
[Federal Register Volume 82, Number 135 (Monday, July 17, 2017)]
[Notices]
[Pages 32734-32737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81120; File No. SR-NASDAQ-2017-062]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Nasdaq Rule 5705(b) To Provide for the Inclusion of Cash in an 
Index or Portfolio Underlying a Series of Index Fund Shares

July 11, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 30, 2017, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Nasdaq Rule 5705(b) to provide for 
the inclusion of cash in an index or portfolio underlying a series of 
Index Fund Shares. This filing is substantively identical to a NYSE 
Arca, Inc. filing previously approved by the Commission (SR-NYSEArca-
2017-30, as amended).\3\
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    \3\ See Securities Exchange Act Release No. 80777 (May 25, 
2017), 82 FR 25378 (June 1, 2017) (SR-NYSEArca-2017-30).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Nasdaq Rule 5705(b)(3) and 
5705(b)(4) to provide for the inclusion of cash in an index or 
portfolio underlying a series of Index Fund Shares.\4\ Nasdaq Rule 
5705(b) provides ``generic'' criteria permitting listing and trading of 
Index Fund Shares pursuant to Rule 19b-4(e) under the Act \5\ when the 
underlying index or portfolio satisfies the criteria set forth in 
Nasdaq Rule 5705(b).
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    \4\ See Nasdaq Rule 5705(b)(1)(A) and (B).
    \5\ 17 CFR 240.19b-4(e).
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    The Exchange understands that certain index providers have 
included, or intend to include, cash as a component in indexes or 
portfolios that also include equity or fixed income securities 
components. An index provider may, for example, provide a certain index 
weighting allocation to cash or may periodically change an allocation 
to cash based on the index provider's assessment of market risk 
associated with other asset classes in the applicable index.\6\
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    \6\ The Exchange notes that shares of the following exchange-
traded funds based on indexes or portfolios that include cash as a 
component are currently listed and traded on the BATS BZX Exchange, 
Inc.: QuantX Risk Managed Growth ETF; QuantX Risk Managed Multi-
Asset Income ETF; QuantX Risk Managed Multi-Asset Total Return ETF; 
and QuantX Risk Managed Real Return ETF.

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[[Page 32735]]

