
[Federal Register Volume 82, Number 102 (Tuesday, May 30, 2017)]
[Notices]
[Pages 24755-24761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10973]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80745; File No. SR-NASDAQ-2017-033]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendments 
No. 1 and 2, To List and Trade Shares of the First Trust California 
Municipal High Income ETF

May 23, 2017.

I. Introduction

    On March 24, 2017, The NASDAQ Stock Market LLC (``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the First 
Trust California Municipal High Income ETF (``Fund'') of First Trust 
Exchange-Traded Fund III (``Trust'') under Nasdaq Rule 5735. The 
proposed rule change was published for comment in the Federal Register 
on April 10, 2017.\3\ On May 12, 2017, the Exchange filed Amendment No. 
1 to the proposed rule change.\4\ On May 16, 2017, the Exchange filed 
Amendment No. 2 to the proposed rule change.\5\ The Commission has 
received no comments on the proposal. The Commission is granting 
approval of the proposed rule change, as modified by Amendments No. 1 
and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 80369 (April 4, 
2017), 82 FR 17314.
    \4\ In Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, the Exchange: (a) Clarified the scope 
and definition of Municipal Securities (defined herein) and other 
municipal securities in which the Fund may invest; (b) represented 
that to the extent the Fund invests in Municipal Securities (as 
defined herein) that are asset-backed and mortgage-backed, those 
investments will not account, in the aggregate, for more than 20% of 
the fixed-income portion of the Fund's portfolio; (c) stated that 
the Fund may invest up to 20% of its net assets in the aggregate in 
OTC Derivatives (as defined herein) and represented that the Fund 
will only enter into transactions in OTC Derivatives with 
counterparties that the Adviser reasonably believes are capable of 
performing under the applicable contract or agreement; and (d) made 
certain technical amendments. Because Amendment No. 1 makes 
clarifying changes and does not unique or novel regulatory issues, 
it is not subject to notice and comment. Amendment No. 1 to the 
proposed rule change is available at: https://www.sec.gov/comments/sr-nasdaq-2017-033/nasdaq2017033-1749423-151718.pdf.
    \5\ In Amendment No. 2, which partially amended the proposed 
rule change, as modified by Amendment No. 1, the Exchange clarified 
that all statements and representations made in the filing regarding 
(a) the description of the portfolio or reference assets, (b) 
limitations on portfolio holdings or reference assets, (c) 
dissemination and availability of the reference asset or intraday 
indicative values, or (d) the applicability of Exchange listing 
rules shall constitute continued listing requirements for listing 
the Shares on the Exchange. Because Amendment No. 2 does not 
materially alter the substance of the proposed rule change or raise 
unique or novel regulatory issues, it is not subject to notice and 
comment. Amendment No. 2 to the proposed rule change is available 
at: https://www.sec.gov/comments/sr-nasdaq-2017-033/nasdaq2017033.htm.
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II. Exchange's Description of the Proposed Rule Change

    The Exchange proposes to list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares on the Exchange. The Fund will be an actively-
managed exchange-traded fund (``ETF''). The Trust, which was 
established as a Massachusetts business trust on January 9, 2008 and is 
registered with the Commission as an investment company, has filed with 
the Commission a registration statement on Form N-1A (``Registration 
Statement'').\6\ First Trust Advisors L.P. will serve as the investment 
adviser (``Adviser'') to the Fund. First Trust Portfolios L.P. will 
serve as the principal underwriter and distributor (``Distributor'') of 
the Fund's Shares.\7\ Brown Brothers Harriman & Co. will act as the 
administrator, accounting agent, custodian, and transfer agent to the 
Fund.
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    \6\ See Post-Effective Amendment No. 65 to the Registration 
Statement for the Trust, dated March 24, 2017 (File Nos. 333-176976 
and 811-22245). The Exchange represents that the Trust has obtained 
certain exemptive relief from the Commission under the Investment 
Company Act of 1940 (``1940 Act''). See Investment Company Act 
Release No. 30029 (April 10, 2002) (File No. 812-13795).
    \7\ The Exchange represents that, while the Adviser is not a 
broker dealer, it is affiliated with the Distributor, a broker 
dealer. The Exchange states that the Adviser has implemented and 
will maintain a fire wall between the Adviser and the Distributor 
with respect to access to information concerning the composition of, 
and changes to, 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 of, 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.
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategies, including the 
Fund's portfolio holdings and investment restrictions.\8\
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    \8\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, including investment 
strategies, risks, net asset value (``NAV'') calculation, creation 
and redemption procedures, fees, Fund holdings disclosure policies, 
distributions, and taxes, among other information, is included in 
the proposed rule change, as modified by Amendments No. 1 and 2, and 
the Registration Statement, as applicable. See Amendments No. 1 and 
2 and Registration Statement, supra notes 4, 5, and 6, respectively, 
and accompanying text.
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A. Exchange's Description of the Fund's Principal Investments

