
[Federal Register Volume 81, Number 164 (Wednesday, August 24, 2016)]
[Notices]
[Pages 57968-57977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20210]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78616; File No. SR-NASDAQ-2016-104]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Nasdaq Rule 5735 To 
Adopt Generic Listing Standards for Managed Fund Shares

August 18, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 16, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Nasdaq Rule 5735 to adopt generic 
listing standards for Managed Fund Shares.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Nasdaq Rule 5735 to adopt generic 
listing standards for Managed Fund Shares, as well as to make 
additional changes as described below. Under the Exchange's current 
rules, a proposed rule change must be filed with the Commission for the 
listing and trading of each new series of Managed Fund Shares. The 
Exchange believes that it is appropriate to codify certain rules within 
Rule 5735 that would generally eliminate the need for such proposed 
rule changes, which would create greater efficiency and promote uniform 
standards in the listing process.\3\
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    \3\ Except as noted below, this proposed rule change is 
substantively identical to changes approved by the Commission to 
NYSE Arca Equities Rule 8.600. See Securities Exchange Act Release 
No. 78397 (July 22, 2016) (SR-NYSEArca-2015-110) (order approving 
generic listing standards for Managed Fund Shares listed per NYSE 
Arca Equities Rule 8.600). The definition of ``Exchange Traded 
Derivative Securities'' provided in proposed Rule 5735(c)(6) is 
similar to, but more narrow than, the definition of ``Derivative 
Securities Product'' used in NYSE Arca Rule 8.600 because the 
proposed definition of Exchange Traded Derivative Securities does 
not include an Exchange rule comparable to NYSE Arca Equities Rule 
8.400 (Paired Trust Shares). In addition, non-substantive changes 
are made in order to conform the proposal to the structure of the 
Exchange's current rules. See also Securities Exchange Act Release 
No. 78396 (July 22, 2016) (SR-BATS-2015-100) (order approving 
generic BATS listing standards for Managed Fund Shares).
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Background
    Rule 5735 sets forth certain rules related to the listing and 
trading of Managed Fund Shares.\4\ Under Rule 5735(c)(1), the term 
``Managed Fund Share'' means a security that:
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    \4\ See Securities Exchange Act Release No. 57962 (June 13, 
2008), 73 FR 35175 (June 20, 2008) (SR-NASDAQ-2008-039) (order 
approving Nasdaq Rule 4420(o) and listing and trading of shares of 
certain issues of Managed Fund Shares) (the ``Approval Order''). The 
Approval Order approved, among other things, the rules permitting 
the listing and trading of Managed Fund Shares. Rule 4420(o) was 
subsequently relocated to Rule 5735. See Securities Exchange Act 
Release No. 59663 (March 31, 2009), 74 FR 15552 (April 6, 2009) (SR-
NASDAQ-2009-018).
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    (a) Represents an interest in a registered investment company 
(``Investment Company'') organized as an open-end management investment 
company or similar entity, that invests in a portfolio of securities 
selected by the Investment Company's investment adviser (hereafter 
``Adviser'') consistent with the Investment Company's investment 
objectives and policies;
    (b) is issued in a specified aggregate minimum number in return for 
a deposit of a specified portfolio of securities and/or a cash amount 
with a value equal to the next determined net asset value; and
    (c) when aggregated in the same specified minimum number, may be 
redeemed at a holder's request, which holder will be paid a specified 
portfolio of securities and/or cash with a value equal to the next 
determined net asset value.
    Effectively, Managed Fund Shares are securities issued by an 
actively-managed open-end Investment Company (i.e., an actively-managed 
exchange-traded fund (``ETF'')). Because Managed Fund Shares are 
actively-managed, they do not seek to replicate the performance of a 
specified passive index of securities. Instead, they generally use an 
active investment strategy to seek to meet their investment objectives. 
In contrast, an open-end Investment Company that issues Index Fund 
Shares, listed and traded on the Exchange pursuant to Nasdaq Rule 
5705(b), seeks to provide investment results that generally correspond 
to the price and yield performance of a specific foreign or domestic 
stock index, fixed income securities index, or combination thereof.
    All Managed Fund Shares listed and/or traded pursuant to Rule 5735 
(including pursuant to unlisted trading privileges) are subject to the 
full panoply of Exchange rules and procedures that currently govern the 
trading of equity securities on the Exchange.\5\
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    \5\ See Approval Order, note 4 above, at 35177.
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    In addition, Rule 5735(d) currently provides for the criteria that 
Managed Fund Shares must satisfy for initial and continued listing on 
the Exchange, including, for example, that a minimum number of Managed 
Fund Shares are required to be outstanding at the time of commencement 
of trading on the Exchange. However, the current process for listing 
and trading new series of Managed Fund Shares on the Exchange requires 
that the Exchange submit a proposed rule change with the Commission. In 
this regard, Rule 5735(b)(1) specifies that the Exchange will file 
separate proposals under Section 19(b) of the Act (hereafter, a 
``proposed rule change'') before listing and trading shares of an issue 
of Managed Fund Shares.

[[Page 57969]]

