments, which are commodity futures, exchange-traded master 
limited partnerships (``MLPs'') and real estate-related securities, 
which include foreign and domestic exchange-traded real estate 
investment trusts (``REITs'') or exchange-traded real estate 
operating companies (``REOCs'').
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    The Exchange states that the Fund is a ``fund of funds,'' which 
means that it primarily invests in ETFs; however, the Adviser may elect 
to invest directly in the types of securities described above. The 
Adviser may elect to make these direct investments when it is cost 
effective for the Fund to do so (such as when the Fund reaches a size 
sufficient to effectively purchase the underlying securities held by 
the ETFs in which it invests, allowing the Fund to avoid the costs 
associated with indirect investments). The Adviser uses technical 
analysis \12\ to allocate the Fund's portfolio among the asset classes 
described above.
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    \12\ Technical analysis is the method of evaluating securities 
by analyzing statistics generated by market activity, such as past 
prices and trading volume, in an effort to determine probable future 
prices.
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    The Exchange states that under normal market conditions,\13\ the 
Fund will invest:
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    \13\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the securities 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. In periods of 
extreme market disturbance, the Fund may take temporary defensive 
positions, by overweighting its portfolio in cash/cash-like 
instruments; however, to the extent possible, the Adviser would 
continue to seek to achieve the Fund's investment objective.
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     From 25% to 65% in ETFs that invest in equity securities;
     from 25% to 65% in ETFs that invest in fixed income 
securities; and
     from 10% to 40% in ETFs that invest in alternative assets.
    The Fund will have the ability to invest up to 25% of its total 
assets in the Balanced Subsidiary. The Balanced Subsidiary will invest 
primarily in commodity futures, as well as fixed income securities and 
cash equivalents, which are intended to serve as margin

[[Page 48265]]

or collateral for the Balanced Subsidiary's investments in commodity 
futures.
    The Fund will invest in ETFs within specific asset classes when the 
technical models used by the Adviser indicate a high probability that 
the applicable asset classes and ETFs are likely to outperform the 
applicable universe. The Fund will sell interests or reduce investment 
exposure among an asset class or ETF when the technical models used by 
the Adviser indicate that such asset class or ETF is likely to 
underperform the applicable universe. The Fund may be more heavily 
invested in fixed-income ETFs, cash positions and similar securities 
when the technical models indicate these assets should significantly 
outperform the equity and/or alternative asset classes.
    The Exchange states that, in general, the Fund's investments in 
equity securities are intended to achieve the capital appreciation 
component of its investment objective and the Fund's investments in 
fixed income securities are intended to achieve the capital 
preservation component of its investment objective. Under normal market 
conditions, the Adviser expects that the Fund will invest a combined 
minimum of 35% in fixed-income securities and in alternative assets. 
The Fund's investments in alternative assets are intended to enable the 
portfolio to be less reliant on fixed-income investments for reducing 
volatility and equities for increasing returns. The Adviser may engage 
in frequent buying and selling of portfolio securities to achieve the 
Fund's investment objective.
    The Exchange states that the Fund seeks to achieve its investment 
objective by implementing a proprietary technical asset allocation 
(``TAA'') model. The Adviser will overweight asset classes, rotation 
strategies, and underlying ETFs exhibiting positive relative strength, 
and underweight asset classes, rotation strategies, and underlying ETFs 
exhibiting negative relative strength. In essence, TAA works by 
reallocating at different times in response to the changing patterns of 
returns available in the markets. This methodology does not attempt to 
predict the future; it simply reacts to pattern changes in the 
marketplace at any given time. This methodology allows the Fund to be 
adaptive to current market conditions. The tactical model relies on a 
number of technical indicators when making allocation decisions for the 
Fund. The Adviser utilizes relative strength as the primary technical 
indicator to tactically allocate assets both within and across asset 
classes and rotation strategies. The relative strength indicator is 
important because it adapts to the changing market conditions. Relative 
strength measures the likelihood that an ETF or a group of ETFs will 
outperform the appropriate base index. When the indicator is moving up, 
it shows that the ETF or group of ETFs is performing better than the 
base index. When the indicator is moving down, it shows that the ETF or 
group of ETFs is performing worse than the base index (i.e., not rising 
as fast or falling faster).\14\
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    \14\ For example, in the sector rotation strategy, the Adviser 
creates a sector-based index to compare all available sector ETFs 
for investment in the Fund. The performance of each ETF is compared 
to the base index and ranked. The Adviser generally purchases the 
ETFs that demonstrate the highest-ranked relative strength and sells 
any positions that are not included in that list.
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    The Exchange states that the Adviser has discretion to add to or 
delete from the universe of eligible ETFs for each strategy based on 
holdings, expense ratio, volume, liquidity, new product availability, 
and other factors that can positively contribute to achieving the 
Fund's investment objectives.

