[Federal Register Volume 83, Number 71 (Thursday, April 12, 2018)]
[Notices]
[Pages 15883-15889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-07527]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83007; File No. SR-NASDAQ-2017-128]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To List and Trade Shares of the Western Asset 
Total Return ETF

April 6, 2018.
    On December 20, 2017, The Nasdaq Stock Market LLC (``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 Western Asset Total Return 
ETF (``Fund''), a series of Legg Mason ETF Investment Trust 
(``Trust''), under Nasdaq Rule 5735 (Managed Fund Shares). The proposed 
rule change was published for comment in the Federal Register on 
January 9, 2018.\3\ On February 21, 2018, pursuant to Section 19(b)(2) 
of the Act,\4\ the Commission designated a longer period within which 
to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ The Commission has received no comments on the 
proposed rule change. This order institutes proceedings under Section 
19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82439 (Jan. 3, 
2018), 83 FR 1062 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82757, 83 FR 8532 
(Feb. 27, 2018). The Commission designated April 9, 2018, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

I. Summary of the Exchange's Description of the Proposed Rule Change 
\7\
---------------------------------------------------------------------------

    \7\ For a complete description of the Exchange's proposal, see 
the Notice, supra note 3.
---------------------------------------------------------------------------

    The Exchange proposes to list and trade Shares of the Fund under 
Nasdaq Rule 5735, which governs the listing and trading of Managed Fund 
Shares on the Exchange. The Shares will be offered by the Trust, which 
is registered with the Commission as an investment company under the 
Investment Company Act of 1940 (``1940 Act''). The Fund will be a 
series of the Trust.\8\
---------------------------------------------------------------------------

    \8\ The Trust filed a registration statement on Form N-1A with 
the Commission with respect to the Fund but withdrew it on February 
14, 2018. See Post-Effective Amendment No. 27 to the Registration 
Statement on Form N-1A for the Trust (File Nos. 333-206784 and 811-
23096) as filed on August 8, 2017 (``Registration Statement'') and 
Request for Withdrawal of Post-Effective Amendments Nos. 27, 31, 33, 
35, 36 and 38 to the Trust's Registration Statement filed on Form N-
1A as filed on February 14, 2018.
---------------------------------------------------------------------------

    Legg Mason Partners Fund Advisor, LLC will be the investment 
manager (``Manager'') to the Fund. Western Asset Management Company 
will serve as the sub-adviser to the Fund (``Sub-Adviser'') and Western 
Asset Management Company Limited in London, Western Asset Management 
Company Pte. Ltd. in Singapore, and Western Asset Management Company 
Ltd in Japan will each serve as sub-sub-advisers to the Fund 
(collectively, ``Sub-Sub-Advisers'' and each, a ``Sub-Sub-
Adviser'').\9\ Legg Mason Investor Services, LLC (``Distributor'') will 
be the distributor of the Fund's Shares. The Manager, each of the Sub-
Advisers, and the Distributor are wholly-owned subsidiaries of Legg 
Mason, Inc. (``Legg Mason''). The Exchange states that an entity that 
is not affiliated with Legg Mason, and which is named in the 
Registration Statement, will act as the administrator, accounting 
agent, custodian, and transfer agent to the Fund.\10\
---------------------------------------------------------------------------

    \9\ References to ``Sub-Adviser'' or ``Sub-Advisers'' 
hereinafter include the Sub-Adviser and each applicable Sub-Sub-
Adviser.
    \10\ According to the Exchange, none of the Manager or any of 
the Sub-Advisers is a broker-dealer, but each is affiliated with the 
Distributor, a broker-dealer. The Exchange states that each of the 
Manager and the Sub-Advisers has implemented and will maintain a 
fire wall with respect to its broker-dealer affiliate regarding 
access to information concerning the composition of and/or changes 
to the portfolio prior to implementation. In addition, personnel who 
make decisions on the Fund's portfolio composition will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding the Fund's portfolio. In 
the event (i) the Manager or any of the Sub-Advisers registers as a 
broker-dealer or becomes newly affiliated with a broker-dealer, or 
(ii) any new manager or sub adviser to the Fund 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 prior to implementation and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding the portfolio.