    According to the Exchange, the primary investment objective of the 
Fund will be to seek to provide 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,\9\ the Fund will seek to

[[Page 24756]]

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'').\10\ 
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. 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 invest at 
least 80% of its net assets in Municipal Securities that are not 
Territorial Obligations.
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    \9\ The term ``under normal market conditions'' for purposes of 
the filing, 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. The Exchange 
represents that, on a temporary basis, including for defensive 
purposes, during the initial invest-up period (for purposes of this 
filing, 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 (for purposes of this filing, 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. According to the Exchange, 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.
    \10\ 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.
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    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 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, the weighted 
average maturity of the Fund will be less than or equal to 14 years.
    Under normal market conditions, except for the initial invest-up 
period and periods of high cash inflows or outflows, 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) \12\ 
(``Investment Grade Requirement''). The Fund will consider pre-refunded 
or escrowed to maturity bonds, regardless of rating, to be investment 
grade Municipal Securities. Under normal market conditions, except for 
the initial invest-up period and periods of high cash inflows or 
outflows, the Fund will invest no more than 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).\13\ 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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    \12\ 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.
    \13\ 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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    Certain representations included in this filing, described below, 
will meet or exceed similar requirements set forth in the generic 
listing standards for actively-managed ETFs (``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.\14\ 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. 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 significantly invest) \15\ tend to 
have less

[[Page 24757]]

outstanding debt than municipal borrowers in other municipal 
industries.
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    \14\ See Nasdaq Rule 5735(b)(1)(B)(i).
    \15\ These industries include charter schools, senior living 
facilities (i.e., continuing care retirement communities), and 
special tax districts, among others. See infra note 27 and 
accompanying text (providing additional information 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 (``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, at least 
40% (based on dollar amount invested) of the Municipal Securities in 
which the Fund invests \16\ 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 (``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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    \16\ 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 and periods of high cash inflows or outflows, 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.\17\ Further, under normal market conditions, 
except for the initial invest-up period and periods of high cash 
inflows or outflows, the Fund's portfolio of Municipal Securities will 
include securities from a minimum of 30 non-affiliated issuers.\18\ 
Moreover, under normal market conditions, except for the initial 
invest-up period and periods of high cash inflows or outflows, 
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.\19\ 
Additionally, to the extent the Fund invests in Municipal Securities 
that are mortgage-backed or asset-backed securities, 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.\20\
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    \17\ 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. In the case of Municipal Securities 
that are issued by Municipal Entities, the underlying municipal 
bonds will be taken into account.
    \18\ 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. 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.
    \19\ 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.
    \20\ See the Generic Listing Standards requirement set forth in 
Nasdaq Rule 5735(b)(1)(B)(v).
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B. Exchange's Description of the Fund's Other Investments

    The Fund may invest up to an aggregate of 20% of its net assets in 
the securities and other instruments (including cash) described in this 
section.
    The Fund may invest in the short-term debt instruments described 
below, money market funds and other cash equivalents, and taxable 
municipal securities and other municipal securities that are not 
Municipal Securities, or it may hold cash.
    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,\21\ 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.\22\
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    \21\ 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. 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.
    \22\ 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,\23\ 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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    \23\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. 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 (collectively, 
``Listed Derivatives'') and (ii) acquire short positions in the Listed 
Derivatives. Transactions in the Listed Derivatives may allow the Fund 
to obtain net long

[[Page 24758]]

