
[Federal Register Volume 82, Number 111 (Monday, June 12, 2017)]
[Notices]
[Pages 26970-26975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12043]



[[Page 26970]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80865; File No. SR-NYSEArca-2017-48]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating 
to the Listing and Trading of Shares of the Franklin Liberty 
Intermediate Municipal Opportunities ETF and Franklin Liberty Municipal 
Bond ETF Under NYSE Arca Equities Rule 8.600

June 6, 2017.

I. Introduction

    On May 8, 2017, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of the Franklin Liberty Intermediate Municipal 
Opportunities ETF and Franklin Liberty Municipal Bond ETF (each, a 
``Fund'' and collectively, the ``Funds'') under NYSE Arca Equities Rule 
8.600. The proposed rule change was published for comment in the 
Federal Register on May 3, 2017.\3\ On May 8, 2017, the Exchange filed 
Amendment No. 1 to the proposed rule change.\4\ The Commission has not 
received any comments on the proposed rule change. The Commission is 
approving the proposed rule change, as modified by Amendment No. 1 
thereto.
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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. 80541 (April 27, 
2017), 82 FR 20656 (``Notice'').
    \4\ In Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, the Exchange, among other things, 
clarified that: (i) The Franklin Liberty Municipal Bond ETF will 
only buy Municipal Securities (defined below) rated, at the time of 
purchase, in one of the top four ratings categories by one or more 
U.S. nationally recognized rating services (or comparable unrated or 
short-term rated securities); (ii) the Franklin Liberty Municipal 
Bond ETF may not buy defaulted or distressed Municipal Securities 
(which limitation will be applied at the time of purchase, and the 
Fund is not required to sell a Municipal Security that has defaulted 
or become distressed if the Adviser believes it is advantageous to 
continue holding the security); (iii) the Franklin Liberty Municipal 
Bond ETF may not buy high-yield or lower-rated debt securities 
(which limitation generally will be applied at the time of purchase 
and a downgrade of a particular security below one of the top four 
ratings categories will not automatically cause the Fund to sell the 
security); (iv) the components of a Fund's portfolio with a minimum 
original principal amount outstanding of $100 million or more may in 
the aggregate account for less than 75% of the weight of a Fund's 
portfolio; and (v) trading will be subject to NYSE Arca Equities 
Rule 8.600(d)(2)(D), which sets forth circumstances under which 
trading may be halted. Amendment No. 1 also made non-substantive, 
technical amendments. Because Amendment No. 1 makes only clarifying 
and technical changes, and does not present unique or novel 
regulatory issues, it is not subject to notice and comment. 
Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2017-48/nysearca201748-1745331-151464.pdf.
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II. The Exchange's Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Funds under 
NYSE Arca Equities Rule 8.600, which governs the listing and trading of 
Managed Fund Shares on the Exchange. The Shares will be offered by the 
Franklin Templeton ETF Trust (``Trust''), which is registered with the 
Commission as an open-end management investment company.\5\ Each Fund 
is a series of the Trust. The investment adviser to each Fund will be 
Franklin Advisers, Inc. (``Adviser'').\6\ Franklin Templeton 
Distributors, Inc. will serve as the distributor, Franklin Templeton 
Services, LLC will serve as the administrator, and State Street Bank 
and Trust Company will serve as the sub-administrator, custodian, and 
transfer agent for each Fund.
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    \5\ According to the Exchange, on March 23, 2017, the Trust 
filed with the Commission an amendment to its registration statement 
on Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a) and 
under the Investment Company Act of 1940 (``1940 Act'') relating to 
the Funds (File Nos. 333-208873 and 811-23124) (``Registration 
Statement''). In addition, according to the Exchange, the Commission 
has issued an order granting certain exemptive relief to the Trust, 
Franklin Advisers, Inc., and Franklin Templeton Distributors, Inc. 
under the 1940 Act. See Investment Company Act Release No. 30350 
(January 15, 2013) (File No. 812-14042).
    \6\ The Exchange represents that the Adviser is not a registered 
broker-dealer but is affiliated with a broker-dealer. The Exchange 
represents that the Adviser has implemented and will maintain a 
``fire wall'' with respect to such broker-dealer affiliate regarding 
access to information concerning the composition of and/or changes 
to each Fund's portfolio. In addition, in the event (a) the Adviser 
becomes registered as a broker-dealer or newly affiliated with a 
broker-dealer, or (b) any new adviser or sub-adviser to a Fund is a 
registered broker-dealer or becomes affiliated with a broker-dealer, 
the applicable adviser or sub-adviser will implement and maintain a 
fire wall with respect to its relevant personnel or broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to a Fund's 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 Funds and their investment strategies, including each 
Fund's portfolio holdings and investment restrictions.\7\
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    \7\ The Commission notes that additional information regarding 
the Trust, the Funds, and the Shares, including investment 
strategies, risks, creation and redemption procedures, calculation 
of net asset value (``NAV''), fees, distributions, and taxes, among 
other things, is included in the proposed rule change, as modified 
by Amendment No. 1, and the Registration Statement, as applicable. 
See Amendment No. 1 and Registration Statement, supra notes 4 and 5, 
respectively.
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A. Exchange's Description of the Funds' Principal Investments