Proposed Changes to Rule 5735
    The Exchange proposes to amend Rule 5735(b)(1) to specify that the 
Exchange may approve Managed Fund Shares for listing and/or trading 
(including pursuant to unlisted trading privileges) pursuant to SEC 
Rule 19b-4(e) under the Act, which pertains to derivative securities 
products (``SEC Rule 19b-4(e)'').\6\ SEC Rule 19b-4(e)(1) provides that 
the listing and trading of a new derivative securities product by a 
self-regulatory organization (``SRO'') is not deemed a proposed rule 
change, pursuant to paragraph (c)(1) of Rule 19b-4,\7\ if the 
Commission has approved, pursuant to section 19(b) of the Act, the 
SRO's trading rules, procedures, and listing standards for the product 
class that would include the new derivative securities product and the 
SRO has a surveillance program for the product class. This is the 
current method pursuant to which ``passive'' ETFs are listed under 
Nasdaq Rule 5705.
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    \6\ 17 CFR 240.19b-4(e). As provided under SEC Rule 19b-4(e), 
the term ``new derivative securities product'' means any type of 
option, warrant, hybrid securities product, or any other security, 
other than a single equity option or a security futures product, 
whose value is based, in whole or in part, upon the performance of, 
or interest in, an underlying instrument.
    \7\ 17 CFR 240.19b-4(c)(1). As provided under SEC Rule 19b-
4(c)(1), a stated policy, practice, or interpretation of the SRO 
shall be deemed to be a proposed rule change unless it is reasonably 
and fairly implied by an existing rule of the SRO.
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    The Exchange would also specify within Rule 5735(b)(1) that 
components of Managed Fund Shares listed pursuant to SEC Rule 19b-4(e) 
must satisfy, upon initial listing and on a continual basis, certain 
specific criteria, which the Exchange would include within Rule 
5735(b)(1), as described in greater detail below. As proposed, the 
Exchange would continue to file separate proposed rule changes before 
the listing and trading of Managed Fund Shares with components that do 
not satisfy the additional criteria described below or components other 
than those specified below. For example, if the components of a Managed 
Fund Share exceeded one of the applicable thresholds, the Exchange 
would file a separate proposed rule change before listing and trading 
such Managed Fund Share. Similarly, if the components of a Managed Fund 
Share included a security or asset that is not specified below, the 
Exchange would file a separate proposed rule change.
    The Exchange would also add to Rule 5735(c) to provide that the Web 
site for each series of Managed Fund Shares shall disclose certain 
information regarding the Disclosed Portfolio, to the extent 
applicable. The required information includes the following, to the 
extent applicable: Ticker symbol, CUSIP or other identifier, a 
description of the holding, identity of the asset upon which the 
derivative is based, the strike price for any options, the quantity of 
each security or other asset held as measured by select metrics, 
maturity date, coupon rate, effective date, market value, and 
percentage weight of the holding in the portfolio.\8\
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    \8\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included disclosure requirements 
with respect to each portfolio holding, as applicable to the type of 
holding. See, e.g., Securities Exchange Act Release No. 77688 (April 
22, 2016), 81 FR 25467 (April 28, 2016) (SR-NASDAQ-2016-030) (the 
``Elkhorn Dorsey Wright Commodity Rotation Portfolio of Elkhorn ETF 
Trust Approval''), generally and at 14147. See also Securities 
Exchange Act Release No. 72666 (July 3, 2014), 79 FR 44224 (July 30, 
2014) (SR-NYSEArca-2013-122) (the ``PIMCO Total Return Use of 
Derivatives Approval''), generally and at 44227.
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    In addition, the Exchange would amend Rule 5735(d) to specify that 
all Managed Fund Shares must have a stated investment objective, which 
must be adhered to under normal market conditions.\9\
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    \9\ The Exchange would also add a new defined term under Rule 
5735(c)(5) to specify that the term ``normal market conditions'' 
includes, but is not limited to, the absence of trading halts in the 
applicable financial markets generally; operational issues (e.g., 
systems failure) causing dissemination of inaccurate market 
information; or force majeure type events such as a natural or man-
made disaster, act of God, armed conflict, act of terrorism, riot or 
labor disruption or any similar intervening circumstance.
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    Finally, the Exchange would also amend the continued listing 
requirement in Rule 5735(d)(2)(A) by changing the requirement that an 
Intraday Indicative Value for Managed Fund Shares be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the time when the Managed Fund Shares trade on the 
Exchange to a requirement that an Intraday Indicative Value be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Regular Market Session (as defined in Nasdaq Rule 
4120(b)).
Proposed Managed Fund Share Portfolio Standards
    The Exchange is proposing standards that would pertain to Managed 
Fund Shares to qualify for listing and trading pursuant to SEC Rule 
19b-4(e). These standards would be grouped according to security or 
asset type. The Exchange notes that the standards proposed for a 
Managed Fund Share portfolio that holds U.S. Component Stocks, Non-U.S. 
Component Stocks, Exchange Traded Derivative Securities, and Linked 
Securities are based in large part on the existing equity security 
standards applicable to Index Fund Shares in Rule 5705(b)(3).
    The standards proposed for a Managed Fund Share portfolio that 
holds fixed income securities are based in large part on the existing 
fixed income security standards applicable to Index Fund Shares in Rule 
5705(b)(4). Many of the standards proposed for other types of holdings 
in a Managed Fund Share portfolio are based on previous proposed rule 
changes for specific series of Managed Fund Shares.\10\
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    \10\ See, e.g., Securities Exchange Act Release No. 77688 (April 
22, 2016), 81 FR 25467 (April 28, 2016) (SR-NASDAQ-2016-030) (order 
approving listing and trading of Elkhorn Dorsey Wright Commodity 
Rotation Portfolio of Elkhorn ETF Trust). See also Securities 
Exchange Act Release Nos. 72728 (July 31, 2014) 79 FR 45852 (August 
6, 2014) (SR-NASDAQ-2014-059) (order approving listing and trading 
of Global X Commodities Strategy ETF); 72506 (July 1, 2014), 79 FR 
38631 (July 8, 2014) (SR-NASDAQ-2014-050) (order approving listing 
and trading of First Trust Strategic Income ETF); 69464 (April 26, 
2013), 78 FR 25774 (May 2, 2013) (SR-NASDAQ-2013-036) (order 
approving listing and trading of First Trust Senior Loan Fund); and 
66489 (February 29, 2012), 77 FR 13379 (March 6, 2012) (SR-NASDAQ-
2012-004) (order approving listing and trading of WisdomTree 
Emerging Markets Corporate Bond Fund). See also Securities Exchange 
Act Release Nos. 66321 (February 3, 2012), 77 FR 6850 (February 9, 
2012) (SR-NYSEArca-2011-95) (the ``PIMCO Total Return Approval''); 
69244 (March 27, 2013), 78 FR 19766 (April 2, 2013) (SR-NYSEArca-
2013-08) (the ``SPDR Blackstone/GSO Senior Loan Approval''); 68870 
(February 8, 2013), 78 FR 11245 (February 15, 2013) (SR-NYSEArca-
2012-139) (the ``First Trust Preferred Securities and Income 
Approval''); 69591 (May 16, 2013), 78 FR 30372 (May 22, 2013) (SR-
NYSEArca-2013-33) (the ``International Bear Approval''); 61697 
(March 12, 2010), 75 FR 13616 (March 22, 2010) (SR-NYSEArca-2010-04) 
(the ``WisdomTree Real Return Approval''); and 67054 (May 24, 2012), 
77 FR 32161 (May 31, 2012) (SR-NYSEArca-2012-25) (the ``WisdomTree 
Brazil Bond Approval''). Certain standards proposed herein for 
Managed Fund Shares are also based on previous proposed rule changes 
for specific series of Index Fund Shares for which Commission 
approval for listing was required due to the Index Fund Shares not 
satisfying certain standards of Rule 5705(b)(3) and 5705(b)(4). On 
NYSE Arca, similar products under NYSE Commentary .01 and .02 to 
NYSE Arca Equities Rule 5.2(j)(3) are called Investment Company 
Units. See, e.g., Securities Exchange Act Release No. 69373 (April 
15, 2013), 78 FR 23601 (April 19, 2013) (SR-NYSEArca-2012-108) (the 
``NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund 
Approval'').
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    Proposed Rule 5735(b)(1)(A) would describe the standards for a 
Managed Fund Share portfolio that holds equity securities, which are 
defined to be U.S. Component Stocks,\11\ Non-U.S. Component Stocks,\12\ 
Exchange Traded

[[Page 57970]]

