
[Federal Register Volume 82, Number 67 (Monday, April 10, 2017)]
[Notices]
[Pages 17314-17324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07045]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80369; File No. SR-NASDAQ-2017-033]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To List and Trade the Shares 
of the First Trust California Municipal High Income ETF

April 4, 2017.
    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 March 24, 2017, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 list and trade the shares of the First 
Trust California Municipal High Income ETF (the ``Fund'') of First 
Trust Exchange-Traded Fund III (the ``Trust'') under Nasdaq Rule 5735 
(``Managed Fund Shares'').\3\ The shares of the Fund are collectively 
referred to herein as the ``Shares.''
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    \3\ The Commission approved Nasdaq Rule 5735 in Securities 
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 
20, 2008) (SR-NASDAQ-2008-039). The Exchange notes that the 
Commission has previously issued orders with respect to the First 
Trust Municipal High Income ETF, Securities Exchange Act Release No. 
78913 (September 23, 2016), 81 FR 69109 (October 5, 2016) (SR-
NASDAQ-2016-002); and First Trust Managed Municipal ETF, Securities 
Exchange Act Release No. 71913 (April 9, 2014), 79 FR 21333 (April 
15, 2014) (SR-NASDAQ-2014-019). The Exchange believes the proposed 
rule change raises no significant issues not previously addressed in 
those prior Commission orders. In addition, the Exchange notes that 
the Commission has approved listing and trading of certain index-
based ETFs that invest in municipal securities. See, e.g., 
Securities Exchange Act Release Nos. 75376 (July 7, 2015), 80 FR 
40113 (July 13, 2015) (SR-NYSEArca-2015-18) (order approving listing 
and trading of Vanguard Tax-Exempt Bond Index Fund); 71232 (January 
3, 2014), 79 FR 1662 (January 9, 2014) (SR-NYSEArca-2013-118) (order 
approving listing and trading of Market Vectors Short High-Yield 
Municipal Index ETF); and 63881 (February 9, 2011), 76 FR 9065 
(February 16, 2011) (SR-NYSEArca-2010-120) (order approving listing 
and trading of SPDR Nuveen S&P High Yield Municipal Bond ETF).
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    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 list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares \4\ on the Exchange. The Fund will

[[Page 17315]]

be an actively-managed exchange-traded fund (``ETF''). The Shares will 
be offered by the Trust, which was established as a Massachusetts 
business trust on January 9, 2008.\5\ The Trust is registered with the 
Commission as an investment company and has filed a registration 
statement on Form N-1A (``Registration Statement'') with the 
Commission.\6\ The Fund will be a series of the Trust. The Fund intends 
to qualify each year as a regulated investment company (``RIC'') under 
Subchapter M of the Internal Revenue Code of 1986, as amended.
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    \4\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') organized 
as an open-end investment company or similar entity that invests in 
a portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Index Fund Shares, listed 
and traded on the Exchange under Nasdaq Rule 5705, seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specific foreign or domestic stock index, fixed 
income securities index or combination thereof.
    \5\ The Commission has issued an order, upon which the Trust may 
rely, granting certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 30029 (April 10, 2012) (File No. 
812-13795) (the ``Exemptive Relief''). In addition, on December 6, 
2012, the staff of the Commission's Division of Investment 
Management (``Division'') issued a no-action letter (``No-Action 
Letter'') relating to the use of derivatives by actively-managed 
ETFs. See No-Action Letter dated December 6, 2012 from Elizabeth G. 
Osterman, Associate Director, Office of Exemptive Applications, 
Division of Investment Management. The No-Action Letter stated that 
the Division would not recommend enforcement action to the 
Commission under applicable provisions of and rules under the 1940 
Act if actively-managed ETFs operating in reliance on specified 
orders (which include the Exemptive Relief) invest in options 
contracts, futures contracts or swap agreements provided that they 
comply with certain representations stated in the No-Action Letter.
    \6\ See Post-Effective Amendment No. 65 to Registration 
Statement on Form N-1A for the Trust, dated March 23, 2017 (File 
Nos. 333-176976 and 811-22245). The descriptions of the Fund and the 
Shares contained herein are based, in part, on information in the 
Registration Statement.
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    First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund. First Trust Portfolios L.P. (the 
``Distributor'') will be the principal underwriter and distributor of 
the Fund's Shares. Brown Brothers Harriman & Co. (``BBH'') will act as 