Arrow DWA Tactical ETF

    The Exchange states that the Fund's primary investment objective is 
to seek to achieve long-term capital appreciation with capital 
preservation as a secondary objective. In pursuing its investment 
objective, the Fund will invest in other ETFs \15\ that each invests 
primarily in domestic and foreign (including emerging markets) (i) 
equity securities \16\ of any market capitalization, (ii) fixed-income 
securities \17\ of any credit quality, or (iii) alternative assets.\18\ 
In addition, the Fund will invest in commodity futures through a 
wholly-owned and controlled Cayman subsidiary (``Tactical 
Subsidiary''). The Fund's fixed income securities may be rated below 
investment grade (rated BB+ or lower by S&P or comparably rated by 
another NRSRO, also known as ``high yield'' or ``junk'' bonds, and in 
unrated debt securities determined by the Adviser to be of comparable 
quality.
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    \15\ See supra note 8.
    \16\ See supra note 9.
    \17\ See supra note 10.
    \18\ See supra note 11.
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    The Exchange represents that the Fund is a ``fund of funds,'' which 
means that it primarily invests in ETFs; however, the Adviser may elect 
to invest directly in the types of securities described above. The 
Adviser may elect to make these direct investments when it is cost 
effective for the Fund to do so (such as when the Fund reaches a size 
sufficient to effectively purchase the underlying securities held by 
the ETFs in which it invests, allowing the Fund to avoid the costs 
associated with indirect investments). The Adviser uses technical 
analysis to allocate the Fund's assets among the asset classes 
described above.\19\
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    \19\ See supra note 12.
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    The Exchange states that under normal market conditions, the Fund 
will invest:
     From 0% to 100% of its assets in ETFs that invest in 
equity securities;
     From 0% to 100% of its assets in ETFs that invest in 
fixed-income securities; and
     From 0% up to 90% of its assets in ETFs that invest in 
alternative assets.
    The Exchange states that the Fund will have the ability to invest 
up to 25% of its total assets in the Tactical Subsidiary. The Tactical 
Subsidiary will invest primarily in commodity futures, as well as 
fixed-income securities and cash equivalents, which are intended to 
serve as margin or collateral for the Tactical Subsidiary's investments 
in commodity futures.
    The Exchange states that the Fund will invest in ETFs within 
specific asset classes when the technical models used by the Adviser 
indicate a high probability that the applicable asset classes and ETFs 
are likely to outperform the applicable universe. The Fund will sell 
interests or reduce investment exposure among an asset class or ETF 
when the technical models used by the Adviser indicate that such asset 
class or ETF is likely to underperform the applicable universe. The 
Fund may invest more heavily in fixed-income ETFs, cash positions and 
similar securities when the technical models indicate these assets 
should significantly outperform the equity and/or alternative asset 
classes.
    The Exchange states that, in general, the Fund's investments in 
equity securities are intended to achieve the capital appreciation 
component of the Fund's investment objectives. At times, the Fund may 
invest in fixed-income securities in order to achieve the capital 
preservation component of the Fund's investment objectives. The Fund's 
investments in alternative assets are intended to enable the portfolio 
to be less reliant on fixed-income investments for reducing volatility 
and equities for increasing returns. The Adviser may engage in frequent 
buying and selling of portfolio securities to achieve the Fund's 
investment objectives.
    The Exchange states that the Fund seeks to achieve its investment 
objectives by implementing a proprietary TAA model. The Adviser will 
overweight asset classes, rotation

[[Page 48266]]

strategies and underlying ETFs exhibiting positive relative strength 
and underweight asset classes, rotation strategies and underlying ETFs 
exhibiting negative relative strength. The tactical model relies on a 
number of technical indicators when making allocation decisions for the 
Fund. The Adviser utilizes relative strength as the primary technical 
indicator to tactically allocate assets both within and across asset 
classes and rotation strategies. The relative strength indicator is 
important because it adapts to the changing market conditions. Relative 
strength measures the likelihood that an ETF or a group of ETFs will 
outperform the appropriate base index. When the indicator is moving up, 
it shows that the ETF or group of ETFs is performing better than the 
base index. When the indicator is moving down, it shows that the ETF or 
group of ETFs is performing worse than the base index (i.e., not rising 
as fast or falling faster).\20\
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    \20\ See supra note 14.
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    The Exchange states that the Adviser has discretion to add to or 
subtract from the universe of eligible ETFs for each strategy based on 
holdings, expense ratio, volume, liquidity, new product availability 
and other factors that can positively contribute to achieving the 
Fund's investment objectives.