Derivative Securities,\13\ and Linked Securities \14\ listed on a 
national securities exchange. For Exchange Traded Derivative Securities 
and Linked Securities, no more than 25% of the equity weight of the 
portfolio could include leveraged and/or inverse leveraged Exchange 
Traded Derivative Securities or Linked Securities. In addition, 
proposed rule 5735(b)(1)(A) would provide that, to the extent that a 
portfolio includes convertible securities, the equity security into 
which such security is converted would be required to meet the criteria 
of 5735(b)(1)(A) after converting.
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    \11\ For the purposes of Rule 5735(b)(1) and this proposal, the 
term ``U.S. Component Stocks'' would have the same meaning as 
defined in Rule 5705(b)(1)(D).
    \12\ For the purposes of Rule 5735(b)(1) and this proposal, the 
term ``Non-U.S. Component Stocks'' would have the same meaning as 
defined in Rule 5705(b)(1)(E).
    \13\ For the purposes of Rule 5735(b)(1)(A) and this proposal, 
proposed Rule 5735(c)(6) would define the term ``Exchange Traded 
Derivative Securities'' to mean the securities described in Nasdaq 
Rules 5705(a) (Portfolio Depository Receipts); 5705(b) (Index Fund 
Shares); 5720 (Trust Issued Receipts); 5711(d) (Commodity-Based 
Trust Shares); 5711(e) (Currency Trust Shares); 5711(f), (Commodity 
Index Trust Shares); 5711(g) (Commodity Futures Trust Shares); 
5711(h) (Partnership Units); 5711(i) (Trust Units); 5735 (Managed 
Fund Shares); and 5711(j) (Managed Trust Securities). This proposed 
definition is more narrow than the term ``Derivative Securities 
Product,'' as defined in Nasdaq Rule 4120(b)(4)(A) and used in Rule 
5705(b), because it excludes certain securities including 
NextShares. It is also more narrow than the term ``Derivative 
Securities Product'' as defined in commentary .01(a) to NYSE Arca 
Rule 8.600 because it excludes Paired Trust Shares.
    \14\ Linked Securities are securities that qualify for Exchange 
listing and trading under Rule 5710. The securities described in 
Rules 5705, 5710, and 5735(c)(6), as referenced above, would include 
securities listed on another national securities exchange pursuant 
to substantially equivalent listing rules.
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    As proposed in Rule 5735(b)(1)(A)(i), the component stocks of the 
equity portion of a portfolio that are U.S. Component Stocks shall meet 
the following criteria initially and on a continuing basis:
    (1) Component stocks (excluding Exchange Traded Derivative 
Securities and Linked Securities) that in the aggregate account for at 
least 90% of the equity weight of the portfolio (excluding such 
Exchange Traded Derivative Securities and Linked Securities) each must 
have a minimum market value of at least $75 million; \15\
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    \15\ This proposed text is substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(i)a., except for the 
omission of the reference to ``index,'' which is not applicable, the 
substitution of a more narrow exclusion for ``Exchange Traded 
Derivative Securities'' instead of for ``Derivative Securities 
Products,'' and the addition of the reference to Linked Securities.
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    (2) Component stocks (excluding Exchange Traded Derivative 
Securities and Linked Securities) that in the aggregate account for at 
least 70% of the equity weight of the portfolio (excluding such 
Exchange Traded Derivative Securities and Linked Securities) each must 
have a minimum monthly trading volume of 250,000 shares or minimum 
notional volume traded per month of $25,000,000, averaged, over the 
last six months; \16\
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    \16\ This proposed text is substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(i)b., except for the 
omission of the reference to ``index,'' which is not applicable, the 
substitution of a more narrow exclusion for ``Exchange Traded 
Derivative Securities'' instead of for ``Derivative Securities 
Products,'' and the addition of the reference to Linked Securities.
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    (3) The most heavily weighted component stock (excluding Exchange 
Traded Derivative Securities and Linked Securities) must not exceed 30% 
of the equity weight of the portfolio, and, to the extent applicable, 
the five most heavily weighted component stocks (excluding Exchange 
Traded Derivative Securities and Linked Securities) must not exceed 65% 
of the equity weight of the portfolio; \17\
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    \17\ This proposed text is substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(i)c., except for the 
omission of the reference to ``index,'' which is not applicable, the 
substitution of a more narrow exclusion for ``Exchange Traded 
Derivative Securities'' instead of for ``Derivative Securities 
Products,'' and the addition of the reference to Linked Securities.
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    (4) Where the equity portion of the portfolio does not include Non-
U.S. Component Stocks, the equity portion of the portfolio shall 
include a minimum of 13 component stocks; provided, however, that there 
shall be no minimum number of component stocks if (a) one or more 
series of Exchange Traded Derivative Securities or Linked Securities 
constitute, at least in part, components underlying a series of Managed 
Fund Shares, or (b) one or more series of Exchange Traded Derivative 
Securities or Linked Securities account for 100% of the equity weight 
of the portfolio of a series of Managed Fund Shares; \18\
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    \18\ This proposed text is substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(i)d., except for the 
omission of the reference to ``index,'' which is not applicable, the 
addition of the reference to Linked Securities, the substitution of 
a more narrow exclusion for ``Exchange Traded Derivative 
Securities'' instead of for ``Derivative Securities Products,'' and 
the reference to the 100% limit applying to the ``equity portion'' 
of the portfolio.
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    (5) Except as provided in proposed Rule 5735(b)(1)(A), equity 
securities in the portfolio must be U.S. Component Stocks listed on a 
national securities exchange and must be NMS Stocks as defined in Rule 
600 of Regulation NMS; \19\ and
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    \19\ 17 CFR 240.600. This proposed text is substantively 
identical to the corresponding text of Rule 5705(b)(3)(A)(i)e., 
except for the addition of ``equity'' to make clear that the 
standard applies to ``equity securities,'' the exclusion of 
unsponsored ADRs, and the omission of the reference to ``index,'' 
which is not applicable.
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    (6) American Depositary Receipts (``ADRs'') may be exchange-traded 
or non-exchange-traded. However no more than 10% of the equity weight 
of the portfolio shall consist of non-exchange-traded ADRs.\20\
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    \20\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included the ability for such 
Managed Fund Shareholdings to include not more than 10% of net 
assets in unsponsored ADRs (which are not exchange-listed). See, 
e.g., Securities Exchange Act Release No. 73480 (October 31, 2014), 
79 FR 66022 (November 6, 2014) (SR-NASDAQ-2014-090) (order approving 
the Listing and Trading of Shares of the Validea Market Legends 
ETFs). See also Securities Exchange Act Release No. 71067 (December 
12, 2013), 78 FR 76669 (December 18, 2013) (order approving listing 
and trading of shares of the SPDR MFS Systematic Core Equity ETF, 
SPDR MFS Systematic Growth Equity ETF, and SPDR MFS Systematic Value 
Equity ETF under NYSE Arca Equities Rule 8.600).
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    As proposed in Rule 5735(b)(1)(A)(ii), the component stocks of the 
equity portion of a portfolio that are Non-U.S. Component Stocks shall 
meet the following criteria initially and on a continuing basis:
    (1) Non-U.S. Component Stocks each shall have a minimum market 
value of at least $100 million; \21\
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    \21\ The proposed text is identical to the corresponding 
representations from the First Trust Approval Order and the SSgA 
Global Managed Volatility Release, as noted in footnote 28, below. 
The proposed text is also substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(ii)a., except for the 
omission of the reference to ``index,'' which is not applicable, and 
that each Non-U.S. Component Stock must have a minimum market value 
of at least $100 million instead of the 90% required under Rule 
5705(b)(3)(A)(ii)a.
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    (2) Non-U.S. Component Stocks each shall have a minimum global 
monthly trading volume of 250,000 shares, or minimum global notional 
volume traded per month of $25,000,000, averaged over the last six 
months; \22\
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    \22\ The proposed text is identical to the corresponding 
representations from the First Trust Approval Order and the SSgA 
Global Managed Volatility Release, as noted in footnote 28, below. 
This proposed text also is substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(ii)b., except for the 
omission of the reference to ``index,'' which is not applicable.
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    (3) The most heavily weighted Non-U.S. Component Stock shall not 
exceed 25% of the equity weight of the portfolio, and, to the extent 
applicable, the five most heavily weighted Non-U.S. Component Stocks 
shall not exceed 60% of the equity weight of the portfolio; \23\
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    \23\ This proposed text is substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(ii)c., except for the 
omission of the reference to ``index,'' which is not applicable.
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    (4) Where the equity portion of the portfolio includes Non-U.S. 
Component Stocks, the equity portion of the portfolio shall include a 
minimum of 20 component stocks; provided, however, that there shall be 
no minimum number of component stocks if (i) one or more series of 
Exchange Traded Derivative

[[Page 57971]]

Securities or Linked Securities constitute, at least in part, 
components underlying a series of Managed Fund Shares, or (ii) one or 
more series of Exchange Traded Derivative Securities or Linked 
Securities account for 100% of the equity weight of the portfolio of a 
series of Managed Fund Shares \24\; and
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    \24\ This proposed text is substantively identical to the 
corresponding text of Rule 5705(b)(3)(A)(ii)d., except for the 
omission of the reference to ``index,'' which is not applicable, the 
substitution of a more narrow exclusion for ``Exchange Traded 
Derivative Securities'' instead of for ``Derivative Securities 
Products,'' the addition of the reference to Linked Securities, the 
reference to the equity portion of the portfolio including Non-U.S. 
Component Stocks, and the reference to the 100% limitation applying 
to the ``equity weight'' of the portfolio, which is included because 
the proposed standards in Rule 5735(b) permit the inclusion of non-
equity securities, whereas Rule 5705 applies only to equity 
securities.
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    (5) Each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting.\25\
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    \25\ This proposed text is substantively identical to Rule 
5705(b)(3)(A)(ii)e. as it relates to Non-U.S. Component Stocks.
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    The Exchange notes that it is not proposing to require that any of 
the equity portion of the equity portfolio composed of Non-U.S. 
Component Stocks be listed on markets that are either a member of the 
Intermarket Surveillance Group (``ISG'') or a market with which the 
Exchange has a comprehensive surveillance sharing agreement 
(``CSSA'').\26\ However, as further detailed below, the regulatory 
staff of the Exchange, or the Financial Industry Regulatory Authority, 
Inc. (``FINRA''), on behalf of the Exchange, will communicate as needed 
regarding trading in Managed Fund Shares with other markets that are 
members of the ISG, including U.S. securities exchanges on which the 
components are traded.
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    \26\ ISG is comprised of an international group of exchanges, 
market centers, and market regulators that perform front-line market 
surveillance in their respective jurisdictions. See 
www.isgportal.org. A list of ISG members is available at 
www.isgportal.org.
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    The Exchange notes that the generic listing standards for Index 
Fund Shares based on foreign indexes in Rule 5705 do not include 
specific ISG or CSSA requirements.\27\ In addition, the Commission has 
approved listing and trading on the Exchange of shares of an issue of 
Managed Fund Shares under Rule 5735 where non-U.S. equity securities in 
such issue's portfolio meet specified criteria and where there is no 
requirement that such non-U.S. equity securities are traded in markets 
that are members of ISG or with which the Exchange has in place a 
CSSA.\28\
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    \27\ Under Rule 5705(b)(3), Index Fund Shares with components 
that include Non-U.S. Component Stocks can hold a portfolio that is 
entirely composed of Non-U.S. Component Stocks that are listed on 
markets that are neither members of ISG, nor with which the Exchange 
has in place a CSSA.
    \28\ See, e.g., Securities Exchange Act Release No. 77548 (April 
6, 2016), 81 FR 21626 (April 12, 2016) (SR-NASDAQ-2015-161) (order 
approving listing and trading of the Shares of the First Trust 
RiverFront Dynamic Europe ETF, First Trust RiverFront Dynamic Asia 
Pacific ETF, First Trust RiverFront Dynamic Emerging Markets ETF, 
and First Trust RiverFront Dynamic Developed International ETF of 
First Trust Exchange-Traded Fund III) (the ``First Trust Approval 
Order''). See also Securities Exchange Act Release No. 75023 (May 
21, 2015), 80 FR 30519 (May 28, 2015) (SR-NYSEArca-2014-100) (order 
approving listing and trading on the Exchange of shares of the SPDR 
SSgA Global Managed Volatility ETF under NYSE Arca Equities Rule 
8.600) (``SSgA Global Managed Volatility Release'').
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    Proposed Rule 5735(b)(1)(B) would describe the standards for a 
Managed Fund Share portfolio that holds fixed income securities, which 
are debt securities \29\ that are notes, bonds, debentures, or evidence 
of indebtedness that include, but are not limited to, U.S. Department 
of Treasury securities (``Treasury Securities''), government-sponsored 
entity securities (``GSE Securities''), municipal securities, trust 
preferred securities, supranational debt and debt of a foreign country 
or a subdivision thereof, investment grade and high yield corporate 
debt, bank loans, mortgage and asset backed securities, and commercial 
paper.
---------------------------------------------------------------------------