    Accordingly, the Exchange proposes to amend Nasdaq Rule 5705(b)(3) 
and 5705(b)(4) to permit listing and trading of Index Fund Shares based 
on an index or portfolio that includes cash as a component. While open-
end investment companies, like mutual funds, will generally hold an 
amount of cash, Nasdaq Rule 5705(b) currently provides that components 
of an index or portfolio underlying a series of Index Fund Shares 
consist of securities--namely, U.S. Component Stocks, Non-U.S. 
Component Stocks, Fixed Income Securities or a combination thereof. As 
described below, the proposed amendments to Nasdaq Rule 5705(b)(3) and 
5705(b)(4) would permit inclusion of cash as an index or portfolio 
component.
    Currently, Nasdaq Rule 5705(b)(3)(A)(i) provides that an underlying 
index or portfolio of U.S. Component Stocks \7\ must meet specified 
criteria. The Exchange proposes to amend Nasdaq Rule 5705(b)(3) to 
provide that the components of an index or portfolio underlying a 
series of Index Fund Shares may also include cash. In addition, the 
percentage weighting criteria in Nasdaq Rule 5705(b)(3)(A)(i)a.-d. each 
would be amended to make clear that such criteria would be applied only 
to the U.S. Component Stocks portion of an index or portfolio. For 
example, in applying the criteria in proposed Nasdaq Rule 
5705(b)(3)(A)(i)a.,\8\ if 85% of the weight of an index consists of 
U.S. Component Stocks and 15% of the index weight is cash, the 
requirement that component stocks accounting for 90% of the weight of 
the index or portfolio each have a minimum market value of $75 million 
minimum would be applied only to the 85% portion consisting of U.S. 
Component Stocks.
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    \7\ Nasdaq Rule 5705(b)(1)(D) defines ``U.S. Component Stock'' 
as an equity security that is registered under Sections 12(b) or 
12(g) of the Act or an American Depositary Receipt, the underlying 
equity security of which is registered under Sections 12(b) or 12(g) 
of the Act.
    \8\ Nasdaq Rule 5705(b)(3)(A)(i)a. would provide that component 
stocks (excluding Derivative Securities Products) that in the 
aggregate account for at least 90% of the weight of the U.S. 
Component Stocks portion of the index or portfolio (excluding such 
Derivative Securities Products) each shall have a minimum market 
value of at least $75 million.
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    Nasdaq Rule 5705(b)(3)(A)(ii), which relates to international or 
global indexes or portfolios, would be amended to provide that 
components of an index or portfolio underlying a series of Index Fund 
Shares may consist of (a) only Non-U.S. Component Stocks, (b) Non-U.S. 
Component Stocks and cash, (c) both U.S. Component Stocks and Non-U.S. 
Component Stocks, or (d) U.S. Component Stocks, Non-U.S. Component 
Stocks and cash. In addition, the percentage weighting criteria in 
Nasdaq Rule 5705(b)(3)(A)(ii)a.-d. each would be amended to make clear 
that such criteria would be applied only to the U.S. and Non-U.S. 
Component Stocks portions of an index or portfolio.
    Nasdaq Rule 5705(b)(4) provides generic criteria applicable to 
listing and trading of Index Fund Shares whose underlying index or 
portfolio includes Fixed Income Securities.\9\ Currently, Nasdaq Rule 
5705(b)(4)(A)(i) provides that an underlying index or portfolio must 
consist of Fixed Income Securities. The Exchange proposes to amend 
Nasdaq Rule 5705(b)(4)(A)(i) to provide that the index or portfolio may 
also include cash. In addition, the percentage weighting criteria in 
Nasdaq Rule 5705(b)(4)(A)(ii), 5705(b)(4)(A)(iv) and 5705(b)(4)(A)(vi) 
each would be amended to make clear that such criteria would be applied 
only to the Fixed Income Securities portion of an index or portfolio. 
For example, in applying the criteria in proposed Nasdaq Rule 
5705(b)(4)(A)(ii),\10\ if 90% of the weight of an index or portfolio 
consists of Fixed Income Securities and 10% of the index weight is 
cash, the requirement that Fixed Income Securities accounting for at 
least 75% of the weight of the index or portfolio each have a minimum 
original principal amount outstanding of $100 million would be applied 
only to the 90% portion consisting of Fixed Income Securities.
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    \9\ As defined in Nasdaq Rule 5705(b)(4), Fixed Income 
Securities are debt securities that are notes, bonds, debentures or 
evidence of indebtedness that include, but are not limited to, U.S. 
Department of Treasury securities (``Treasury Securities''), 
government-sponsored entity securities (``GSE Securities''), 
municipal securities, trust preferred securities, supranational debt 
and debt of a foreign country or a subdivision thereof.
    \10\ Nasdaq Rule 5705(b)(4)(A)(ii) would provide that Fixed 
Income Security components that in aggregate account for at least 
75% of the Fixed Income Securities portion of the weight of the 
index or portfolio each shall have a minimum original principal 
amount outstanding of $100 million or more.
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    The Exchange notes that the Commission has previously approved 
Exchange rules allowing portfolios held by issues of Managed Fund 
Shares (actively managed exchange-traded funds) under Nasdaq Rule 5735 
to include cash.\11\ Like the provision in Nasdaq Rule 5735, which 
states that there is no limit to cash holdings by an issue of Managed 
Fund Shares listed under the rule, there is no proposed limit to the 
weighting of cash in an index or portfolio underlying a series of Index 
Fund Shares. The Exchange believes this is appropriate in that cash 
does not, in itself, impose investment or market risk.
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    \11\ See Nasdaq Rule 5735.
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    The Exchange believes the proposed amendments, by permitting 
inclusion of cash as a component of indexes or portfolios underlying 
series of Index Fund Shares, would provide issuers of Index Fund Shares 
with additional choice in indexes or portfolios permitted to underlie 
Index Fund Shares that are permitted to list and trade on the Exchange 
pursuant to Rule 19b-4(e), which would enhance competition among market 
participants, to the benefit of investors and the marketplace. In 
addition, the proposed amendments would provide investors with greater 
ability to hold Index Fund Shares based on underlying indexes or 
portfolios that may accord more closely with an investor's assessment 
of market risk, in that some investors may view cash as a desirable 
component of an underlying index or portfolio under certain market 
conditions.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ in particular, because it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to, and perfect the mechanisms of, 
a free and open market and a national market system and, in general, to 
protect investors and the public interest and because it is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Exchange has in place surveillance procedures that are adequate 
to properly monitor trading in Index Fund Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws.
    The Exchange notes that, as described above, the percentage 
weighting criteria in Nasdaq Rule 5705(b)(3)(A)(i)a.-d. and Nasdaq Rule 
5705(b)(3)(A)(ii)a.-d. each would be amended to make clear that such 
criteria would be applied only to the U.S. and Non-U.S. Component