The Subsidiaries

    The Exchange represents that the Balanced Fund and Tactical Fund 
each has the ability to invest up to 25% of its total assets in the 
Balanced Subsidiary and the Tactical Subsidiary, respectively (each a 
``Subsidiary''; together, ``Subsidiaries''). Each Subsidiary will 
invest primarily in commodity futures, as well as fixed-income 
securities and cash equivalents, which are intended to serve as margin 
or collateral for each Subsidiary's investments in commodity futures. 
Each Subsidiary may have both long and short positions in commodities 
futures. However, for a given commodity, each Subsidiary will have a 
net long exposure. Each Subsidiary will also be advised by the 
Adviser.\21\
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    \21\ Neither Subsidiary will be registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') nor will be 
directly subject to its investor protections, except as noted in the 
Registration Statement. However, each Subsidiary will be wholly-
owned and controlled by the applicable Fund and will be advised by 
the Adviser. Therefore, each Fund's ownership and control of its 
respective Subsidiary will prevent the applicable Subsidiary from 
taking action contrary to the interests of the Fund or its 
shareholders. The Board of Trustees of the Trust (``Board'') will 
have oversight responsibility for the investment activities of each 
Fund, including its expected investment in the applicable 
Subsidiary, and the Fund's role as the sole shareholder of the 
applicable Subsidiary. The Adviser will receive no additional 
compensation for managing the assets of each Subsidiary. Each 
Subsidiary will also enter into separate contracts for the provision 
of custody, transfer agency, and accounting agent services with the 
same, or with affiliates of the same, service providers that provide 
those services to the Funds.
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    By investing in commodities futures indirectly through the 
applicable Subsidiary, the Exchange states that each of the Balanced 
Fund and the Tactical Fund will obtain exposure to the commodities 
markets within the federal tax requirements that apply to the Fund. 
Investment in each Subsidiary is expected to provide the applicable 
Fund with exposure to the commodities markets within the limitations of 
the federal tax requirements of Subchapter M of the Internal Revenue 
Code.
    Because each of the Balanced Fund and the Tactical Fund may invest 
up to 25% of its assets in its respective Subsidiary, each Fund may be 
considered to be investing indirectly in such investments through its 
Subsidiary, and references to each of the Balanced Fund and Tactical 
Fund may also include its Subsidiary. When viewed on a consolidated 
basis, each Subsidiary will be subject to the same investment 
restrictions and limitations, and follow the same compliance policies 
and procedures, as the applicable Fund.
    The Exchange represents that as a result of the instruments that 
will be indirectly held by each of the Balanced Fund and the Tactical 
Fund, the Adviser has registered as a commodity pool operator \22\ and 
is also a member of the National Futures Association (``NFA''). Each of 
the Balanced Fund, Tactical Fund, and the Subsidiaries are subject to 
regulation by the Commodity Futures Trading Commission and NFA, and to 
additional disclosure, reporting, and recordkeeping rules imposed upon 
commodity pools.
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    \22\ As defined in Section 1a(11) of the Commodity Exchange Act.
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Arrow DWA Tactical Yield ETF