1. Franklin Liberty Intermediate Municipal Opportunities ETF
    According to the Exchange, the investment objective of the Franklin 
Liberty Intermediate Municipal Opportunities ETF will be to achieve a 
high level of current income that is exempt from federal income taxes. 
Under normal market conditions,\8\ the Fund will invest at least 80% of 
its net assets in municipal securities whose interest is free from 
federal income taxes, including the federal alternative minimum tax.
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    \8\ The term ``normal market conditions'' is defined in NYSE 
Arca Equities Rule 8.600 (c)(5).
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    The Fund may invest in municipal securities rated in any rating 
category by U.S. nationally recognized rating services (or comparable 
unrated or short-term rated securities), including below investment 
grade and defaulted securities and securities of issuers that are, or 
are about to be, involved in reorganizations, financial restructurings, 
or bankruptcy (generally referred to as ``distressed debt''). Such 
investments typically involve the purchase of lower-rated or defaulted 
debt securities, comparable unrated debt securities, or other 
indebtedness (or participations in the indebtedness) of such issuers. 
Although the Adviser will search for investments across a large number 
of municipal securities that finance different types of projects, from 
time to time, based on economic conditions, the Fund may have 
significant positions in municipal securities that finance similar 
types of projects.
    The Funds may invest in one or more of the following municipal 
securities (collectively, ``Municipal Securities''):
     General obligation bonds, which are typically issued by 
states, counties, cities, towns and regional districts and backed by 
the issuer's pledge of its full faith, credit and taxing power for the 
payment of principal and interest;
     revenue bonds, which are generally backed by the net 
revenue derived from a particular facility, group of facilities, or, in 
some cases, the proceeds of a special excise tax or other specific 
revenue source;
     anticipation notes, including bond, revenue and tax 
anticipation notes, which are issued to provide interim financing of 
various municipal needs in anticipation of the receipt of other sources 
of money for repayment of the notes;
     insured Municipal Securities, which are covered by 
insurance policies

[[Page 26971]]