    \29\ Debt securities include a variety of fixed income 
obligations, including, but not limited to, corporate debt 
securities, government securities, municipal securities, convertible 
securities, and mortgage-backed securities. Debt securities include 
investment-grade securities, non-investment-grade securities, and 
unrated securities. Debt securities also include variable and 
floating rate securities.
---------------------------------------------------------------------------

    In addition, to the extent that a portfolio includes convertible 
securities, the fixed income security into which such security is 
converted would be required to meet the criteria of Rule 5735(b)(1)(B) 
after converting.
    The components of the fixed income portion of the portfolio must 
meet the following criteria initially and on a continuing basis:
    (1) Components that in the aggregate account for at least 75% of 
the fixed income weight of the portfolio each shall have a minimum 
original principal amount outstanding of $100 million or more; \30\
---------------------------------------------------------------------------

    \30\ This text of proposed Rule 5735(b)(1)(B)(i) is based on the 
corresponding text of Rule 5705(b)(4)(A)(ii).
---------------------------------------------------------------------------

    (2) No component fixed-income security (excluding Treasury 
Securities and GSE Securities) could represent more than 30% of the 
fixed income weight of the portfolio, and the five most heavily 
weighted component fixed income securities in the portfolio (excluding 
Treasury Securities and GSE Securities) must not in the aggregate 
account for more than 65% of the fixed income weight of the portfolio; 
\31\
---------------------------------------------------------------------------

    \31\ This proposed text is substantively identical to the 
corresponding text of 5705(b)(4)(A)(iv), except for the omission of 
the reference to ``index,'' which is not applicable.
---------------------------------------------------------------------------

    (3) An underlying portfolio (excluding exempted securities) that 
includes fixed income securities must include a minimum of 13 non-
affiliated issuers; provided, however, that there shall be no minimum 
number of non-affiliated issuers required for fixed income securities 
if at least 70% of the weight of the portfolio consists of equity 
securities as described in proposed Rule 5735(b)(1)(A).\32\
---------------------------------------------------------------------------

    \32\ This proposed text is substantively identical to the 
corresponding text of Rule 5705(b)(4)(A)(v), except for the omission 
of the reference to ``index,'' which is not applicable, the 
exclusion of the text ``consisting entirely of exempted securities'' 
and the provision that there shall be no minimum number of non-
affiliated issuers required for fixed income securities if at least 
70% of the weight of the portfolio consists of equity securities as 
described in proposed Rule 5735(b)(1)(A).
---------------------------------------------------------------------------

    (4) Component securities that in aggregate account for at least 90% 
of the fixed income weight of the portfolio must be either (a) from 
issuers that are required to file reports pursuant to Sections 13 and 
15(d) of the Act; (b) from issuers that have a worldwide market value 
of its outstanding common equity held by non-affiliates of $700 million 
or more; (c) from issuers that have outstanding securities that are 
notes, bonds debentures, or evidence of indebtedness having a total 
remaining principal amount of at least $1 billion \33\; (d) exempted 
securities as defined in Section 3(a)(12) of the Act; or (e) from 
issuers that are a government of a foreign country or a political 
subdivision of a foreign country; and
---------------------------------------------------------------------------

    \33\ With respect to subparagraphs (b) and (c) above, the 
special purpose vehicle (``SPV'') that issues the fixed income 
security (e.g., an asset-backed or mortgage-backed security) would 
itself be required to satisfy the $700 million and $1 billion 
criteria, respectively, and not the entity that controls, owns or is 
affiliated with the SPV.
---------------------------------------------------------------------------

    (5) Non-agency, non-GSE, and privately-issued mortgage-related and 
other asset-backed securities components of a portfolio shall not 
account, in the aggregate, for more than 20% of the weight of the fixed 
income portion of the portfolio.\34\
---------------------------------------------------------------------------

    \34\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included the ability for such 
Managed Fund Share holdings to include up to 20% of net assets in 
non-agency, non-GSE and privately-issued mortgage-related and other 
asset-backed securities. See, e.g., Securities Exchange Act Release 
No. 74742 (April 16, 2015) 80 FR 22584 (April 22, 2015) (SR-NASDAQ-
2015-011) (order approving the listing and trading of shares of the 
First Trust Strategic Floating Rate ETF of First Trust Exchange-
Traded Fund IV. See also, Securities Exchange Act Release No. 75566 
(July 30, 2015), 80 FR 46612 (August 5, 2015) (SR-NYSEArca-2015-42) 
(order approving listing and trading of shares of Newfleet Multi-
Sector Unconstrained Bond ETF under Rule 8.600).

---------------------------------------------------------------------------

[[Page 57972]]

    Proposed Rule 5735(b)(1)(C) would describe the standards for a 
Managed Fund Share portfolio that holds cash and cash equivalents.\35\ 
Specifically, the portfolio may hold short-term instruments with 
maturities of less than 3 months. There would be no limitation to the 
percentage of the portfolio invested in such holdings. Short-term 
instruments would include the following: \36\
---------------------------------------------------------------------------

    \35\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included the ability for such 
Managed Fund Share holdings to include cash and cash equivalents. 
See, e.g., note 10 above regarding approval of NYSE Arca's SPDR 
Blackstone/GSO Senior Loan, at 19768-69; and First Trust Preferred 
Securities and Income Approval, at 76150.
    \36\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly specified short-term instruments 
with respect to their inclusion in Managed Fund Share holdings. See, 
e.g., note 10 above, regarding NYSE Arca's First Trust Preferred 
Securities and Income Approval, at 76150-51.
---------------------------------------------------------------------------

    (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 and reverse repurchase agreements;
    (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;
    (6) commercial paper, which are short-term unsecured promissory 
notes; and
    (7) money market funds.
    Proposed Rule 5735(b)(1)(D) would describe the standards for a 
Managed Fund Share portfolio that holds listed derivatives, including 
futures, options, and swaps on commodities, currencies, and financial 
instruments (e.g., stocks, fixed income, interest rates, and 
volatility) or a basket or index of any of the foregoing.\37\ There 
would be no limitation to the percentage of the portfolio invested in 
such holdings, subject to the following requirements:
---------------------------------------------------------------------------

    \37\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included the ability for such 
Managed Fund Share holdings to include listed derivatives. See, 
e.g., note 10 above, regarding NYSE Arca's WisdomTree Real Return 
Approval, at 13617; and WisdomTree Brazil Bond Approval, at 32163.
---------------------------------------------------------------------------