the administrator, accounting agent, custodian, and transfer agent to 
the Fund.
    Paragraph (g) of Rule 5735 provides that if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect a ``fire 
wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio.\7\ In addition, paragraph 
(g) further requires that personnel who make decisions on the open-end 
fund's portfolio composition must be subject to procedures designed to 
prevent the use and dissemination of material, non-public information 
regarding the open-end fund's portfolio.
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    \7\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``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.
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    Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i); however, 
paragraph (g) in connection with the establishment of a ``fire wall'' 
between the investment adviser and the broker-dealer reflects the 
applicable open-end fund's portfolio, not an underlying benchmark 
index, as is the case with index-based funds. The Adviser is not a 
broker-dealer, but it is affiliated with the Distributor, a broker-
dealer, and has implemented and will maintain a fire wall with respect 
to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the portfolio.
    In addition, personnel who make decisions on the Fund's portfolio 
composition will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
Fund's portfolio. In the event (a) the Adviser or any sub-adviser 
registers as a broker-dealer or becomes newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser is a registered broker-
dealer or becomes affiliated with another broker-dealer, it will 
implement and maintain a fire wall with respect to its relevant 
personnel and/or such broker-dealer affiliate, as applicable, regarding 
access to information concerning the composition and/or changes to the 
portfolio and will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding such 
portfolio. The Fund currently does not intend to use a sub-adviser.
First Trust California Municipal High Income ETF
Principal Investments
    The primary investment objective of the Fund will be to generate 
current income that is exempt from regular federal income taxes and 
California income taxes and its secondary objective will be long-term 
capital appreciation. Under normal market conditions,\8\ the Fund will 
seek to achieve its investment objectives by investing at least 80% of 
its net assets (including investment borrowings) in municipal debt 
securities that pay interest that is exempt from regular federal income 
taxes and California income taxes (collectively, ``Municipal 
Securities'').\9\ Municipal Securities will be issued by or on behalf 
of the State of California or territories or possessions of the U.S. 
(including without limitation Puerto Rico, the U.S. Virgin Islands and 
Guam), and/or the political subdivisions, agencies, authorities and 
other instrumentalities of such State, territories or possessions.\10\
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    \8\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the fixed income markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance. On a temporary 
basis, including for defensive purposes, during the initial invest-
up period (i.e., the six-week period following the commencement of 
trading of Shares on the Exchange) and during periods of high cash 
inflows or outflows (i.e., rolling periods of seven calendar days 
during which inflows or outflows of cash, in the aggregate, exceed 
10% of the Fund's net assets as of the opening of business on the 
first day of such periods), the Fund may depart from its principal 
investment strategies; for example, it may hold a higher than normal 
proportion of its assets in cash. During such periods, the Fund may 
not be able to achieve its investment objectives. The Fund may adopt 
a defensive strategy when the Adviser believes securities in which 
the Fund normally invests have elevated risks due to political or 
economic factors and in other extraordinary circumstances.
    \9\ Assuming compliance with the investment requirements and 
limitations described herein, the Fund may invest up to 100% of its 
net assets in Municipal Securities that pay interest that generates 
income subject to the federal alternative minimum tax.
    \10\ For the avoidance of doubt, Municipal Securities issued by 
or on behalf of territories or possessions of the U.S. and/or the 
political subdivisions, agencies, authorities and other 
instrumentalities of such territories or possessions (collectively, 
``Territorial Obligations'') will pay interest that is exempt from 
regular federal income taxes and California income taxes. Under 
normal market conditions, except for the initial invest-up period 
and periods of high cash inflows or outflows, the Fund will limit 
its investments in Territorial Obligations to 20% of its net assets. 
(See note 8 regarding the meaning of the terms ``initial invest-up 
period'' and ``periods of high cash inflows or outflows.'')