[[Page 32736]]

Stocks portions of an index or portfolio. The percentage weighting 
criteria in Nasdaq Rule 5705(b)(4)(A)(ii), 5705(b)(4)(A)(iv) and 
5705(b)(4)(A)(vi) each would be amended to make clear that such 
criteria would be applied only to the Fixed Income Securities portion 
of an index or portfolio. Such applications of the proposed amendments 
would assure that the weighting requirements in Nasdaq Rule 5705(b)(3) 
and 5705(b)(4) would continue to be applied only to securities in an 
index or portfolio, and would not be diluted as a result of inclusion 
of a cash component. In addition, the addition of cash as a permitted 
component of indexes or portfolios underlying Index Fund Shares listed 
and traded on the Exchange pursuant to Rule 19b-4(e) does not raise 
regulatory issues because cash does not, in itself, impose investment 
or market risk and is generally not susceptible to manipulation.
    The Exchange believes the proposed amendments, by permitting 
inclusion of cash as a component of indexes or portfolios underlying 
series of Index Fund Shares, would provide issuers of Index Fund Shares 
with additional choice in indexes or portfolios permitted to underlie 
Index Fund Shares that are permitted to list and trade on the Exchange 
pursuant to Rule 19b-4(e), which would enhance competition among market 
participants, to the benefit of investors and the marketplace. In 
addition, the proposed amendments would provide investors with greater 
ability to hold Index Fund Shares based on underlying indexes or 
portfolios that may accord more closely with an investor's assessment 
of market risk.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change would 
permit Exchange listing and trading under Rule 19b-4(e) of Index Fund 
Shares based on indexes or portfolios that include cash as a component, 
which would enhance competition among market participants, to the 
benefit of investors and the marketplace. Additionally, since the 
Commission has already approved a substantively identical filing by 
NYSE Arca, Inc.\14\ this filing may serve to enhance competition among 
the exchanges.
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    \14\ Supra note 3.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \17\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has asked the 
Commission to waive the 30-day operative delay so that the proposal may 
become operative immediately upon filing. As noted above, the Exchange 
believes that the proposed rule change would provide additional choices 
to issuers of Index Fund Shares and investors in Index Fund Shares. The 
Exchange also noted that the Commission has approved a substantively 
identical proposal by NYSE Arca, Inc.,\18\ and this proposed rule 
change may enhance competition between the exchanges. The Commission 
believes that waiver of the 30-day operative delay is consistent with 
the protection of investors and the public interest. Therefore, the 
Commission hereby waives the 30-day operative delay and designates the 
proposed rule change to be operative upon filing.\19\
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    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ See supra note 3.
    \19\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2017-062 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2017-062. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make

[[Page 32737]]

available publicly. All submissions should refer to File Number SR-
NASDAQ-2017-062 and should be submitted on or before August 7, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017-14890 Filed 7-14-17; 8:45 am]
BILLING CODE 8011-01-P