    (1) In the aggregate, at least 90% of the weight of such holdings 
invested in futures, exchange-traded options, and listed swaps shall, 
on both an initial and continuing basis, consist of futures, options, 
and swaps for which the Exchange may obtain information via the ISG 
from other members or affiliates of the ISG or for which the principal 
market is a market with which the Exchange has a comprehensive 
surveillance sharing agreement (For purposes of calculating this 
limitation, a portfolio's investment in listed derivatives will be 
calculated as the aggregate gross notional value of the listed 
derivatives.); and
    (2) the aggregate gross notional value of listed derivatives based 
on any five or fewer underlying reference assets shall not exceed 65% 
of the weight of the portfolio (including gross notional exposures), 
and the aggregate gross notional value of listed derivatives based on 
any single underlying reference asset shall not exceed 30% of the 
weight of the portfolio (including gross notional exposures).
    Proposed Rule 5735(b)(1)(E) would describe the standards for a 
Managed Fund Share portfolio that holds over the counter (``OTC'') 
derivatives, including forwards, options and swaps on commodities, 
currencies and financial instruments (e.g., stocks, fixed income, 
interest rates, and volatility) or a basket or index of any of the 
foregoing.\38\ Proposed Rule 5735(b)(1)(E) would provide that, on both 
an initial and continuing basis, no more than 20% of the assets in the 
portfolio may be invested in OTC derivatives. For purposes of 
calculating this limitation, a portfolio's investment in OTC 
derivatives will be calculated as the aggregate gross notional value of 
the OTC derivatives.
---------------------------------------------------------------------------

    \38\ A proposed rule change for series of Index Fund Shares 
previously listed and traded on the Exchange pursuant to Rule 5705 
similarly included the ability for such Index Fund Shares' holdings 
to include OTC derivatives, specifically OTC down-and-in put 
options, which are not NMS Stocks as defined in Rule 600 of 
Regulation NMS and therefore do not satisfy the requirements of Rule 
5705. See, e.g., note 10 above, regarding NYSE Arca U.S. Equity 
Synthetic Reverse Convertible Index Fund Approval, at 23602.
---------------------------------------------------------------------------

    Proposed Rule 5735(b)(1)(F) would provide that, to the extent that 
listed or OTC derivatives are used to gain exposure to individual 
equities and/or fixed income securities, or to indexes of equities and/
or fixed income securities, the aggregate gross notional value of such 
exposure shall meet the criteria set forth in Rules 5735(b)(1)(A) and 
(B) (including gross notional exposures), respectively.
    The following examples illustrate how certain of the proposed 
generic criteria of Rule 5735 would be applied:
    1. An actively managed ETF holds non-agency MBS that represent 15% 
of the weight of the fixed income portion of the portfolio. The fixed 
income portion of the portfolio meets all the requirements of Rule 
5735(b)(1)(B). The ETF also holds an OTC swap on a non-agency MBS Index 
that represents 10% of the fixed income weight of the portfolio 
calculated on a notional value basis. Separately, the OTC swap and 
fixed income portion of the portfolio would meet the requirements of 
Rule 5735(b)(1). However, when the 15% weight in non-agency MBS and the 
10% weight in the non-agency MBS Index OTC swap are combined, as 
required by proposed 5735(b)(1)(F), the 25% total weight would exceed 
the 20% limit for non-agency GSE and privately-issued mortgage-related 
securities in 5735(b)(1)(B)(v). The portfolio, therefore, would not 
meet the proposed generic criteria of Rule 5735.
    2. An actively managed ETF holds a portfolio of non-U.S. equity 
securities, S&P 500 Index and gold futures. S&P 500 Index futures and 
the gold futures held by the fund are listed on an ISG member exchange. 
The equity portion of the portfolio consists of developed and emerging 
markets equity securities with a current aggregate market value of $15 
million and all components meet the requirements under Rule 
5735(b)(1)(A)(ii). The gold futures contract trading unit size is 100 
troy ounces and an ounce of gold is currently worth $1200. The fund 
holds 500 gold futures contracts with a notional value of $60 million 
(500*100*$1200). One S&P 500 contract represents 250 units of the S&P 
500 Index and the S&P 500 Index is trading at $2,000. The portfolio 
holds 50 contracts, so the notional value of the S&P 500 Index futures 
position is $25 million (50*250*$2000). The S&P 500 Index futures meet 
the requirement under Rule 5735(b)(1)(F), that is, the S&P 500 Index 
meets the criteria in Rule 5735(b)(1)(A). The weights of the components 
are as follows; equity securities represent 15% of the portfolio, gold 
futures represent 60% of the portfolio and S&P 500 Index futures 
represent 25% of the portfolio. The gold futures represent 60% of the 
portfolio and exceeds the 30% concentration limitation on any single 
underlying reference asset as outlined in proposed Rule 
5735(b)(1)(D)(ii). The portfolio, therefore, would not meet the 
proposed generic criteria of Rule 5735.

[[Page 57973]]

    3. An actively managed ETF holds a portfolio of equity securities 
and call option contracts on company XYZ. The equity portion of the 
portfolio meets the requirements under Rule 5735(b)(1)(A). Company XYZ 
represents 20% of the weight of the equity portion of the portfolio. 
The equity portion of the fund has a market value of $100 million and 
the market value of the fund's holdings in company XYZ has a market 
value of $20 million. The fund also holds 10,000 call option contracts 
on company XYZ which has a current market price of $50 a share and, 
therefore, a notional value of $50 million (50*100*10,000) (that is, 
the $50 market price per share times the multiplier of 100 times 10,000 
contracts). The option contracts are traded on an ISG member exchange. 
The total exposure to company XYZ is therefore $70 million and 
represents 46.7% ($70 million/$150 million=46.7%) of the portfolio. 
This fund would not meet the requirements of Rule 5735 because the 
exposure to XYZ at 46.7% exceeds the 30% concentration limitation of 
proposed Rule 5735(b)(1)(D)(ii).
    The Exchange believes that the proposed standards would continue to 
ensure transparency surrounding the listing process for Managed Fund 
Shares. Additionally, the Exchange believes that the proposed portfolio 
standards for listing and trading Managed Fund Shares, many of which 
track existing Exchange rules relating to Index Fund Shares, are 
reasonably designed to promote a fair and orderly market for such 
Managed Fund Shares.\39\ These proposed standards would also work in 
conjunction with the existing initial and continued listing criteria 
related to surveillance procedures and trading guidelines.
---------------------------------------------------------------------------

    \39\ See note 4 above, Approval Order, at 35177.
---------------------------------------------------------------------------

    In support of this proposal, the Exchange represents that: \40\
---------------------------------------------------------------------------

    \40\ The Exchange made similar representations in the Approval 
Order. See id. at 35177--35178.
---------------------------------------------------------------------------