that guarantee the timely payment of principal and interest; \9\
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    \9\ When beneficial, a Fund may purchase insurance for an 
uninsured bond directly from a qualified municipal bond insurer, in 
which case a Fund pays the insurance premium directly to the 
insurance company.
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     municipal lease obligations, which generally are issued to 
support a government's infrastructure by financing or refinancing 
equipment or property acquisitions or the construction, expansion or 
rehabilitation of public facilities; \10\
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    \10\ A Fund may also gain exposure to municipal lease 
obligations through certificates of participation, which represent a 
proportionate interest in the payments under a specified lease or 
leases.
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     Municipal Securities that are issued on a when-issued or 
delayed delivery basis;
     variable and floating rate securities, including variable 
rate demand notes, municipal inflation protected securities, index-
based floating rate securities, and auction rate securities, which have 
interest rates that change either at specific intervals from daily up 
to semi-annually, or whenever a benchmark rate changes;
     pre-refunded bonds, which are outstanding debt securities 
that are not immediately callable (redeemable) by the issuer but have 
been ``pre-refunded'' by the issuer;
     zero coupon bonds (including convertible and step coupon 
bonds) and deferred interest securities;
     stripped securities, which are debt securities that have 
been transformed from a principal amount with periodic interest coupons 
into a series of zero coupon bonds, each with a different maturity date 
corresponding to one of the payment dates for interest coupon payments 
or the redemption date for the principal amount;
     mandatory tender (mandatory put) Municipal Securities, 
which may be sold with a requirement that a holder of a security 
surrender the security to the issuer or its agent for cash at a date 
prior to the stated maturity;
     callable securities, which give the issuer the right to 
redeem the security on a given date or dates (known as the call dates) 
prior to maturity;
     tax-exempt commercial paper, which typically represents an 
unsecured short-term obligation (270 days or less) issued by a 
municipality; and
     tax-exempt or qualified private activity and industrial 
development revenue bonds, which are typically issued by or on behalf 
of public authorities to finance various privately operated facilities 
which are expected to benefit the municipality and its residents, such 
as business, manufacturing, housing, sports and pollution control, as 
well as public facilities such as airports, mass transit systems, ports 
and parking.
2. Franklin Liberty Municipal Bond ETF
    According to the Exchange, the investment objective of the Franklin 
Liberty Municipal Bond ETF will be to achieve a high level of current 
income that is exempt from federal income taxes. Under normal market 
conditions, the Fund will invest at least 80% of its net assets in 
Municipal Securities (as described above) whose interest is free from 
federal income taxes, including the federal alternative minimum tax.
    Although the Adviser will search for investments across a large 
number of Municipal Securities that finance different types of 
projects, from time to time, based on economic conditions, the Fund may 
have significant positions in Municipal Securities that finance similar 
types of projects.
    The Fund may invest in one or more of the Municipal Securities 
listed above. The Fund will only buy Municipal Securities rated, at the 
time of purchase, in one of the top four ratings categories by one or 
more U.S. nationally recognized rating services (or comparable unrated 
or short-term rated securities).\11\ The Fund may not buy defaulted or 
distressed Municipal Securities.\12\
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    \11\ This limitation generally is applied at the time of 
purchase and a downgrade of a particular security below one of the 
top four ratings categories will not automatically cause the Fund to 
sell the security. The Adviser will, however, take such downgrade 
into account when analyzing the portfolio.
    \12\ This limitation generally will be applied at the time of 
purchase and the Fund is not required to sell a Municipal Security 
that has defaulted or become distressed if the Adviser believes it 
is advantageous to continue holding the security.
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B. Exchange's Description of the Funds' Other Investments

    According to the Exchange, while each Fund, under normal market 
conditions, will invest at least 80% of its net assets in Municipal 
Securities whose interest is free from federal income taxes, including 
the federal alternative minimum tax, each Fund may invest up to 20% of 
its net assets in the securities that pay interest that may be subject 
to the federal alternative minimum tax and, although not anticipated, 
in securities that pay taxable interest, as described below. With 
respect to up to 20% of its net assets, each Fund may invest in bank 
obligations; \13\ taxable commercial paper; \14\ other investment 
companies,\15\ including exchange-traded funds (``ETFs''); \16\ U.S. 
government securities; 3\17\ and unrated debt securities.\18\
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    \13\ Bank obligations include fixed, floating or variable rate 
certificates of deposit (CDs), letters of credit, time and savings 
deposits, bank notes and bankers' acceptances. CDs are negotiable 
certificates issued against funds deposited in a commercial bank for 
a definite period of time and earning a specified return. Time 
deposits are non-negotiable deposits that are held in a banking 
institution for a specified period of time at a stated interest 
rate. Savings deposits are deposits that do not have a specified 
maturity and may be withdrawn by the depositor at any time. Bankers' 
acceptances are negotiable drafts or bills of exchange normally 
drawn by an importer or exporter to pay for specific merchandise.
    \14\ Commercial paper is an unsecured, short-term loan to a 
corporation, typically for financing accounts receivable and 
inventory with maturities of up to 270 days. Each Fund may invest in 
taxable commercial paper only for temporary defensive purposes.
    \15\ Each Fund may invest in other investment companies to the 
extent permitted by the 1940 Act, Commission rules thereunder and 
exemptions thereto. Each Fund may also invest its cash balances in 
affiliated money market funds to the extent permitted by its 
investment policies and rules and exemptions granted under the 1940 
Act.
    \16\ The ETFs in which a Fund may invest include Investment 
Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); 
Portfolio Depositary Receipts (as described in NYSE Arca Equities 
Rule 8.100); and Managed Fund Shares (as described in NYSE Arca 
Equities Rule 8.600). Such ETFs all will be listed and traded in the 
U.S. on registered exchanges.
    \17\ U.S. government securities include obligations of, or 
guaranteed by, the U.S. federal government, its agencies, 
instrumentalities or sponsored enterprises. Some U.S. government 
securities are supported by the full faith and credit of the U.S. 
government. These include U.S. Treasury obligations and securities 
issued by the Government National Mortgage Association (GNMA). A 
second category of U.S. government securities are those supported by 
the right of the agency, instrumentality or sponsored enterprise to 
borrow from the U.S. government to meet its obligations. These 
include securities issued by Federal Home Loan Banks. A third 
category of U.S. government securities are those supported by only 
the credit of the issuing agency, instrumentality or sponsored 
enterprise. These include securities issued by the Federal National 
Mortgage Association (FNMA) and Federal Home Loan Mortgage 
Corporation (FHLMC).
    \18\ Debt securities or their issuers which are not rated by 
rating agencies, sometimes due to the size of or manner of the 
securities offering, the decision by one or more rating agencies not 
to rate certain securities or issuers as a matter of policy, or the 
unwillingness or inability of the issuer to provide the prerequisite 
information and fees to the rating agencies.
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    The Franklin Liberty Intermediate Municipal Opportunities ETF may 
also