or short exposures to selected interest rates. The Listed Derivatives 
may also be used to hedge risks, including interest rate risks and 
credit risks, associated with the Fund's portfolio investments. In 
addition, to hedge interest rate risks associated with the Fund's 
portfolio investments, the Fund may invest in over-the-counter 
(``OTC'') forward contracts and OTC swaps (collectively, ``OTC 
Derivatives'').\24\ The Fund will only enter into transactions in OTC 
Derivatives with counterparties that the Adviser reasonably believes 
are capable of performing under the applicable contract or 
agreement.\25\ 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).
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    \24\ On both an initial and continuing basis, no more than 20% 
of the assets in the Fund's portfolio will be invested in the OTC 
Derivatives and, for purposes of calculating this limitation, the 
Fund's investment in the OTC Derivatives will be calculated as the 
aggregate gross notional value of the OTC Derivatives.
    \25\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser will evaluate the 
creditworthiness of counterparties on an ongoing basis. In addition 
to information provided by credit agencies, the Adviser's analysis 
will evaluate each approved counterparty using various methods of 
analysis and may consider the Adviser's past experience with the 
counterparty, its known disciplinary history and its share of market 
participation.
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C. Exchange's Description of the Fund's 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.\26\ 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.
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    \26\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers and the mechanics of transfer).
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    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to (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. In addition, under 
normal market conditions, except for the initial invest-up period and 
periods of high cash inflows or outflows, the Fund's investments in 
Municipal Securities will provide exposure (based on dollar amount 
invested) to at least 10 different industries \27\ (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).\28\
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    \27\ 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.
    \28\ 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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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's 
proposal is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\29\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\30\ which requires, among other things, 
that the Exchange's rules be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal is consistent with 
Section 11A(a)(1)(C)(iii) of the Act,\31\ which sets forth the finding 
of Congress that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to assure the availability to brokers, dealers, and investors of 
information with respect to quotations for, and transactions in, 
securities. Quotation and last-sale information for the Shares will be 
available via Nasdaq proprietary quote and trade services, as well as 
in accordance with the Unlisted Trading Privileges and the Consolidated 
Tape Association (``CTA'') plans for the Shares. 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'').\32\ 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 municipal securities 
and other municipal securities, Short-Term Debt Instruments (including 
short-term U.S. government securities, commercial paper, and bankers' 
acceptances), repurchase agreements and OTC Derivatives (including 
forward contracts and swaps) will be available from major broker-dealer 
firms and/or major market data vendors and/or Pricing Services. Pricing 
information for 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.
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    \31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \32\ 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'').
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    The Intraday Indicative Value, available on the NASDAQ OMX 
Information LLC proprietary index data

[[Page 24759]]

service,\33\ will be based upon the current value for the components of 
the Disclosed Portfolio (defined below) 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.\34\ 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 identities and quantities of the portfolio 
of securities and other assets (``Disclosed Portfolio,'' as defined in 
Nasdaq Rule 5735(c)(2)) \35\ held by the Fund that will form the basis 
for the Fund's calculation of NAV at the end of the business day.\36\ 
The Fund's Web site, which will be publicly available prior to the 
public offering of Shares, will include a form of the prospectus for 
the Fund and additional data relating to NAV and other applicable 
quantitative information that may be downloaded.
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    \33\ 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.
    \34\ See Nasdaq Rule 4120(b)(4) (describing the trading sessions 
on the Exchange).
    \35\ 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.
    \36\ In addition to disclosing the identities and quantities of 
the portfolio of securities and other assets in the Disclosed 
Portfolio, the Fund also will disclose on a daily basis on its Web 
site the following information, 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, such as 
the type of swap); 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. The 
Fund's NAV will be determined as of the close of regular trading on 
the New York Stock Exchange (``NYSE'') on each day the NYSE is open 
for trading.
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    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. 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. Additionally, 
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, and 
Listed Derivatives) with other markets and other entities that are 
members of the Intermarket Surveillance Group (``ISG''),\37\ 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.\38\
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    \37\ 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.
    \38\ For Municipal Securities, trade information can generally 
be found on the MSRB's EMMA.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange will obtain a representation from the issuer of 
the Shares that the NAV per Share will be calculated daily, and that 
the NAV and the Disclosed Portfolio will be made available to all 
market participants at the same time. 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). 
In addition, 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 5735(d)(2)(D), which sets forth circumstances under 
which Shares of the Fund may be halted.
    The Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees. 
Further, the Commission notes that the Reporting Authority \39\ that 
provides the Disclosed Portfolio must implement and maintain, or be 
subject to, procedures designed to prevent the use and dissemination of 
material, non-public information regarding the actual components of the 
portfolio.\40\ In addition, the Exchange states that the Adviser is not 
a broker-dealer, but it is affiliated with the Distributor, 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 of, and/or changes to, the Fund's 
portfolio.\41\ Moreover, Nasdaq Rule 5735(g) 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 Fund's portfolio.
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    \39\ Nasdaq Rule 5735(c)(4) defines ``Reporting Authority.''
    \40\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \41\ See supra note 7. The Exchange states an investment adviser 
to an open-end fund is required to be registered under the 
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the 
Adviser and its related personnel are subject to the provisions of 
Rule 204A-1 under the Advisers Act relating to codes of ethics. This 
Rule requires investment advisers to adopt a code of ethics that 
reflects the fiduciary nature of the relationship to clients as well 
as compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
the Advisers Act and Rule 204A-1 thereunder. 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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    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both the 
Exchange and FINRA, on behalf of the Exchange, which are designed to 
detect violations