    (1) The Managed Fund Shares will continue to conform to the initial 
and continued listing criteria under Rule 5735;
    (2) the Exchange's surveillance procedures are adequate to continue 
to properly monitor the trading of the Managed Fund Shares in all 
trading sessions and to deter and detect violations of Exchange rules. 
Specifically, the Exchange intends to utilize its existing surveillance 
procedures applicable to derivative products, which will include 
Managed Fund Shares, to monitor trading in the Managed Fund Shares;
    (3) prior to the commencement of trading of a particular series of 
Managed Fund Shares, the Exchange will inform its members in an 
information circular (``Circular'') of the special characteristics and 
risks associated with trading the Managed Fund Shares, including 
procedures for purchases and redemptions of Managed Fund Shares, 
suitability requirements under Rules 2090A and 2111A, the risks 
involved in trading the Managed Fund Shares during the Pre-Market and 
Post-Market Sessions when an updated Portfolio Indicative Value will 
not be calculated or publicly disseminated, information regarding the 
Portfolio Indicative Value and the Disclosed Portfolio, prospectus 
delivery requirements, and other trading information. In addition, the 
Circular will disclose that the Managed Fund Shares are subject to 
various fees and expenses, as described in the applicable registration 
statement, and will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. Finally, 
the Circular will disclose that the net asset value for the Managed 
Fund Shares will be calculated after 4 p.m., ET, each trading day; and
    (4) the issuer of a series of Managed Fund Shares will be required 
to comply with Rule 10A-3 under the Act for the initial and continued 
listing of Managed Fund Shares, as provided under the Nasdaq Rule 5600 
Series.
    The Exchange, on a periodic basis and no less than annually, will 
review issues of Managed Fund Shares generically listed pursuant to 
Rule 5735, and will provide a report to the Regulatory Oversight 
Committee of the Exchange's Board of Directors regarding the Exchange's 
findings. In addition, the Exchange will provide the Commission staff 
with a report each calendar quarter that includes the following 
information for issues of Managed Fund Shares listed during such 
calendar quarter under Rule 5735(b)(1): (1) Trading symbol and date of 
listing on the Exchange; (2) the number of active authorized 
participants and a description of any failure of an issue of Managed 
Fund Shares or of an authorized participant to deliver shares, cash, or 
cash and financial instruments in connection with creation or 
redemption orders; and (3) a description of any failure of an issue of 
Managed Fund Shares to comply with Nasdaq Rule 5735.
    Prior to listing pursuant to proposed amended Rule 5735(b)(1), an 
issuer would be required to represent to the Exchange that it will 
advise the Exchange of any failure by a series of Managed Fund Shares 
to comply with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Act, the Exchange will 
monitor for compliance with the continued listing requirements. If the 
Fund is not in compliance with the applicable listing requirements, the 
Exchange will commence delisting procedures under the Nasdaq Rule 5800 
Series.
    The Exchange notes that the proposed change is not otherwise 
intended to address any other issues and that the Exchange is not aware 
of any problems that members or issuers would have in complying with 
the proposed change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\41\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\42\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, 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.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78f(b).
    \42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest because it would facilitate the listing and trading of 
additional Managed Fund Shares, which would enhance competition among 
market participants, to the benefit of investors and the marketplace.
    Specifically, after more than six years under the current process, 
whereby the Exchange is required to file a proposed rule change with 
the Commission for the listing and trading of each new series of 
Managed Fund Shares, the Exchange believes that it is appropriate to 
codify certain rules within Rule 5735 that would generally eliminate 
the need for separate proposed rule changes.
    The Exchange believes that this would facilitate the listing and 
trading of additional types of Managed Fund Shares that have investment 
portfolios that are similar to investment portfolios for Index Fund 
Shares, which have been approved for listing and trading, thereby 
creating greater efficiencies in the listing process for the Exchange 
and the Commission.
    In this regard, the Exchange notes that the standards proposed for 
Managed Fund Share portfolios that include U.S. Component Stocks, Non-
U.S. Component Stocks, Exchange Traded

[[Page 57974]]

Derivative Securities, and Linked Securities are based in large part on 
the existing equity security standards applicable to Index Fund Shares 
in Rule 5705(b)(3) and that the standards proposed for Managed Fund 
Share portfolios that include fixed income securities are based in 
large part on the existing fixed income standards applicable to Index 
Fund Shares in Rule 5705(b)(4). Additionally, many of the standards 
proposed for other types of holdings of series of Managed Fund Shares 
are based on previous proposed rule changes for specific series of 
Managed Fund Shares.\43\
---------------------------------------------------------------------------

    \43\ See note 10 above.
---------------------------------------------------------------------------

    With respect to the proposed addition to the criteria of Rule 
5735(c) to provide that the Web site for each series of Managed Fund 
Shares shall disclose certain information regarding the Disclosed 
Portfolio, to the extent applicable, the Exchange notes that proposed 
rule changes approved by the Commission for previously-listed series of 
Managed Fund Shares have similarly included disclosure requirements 
with respect to each portfolio holding, as applicable to the type of 
holding.\44\
---------------------------------------------------------------------------

    \44\ See note 8 above.
---------------------------------------------------------------------------

    With respect to the proposed definition of the term ``normal market 
conditions'' in proposed Rule 5735(c)(5), such definition is similar to 
the definition of normal market conditions approved by the Commission 
for other issues of Managed Fund Shares.\45\ In addition, proposed Rule 
5735(d)(1)(C), would specify that a series of Managed Fund Shares would 
be required to adhere to its stated investment objective during normal 
market conditions.
---------------------------------------------------------------------------

    \45\ See, e.g., Securities Exchange Act Release No. 73140 
(September 18, 2014) 79 FR 57144 (September 24, 2014) (SR-NASDAQ-
2014-073) (order approving listing and trading of the First Trust 
Emerging Markets Local Currency Bond ETF of First Trust Exchange-
Traded Fund III. See also, Securities Exchange Act Release No. 74338 
(February 20, 2015), 80 FR 10556 (February 26, 2015) (SR-NYSEArca-
2014-143) (order approving listing and trading of shares of the SPDR 
Doubletree Total Return Tactical ETF under NYSE Arca Equities Rule 
8.600).
---------------------------------------------------------------------------

    With respect to the proposed amendment to the continued listing 
requirement in Rule 5735(d)(2)(A) to require dissemination of a 
Portfolio Indicative Value at least every 15 seconds during the Regular 
Market Session (as defined in Rule 4120(b)), such requirement conforms 
to the requirement applicable to the dissemination of the Intraday 
Indicative Value for Index Fund Shares in Rule 5705(b)(3)(C). In 
addition, such dissemination is consistent with representations made in 
proposed rule changes for issues of Managed Fund Shares previously 
approved by the Commission.\46\
---------------------------------------------------------------------------

    \46\ See, e.g., Approval Order, note 4 above; and International 
Bear Approval, note 10 above.
---------------------------------------------------------------------------

    With respect to the proposed requirement in Rule 5735(b)(1)(A) that 
no more than 25% of the equity weight of the portfolio shall consist of 
leveraged and/or inverse leveraged Exchange Traded Derivative 
Securities or Linked Securities, such requirement would assure that 
only a relatively small proportion of a fund's investments could 
consist of such leveraged and/or inverse securities. In addition, such 
limitation would apply to both U.S. Component Stocks and Non-U.S. 
Component Stocks comprising the equity portion of a portfolio.
    With respect to the proposed provision in Rule 5735(b)(1)(A) that, 
to the extent a portfolio includes a convertible security, the equity 
security into which such security is converted must meet the criteria 
in Rule 5735(b)(1)(A) after converting, such requirement would assure 
that the equity securities into which a convertible security could be 
converted meet the liquidity and other criteria in Rule 5735(b)(1)(A) 
applicable to such equity securities.
    With respect to the proposed exclusion of Exchange Traded 
Derivatives Securities and Linked Securities from the requirements of 
proposed Rule 5735(b)(1)(A), the Exchange believes it is appropriate to 
exclude Linked Securities as well as Exchange Traded Derivative 
Securities from certain component stock eligibility criteria for 
Managed Fund Shares in so far as Exchange Traded Derivative Securities 
and Linked Securities are themselves subject to specific quantitative 
listing and continued listing requirements of a national securities 
exchange on which such securities are listed. Exchange Traded 
Derivative Securities and Linked Securities that are components of a 
fund's portfolio would have been listed and traded on a national 
securities exchange pursuant to a proposed rule change approved by the 
Commission pursuant to Section 19(b)(2) of the Act \47\ or submitted by 
a national securities exchange pursuant to Section 19(b)(3)(A) of the 
Act \48\ or would have been listed by a national securities exchange 
pursuant to the requirements of Rule 19b-4(e) under the Act.\49\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78s(b)(2).
    \48\ 15 U.S.C. 78s(b)(3)(A).
    \49\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

    The Exchange also notes that Exchange Traded Derivative Securities 
and Linked Securities are derivatively priced, and, therefore, the 
Exchange believes that it would not be necessary to apply the proposed 
generic quantitative criteria (e.g., market capitalization, trading 
volume, or portfolio component weighting) applicable to equity 
securities other than Exchange Traded Derivative Securities or Linked 
Securities (e.g., common stocks) to such products.\50\
---------------------------------------------------------------------------

    \50\ See, e.g., Securities Exchange Act Release Nos. 57561 
(March 26, 2008), 73 FR 17390 (April 1, 2008) (SR-NYSEArca-2008-29) 
(notice of filing of proposed rule change to amend eligibility 
criteria for components of an index underlying Investment Company 
Units); 57751 (May 1, 2008), 73 FR 25818 (May 7, 2008) (SR-NYSEArca-
2008-29) (order approving proposed rule change to amend eligibility 
criteria for components of an index underlying Investment Company 
Units).
---------------------------------------------------------------------------