[[Page 26972]]

invest in defaulted debt securities \19\ and high-yield debt 
securities.\20\
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    \19\ Investments in securities of issuers that are, or are about 
to be, involved in reorganizations, financial restructurings, or 
bankruptcy (generally referred to as ``distressed debt'') typically 
involve the purchase of lower-rated or defaulted debt securities, 
comparable unrated debt securities, or other indebtedness of such 
issuers. The Franklin Liberty Municipal Bond ETF may not buy 
defaulted or distressed debt securities. However, the Franklin 
Liberty Municipal Bond ETF is not required to sell a debt security 
that has defaulted or become distressed if the Adviser believes it 
is advantageous to continue holding the security.
    \20\ High-yield or lower-rated debt securities are securities 
that have been rated by Moody's or S&P below their top four rating 
categories (e.g., BB or Ba and lower) and are considered below 
investment grade. The Franklin Liberty Municipal Bond ETF may not 
buy high-yield or lower-rated debt securities. This limitation 
generally is applied at the time of purchase and a downgrade of a 
particular security below one of the top four ratings categories 
will not automatically cause the Franklin Liberty Municipal Bond ETF 
to sell the security. The Adviser will, however, take such downgrade 
into account when analyzing the portfolio.
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    A Fund may invest up to 100% of its assets in temporary defensive 
investments, including cash, cash equivalents or other high quality 
short-term investments, such as short-term debt instruments, including 
U.S. government securities, high grade commercial paper, repurchase 
agreements, negotiable certificates of deposit, non-negotiable fixed 
time deposits, bankers acceptances, and other money market equivalents. 
In addition, with respect to each of the Funds, on a temporary basis, 
during periods of high cash inflows or outflows,\21\ a 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, a Fund may not be able to achieve its investment objective. To 
the extent allowed by exemptions from and rules under the 1940 Act and 
a Fund's other investment policies and restrictions, the Adviser also 
may invest a Fund's assets in shares of one or more money market funds 
managed by the Adviser or its affiliates.
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    \21\ ``Periods of high cash inflows or outflows,'' as used 
herein, mean rolling periods of seven calendar days during which 
inflows or outflows of cash, in the aggregate, exceed 10% of a 
Fund's net assets as of the opening of business on the first day of 
such periods.
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C. Exchange's Description of the Funds' Investment Restrictions