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[[Page 17316]]

    The types of Municipal Securities in which the Fund may invest 
include municipal lease obligations (and certificates of participation 
in such obligations), municipal general obligation bonds, municipal 
revenue bonds, municipal notes, municipal cash equivalents, private 
activity bonds (including without limitation industrial development 
bonds), and pre-refunded \11\ and escrowed to maturity bonds. In 
addition, Municipal Securities include securities issued by entities 
(referred to as ``Municipal Entities'') whose underlying assets are 
municipal bonds (i.e., tender option bond (TOB) trusts and custodial 
receipts trusts).
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    \11\ A pre-refunded municipal bond is a municipal bond that has 
been refunded to a call date on or before the final maturity of 
principal and remains outstanding in the municipal market. The 
payment of principal and interest of the pre-refunded municipal 
bonds held by the Fund will be funded from securities in a 
designated escrow account that holds U.S. Treasury securities or 
other obligations of the U.S. government (including its agencies and 
instrumentalities). As the payment of principal and interest is 
generated from securities held in a designated escrow account, the 
pledge of the municipality has been fulfilled and the original 
pledge of revenue by the municipality is no longer in place. The 
escrow account securities pledged to pay the principal and interest 
of the pre-refunded municipal bond do not guarantee the price 
movement of the bond before maturity. Investment in pre-refunded 
municipal bonds held by the Fund may subject the Fund to interest 
rate risk, market risk and credit risk. In addition, while a 
secondary market exists for pre-refunded municipal bonds, if the 
Fund sells pre-refunded municipal bonds prior to maturity, the price 
received may be more or less than the original cost, depending on 
market conditions at the time of sale.
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    The Fund may invest in Municipal Securities of any maturity. 
However, under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows,\12\ the 
weighted average maturity of the Fund will be less than or equal to 14 
years.
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    \12\ See note 8 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
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    Under normal market conditions, except for the initial invest-up 
period and periods of high cash inflows or outflows,\13\ the Fund will 
invest at least 50% of its net assets in ``investment grade Municipal 
Securities,'' which are Municipal Securities that are, at the time of 
investment, rated investment grade (i.e., rated Baa3/BBB-or above) by 
at least one nationally recognized statistical rating organization 
(``NRSRO'') rating such securities (or Municipal Securities that are 
unrated and determined by the Adviser to be of comparable quality \14\) 
(the ``Investment Grade Requirement''). The Fund will consider pre-
refunded or escrowed to maturity bonds, regardless of rating, to be 
investment grade Municipal Securities. The Fund may invest up to 50% of 
its net assets in Municipal Securities that are, at the time of 
investment, not investment grade Municipal Securities (commonly 
referred to as ``high yield'' or ``junk'' bonds).\15\ If, subsequent to 
purchase by the Fund, a Municipal Security held by the Fund experiences 
a decrease in credit quality and is no longer an investment grade 
Municipal Security, the Fund may continue to hold the Municipal 
Security and it will not cause the Fund to violate the Investment Grade 
Requirement; however, the Municipal Security will be taken into account 
for purposes of determining whether purchases of additional Municipal 
Securities will cause the Fund to violate the Investment Grade 
Requirement.
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    \13\ Id.
    \14\ Comparable quality of unrated Municipal Securities will be 
determined by the Adviser based on fundamental credit analysis of 
the unrated security and comparable rated securities. On a best 
efforts basis, the Adviser will attempt to make a rating 
determination based on publicly available data. In making a 
``comparable quality'' determination, the Adviser may consider, for 
example, whether the issuer of the security has issued other rated 
securities, the nature and provisions of the relevant security, 
whether the obligations under the relevant security are guaranteed 
by another entity and the rating of such guarantor (if any), 
relevant cash flows, macroeconomic analysis, and/or sector or 
industry analysis.
    \15\ These Municipal Securities may include Municipal Securities 
that are currently in default and not expected to pay the current 
coupon (``Distressed Municipal Securities''). The Fund may invest up 
to 10% of its net assets in Distressed Municipal Securities. If, 
subsequent to purchase by the Fund, a Municipal Security held by the 
Fund becomes a Distressed Municipal Security, the Fund may continue 
to hold the Distressed Municipal Security and it will not cause the 
Fund to violate the 10% limitation; however, the Distressed 
Municipal Security will be taken into account for purposes of 
determining whether purchases of additional Municipal Securities 
will cause the Fund to violate such limitation.
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    Although as described below, certain of the representations 
included in this filing will meet or exceed similar requirements set 
forth in the generic listing standards for actively-managed ETFs (the 
``Generic Listing Standards''), it is not anticipated that the Fund 
will meet the requirement that components that in the aggregate account 
for at least 75% of the fixed income weight of the portfolio each have 
a minimum original principal amount outstanding of $100 million or 
more.\16\ In general terms, as described above, the Fund will operate 
as an actively-managed ETF that normally invests in a portfolio of 
Municipal Securities and will be subject to the Investment Grade 
Requirement (in contrast to, for example, an index-based ETF that 
tracks an index comprised of the largest municipal debt issuers). The 
Adviser notes that debt issuance sizes for municipal obligations are 
generally smaller than for corporate obligations. Furthermore, as a 
general matter, municipal borrowers in certain industries with 
municipal obligations rated in the ``A'' and ``BBB'' categories (in 
which the Fund currently intends to invest significantly) \17\ tend to 
have less outstanding debt than municipal borrowers in other municipal 
industries.
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    \16\ See Nasdaq Rule 5735(b)(1)(B)(i).
    \17\ These industries include charter schools, senior living 
facilities (i.e., continuing care retirement communities (CCRCs)) 
and special tax districts, among others. See note 35 and 
accompanying text regarding the Fund's exposure to different 
industries. In the case of a municipal conduit financing (in general 
terms, the issuance of municipal securities by an issuer to finance 
a project to be used primarily by a third party (the ``conduit 
borrower'')), the ``borrower'' is the conduit borrower (i.e., the 
party on which a bondholder must rely for repayment). In the case of 
other municipal financings, the ``borrower'' is the issuer of the 
municipal securities.
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    Therefore, under normal market conditions, except for the initial 
invest-up period and periods of high cash inflows or outflows,\18\ at 
least 40% (based on dollar amount invested) of the Municipal Securities 
in which the Fund invests \19\ will be issued by issuers with total 
outstanding debt issuances that, in the aggregate, have a minimum 
amount of municipal debt outstanding at the time of purchase of $50 
million or more (the ``40/50 Requirement''). The Adviser believes that 
the 40/50 Requirement is appropriate in light of the Fund's investment 
objectives and the manner in which the Fund intends to pursue them. 
Given the expected availability of Municipal Securities that will 
satisfy the Fund's investment parameters and the debt issuance profiles 
of the corresponding issuers and borrowers, the 40/50 Requirement 
should both provide the Fund with flexibility to construct its 
portfolio and, when combined with the other representations in this 
filing (including certain representations set forth below pertaining to 
fixed income securities weightings and number of non-affiliated issuers 
that are based on, but more stringent than, the Generic Listing 
Standards), should support the potential for diversity and liquidity, 
thereby mitigating the Commission's concerns about manipulation.
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    \18\ See note 8 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
    \19\ For the avoidance of doubt, in the case of Municipal 
Securities that are issued by Municipal Entities, the underlying 
municipal bonds will be taken into account.
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    Under normal market conditions, except for the initial invest-up 
period