    With respect to the proposed criteria applicable to U.S. Component 
Stocks, the Exchange notes that such criteria are similar to those in 
Rule 5705(b)(3) relating to criteria applicable to an index or 
portfolio of U.S. Component Stocks. In addition, Non-U.S. Component 
Stocks also will be required to meet criteria similar to certain 
generic listing standards in Rule 5705(b)(3) relating to criteria 
applicable to an index or portfolio of U.S. Component Stocks and Non-
U.S. Component Stocks underlying a series of Index Fund Shares to be 
listed and traded on the Exchange pursuant to Rule 19b-4(e) under the 
Act.
    With respect to the proposed requirement in Rule 5735(b)(1)(A)(i)f. 
that no more than 10% of the equity weight of the portfolio shall 
consist of non-exchange-traded ADRs, the Exchange notes that such 
requirement will ensure that non-exchange-traded ADRs, which are traded 
OTC and which generally have less market transparency than exchange-
traded ADRs, could account for only a small percentage of the equity 
weight of a portfolio. Further, the requirement is consistent with 
representations made in proposed rule changes for issues of Managed 
Fund Shares previously approved by the Commission.\51\
---------------------------------------------------------------------------

    \51\ See note 20 above.
---------------------------------------------------------------------------

    With respect to the proposed provision in Rule 5735(b)(1)(B) that, 
to the extent a portfolio includes convertible securities, the fixed 
income security into which such security is converted must meet the 
criteria in paragraph (B) of Rule 5735(b)(1) after converting, such 
requirement would assure that the fixed income securities into which a 
convertible security could be converted meet the liquidity and other 
criteria in Rule 5735(b)(1)(B) applicable to fixed income securities.

[[Page 57975]]

    As proposed, pursuant to Rule 5735(b)(1)(B)(iii), an underlying 
portfolio (excluding exempted securities) that includes fixed income 
securities must include a minimum of 13 non-affiliated issuers, but 
there would be no minimum number of non-affiliated issuers required for 
fixed income securities if at least 70% of the weight of the portfolio 
consists of equity securities, as described in Rule 5735(b)(1)(A). The 
Exchange notes that, when evaluated in conjunction with proposed Rule 
5735(b)(1)(B)(ii), the proposed rule is consistent with Rules 
5705(b)(4)(A)(iv) and 5705(b)(4)(A)(v) in that it provides for a 
maximum weighting of a fixed income security in the fixed income 
portion of the portfolio of a fund that is comparable to the existing 
rules applicable to Index Fund Shares based on fixed income indexes.
    With respect to the proposed requirement in Rule 5735(b)(1)(B)(v) 
that non-agency, non-GSE and privately-issued mortgage-related and 
other asset-backed securities components of a portfolio shall not 
account, in the aggregate, for more than 20% of the weight of the fixed 
income portion of the portfolio, the Exchange notes that such 
requirement is consistent with representations made in proposed rule 
changes for issues of Managed Fund Shares previously approved by the 
Commission.\52\
---------------------------------------------------------------------------

    \52\ See note 34 above.
---------------------------------------------------------------------------

    With respect to the proposed amendment to Rule 5735(b)(1)(C) 
relating to cash and cash equivalents, while there is no limitation on 
the amount of cash and cash equivalents that can make up the portfolio, 
such instruments are short-term, highly liquid, and of high credit 
quality, making them less susceptible than other asset classes both to 
price manipulation and volatility. Further, the requirement is 
consistent with representations made in proposed rule changes for 
issues of Managed Fund Shares previously approved by the 
Commission.\53\
---------------------------------------------------------------------------

    \53\ See note 35 above.
---------------------------------------------------------------------------

    With respect to proposed Rule 5735(b)(1)(D)(i) relating to listed 
derivatives, the Exchange believes that it is appropriate that there be 
no limit to the percentage of a portfolio invested in such holdings, 
provided that, in the aggregate, at least 90% of the weight of such 
holdings invested in futures, exchange-traded options, and listed swaps 
would consist of futures, options, and swaps for which the Exchange may 
obtain information via ISG from other members or affiliates or for 
which the principal market is a market with which the Exchange has a 
CSSA. Such a requirement would facilitate information sharing among 
market participants trading shares of a series of Managed Fund Shares 
as well as futures and options that such series may hold. In addition, 
listed swaps would be centrally cleared, reducing counterparty risk and 
thereby furthering investor protection.\54\
---------------------------------------------------------------------------

    \54\ The Commission has noted that ``[c]entral clearing 
mitigates counterparty risk among dealers and other institutions by 
shifting that risk from individual counterparties to [central 
counterparties (``CCPs'')], thereby protecting CCPs from each 
other's potential failures.'' See Securities Exchange Act Release 
No. 67286 (June 28, 2012) (File No. S7-44-10) (Process for 
Submissions for Review of Security-Based Swaps for Mandatory 
Clearing and Notice Filing Requirements for Clearing Agencies).
---------------------------------------------------------------------------

    With respect to proposed Rule 5735(b)(1)(D)(ii), requiring 
percentage caps on the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets or 
based on any single underlying reference asset, the Exchange believes 
such requirements will help ensure that listed derivatives utilized by 
a fund are adequately diversified and not unduly concentrated.
    With respect to proposed Rule 5735(b)(1)(E) relating to OTC 
derivatives, the Exchange believes that the limitation to 20% of a 
fund's assets would assure that the preponderance of fund investments 
would not be in derivatives that are not listed and centrally cleared. 
The Exchange believes that such a limitation is sufficient to mitigate 
the risks associated with price manipulation because a 20% cap on OTC 
derivatives will ensure that any series of Managed Fund Shares will be 
sufficiently broad-based in scope to minimize potential manipulation 
associated with OTC derivatives and because the remaining 80% of the 
portfolio will consist of instruments subject to numerous restrictions 
designed to prevent manipulation, including equity securities (which, 
as proposed, would be subject to market cap, trading volume, and 
diversity requirements, among others), fixed income securities (which, 
as proposed, would be subject to principal amount outstanding, 
diversity, and issuer requirements, among others), cash and cash 
equivalents (which, as proposed, would be limited to short-term, highly 
liquid, and high credit quality instruments), and/or listed derivatives 
(which would be subject to the limitations in proposed Rule 
5735(b)(1)(D)).
    The Exchange notes that a fund's investments in derivative 
instruments would be subject to limits on leverage imposed by the 1940 
Act. Section 18(f) of the 1940 Act and related Commission guidance 
limit the amount of leverage an investment company can obtain. A fund's 
investments would be consistent with its investment objective and would 
not be used to enhance leverage. To limit the potential risk associated 
with a fund's use of derivatives, a fund will segregate or ``earmark'' 
assets determined to be liquid by a fund in accordance with the 1940 
Act (or, as permitted by applicable regulation, enter into certain 
offsetting positions) to cover its obligations under derivative 
instruments.
    With respect to proposed Rule 5735(b)(1)(F) relating to a fund's 
use of listed or OTC derivatives to gain exposure to individual 
equities and/or fixed income securities, or to indexes of equities and/
or indexes of fixed income securities, the Exchange notes that the 
aggregate gross notional value of such exposure would be required to 
meet the numerical and other criteria set forth in proposed Rules 
5735(b)(1)(A) and 5735(b)(1)(B) (including gross notional exposures), 
respectively.
    Quotation and other market information relating to listed futures 
and options is available from the exchanges listing such instruments as 
well as from market data vendors. With respect to centrally-cleared 
swaps \55\ and non-centrally-cleared swaps regulated by the CFTC,\56\ 
the Dodd-Frank Act mandates that swap information be reported to swap 
data repositories (``SDRs'').\57\ SDRs provide a central facility for 
swap data reporting and recordkeeping and are required to comply with 
data standards set by the CFTC, including real-time public reporting of 
swap transaction data to a derivatives clearing organization or 
SEF.\58\ SDRs require real-time reporting of all OTC and centrally 
cleared derivatives, including public reporting of the swap price and 
size. The parties responsible for reporting swaps information are CFTC-
registered swap dealers (``RSDs''), major swap participants, and swap 
execution facilities (``SEFs''). If swap counterparties do not fall 
into the above