    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
consistent with Commission guidance. Each Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of a Fund's net assets are held 
in illiquid assets. Illiquid assets include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
    Each Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns.
    A Fund will not necessarily focus its investments in a particular 
state, and will not invest more than 15% of its total assets in 
Municipal Securities of any one state. Under normal market conditions, 
except for periods of high cash inflows or outflows, each Fund will 
satisfy the following criteria: (i) Each Fund will have a minimum of 35 
Municipal Securities holdings; (ii) after a Fund has at least $100 
million in assets, it will have a minimum of 75 Municipal Securities 
holdings; (iii) with respect to 75% of each Fund's total assets, no 
single Municipal Securities issuer will account for more than 3% of the 
weight of a Fund's portfolio; for the remaining portion of each Fund's 
assets, no single Municipal Securities issuer will account for more 
than 6% of the weight of a Fund's portfolio; (iv) each Fund will limit 
its investments in Municipal Securities of any one state to 15% of a 
Fund's total assets and will be diversified among issuers in at least 
10 states; and (v) each Fund will limit its investments in Municipal 
Securities in any single sector to 25% of a Fund's total assets.\22\ 
The Exchange states that pre-refunded bonds will be excluded from the 
above limits given that they have a high level of credit quality and 
liquidity.\23\
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    \22\ A Fund's investments in Municipal Securities will include 
investments in state and local (e.g., county, city, town) Municipal 
Securities relating to such sectors as the following: Dedicated tax; 
public power; tax increment; toll road; port revenue; airport 
revenue; water revenue; sewer revenue; higher education (colleges 
and universities); wastewater revenue; school districts; and sales 
tax revenue.
    \23\ Pre-refunded bonds (also known as refunded or escrow-
secured bonds) have a high level of credit quality and liquidity 
because the issuer ``pre-refunds'' the bond by setting aside in 
advance all or a portion of the amount to be paid to the bondholders 
when the bond is called. Generally, an issuer uses the proceeds from 
a new bond issue to buy high grade, interest bearing debt 
securities, including direct obligations of the U.S. government, 
which are then deposited in an irrevocable escrow account held by a 
trustee bank to secure all future payments of principal and interest 
on the pre-refunded bonds.
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D. Exchange's Description of the Application of Generic Listing 
Requirements to the Funds

    The Exchange states that it is submitting this proposed rule change 
because the portfolios for the Funds will not meet all of the 
``generic'' listing requirements of Commentary .01 to NYSE Arca 
Equities Rule 8.600 applicable to the listing of Managed Fund Shares. 
The Exchange states that each Fund's portfolio will meet all the 
requirements set forth in Commentary .01 to NYSE Arca Equities Rule 
8.600 except for those set forth in Commentary .01(b)(1), which 
requires that components that in the aggregate account for at least 75% 
of the fixed income weight of the portfolio each shall have a minimum 
original principal amount outstanding of $100 million or more.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\24\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\25\ 
which requires, among other things, that the Exchange's rules be 
designed to prevent fraudulent and manipulative acts and practices, 
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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    \24\ 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).
    \25\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal to list and trade 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Act,\26\ which sets forth Congress' finding that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last 
sale information for the Shares and for ETFs will be available via the 
Consolidated Tape Association (``CTA'') high-speed line, and from the 
national securities exchange on which they are listed.\27\
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    \26\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \27\ Amendment No. 1 at 19.