[[Page 17317]]

and periods of high cash inflows or outflows,\20\ no component fixed 
income security (excluding the U.S. government securities described in 
``Other Investments'' below) will represent more than 15% of the Fund's 
net assets, and the five most heavily weighted component fixed income 
securities in the Fund's portfolio (excluding U.S. government 
securities) will not, in the aggregate, account for more than 25% of 
the Fund's net assets.\21\ Further, under normal market conditions, 
except for the initial invest-up period and periods of high cash 
inflows or outflows,\22\ the Fund's portfolio of Municipal Securities 
will include securities from a minimum of 30 non-affiliated 
issuers.\23\ Moreover, under normal market conditions, except for the 
initial invest-up period and periods of high cash inflows or 
outflows,\24\ component securities that in the aggregate account for at 
least 90% of the weight of the Fund's portfolio of Municipal Securities 
will be exempted securities as defined in Section 3(a)(12) of the 
Act.\25\ Additionally, to the extent the Fund invests in Municipal 
Securities that are asset-backed securities,\26\ such investments will 
not account, in the aggregate, for more than 20% of the weight of the 
fixed income portion of the Fund's portfolio.\27\
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    \20\ See note 8 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
    \21\ See the Generic Listing Standards requirement set forth in 
Nasdaq Rule 5735(b)(1)(B)(ii), which provides that that no component 
fixed income security (excluding U.S. Treasury securities and 
government-sponsored entity (``GSE'') securities) may represent more 
than 30% of the fixed income weight of the portfolio, and that the 
five most heavily weighted component fixed income securities in the 
portfolio (excluding U.S. Treasury securities and GSE securities) 
may not in the aggregate account for more than 65% of the fixed 
income weight of the portfolio. For the avoidance of doubt, in the 
case of Municipal Securities that are issued by Municipal Entities, 
the underlying municipal bonds will be taken into account.
    \22\ See note 8 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
    \23\ See the Generic Listing Standards requirement set forth in 
Nasdaq Rule 5735(b)(1)(B)(iii), which provides that generally an 
underlying portfolio (excluding exempted securities) that includes 
fixed income securities must include a minimum of 13 non-affiliated 
issuers. For the avoidance of doubt, in the case of Municipal 
Securities that are issued by Municipal Entities, the underlying 
municipal bonds will be taken into account. Additionally, for 
purposes of this restriction, each separate political subdivision, 
agency, authority, or instrumentality of the State of California, 
and each guarantor, if any, will be treated as separate, non-
affiliated issuers of Municipal Securities.
    \24\ See note 8 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
    \25\ See the Generic Listing Standards requirement set forth in 
Nasdaq Rule 5735(b)(1)(B)(iv)(d). For the avoidance of doubt, in the 
case of Municipal Securities that are issued by Municipal Entities, 
the underlying municipal bonds will be taken into account.
    \26\ For the avoidance of doubt, municipal debt securities 
backed by mortgages or tax liens will not be considered asset-backed 
securities.
    \27\ See the Generic Listing Standards requirement set forth in 
Nasdaq Rule 5735(b)(1)(B)(v).
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    Additional representations pertaining to the Fund's portfolio, 
including representations relating to exposure to industries, are set 
forth below under ``Investment Restrictions'' (such representations 
relating to exposure to industries, together with the representations 
set forth in the two preceding paragraphs and the Investment Grade 
Requirement, are collectively the ``Portfolio Representations''). In 
light of the requirements they impose (e.g., concerning credit quality, 
municipal debt outstanding, fixed income securities weightings, issuer 
diversification, the nature of the securities in which the Fund will 
invest (including representations relating to exempted securities and 
asset-backed securities), and exposure to industries), the Portfolio 
Representations should provide support regarding the anticipated 
diversity and liquidity of the Fund's Municipal Securities portfolio 
and should mitigate the risks associated with manipulation.
Other Investments
    With respect to up to 20% (in the aggregate) of its net assets, the 
Fund may invest in and hold the securities and other instruments 
(including cash) described below.
    The Fund may invest in short-term debt instruments (described 
below), money market funds and other cash equivalents, and taxable and 
other municipal securities that are not Municipal Securities, or it may 
hold cash. The percentage of the Fund invested in such holdings or held 
in cash will vary and will depend on several factors, including market 
conditions. Short-term debt instruments, which do not include Municipal 
Securities, are issued by issuers having a long-term debt rating of at 
least A-/A3 (as applicable) by S&P Global Ratings (``S&P''), Moody's 
Investors Service, Inc. (``Moody's'') or Fitch Ratings (``Fitch'') and 
have a maturity of one year or less.
    The Fund may invest in the following short-term debt instruments: 
(1)Fixed rate and floating rate U.S. government securities, including 
bills, notes and bonds differing as to maturity and rates of interest, 
which are either issued or guaranteed by the U.S. Treasury or by U.S. 
government agencies or instrumentalities; (2) certificates of deposit 
issued against funds deposited in a bank or savings and loan 
association; (3) bankers' acceptances, which are short-term credit 
instruments used to finance commercial transactions; (4) repurchase 
agreements,\28\ which involve purchases of debt securities; (5) bank 
time deposits, which are monies kept on deposit with banks or savings 
and loan associations for a stated period of time at a fixed rate of 
interest; and (6) commercial paper, which is short-term unsecured 
promissory notes.\29\
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    \28\ The Fund intends to enter into repurchase agreements only 
with financial institutions and dealers believed by the Adviser to 
present minimal credit risks in accordance with criteria approved by 
the Board of Trustees of the Trust (``Trust Board''). The Adviser 
will review and monitor the creditworthiness of such institutions. 
The Adviser will monitor the value of the collateral at the time the 
transaction is entered into and at all times during the term of the 
repurchase agreement.
    \29\ The Fund may only invest in commercial paper rated A-3 or 
higher by S&P, Prime-3 or higher by Moody's or F3 or higher by 
Fitch.
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    The Fund may (i) invest in the securities of other investment 
companies registered under the 1940 Act, including money market funds, 
ETFs,\30\ open-end funds (other than money market funds and other 
ETFs), and closed-end funds and (ii) acquire short positions in the 
securities of the foregoing investment companies.
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    \30\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. Many ETFs are designed to 
track the performance of a securities index, including industry, 
sector, country and region indexes. ETFs included in the Fund will 
be listed and traded in the U.S. on one or more registered 
exchanges. The Fund may invest in the securities of certain ETFs in 
excess of the limits imposed under the 1940 Act pursuant to 
exemptive orders obtained by such ETFs and their sponsors from the 
Commission. In addition, the Fund may invest in the securities of 
certain other investment companies in excess of the limits imposed 
under the 1940 Act pursuant to an exemptive order that the Trust has 
obtained from the Commission. See Investment Company Act Release No. 
30377 (February 5, 2013) (File No. 812-13895). The ETFs in which the 
Fund may invest include Index Fund Shares (as described in Nasdaq 
Rule 5705), Portfolio Depository Receipts (as described in Nasdaq 
Rule 5705), and Managed Fund Shares (as described in Nasdaq Rule 
5735). While the Fund may invest in inverse ETFs, the Fund will not 
invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs.
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    The Fund may (i) invest in exchange-listed options on U.S. Treasury 
securities, exchange-listed options on U.S. Treasury futures contracts, 
and exchange-listed U.S. Treasury futures contracts and (ii) acquire 
short positions in the foregoing derivatives. Transactions in the 
foregoing derivatives may allow the Fund to obtain net long or short 
exposures to selected interest rates. These derivatives may also be 
used to hedge risks, including interest rate risks and credit risks, 
associated with the Fund's portfolio investments. The Fund's

[[Page 17318]]