[[Page 57976]]

categories, then one of the parties to the swap must report the trade 
to the SDR. Cleared swaps regulated by the CFTC must be executed on a 
Designated Contract Market (``DCM'') or SEF. Such cleared swaps have 
the same reporting requirements as futures, including end-of-day price, 
volume, and open interest. CFTC swaps reporting requirements require 
public dissemination of, among other items, product ID (if available); 
asset class; underlying reference asset, reference issuer, or reference 
index; termination date; date and time of execution; price, including 
currency; notional amounts, including currency; whether direct or 
indirect counterparties include an RSD; whether cleared or uncleared; 
and platform ID of where the contract was executed (if applicable).
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    \55\ There are currently five categories of swaps eligible for 
central clearing: Interest rate swaps; credit default swaps; foreign 
exchange swaps; equity swaps; and commodity swaps. The following 
entities provide central clearing for OTC derivatives: ICE Clear 
Credit (US); ICE Clear (EU); CME Group; LCH.Clearnet; and Eurex.
    \56\ Pursuant to the Dodd-Frank Act, OTC and centrally-cleared 
swaps are regulated by the CFTC with the exception of security-based 
swaps, which are regulated by the Commission.
    \57\ The following entities are provisionally registered with 
the CFTC as SDRs: BSDR LLC., Chicago Mercantile Exchange, Inc., DTCC 
Data Repository, and ICE Trade Vault.
    \58\ Approximately eighteen entities are currently registered 
with the CFTC as SEFs.
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    With respect to security-based swaps regulated by the Commission, 
the Commission has adopted Regulation SBSR under the Act implementing 
requirements for regulatory reporting and public dissemination of 
security-based swap transactions set forth in Title VII of the Dodd-
Frank Act. Regulation SBSR provides for the reporting of security-based 
swap information to registered security-based swap data repositories 
(``Registered SDRs'') or the Commission, and the public dissemination 
of security-based swap transaction, volume, and pricing information by 
Registered SDRs.\59\
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    \59\ See Securities Exchange Act Release No. 74244 (February 11, 
2015), 80 FR 14564 (March 19, 2015) (Regulation SBSR--Reporting and 
Dissemination of Security-Based Swap Information).
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    Price information relating to forwards and OTC options will be 
available from major market data vendors.
    A fund's investments will not be used to seek performance that is 
the multiple or inverse multiple (i.e., 2Xs and 3Xs) of a fund's broad-
based securities market index (as defined in Form N-1A).\60\ In 
addition, the Exchange notes that, under proposed Rule 5735(b)(1)(A), 
for Exchange Traded Derivative Securities and Linked Securities, no 
more than 25% of the equity weight of a fund's portfolio could include 
leveraged and/or inverse leveraged Exchange Traded Derivative 
Securities or Linked Securities.
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    \60\ See, e.g., Securities Exchange Act Release No. 74842 (April 
29, 2015), 86 FR 25723 (May 5, 2015) (SR-NYSEArca-2014-89) (order 
approving listing and trading of shares of eight PIMCO exchange-
traded funds).
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    The proposed rule change is also designed to protect investors and 
the public interest because Managed Fund Shares listed and traded 
pursuant to Rule 5735, including pursuant to the proposed new portfolio 
standards, would continue to be subject to the full panoply of Exchange 
rules and procedures that currently govern the trading of equity 
securities on the Exchange.\61\
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    \61\ See note 4 above, Approval Order, at 35177.
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    The proposed rule change is also designed to protect investors and 
the public interest as well as to promote just and equitable principles 
of trade in that any Non-U.S. Component Stocks will each meet the 
following criteria initially and on a continuing basis: (1) Have a 
minimum market value of at least $100 million; (2) have a minimum 
global monthly trading volume of 250,000 shares, or minimum global 
notional volume traded per month of $25,000,000, averaged over the last 
six months; (3) most heavily weighted Non-U.S. Component Stock shall 
not exceed 25% of the equity weight of the portfolio, and, to the 
extent applicable, the five most heavily weighted Non-U.S. Component 
Stocks shall not exceed 60% of the equity weight of the portfolio; and 
(4) each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting.
    The Exchange believes that such quantitative criteria are 
sufficient to mitigate any concerns that may arise on the basis of a 
series of Managed Fund Shares potentially holding 100% of its assets in 
Non-U.S. Component Stocks that are neither listed on members of ISG nor 
exchanges with which the Exchange has in place a CSSA because, as 
stated above, such criteria are either the same or more stringent than 
the portfolio requirements for Index Fund Shares that hold Non-U.S. 
Component Stocks and there are no such requirements related to such 
securities being listed on an exchange that is a member of ISG or with 
which the Exchange has in place a CSSA.
    Further, the Exchange has not encountered and is not aware of any 
instances of manipulation or other negative impact in any series of 
Index Fund Shares that has occurred by virtue of the Index Fund Shares 
holding such Non-U.S. Component Stocks. Therefore, the Exchange 
believes that there should be no difference in the portfolio 
requirements for Managed Fund Shares and Index Fund Shares as it 
relates to holding Non-U.S. Component Stocks that are not listed on an 
exchange that is a member of ISG or with which the Exchange has in 
place a CSSA.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices because the 
Managed Fund Shares will be listed and traded on the Exchange pursuant 
to the initial and continued listing criteria in Rule 5735. The 
Exchange has in place surveillance procedures that are adequate to 
properly monitor trading in the Managed Fund Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. FINRA, on behalf of the Exchange, 
or the regulatory staff of the Exchange, will communicate as needed 
regarding trading in Managed Fund Shares with other markets that are 
members of the ISG, including all U.S. securities exchanges and futures 
exchanges on which the components are traded.
    In addition, the Exchange may obtain information regarding trading 
in Managed Fund Shares from other markets that are members of the ISG, 
including all U.S. securities exchanges and futures exchanges on which 
the components are traded, or with which the Exchange has in place a 
CSSA.
    The Exchange also believes that the proposed rule change would 
fulfill the intended objective of Rule 19b-4(e) under the Act by 
allowing Managed Fund Shares that satisfy the proposed listing 
standards to be listed and traded without separate Commission approval. 
However, as proposed, the Exchange would continue to file separate 
proposed rule changes before the listing and trading of Managed Fund 
Shares that do not satisfy the additional criteria described above.
    The Exchange, on a periodic basis and no less than annually, will 
review issues of Managed Fund Shares listed pursuant to Rule 
5735(b)(1), and will provide a report to the Regulatory Oversight 
Committee of the Exchange's Board of Directors regarding the Exchange's 
findings. In addition, the Exchange will provide the Commission staff 
with a report each calendar quarter that includes the following 
information for issues of Managed Fund Shares listed during such 
calendar quarter under Rule 5735(b)(1): (1) Trading symbol and date of 
listing on the Exchange; (2) the number of active authorized 
participants and a description of any failure of an issue of Managed 
Fund Shares listed pursuant to Rule 5735(b)(1) or of an authorized 
participant to deliver shares, cash, or cash and financial instruments 
in connection with creation or redemption orders; and (3) a description 
of any failure of an issue of Managed Fund Shares to comply with Rule 
5735.
    Prior to listing pursuant to proposed amended Rule 5735(b)(1), an 
issuer would be required to represent to the Exchange that it will 
advise the Exchange of any failure by a series of

[[Page 57977]]

Managed Fund Shares to comply with the continued listing requirements, 
and, pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will monitor for compliance with the continued listing 
requirements. If the Fund is not in compliance with the applicable 
listing requirements, the Exchange will commence delisting procedures 
under the Nasdaq Rule 5800 Series.
    For these reasons, the Exchange believes that the proposal is 
consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\62\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act. Instead, the Exchange believes that the 
proposed rule change would facilitate the listing and trading of 
additional types of Managed Fund Shares and result in a significantly 
more efficient process surrounding the listing and trading of Managed 
Fund Shares, which will enhance competition among market participants, 
to the benefit of investors and the marketplace. The Exchange believes 
that this would reduce the time frame for bringing Managed Fund Shares 
to market, thereby reducing the burdens on issuers and other market 
participants and promoting competition. In turn, the Exchange believes 
that the proposed change would make the process for listing Managed 
Fund Shares more competitive by applying uniform listing standards with 
respect to Managed Fund Shares.
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    \62\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2016-104 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2016-104. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2016-104 and should 
be submitted on or before September 14, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\63\
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    \63\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20210 Filed 8-23-16; 8:45 am]
 BILLING CODE 8011-01-P