    The Exchange states that the Fund's primary investment objective is 
to seek high current income with an appropriate balance between long-
term capital appreciation and capital preservation. In pursuing its 
investment objective, the Fund will invest in other ETFs \23\ that each 
invest in domestic and foreign (including emerging markets) (i) equity 
securities \24\ of any market capitalization or (ii) fixed-income 
securities \25\ of any credit quality. The Fund also invests indirectly 
in these asset classes through various exchange-traded products 
(``ETPs'') \26\ and exchange-traded closed-end funds, and directly 
through individual securities. In order to mitigate the settlement risk 
of the foreign denominated securities in which it invests due to 
currency fluctuations, the Fund may also invest up to 25% of its net 
assets in Spot Forex futures.
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    \23\ See supra note 8.
    \24\ The Fund defines equity securities to be exchange-traded 
common and preferred stocks and exchange-traded REITs.
    \25\ See supra note 10.
    \26\ The ETPs in which the Fund may invest include exchange-
traded currency trusts (as described in Nasdaq Rule 5711(e)) and 
exchange-traded notes (``ETNs'') (as described in Nasdaq Rule 5730).
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    The Exchange states that the Fund will maintain two income 
strategies that focus on (i) securities that generate ``high beta 
yield,'' consisting of securities correlated to equities based on a 
proprietary methodology, and (ii) securities that generate ``low beta 
yield,'' consisting of securities less correlated to equities based on 
a proprietary methodology. Beta is a measure of the price volatility, 
or risk, of a security or a portfolio in comparison to the market as a 
whole. A security's correlation to equities is a measure of the 
performance similarity of the security to the S&P 500 index. The high 
beta strategy is a composite of securities that are selected based on 
their credit and equity risk premiums characteristics. The low beta 
yield strategy is a composite of securities that are selected based on 
their inflation, interest, and credit risk characteristics. The Fund 
uses a proprietary selection methodology designed to identify 
securities that demonstrate strong relative strength characteristics 
within each strategy. The Fund will then utilize a quantitative 
methodology that relies on economic and fundamental factors to 
tactically underweight and overweight the income strategies.
    The Exchange represents that the Fund will, under normal market 
conditions, invest as follows:
     From 20% to 80% in the Low Beta (LB). The LB will be 
comprised of equity and fixed income securities, including ETPs that 
invest in international and domestic securities; and
     From 20% to 80% in the High Beta (HB). The HB will be in 
equity and fixed income securities, including ETPs that invest in 
international and domestic securities.
    The Exchange states that the Fund expects to be a ``fund of 
funds,'' which means that it primarily invests in ETFs, ETPs, and 
closed-end funds; however, the Adviser may elect to invest directly in 
the asset classes described above. The Adviser may elect to make these 
direct

[[Page 48267]]

investments when it is cost effective for the Fund to do so (such as 
when the Fund reaches a size sufficient to effectively purchase the 
underlying securities held by the ETFs, ETPs, or closed-end Funds in 
which it invests, allowing the Fund to avoid the costs associated with 
indirect investments).

All Funds

    The Exchange represents that in certain situations or market 
conditions, a Fund may temporarily depart from its normal investment 
policies and strategies, provided that the alternative is consistent 
with the Fund's investment objective and is in the best interest of the 
Fund. For example, a Fund may hold a higher than normal proportion of 
its assets in cash in times of extreme market stress. The Funds may 
borrow money from a bank as permitted by the 1940 Act or other 
governing statute, by applicable rules thereunder, or by Commission or 
other regulatory agency with authority over the Funds, but only for 
temporary or emergency purposes. The use of temporary investments is 
not a part of a principal investment strategy of the Funds.
    The Exchange represents that each Fund may hold up to an aggregate 
amount of 15% of its net assets in illiquid assets (calculated at the 
time of investment). Each 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 a 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.
    The Exchange represents that each Fund will not invest 25% or more 
of the value of its total assets in securities of issuers in any one 
industry.
    The Exchange states that the Funds will be classified as ``non-
diversified'' investment companies under the 1940 Act, and that the 
Funds intend to qualify for and to elect treatment as a separate 
regulated investment company under Subchapter M of the Internal Revenue 
Code.
    The Funds will not invest in options or swaps.
    The Exchange represents that each Fund's investments and each 
Subsidiary's investments will be consistent with its (or its applicable 
Fund's) respective investment objective and, although certain 
derivative investments will have a leveraging effect on the Funds and 
Subsidiaries, the Funds and Subsidiaries will not seek leveraged 
returns (e.g., 2X or -3X).

III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\27\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 6(b)(5) of the Act,\28\ 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 Funds and the Shares must comply with the 
requirements of Nasdaq Rule 5735 to be listed and traded on the 
Exchange.
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    \27\ 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).
    \28\ 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,\29\ 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 plans 
for the Shares. In addition, the Intraday Indicative Value,\30\ as 
defined in Nasdaq Rule 5735(c)(3), of each Fund will be available on 
the NASDAQ OMX Information LLC proprietary index data service, and 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.\31\ On each business day, before commencement of trading in 
Shares in the Regular Market Session \32\ on the Exchange, the Funds 
will disclose on their Web site the identities and quantities of the 
portfolio of securities and other assets (``Disclosed Portfolio'' as 
defined in Nasdaq Rule 5735(c)(2)) held by each Fund that will form the 
basis for each Fund's calculation of NAV at the end of the business 
day.\33\ The Custodian, through the National Securities Clearing 
Corporation, 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 each Fund for that day. The NAV of 
each Fund will be determined once each business day, normally as of the 
close of trading of the New York Stock Exchange, generally, 4:00 p.m. 
Eastern Time.\34\ 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 
quotations on the securities and other assets held by the Funds and 
Subsidiaries will be available from major broker-dealer firms or on the 
exchange on which they are traded, as applicable. Intraday price 
information will also be available through subscription services, such 
as Bloomberg, Markit, and Thomson Reuters, which can be accessed by 
authorized participants and other