investments in derivative instruments will be consistent with the 
Fund's investment objectives and the 1940 Act and will not be used to 
seek to achieve a multiple or inverse multiple of the Fund's broad-
based securities market index (as defined in Form N-1A).
Investment Restrictions
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser.\31\ The 
Fund will monitor its portfolio liquidity on an ongoing basis to 
determine whether, in light of current circumstances, an adequate level 
of liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets. 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.\32\
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    \31\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers and the mechanics of transfer).
    \32\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also Investment Company Act 
Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) 
(Statement Regarding ``Restricted Securities''); Investment Company 
Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) 
(Revisions of Guidelines to Form N-1A). A fund's portfolio security 
is illiquid if it cannot be disposed of in the ordinary course of 
business within seven days at approximately the value ascribed to it 
by the fund. See Investment Company Act Release No. 14983 (March 12, 
1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 
under the 1940 Act); Investment Company Act Release No. 17452 (April 
23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under 
the Securities Act of 1933).
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    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to (a) municipal securities issued by governments or 
political subdivisions of governments, (b) obligations issued or 
guaranteed by the U.S. government, its agencies or instrumentalities, 
or (c) securities of other investment companies.\33\ In addition, under 
normal market conditions, except for the initial invest-up period and 
periods of high cash inflows or outflows,\34\ the Fund's investments in 
Municipal Securities will provide exposure (based on dollar amount 
invested) to at least 10 different industries \35\ (with no more than 
25% of the value of the Fund's net assets comprised of Municipal 
Securities that provide exposure to any single industry).\36\
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    \33\ See Form N-1A, Item 9. The Commission has taken the 
position that a fund is concentrated if it invests more than 25% of 
the value of its total assets in any one industry. See, e.g., 
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR 
54241 (November 21, 1975).
    \34\ See note 8 regarding the meaning of the terms ``initial 
invest-up period'' and ``periods of high cash inflows or outflows.''
    \35\ The municipal industry classification system used by the 
Fund will divide the municipal securities universe into distinct 
categories that are intended to reflect either the use of proceeds 
generated by particular subsets of municipal securities or the 
collateral/sources of repayment securing/backing such municipal 
securities. For example, municipal bonds associated with the airport 
industry are issued to construct or expand an airport and/or related 
facilities and are secured by revenues generated from the use of the 
airport.
    \36\ For the avoidance of doubt, in the case of Municipal 
Securities that are issued by Municipal Entities, the underlying 
municipal bonds will be taken into account.
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Creation and Redemption of Shares
    The Fund will issue and redeem Shares on a continuous basis at net 
asset value (``NAV'') \37\ only in large blocks of Shares (``Creation 
Units'') in transactions with authorized participants, generally 
including broker-dealers and large institutional investors 
(``Authorized Participants''). Creation Units generally will consist of 
50,000 Shares, although this may change from time to time. Creation 
Units, however, are not expected to consist of less than 50,000 Shares. 
As described in the Registration Statement and consistent with the 
Exemptive Relief, the Fund will issue and redeem Creation Units in 
exchange for an in-kind portfolio of instruments and/or cash in lieu of 
such instruments (the ``Creation Basket'').\38\ In addition, if there 
is a difference between the NAV attributable to a Creation Unit and the 
market value of the Creation Basket exchanged for the Creation Unit, 
the party conveying instruments (which may include cash-in-lieu 
amounts) with the lower value will pay to the other an amount in cash 
equal to the difference (referred to as the ``Cash Component'').
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    \37\ The NAV of the Fund's Shares generally will be calculated 
once daily Monday through Friday as of the close of regular trading 
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m., 
Eastern Time (the ``NAV Calculation Time''). NAV per Share will be 
calculated by dividing the Fund's net assets by the number of Fund 
Shares outstanding.
    \38\ Subject to, and in accordance with, the provisions of the 
Exemptive Relief, it is expected that the Fund will typically issue 
and redeem Creation Units on a cash basis; however, at times, it may 
issue and redeem Creation Units on an in-kind (or partially in-kind) 
basis.
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    Creations and redemptions must be made by or through an Authorized 
Participant that has executed an agreement that has been agreed to by 
the Distributor and BBH with respect to creations and redemptions of 
Creation Units. All standard orders to create Creation Units must be 
received by the transfer agent no later than the closing time of the 
regular trading session on the NYSE (ordinarily 4:00 p.m., Eastern 
Time) (the ``Closing Time''), in each case on the date such order is 
placed in order for the creation of Creation Units to be effected based 
on the NAV of Shares as next determined on such date after receipt of 
the order in proper form. Shares may be redeemed only in Creation Units 
at their NAV next determined after receipt, not later than the Closing 
Time, of a redemption request in proper form by the Fund through the 
transfer agent and only on a business day.
    The Fund's 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 comprising the Creation Basket, as well 
as the estimated Cash Component (if any), for that day. The published 
Creation Basket will apply until a new Creation Basket is announced on 
the following business day prior to commencement of trading in the 
Shares.
Net Asset Value
    The Fund's NAV will be determined as of the close of regular 
trading on the NYSE on each day the NYSE is open for trading. If the 
NYSE closes early on a valuation day, the NAV will be determined as of 
that time. NAV per Share will be calculated for the Fund by taking the 
value of the Fund's total assets, including interest or dividends 
accrued but not yet collected, less all liabilities, including accrued 
expenses and dividends declared but unpaid, and dividing such amount by 
the total number of Shares outstanding. The result, rounded to the 
nearest cent, will be the NAV per Share. All valuations will be subject 
to review by the Trust Board or its delegate.
    The Fund's investments will be valued daily. As described more 
specifically below, investments traded on an exchange (i.e., a 
regulated market), will generally be valued at market value prices that 
represent last sale or official closing prices. In

[[Page 17319]]

addition, as described more specifically below, non-exchange traded 
investments (including Municipal Securities) will generally be valued 
using prices obtained from third-party pricing services (each, a 
``Pricing Service'').\39\ If, however, valuations for any of the Fund's 
investments cannot be readily obtained as provided in the preceding 
manner, or the Pricing Committee of the Adviser (the ``Pricing 
Committee'') \40\ questions the accuracy or reliability of valuations 
that are so obtained, such investments will be valued at fair value, as 
determined by the Pricing Committee, in accordance with valuation 
procedures (which may be revised from time to time) adopted by the 
Trust Board (the ``Valuation Procedures''), and in accordance with 
provisions of the 1940 Act. The Pricing Committee's fair value 
determinations may require subjective judgments about the value of an 
asset. The fair valuations attempt to estimate the value at which an 
asset could be sold at the time of pricing, although actual sales could 
result in price differences, which could be material.
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    \39\ The Adviser may use various Pricing Services or discontinue 
the use of any Pricing Services, as approved by the Trust Board from 
time to time.
    \40\ The Pricing Committee will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the Fund's portfolio.
---------------------------------------------------------------------------