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

[[Page 15884]]

    The Fund will be an actively managed exchange-traded fund 
(``ETF''). According to the Exchange, the investment objective of the 
Fund will be to seek to maximize total return, consistent with prudent 
investment management and liquidity needs. Although the Fund may invest 
in securities and Debt (as defined below) of any maturity, the Fund 
will normally maintain an average effective duration within 35% of the 
average duration of the U.S. bond market as a whole (generally, this 
bond market range is 2.5 to 7 years) as estimated by the Sub-
Adviser.\11\
---------------------------------------------------------------------------

    \11\ The Exchange states that the average effective duration of 
the Fund may fall outside of its expected range due to market 
movements, and that if this happens, the Sub-Advisers will take 
action to bring the Fund's average effective duration back within 
its expected range within a reasonable period of time.
---------------------------------------------------------------------------

A. Principal Investments

    According to the Exchange, under Normal Market Conditions,\12\ the 
Fund will seek to achieve its investment objective by investing at 
least 80% of its net assets in a portfolio comprised of (i) U.S. or 
foreign fixed income securities (as described below); (ii) U.S. or 
foreign Debt (as described below); (iii) ETFs \13\ that provide 
exposure to such U.S. or foreign fixed income securities, Debt, or 
other Principal Investments (as described below); (iv) derivatives \14\ 
that (a) provide exposure to such U.S. or foreign fixed income 
securities, Debt, and other Principal Investments, (b) are used to risk 
manage the Fund's holdings,\15\ or (c) are used to enhance returns, 
such as through covered call strategies; (v) U.S. or foreign equity 
securities of any type acquired in reorganizations of issuers of fixed 
income securities or Debt held by the Fund (``Work Out 
Securities'');\16\ (vi) U.S. or foreign non-convertible preferred 
securities (other than trust preferred securities, which the Fund may 
invest in but which are treated as fixed income securities under Nasdaq 
Rule 5735(b)(1)(B)) (``Non-Convertible Preferred Securities''); \17\ 
(vii) warrants \18\ on U.S. or foreign fixed income securities; (viii) 
warrants on U.S. or foreign equity securities that are attached to, 
accompany, or are purchased alongside investments in U.S. or foreign 
fixed income securities issued by the issuer of the warrants (``Equity-
Related Warrants''); \19\ (ix) cash and cash equivalents; \20\ and (x) 
foreign currencies (collectively, the ``Principal Investments;'' and 
the equity elements of the Principal Investments, which consist of ETFs 
that provide exposure to fixed income securities, Debt, or other 
Principal Investments; Work Out Securities; Non-Convertible Preferred 
Securities; and Equity-Related Warrants, collectively referred to as 
``Principal Investment Equities'').
---------------------------------------------------------------------------