[[Page 24760]]

of Exchange rules and applicable federal securities laws.\42\ The 
Exchange further represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and applicable 
federal securities laws. Moreover, the Exchange states that, prior to 
the commencement of trading, it will inform its members in an 
Information Circular of the special characteristics and risks 
associated with trading the Shares.
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    \42\ The Exchange states that 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.
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    The Exchange represents that the Shares are deemed to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including the following:
    (1) The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-listed securities and 
instruments held by the Fund (including closed-end funds, ETFs, and 
Listed Derivatives) 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, and the MSRB's EMMA will be a source of 
price information for Municipal Securities and taxable and other 
municipal securities.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how information regarding 
the Intraday Indicative Value and the Disclosed Portfolio is 
disseminated; (d) the risks involved in trading the Shares during the 
Pre-Market and Post-Market Sessions when an updated Intraday Indicative 
Value will not be calculated or publicly disseminated; (e) the 
requirement that members deliver a prospectus to investors purchasing 
newly issued Shares prior to or concurrently with the confirmation of a 
transaction; and (f) trading information.
    (5) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\43\
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    \43\ See 17 CFR 240.10A-3.
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    (6) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the Fund will 
invest at least 80% of its net assets in Municipal Securities that are 
not Territorial Obligations.
    (7) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the Fund will 
invest at least 50% of its net assets in investment grade Municipal 
Securities, and the Fund will invest no more than 50% of its net assets 
in Municipal Securities that are, at the time of investment, not 
investment grade Municipal Securities.
    (8) The Fund may not invest more than 10% of its net assets in 
Distressed Municipal Securities.
    (9) To the extent the Fund invests in Municipal Securities that are 
mortgage-backed or asset-backed securities, 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.
    (10) At least 40% (based on dollar amount invested) of the 
Municipal Securities in which the Fund invests 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.
    (11) On both an initial and continuing basis, no more than 20% of 
the assets in the Fund's portfolio will be invested in the OTC 
Derivatives and, for purposes of calculating this limitation, the 
Fund's investment in the OTC Derivatives will be calculated as the 
aggregate gross notional value of the OTC Derivatives. The Fund will 
only enter into transactions in OTC Derivatives with counterparties 
that the Adviser reasonably believes are capable of performing under 
the applicable contract or agreement.
    (12) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the Fund's 
investments in Municipal Securities will provide exposure (based on 
dollar amount invested) to at least 10 different industries (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).
    (13) ETFs included in the Fund will be listed and traded in the 
U.S. on one or more registered exchanges. While the Fund may invest in 
inverse ETFs, the Fund will not invest in leveraged or inverse 
leveraged (e.g., 2X or 3X) ETFs.
    (14) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows: No component 
fixed-income security (excluding the U.S. government securities 
described in ``Other Investments'') 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. Further, under normal market conditions, except 
for the initial invest-up period and periods of high cash inflows or 
outflows, the Fund's portfolio of Municipal Securities will include 
securities from a minimum of 30 non-affiliated issuers. Moreover, under 
normal market conditions, except for the initial invest-up period and 
periods of high cash inflows or outflows, 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.
    (15) 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,

[[Page 24761]]

through a change in values, net assets, or other circumstances, more 
than 15% of the Fund's net assets are held in illiquid assets.
    (16) 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).
    (17) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    The Exchange represents that all statements and representations 
made in the filing regarding (a) the description of the portfolio or 
reference assets, (b) limitations on portfolio holdings or reference 
assets, (c) dissemination and availability of the reference asset or 
intraday indicative values, or (d) the applicability of Exchange 
listing rules 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.\44\ If the Fund is not in compliance with the applicable 
listing requirements, the Exchange will commence delisting procedures 
under the Nasdaq 5800 Series.
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    \44\ The Commission notes that certain other proposals for the 
listing and trading of Managed Fund Shares include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Securities Exchange Act Release No. 
77499 (April 1, 2016), 81 FR 20428 (April 7, 2016) (SR-BATS-2016-
04). In the context of this representation, it is the Commission's 
view that ``monitor'' and ``surveil'' both mean ongoing oversight of 
a fund's compliance with the continued listing requirements. 
Therefore, the Commission does not view ``monitor'' as a more or 
less stringent obligation than ``surveil'' with respect to the 
continued listing requirements.
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    This order is based on all of the Exchange's representations, 
including those set forth above and in Amendments No. 1 and 2. The 
Commission notes that the Fund and the Shares must comply with the 
requirements of Nasdaq Rule 5735 for the Shares to be listed and traded 
on the Exchange.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendments No. 1 and 2, is consistent with 
Section 6(b)(5) of the Act \45\ and Section 11A(a)(1)(C)(iii) of the 
Act \46\ and the rules and regulations thereunder applicable to a 
national securities exchange.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78f(b)(5).
    \46\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\47\ that the proposed rule change (SR-NASDAQ-2017-033), as 
modified by Amendments No. 1 and 2, be, and it hereby is, approved.
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    \47\ Id.
    \48\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10973 Filed 5-26-17; 8:45 am]
BILLING CODE 8011-01-P