    Certain securities, including in particular Municipal Securities, 
in which the Fund may invest will not be listed on any securities 
exchange or board of trade. Such securities will typically be bought 
and sold by institutional investors in individually negotiated private 
transactions that function in many respects like an over-the-counter 
secondary market, although typically no formal market makers will 
exist. Certain securities, particularly debt securities, will have few 
or no trades, or trade infrequently, and information regarding a 
specific security may not be widely available or may be incomplete. 
Accordingly, determinations of the value of debt securities may be 
based on infrequent and dated information. Because there is less 
reliable, objective data available, elements of judgment may play a 
greater role in valuation of debt securities than for other types of 
securities.
    The information summarized below is based on the Valuation 
Procedures as currently in effect; however, as noted above, the 
Valuation Procedures are amended from time to time and, therefore, such 
information is subject to change.
    The following investments will typically be valued using 
information provided by a Pricing Service: (a) Except as provided 
below, Municipal Securities; (b) except as provided below, short-term 
U.S. government securities, commercial paper, and bankers' acceptances, 
all as set forth under ``Other Investments'' (collectively, ``Short-
Term Debt Instruments''); and (c) except as provided below, taxable and 
other municipal securities that are not Municipal Securities. Debt 
instruments may be valued at evaluated mean prices, as provided by 
Pricing Services. Pricing Services typically value non-exchange-traded 
instruments utilizing a range of market-based inputs and assumptions, 
including readily available market quotations obtained from broker-
dealers making markets in such instruments, cash flows, and 
transactions for comparable instruments. In pricing certain 
instruments, the Pricing Services may consider information about an 
instrument's issuer or market activity provided by the Adviser.
    Municipal Securities, Short-Term Debt Instruments, and taxable and 
other municipal securities having a remaining maturity of 60 days or 
less when purchased will typically be valued at cost adjusted for 
amortization of premiums and accretion of discounts, provided the 
Pricing Committee has determined that the use of amortized cost is an 
appropriate reflection of value given market and issuer-specific 
conditions existing at the time of the determination.
    Repurchase agreements will typically be valued as follows:
    Overnight repurchase agreements will be valued at amortized cost 
when it represents the best estimate of value. Term repurchase 
agreements (i.e., those whose maturity exceeds seven days) will be 
valued at the average of the bid quotations obtained daily from at 
least two recognized dealers.
    Equity securities (including ETFs and closed-end funds) listed on 
any exchange other than the Exchange will typically be valued at the 
last sale price on the exchange on which they are principally traded on 
the business day as of which such value is being determined. Such 
equity securities (including ETFs and closed-end funds) listed on the 
Exchange will typically be valued at the official closing price on the 
business day as of which such value is being determined. If there has 
been no sale on such day, or no official closing price in the case of 
securities traded on the Exchange, such equity securities will 
typically be valued using fair value pricing. Such equity securities 
traded on more than one securities exchange will be valued at the last 
sale price or official closing price, as applicable, on the business 
day as of which such value is being determined at the close of the 
exchange representing the principal market for such securities.
    Money market funds and other registered open-end management 
investment companies (other than ETFs, which will be valued as 
described above) will typically be valued at their net asset values as 
reported by such registered open-end management investment companies to 
Pricing Services.
    Exchange-listed derivatives (including options on U.S. Treasury 
securities, options on U.S. Treasury futures contracts, and U.S. 
Treasury futures contracts) will typically be valued at the closing 
price in the market where such instruments are principally traded.
Availability of Information
    The Fund's Web site (www.ftportfolios.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Fund that may be downloaded. The Web site 
will include the Shares' ticker, CUSIP and exchange information along 
with additional quantitative information updated on a daily basis, 
including, for the Fund: (1) Daily trading volume, the prior business 
day's reported NAV and closing price, mid-point of the bid/ask spread 
at the time of calculation of such NAV (the ``Bid/Ask Price''),\41\ and 
a calculation of the premium and discount of the Bid/Ask Price against 
the NAV; and (2) data in chart format displaying the frequency 
distribution of discounts and premiums of the daily Bid/Ask Price 
against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Regular Market Session \42\ on the 
Exchange, the Fund will disclose on its Web site the identities and 
quantities of the portfolio of securities and other assets (the 
``Disclosed Portfolio'' as defined in Nasdaq Rule 5735(c)(2)) held by 
the Fund that will form the basis for the

[[Page 17320]]

Fund's calculation of NAV at the end of the business day.\43\
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    \41\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \42\ 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 
p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m., Eastern Time).
    \43\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.
---------------------------------------------------------------------------

    The Fund's disclosure of derivative positions in the Disclosed 
Portfolio will include sufficient information for market participants 
to use to value these positions intraday. On a daily basis, the Fund 
will disclose on the Fund's Web site the following information 
regarding each portfolio holding, as applicable to the type of holding: 
Ticker symbol, CUSIP number or other identifier, if any; a description 
of the holding (including the type of holding); with respect to 
holdings in derivatives, the identity of the security, index or other 
asset upon which the derivative is based; for options, the option 
strike price; quantity held (as measured by, for example, par value, 
notional value or number of shares, contracts or units); maturity date, 
if any; coupon rate, if any; effective date, if any; market value of 
the holding; and percentage weighting of the holding in the Fund's 
portfolio. The Web site information will be publicly available at no 
charge.
    In addition, for the Fund, an estimated value, defined in Rule 
5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's Disclosed Portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value, available on the 
NASDAQ OMX Information LLC proprietary index data service,\44\ will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated by one or more 
major market data vendors and broadly displayed at least every 15 
seconds during the Regular Market Session. The Intraday Indicative 
Value will be based on quotes and closing prices provided by a dealer 
who makes a market in those instruments. Premiums and discounts between 
the Intraday Indicative Value and the market price may occur. This 
should not be viewed as a ``real time'' update of the NAV per Share of 
the Fund, which is calculated only once a day.
---------------------------------------------------------------------------

    \44\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') is the Nasdaq global index data feed service, offering 
real-time updates, daily summary messages, and access to widely 
followed indexes and Intraday Indicative Values for ETFs. GIDS 
provides investment professionals with the daily information needed 
to track or trade Nasdaq indexes, listed ETFs, or third-party 
partner indexes and ETFs.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of the Fund on a daily basis and will provide 
a close estimate of that value throughout the trading day.
    Investors will also be able to obtain the Fund's Statement of 
Additional Information (``SAI''), the Fund's annual and semi-annual 
reports (together, ``Shareholder Reports''), and its Form N-CSR and 
Form N-SAR, filed twice a year. The Fund's SAI and Shareholder Reports 
will be available free upon request from the Fund, and those documents 
and the Form N-CSR and Form N-SAR may be viewed on-screen or downloaded 
from the Commission's Web site at www.sec.gov. 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. Quotation and last sale information 
for the Shares will be available via Nasdaq proprietary quote and trade 
services, as well as in accordance with the Unlisted Trading Privileges 
and the Consolidated Tape Association (``CTA'') plans for the Shares. 
Quotation and last sale information for exchange-listed equity 
securities (including other ETFs and closed-end funds) will be 
available from the exchanges on which they are traded as well as in 
accordance with any applicable CTA plans. Quotation and last sale 
information for U.S. exchange-listed options will be available via the 
Options Price Reporting Authority.
    One source of price information for Municipal Securities and 
taxable and other municipal securities will be the Electronic Municipal 
Market Access (``EMMA'') of the Municipal Securities Rulemaking Board 
(``MSRB'').\45\ Additionally, the MSRB offers trade data subscription 
services that permit subscribers to obtain same-day pricing information 
about municipal securities transactions. Moreover, pricing information 
for Municipal Securities, as well as for taxable and other municipal 
securities, Short-Term Debt Instruments (including short-term U.S. 
government securities, commercial paper, and bankers' acceptances), and 
repurchase agreements will be available from major broker-dealer firms 
and/or major market data vendors and/or Pricing Services.
---------------------------------------------------------------------------