    \12\ The term ``Normal Market Conditions'' has the meaning set 
forth in Nasdaq Rule 5735(c)(5). In addition, the Exchange states 
that the Fund may vary from ordinary parameters on a temporary 
basis, including for defensive purposes, during the initial invest-
up period (i.e., the six-week period following the commencement of 
trading of Shares on the Exchange) and during periods of high cash 
inflows or outflows (i.e., rolling periods of seven calendar days 
during which inflows or outflows of cash, in the aggregate, exceed 
10% of the Fund's net assets as of the opening of business on the 
first day of such periods). In those situations, the Fund may depart 
from its principal investment strategies and may, for example, hold 
a higher than normal proportion of its assets in cash and cash 
equivalents. During such periods, the Fund may not be able to 
achieve its investment objective. The Fund may also adopt a 
defensive strategy and hold a significant portion of its assets in 
cash and cash equivalents when the Manager or any Sub-Adviser 
believes securities, Debt, and other instruments in which the Fund 
normally invests have elevated risks due to political or economic 
factors, heightened market volatility or in other extraordinary 
circumstances that do not constitute ``Normal Market Conditions.''
    \13\ The Exchange states that the ETFs in which the Fund may 
invest include Index Fund Shares (as described in Nasdaq Rule 
5705(b)), Portfolio Depositary Receipts (as described in Nasdaq Rule 
5705(a)), and Managed Fund Shares (as described in Nasdaq Rule 
5735). According to the Exchange, the Fund will not invest in ETFs 
that are not registered as investment companies under the 1940 Act. 
The ETFs held by the Fund will invest in fixed income securities, 
Debt, and money-market instruments to which the Fund seeks exposure. 
The Exchange represents that all such ETFs will trade on markets 
that are members of the Intermarket Surveillance Group (``ISG'') or 
exchanges that are parties to a comprehensive surveillance sharing 
agreement with the Exchange. In addition, the Exchange states that 
the Fund will not invest in leveraged, inverse, or inverse leveraged 
ETFs.
    \14\ The Exchange states that derivatives will include: (i) 
Swaps and security-based swaps, futures, options, options on 
futures, and swaptions that are traded on an exchange, trading 
facility, swap execution facility or alternative trading system (a) 
that is a member of the ISG, which includes all U.S. national 
securities exchanges and most futures exchanges, (b) that is subject 
to a comprehensive surveillance sharing agreement with the Exchange, 
or (c) that is not an ISG member and with which the Exchange does 
not have a comprehensive surveillance sharing agreement (``Exchange-
Traded Derivatives''); and (ii) swaps and security-based swaps, 
options, options on futures, swaptions, forwards, and similar 
instruments that are traded in the over-the-counter (``OTC'') market 
and are either centrally cleared or cleared bilaterally (``OTC 
Derivatives). Specifically, the Exchange states that derivatives 
that the Fund may enter into include: (A) OTC deliverable and non-
deliverable foreign exchange forward contracts; (B) exchange-listed 
futures contracts on securities (including Treasury Securities and 
foreign government securities), commodities, indices, interest 
rates, financial rates, and currencies; (C) exchange-listed or OTC 
options or swaptions (i.e., options to enter into a swap) on 
securities, commodities, indices, interest rates, financial rates, 
currencies, and futures contracts; and (D) exchange-listed or OTC 
swaps (including total return swaps) on securities, commodities, 
indices, interest rates, financial rates, currencies, and debt, and 
credit default swaps on single names, basket, and indices (both as 
protection seller and as protection buyer).
    \15\ According to the Exchange, the risk management uses of 
derivatives will include managing (i) investment-related risks; (ii) 
risks due to fluctuations in securities prices, interest rates, or 
currency exchanges rates; (iii) risks due to the credit-worthiness 
of an issuer; and (iv) the effective duration of the Fund's 
portfolio.
    \16\ According to the Exchange, Work Out Securities will 
generally be traded in the OTC market or may be listed on an 
exchange that may or may not be an ISG member.
    \17\ According to the Exchange, Non-Convertible Preferred 
Securities may be listed on either an ISG member exchange (or an 
exchange with which the Exchange has a comprehensive surveillance 
sharing agreement) or a non-ISG member exchange, or be unlisted and 
trade in the OTC market.
    \18\ The Exchange states that the Fund may hold warrants that 
provide the right to purchase fixed income securities or equity 
securities, and such warrants may be traded in the OTC market or may 
be listed on an exchange, including an exchange that is not an ISG 
member. According to the Exchange, the Fund expects that most of the 
warrants it holds will be attached to related fixed income 
securities.
    \19\ According to the Exchange, the Fund's interests in Equity-
Related Warrants will be similar to the Fund's interest in Work Out 
Securities in that they reflect interests in equity securities that 
are held solely in connection with investments in fixed income 
securities.
    \20\ According to the Exchange, cash equivalents consist of the 
following, all of which have maturities of less than three months: 
U.S. government securities; certificates of deposit issued against 
funds deposited in a bank or savings and loan association; bankers' 
acceptances; repurchase agreements and reverse repurchase 
agreements; and bank time deposits. In addition, cash equivalents 
consist of money market funds registered under the 1940 Act and 
money market funds that are not registered under the 1940 Act but 
that comply with Rule 2a-7 under the 1940 Act (together, ``Money 
Market Funds''), money market ETFs, and commercial paper having 
maturities of 360 days or less.
---------------------------------------------------------------------------

    The Exchange states that fixed income securities may consist of the 
following: (i) U.S. or foreign corporate debt securities, including 
notes, bonds, debentures, trust preferred securities, and commercial 
paper issued by corporations, trusts, limited partnerships, limited 
liability companies, and other types of non-governmental legal 
entities; (ii) U.S. government securities, including