[[Page 48268]]

investors. Pricing information for exchange-traded securities such as 
common and preferred stocks, ETFs, ETPs, ETNs, closed-end funds, 
futures contracts, REITs, MLPs, and REOCs will be publicly available 
from the Web sites of the exchanges on which they trade, on public 
financial Web sites, and through subscription services such as 
Bloomberg and Thompson Reuters. Pricing information regarding debt 
securities (including high yield fixed-income securities, bonds, notes, 
and debentures) will be available through subscription services such as 
Markit, Bloomberg, and Thompson Reuters. The Funds' Web site will 
include a form of the prospectus for the Funds and additional data 
relating to NAV and other applicable quantitative information.
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    \29\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \30\ According to the Exchange, the Intraday Indicative Value 
reflects an estimated intraday value of each Fund's portfolio. The 
Intraday Indicative Value will be based upon the current value for 
the components of a Disclosed Portfolio.
    \31\ 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.
    \32\ 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).
    \33\ The Disclosed Portfolio will include, as applicable, the 
names, quantity, percentage weighting and market value of securities 
and other assets held by each Fund and each Subsidiary and the 
characteristics of such assets. The Web site and information will be 
publicly available at no charge.
    \34\ NAV will be calculated by deducting all of a Fund's 
liabilities from the total value of its assets and dividing the 
result by the number of Shares outstanding, rounding to the nearest 
cent.
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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 Funds will be 
halted under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pause provisions under 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,\35\ 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 Funds 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.\36\ 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 of or 
changes to the portfolio.\37\ The Exchange represents that trading in 
the Shares will be subject to the existing trading surveillances, 
administered by both Nasdaq and also the Financial Industry Regulatory 
Authority (``FINRA'') on behalf of the Exchange, which are designed to 
detect violations of Exchange rules and applicable federal securities 
laws.\38\ 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. The Exchange represents that 
FINRA, on behalf of the Exchange, will communicate as needed regarding 
trading information it can obtain relating to the Shares and other 
exchange-traded securities and instruments held by the Funds with other 
markets and other entities that are members of the Intermarket 
Surveillance Group (``ISG''), and FINRA may obtain trading information 
regarding trading in the Shares and exchange-traded securities and 
instruments held by the Fund from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in the 
Shares and exchange-traded securities and instruments held by the Fund 
from markets and other entities that are members of ISG, which includes 
all U.S. national securities and certain futures exchanges, or are 
parties to 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 each Fund 
reported to FINRA's Trade Reporting and Compliance Engine. 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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    \35\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities and other assets constituting the 
Disclosed Portfolios of the Funds; 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 Funds.
    \36\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \37\ See supra note 7. 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.
    \38\ 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) Trading in the Shares will 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, and 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.
    (4) At all times, 90% of each Fund's exchange-traded assets will be 
securities that trade in markets that are members of the ISG, which 
includes all U.S. national securities and certain futures exchanges, or 
are parties to a comprehensive surveillance sharing agreement.
    (5) 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

[[Page 48269]]

recommending transactions in the Shares to customers; (c) how and by 
whom information regarding the Intraday Indicative Value and Disclosed 
Portfolio is disseminated; (d) the risks involved in trading the Shares 
during the Pre-Market and Post-Market Sessions when an updated Intraday 
Indicative Value will not be calculated or publicly disseminated; (e) 
the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (f) trading information.
    (6) For initial and continued listing, the Funds will be in 
compliance with Rule 10A-3 under the Act.\39\
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    \39\ See 17 CFR 240.10A-3.
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    (7) Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment). Each 
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 a Fund's 
net assets are held in illiquid assets.
    (8) The Funds will not invest in options or swaps.
    (9) Each Fund's investments and each Subsidiary's investments will 
be consistent with its (or its applicable Fund's) respective investment 
objective and, although certain derivative investments will have a 
leveraging effect on the Funds and Subsidiaries, the Funds and 
Subsidiaries will not seek leveraged returns (e.g., 2X or -3X).
    (10) A minimum of 100,000 Shares of each Fund 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, as modified by Amendment No. 1 thereto, is consistent with 
Section 6(b)(5) of the Act \40\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \40\ 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,\41\ that the proposed rule change (SR-NASDAQ-2014-063), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \41\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19335 Filed 8-14-14; 8:45 am]
BILLING CODE 8011-01-P