    \45\ Information available on EMMA includes next-day information 
regarding municipal securities transactions and par amounts traded. 
In addition, a source of price information for certain taxable 
municipal securities is the Trade Reporting and Compliance Engine 
(``TRACE'') of the Financial Industry Regulatory Authority 
(``FINRA'').
---------------------------------------------------------------------------

    Pricing information for exchange-listed derivatives (including 
options on U.S. Treasury securities, options on U.S. Treasury futures 
contracts, and U.S. Treasury futures contracts), ETFs and closed-end 
funds will be available from the applicable listing exchange and from 
major market data vendors.
    Money market funds and other open-end funds (excluding ETFs) are 
typically priced once each business day and their prices will be 
available through the applicable fund's Web site or from major market 
data vendors.
    Additional information regarding the Fund and the Shares, including 
investment strategies, risks, creation and redemption procedures, fees, 
Fund holdings disclosure policies, distributions and taxes will be 
included in the Registration Statement.
Initial and Continued Listing
    The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and continued 
listing, the Fund must be in compliance with Rule 10A-3 \46\ under the 
Act. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. 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.
---------------------------------------------------------------------------

    \46\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. Nasdaq will halt trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121, 
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12). 
Trading may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
These may include: (1) The extent to which trading is not occurring in 
the securities and/or the other assets constituting the Disclosed 
Portfolio of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule

[[Page 17321]]

5735(d)(2)(D), which sets forth circumstances under which Shares of the 
Fund may be halted.
Trading Rules
    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity securities. Nasdaq will allow trading in the Shares 
from 4:00 a.m. until 8:00 p.m., Eastern Time. The Exchange has 
appropriate rules to facilitate transactions in the Shares during all 
trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum 
price variation for quoting and entry of orders in Managed Fund Shares 
traded on the Exchange is $0.01.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both Nasdaq and 
also FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\47\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and applicable 
federal securities laws.
---------------------------------------------------------------------------

    \47\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-listed securities and 
instruments held by the Fund (including closed-end funds, ETFs, 
exchange-listed options on U.S. Treasury securities, exchange-listed 
options on U.S. Treasury futures contracts, and exchange-listed U.S. 
Treasury futures contracts) with other markets and other entities that 
are members of the Intermarket Surveillance Group (``ISG''),\48\ and 
FINRA may obtain trading information regarding trading in the Shares 
and such exchange-listed 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 the exchange-
listed securities and instruments held by the Fund from markets and 
other entities that are members of ISG, which includes securities and 
futures exchanges, or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. Moreover, FINRA, on 
behalf of the Exchange, will be able to access, as needed, trade 
information for certain fixed income securities held by the Fund 
reported to FINRA's TRACE.\49\
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    \48\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
    \49\ For Municipal Securities, trade information can generally 
be found on the MSRB's EMMA.
---------------------------------------------------------------------------

    At least 90% of the Fund's net assets that are invested in 
exchange-listed options on U.S. Treasury securities, exchange-listed 
options on U.S. Treasury futures contracts, and exchange-listed U.S. 
Treasury futures contracts (in the aggregate) will be invested in 
instruments that trade in markets that are members of ISG or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange. All of the Fund's net assets that are invested in exchange-
listed equity securities (including closed-end funds and ETFs) will be 
invested in securities that trade in markets that are members of ISG or 
are parties to a comprehensive surveillance sharing agreement with the 
Exchange.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Circular
    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: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Intraday Indicative Value and the Disclosed Portfolio is 
disseminated; (4) 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; (5) the 
requirement that members deliver a prospectus to investors purchasing 
newly issued Shares prior to or concurrently with the confirmation of a 
transaction; and (6) trading information. The Information Circular will 
also discuss any exemptive, no-action and interpretive relief granted 
by the Commission from any rules under the Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV Calculation Time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the Fund's 
Web site.
Continued Listing Representations
    All statements and representations made in this filing regarding 
(a) the description of the portfolio, (b) limitations on portfolio 
holdings or reference assets, or (c) the applicability of Exchange 
rules and surveillance procedures shall constitute continued listing 
requirements for listing the Shares on the Exchange. In addition, the 
issuer has represented to the Exchange that it will advise the Exchange 
of any failure by the Fund 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 5800 Series.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act in general and Section 6(b)(5) of the Act in particular in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and, in general, to protect 
investors and the public interest.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Nasdaq Rule 5735. The

[[Page 17322]]