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    The Indicative Optimized Portfolio Value (``IOPV'') of the Shares 
(which is the Portfolio Indicative Value, as defined in NYSE Arca 
Equities Rule 8.600(c)(3)) will be widely disseminated every 15 seconds 
during the Exchange's Core Trading Session (normally 9:30 a.m. to 4:00 
p.m., Eastern Time) by one or more major market data vendors or other 
information providers.\28\ On each business day, before commencement of 
trading in Shares in the Core Trading Session on the Exchange 
(ordinarily 9:30 a.m., Eastern Time), each Fund's Web site will 
disclose the Disclosed Portfolio \29\ that will form the basis for a 
Fund's calculation of NAV at the end of the business day.\30\ In 
addition, a basket composition file, which includes the security names 
and share quantities, if applicable, required to be delivered in 
exchange for a Fund's Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the Exchange via the National Securities Clearing Corporation. The 
basket represents one creation unit of a Fund. The NAV of Shares of a 
Fund will normally be determined as of the close of the Core Trading 
Session on the Exchange (ordinarily 4:00 p.m. Eastern Time) on each 
business day. Authorized participants may refer to the basket 
composition file for information regarding securities and financial 
instruments that may comprise a Fund's basket on a given day.
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    \28\ The Exchange represents that several major market data 
vendors display and/or make widely available IOPVs taken from CTA or 
other data feeds. According to the Exchange, the IOPV will be based 
on the current market value of a Fund's portfolio holdings that will 
form the basis for the Fund's calculation of NAV at the end of the 
Business Day, as disclosed on the Fund's Web site prior to that 
Business Day's commencement of trading. According to the Exchange, 
the IOPV will generally be determined by using both current market 
quotations and/or price quotations obtained from broker-dealers that 
may trade in the portfolio securities held by a Fund.
    \29\ The term ``Disclosed Portfolio'' is defined in NYSE Arca 
Equities Rule 8.600(c)(2).
    \30\ On a daily basis, the Funds will disclose the information 
required under NYSE Arca Equities Rule 8.600(c)(2) to the extent 
applicable. The Web site information will be publicly available at 
no charge.
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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. Quotation information from brokers and dealers 
or pricing services will be available for Municipal Securities, unrated 
debt securities, defaulted debt securities, high yield debt securities, 
and cash equivalents or other high quality short-term investments, 
including U.S. government securities, bank obligations, and taxable 
commercial paper. Price information for money market funds and other 
investment companies will be available from the applicable investment 
company's Web site and from market data vendors. Pricing information 
regarding each other asset class in which a Fund will invest will be 
available generally through nationally recognized data service 
providers through subscription agreements.
    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 for each Fund will be calculated 
daily and that the NAV and the Disclosed Portfolio for each Fund will 
be made available to all market participants at the same time. Trading 
in Shares of the Funds will be halted if the circuit breaker parameters 
in NYSE Arca Equities Rule 7.12 have been reached or because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.\31\ Trading in the Shares will be 
subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
additional circumstances under which Shares of the Funds may be halted.
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    \31\ The Exchange may consider all relevant factors in 
exercising its discretion to halt or suspend trading in the Shares 
of a Fund.
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    The Exchange represents that it has a general policy prohibiting 
the distribution of material, non-public information by its employees. 
In addition, Commentary .06 to NYSE Arca Equities Rule 8.600 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. The Exchange represents that the Adviser 
is not a registered broker-dealer but is affiliated with a broker-
dealer, and that the Adviser has implemented and will maintain a ``fire 
wall'' with respect to that broker-dealer affiliate regarding access to 
information concerning the composition of, and/or changes to, each 
Fund's portfolio.
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit Holders in an Information Bulletin (``Bulletin'') 
of the special characteristics and risks associated with trading the 
Shares. The Exchange represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by the 
Exchange, as well as cross-market surveillances administered by 
Financial Industry Regulatory Authority (``FINRA'') on behalf of the 
Exchange, which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\32\ The Commission believes that 
the Exchange's initial and continued listing requirements, combined 
with the Fund's investment criteria that would apply to Municipal 
Securities in the portfolio, are designed to mitigate the potential for 
price manipulation of the Shares.
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    \32\ The Exchange states that FINRA conducts cross-market 
surveillances on behalf of the Exchange pursuant to a regulatory 
services agreement and that the Exchange is responsible for FINRA's 
performance under this regulatory services agreement.
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    The Exchange represents that it deems the Shares to be equity 
securities, thus rendering the trading of the Shares subject to the 
Exchange's existing rules governing the trading of equity securities.
    In support of this proposal, the Exchange has made the following 
additional representations:
    (1) The Shares of each Fund will conform to the initial and 
continued listing criteria under NYSE Arca Equities Rule 8.600.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) Trading in the Shares will be subject to the existing trading 
surveillances, administered by the Exchange, as well as cross-market 
surveillances administered by FINRA on behalf of the Exchange, which 
are designed to detect violations of Exchange rules and applicable 
federal securities laws. 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 federal securities laws applicable to trading on the Exchange. 
These surveillances 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

[[Page 26974]]