Exchange represents that trading in the Shares will be subject to the 
existing trading surveillances, administered by both Nasdaq and also 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities laws.
    The Adviser is not a broker-dealer, but it is affiliated with a 
broker-dealer and is required to implement and maintain a ``fire wall'' 
with respect to such broker-dealer affiliate regarding access to 
information concerning the composition and/or changes to the Fund's 
portfolio. In addition, paragraph (g) of Nasdaq Rule 5735 further 
requires that personnel who make decisions on the open-end fund's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material non-public information regarding 
the open-end fund's portfolio.
    FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-listed securities and 
instruments held by the Fund (including closed-end funds, ETFs, 
exchange-listed options on U.S. Treasury securities, exchange-listed 
options on U.S. Treasury futures contracts, and exchange-listed U.S. 
Treasury futures contracts) with other markets and other entities that 
are members of ISG, and FINRA may obtain trading information regarding 
trading in the Shares and such exchange-listed 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 the exchange-listed securities and instruments held 
by the Fund from markets and other entities that are members of ISG, 
which includes securities and futures exchanges, or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
Moreover, FINRA, on behalf of the Exchange, will be able to access, as 
needed, trade information for certain fixed income securities held by 
the Fund reported to FINRA's TRACE. At least 90% of the Fund's net 
assets that are invested in exchange-listed options on U.S. Treasury 
securities, exchange-listed options on U.S. Treasury futures contracts, 
and exchange-listed U.S. Treasury futures contracts (in the aggregate) 
will be invested in instruments that trade in markets that are members 
of ISG or are parties to a comprehensive surveillance sharing agreement 
with the Exchange. All of the Fund's net assets that are invested in 
exchange-listed equity securities (including closed-end funds and ETFs) 
will be invested in securities that trade in markets that are members 
of ISG or are parties to a comprehensive surveillance sharing agreement 
with the Exchange.
    The primary investment objective of the Fund will be to generate 
current income that is exempt from regular federal income taxes and 
California income taxes, and its secondary objective will be long-term 
capital appreciation. Under normal market conditions, the Fund will 
seek to achieve its investment objectives by investing at least 80% of 
its net assets (including investment borrowings) in Municipal 
Securities. Under normal market conditions, except for the initial 
invest-up period and periods of high cash inflows or outflows, the Fund 
will limit its investments in Territorial Obligations to 20% of its net 
assets. The Fund will invest in accordance with the Portfolio 
Representations. In light of the requirements they impose (e.g., 
concerning credit quality, municipal debt outstanding, fixed income 
securities weightings, issuer diversification, the nature of the 
securities in which the Fund will invest (including representations 
relating to exempted securities and asset-backed securities), and 
exposure to industries), the Exchange believes that the Portfolio 
Representations should provide support regarding the anticipated 
diversity and liquidity of the Fund's Municipal Securities portfolio 
and should mitigate the risks associated with manipulation.
    The Fund may invest up to 20% of its net assets in taxable and 
other municipal securities that are not Municipal Securities. In 
addition, the Fund may invest up to 10% of its net assets in Distressed 
Municipal Securities. With respect to up to 20% of its net assets, the 
Fund may (i) invest in exchange-listed options on U.S. Treasury 
securities, exchange-listed options on U.S. Treasury futures contracts, 
and exchange-listed U.S. Treasury futures contracts and (ii) acquire 
short positions in the foregoing derivatives. The Fund's investments in 
derivative instruments will be consistent with the Fund's investment 
objectives and the 1940 Act and will not be used to seek to achieve a 
multiple or inverse multiple of the Fund's broad-based securities 
market index (as defined in Form N-1A). Also, the Fund may hold up to 
an aggregate amount of 15% of its net assets in illiquid assets 
(calculated at the time of investment), including Rule 144A securities 
deemed illiquid by the Adviser. The Fund will monitor its portfolio 
liquidity on an ongoing basis to determine whether, in light of current 
circumstances, an adequate level of liquidity is being maintained, and 
will consider taking appropriate steps in order to maintain adequate 
liquidity if, through a change in values, net assets, or other 
circumstances, more than 15% of the Fund's net assets are held in 
illiquid assets. 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 Fund's investments will be valued daily. Investments traded on 
an exchange (i.e., a regulated market), will generally be valued at 
market value prices that represent last sale or official closing 
prices. Non-exchange traded investments (including Municipal 
Securities) will generally be valued using prices obtained from a 
Pricing Service. If, however, valuations for any of the Fund's 
investments cannot be readily obtained as provided in the preceding 
manner, or the Pricing Committee questions the accuracy or reliability 
of valuations that are so obtained, such investments will be valued at 
fair value, as determined by the Pricing Committee, in accordance with 
the Valuation Procedures and in accordance with provisions of the 1940 
Act.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information will be publicly available regarding the Fund and the 
Shares, thereby promoting market transparency. Moreover, the Intraday 
Indicative Value, available on the NASDAQ OMX Information LLC 
proprietary index data service, will be widely disseminated by one or 
more major market data vendors and broadly displayed at least every 15 
seconds during the Regular Market Session.
    On each business day, before commencement of trading in Shares in 
the Regular Market Session on the Exchange, the Fund will disclose on 
its Web site the Disclosed Portfolio that will form the basis for the 
Fund's calculation of NAV at the end of the business day. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services, and quotation 
and last sale information for the Shares will be available via Nasdaq 
proprietary

[[Page 17323]]

quote and trade services, as well as in accordance with the Unlisted 
Trading Privileges and the CTA plans for the Shares. One source of 
price information for Municipal Securities and taxable and other 
municipal securities will be the MSRB's EMMA.
    Additionally, the MSRB offers trade data subscription services that 
permit subscribers to obtain same-day pricing information about 
municipal securities transactions. Moreover, pricing information for 
Municipal Securities, as well as for taxable and other municipal 
securities, Short-Term Debt Instruments (including short-term U.S. 
government securities, commercial paper, and bankers' acceptances), and 
repurchase agreements will be available from major broker-dealer firms 
and/or major market data vendors and/or Pricing Services.
    Pricing information for exchange-listed derivatives (including 
options on U.S. Treasury securities, options on U.S. Treasury futures 
contracts, and U.S. Treasury futures contracts), ETFs and closed-end 
funds will be available from the applicable listing exchange and from 
major market data vendors.
    Money market funds and other open-end funds (excluding ETFs) are 
typically priced once each business day and their prices will be 
available through the applicable fund's Web site or from major market 
data vendors.
    The Fund's Web site will include a form of the prospectus for the 
Fund and additional data relating to NAV and other applicable 
quantitative information. Trading in Shares of the Fund will be halted 
under the conditions specified in Nasdaq Rules 4120 and 4121 or because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable, and trading in the Shares will 
be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances 
under which Shares of the Fund may be halted. In addition, as noted 
above, investors will have ready access to information regarding the 
Fund's holdings, the Intraday Indicative Value, the Disclosed 
Portfolio, and quotation and last sale information for the Shares.
    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 in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, FINRA, on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares 
and the exchange-listed securities and instruments held by the Fund 
(including closed-end funds, ETFs, exchange-listed options on U.S. 
Treasury securities, exchange-listed options on U.S. Treasury futures 
contracts, and exchange-listed U.S. Treasury futures contracts) with 
other markets and other entities that are members of ISG, and FINRA may 
obtain trading information regarding trading in the Shares and such 
exchange-listed 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 the exchange-listed securities and instruments held 
by the Fund from markets and other entities that are members of ISG, 
which includes securities and futures exchanges, or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
Furthermore, as noted above, investors will have ready access to 
information regarding the Fund's holdings, the Intraday Indicative 
Value, the Disclosed Portfolio, and quotation and last sale information 
for the Shares.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.

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

    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. The Exchange believes that 
the proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded fund that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace.

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 self-regulatory organization consents, the Commission will: 
(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-2017-033 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-2017-033. 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-2017-033 and should 
be submitted on or before May 1, 2017.


[[Page 17324]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07045 Filed 4-7-17; 8:45 am]
BILLING CODE 8011-01-P