all relevant parties for all relevant trading violations.
    (4) The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and ETFs with 
other markets and other entities that are members of the ISG, and the 
Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading in the Shares and ETFs from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares and ETFs from markets and 
other entities that are members of ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement. In addition, 
FINRA, on behalf of the Exchange, is able to access, as needed, trade 
information for certain fixed income securities held by a Fund reported 
to FINRA's Trade Reporting and Compliance Engine. FINRA also can access 
data obtained from the Municipal Securities Rulemaking Board relating 
to municipal bond trading activity for surveillance purposes in 
connection with trading in the Shares.
    (5) Prior to the commencement of trading, the Exchange will inform 
its Equity Trading Permit Holders in a Bulletin of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Bulletin will discuss (a) the procedures for 
purchases and redemptions of Shares in creation unit aggregations (and 
that Shares are not individually redeemable); (b) NYSE Arca Equities 
Rule 9.2(a), which imposes a duty of due diligence on its Equity 
Trading Permit Holders to learn the essential facts relating to every 
customer prior to trading the Shares; (c) the risks involved in trading 
the Shares during the Early and Late Trading Sessions when an updated 
IOPV will not be calculated or publicly disseminated; (d) how 
information regarding the IOPV and the Disclosed Portfolio is 
disseminated; (e) the requirement that Equity Trading Permit Holders 
deliver a prospectus to investors purchasing newly issued Shares prior 
to or concurrently with the confirmation of a transaction; and (f) 
trading information. The Bulletin will discuss any exemptive, no-
action, and interpretive relief granted by the Commission from any 
rules under the Act. The Bulletin will also disclose that the NAV for 
the Shares will be calculated after 4:00 p.m., Eastern Time each 
trading day.
    (6) For initial and continued listing, the Funds must be in 
compliance with Rule 10A-3 under the Act.\33\
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    \33\ See 17 CFR 240.10A-3.
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    (7) Under normal market conditions, each Fund will invest at least 
80% of net assets in municipal securities whose interest is free from 
federal income taxes, including the federal alternative minimum tax.
    (8) The Franklin Liberty Municipal Bond ETF will only buy municipal 
securities rated, at the time of purchase, in one of the top four 
rating categories by one or more U.S. nationally recognized rating 
services (or comparable unrated or short-term rated securities), and 
the Fund may not buy defaulted or distressed municipal securities.
    (9) The ETFs in which the Funds may invest will be listed and 
traded in the U.S. on registered exchanges.
    (10) Each Fund's portfolio will meet all the requirements set forth 
in Commentary .01 to NYSE Arca Equities Rule 8.600 except for those set 
forth in Commentary .01(b)(1).
    (11) Under normal market conditions, except for periods of high 
cash inflows or outflows, each Fund will satisfy the following 
criteria: (i) Each Fund will have a minimum of 35 Municipal Securities 
holdings; (ii) after a Fund has at least $100 million in assets, it 
will have a minimum of 75 Municipal Securities holdings; (iii) with 
respect to 75% of each Fund's total assets, no single Municipal 
Securities issuer will account for more than 3% of the weight of a 
Fund's portfolio; for the remaining portion of each Fund's assets, no 
single Municipal Securities issuer will account for more than 6% of the 
weight of a Fund's portfolio; (iv) each Fund will limit its investments 
in Municipal Securities of any one state to 15% of a Fund's total 
assets and will be diversified among issuers in at least 10 states; and 
(v) each Fund will limit its investments in Municipal Securities in any 
single sector to 25% of a Fund's total assets.
    (12) Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
consistent with Commission guidance. Each Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of a Fund's net assets are held 
in illiquid assets. Illiquid assets include securities subject to 
contractual or other restrictions on resale and other instruments that 
lack readily available markets as determined in accordance with 
Commission staff guidance.
    (13) Each Fund's investments will be consistent with its investment 
objective and will not be used to provide multiple returns of a 
benchmark or to produce leveraged returns.
    The Exchange also represents that all statements and 
representations made in the filing regarding (a) the description of the 
portfolio, (b) limitations on portfolio holdings or reference assets, 
or (c) applicability of Exchange listing rules specified in the filing 
shall constitute continued listing requirements for listing the Shares 
of a Fund on the Exchange.
    The issuer has represented to the Exchange that it will advise the 
Exchange of any failure by a 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.\34\ If a Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under NYSE Arca Equities Rule 5.5(m).
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    \34\ 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. 
78005 (Jun. 7, 2016), 81 FR 38247 (Jun. 13, 2016) (SR-BATS-2015-
100). 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 approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice, and 
the Exchange's description of the Funds. The Commission notes that the 
Funds and the Shares must comply with the requirements of NYSE Arca 
Equities Rule 8.600 to be listed and traded on the Exchange.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \35\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \35\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (SR-NYSEArc-2017-48), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \36\ 15 U.S.C. 78s(b)(2)


[[Page 26975]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2017-12043 Filed 6-9-17; 8:45 am]
 BILLING CODE 8011-01-P