[[Page 15885]]

obligations of, or securities guaranteed by, the U.S. government, its 
agencies, or government-sponsored entities (``GSEs''); (iii) sovereign 
debt securities, including fixed income securities issued by 
governments, agencies, or instrumentalities and their political 
subdivisions; securities issued by government-owned, controlled, or 
sponsored entities; interests in entities organized and operated for 
the purpose of restructuring the investment instruments issued by such 
entities; Brady Bonds; and fixed income securities issued by 
supranational entities such as the World Bank; (iv) U.S. or foreign 
mortgage-backed securities (``MBS''); (v) U.S. or foreign asset-backed 
securities (``ABS''); \21\ (vi) municipal securities, which include 
general obligation bonds, revenue bonds, housing authority bonds, 
private activity bonds, industrial development bonds, residual interest 
bonds, tender option bonds, tax and revenue anticipation notes, bond 
anticipation notes, tax-exempt commercial paper, municipal leases, 
participation certificates and custodial receipts; (vii) zero coupon 
securities; (viii) pay-in-kind securities; (ix) deferred interest 
securities; (x) U.S. or foreign structured notes and indexed 
securities, including securities that have demand, tender or put 
features, or interest rate reset features; and (xi) U.S. or foreign 
inflation-indexed or inflation-protected securities, which include, 
among others, U.S. Treasury Inflation Protected Securities. The 
securities may pay fixed, variable, or floating rates of interest or, 
in the case of instruments such as zero coupon bonds, do not pay 
current interest but are issued at a discount from their face values.
---------------------------------------------------------------------------

    \21\ According to the Exchange, the MBS and ABS in which the 
Fund will invest make periodic payments of interest and/or principal 
on underlying pools of mortgages, government securities, or, in the 
case of ABS, loans, leases, and receivables other than real estate. 
The Fund may also invest in stripped ABS or MBS, which represent the 
right to receive either payments of principal or payments of 
interest on real estate receivables, in the case of MBS, or non-real 
estate receivables, in the case of ABS.
---------------------------------------------------------------------------

    The Exchange states that the Fund may invest in debt instruments 
(``Debt'') that may be deemed not to be ``securities,'' as defined in 
the Act, which will be comprised primarily of the following: (i) U.S. 
or foreign bank loans and participations in bank loans; (ii) U.S. or 
foreign loans by non-bank lenders and participations in such loans; 
(iii) U.S. or foreign loans on real estate secured by mortgages and 
participations (without guarantees by a GSE); and (iv) participations 
in U.S. or foreign loans and/or other extensions of credit, such as 
guarantees, made by governmental entities or financial institutions. 
Debt may be partially or fully secured by collateral supporting the 
payment of interest and principal, or unsecured and/or subordinated to 
other instruments. Debt may relate to financings for highly-leveraged 
borrowers. The Fund may acquire an interest in Debt by purchasing 
participations in and/or assignments of portions of loans from third 
parties or by investing in pools of loans, such as collateralized debt 
obligations.
    With respect to fixed income securities and Debt, the Fund may 
invest in restricted instruments, such as Rule 144A and Regulation S 
securities, which are subject to resale restrictions that limit 
purchasers to qualified institutional buyers, as defined in Rule 144A 
under the Securities Act of 1933, as amended (``Securities Act'') or 
non-U.S. persons, within the meaning of Regulation S under the 
Securities Act.
    The Exchange states that, as a result of the Fund's use of 
derivatives and to serve as collateral, the Fund may also hold 
significant amounts of Treasury Securities, cash, and cash equivalents 
and, in the case of derivatives that are payable in a foreign currency, 
the foreign currency in which the derivatives are payable.
    The Exchange states that the Fund may, without limitation, enter 
into repurchase arrangements and borrowing and reverse repurchase 
arrangements, purchase and sale contracts, buybacks and dollar 
rolls,\22\ and spot currency transactions. The Fund may also, subject 
to required margin and without limitation, purchase securities and 
other instruments under when-issued, delayed delivery, to be announced 
or forward commitment transactions, where the securities or instruments 
will not be delivered or paid for immediately.
---------------------------------------------------------------------------

    \22\ According to the Exchange, the Fund may enter into a 
forward roll transaction (also referred to as a mortgage dollar 
roll) with the intention of entering into an offsetting transaction 
whereby, rather than accepting delivery of the security on the 
specified date, the Fund sells the security and agrees to repurchase 
a similar security at a later time.
---------------------------------------------------------------------------

B. Other Investments

    According to the Exchange, under Normal Market Conditions, the Fund 
will seek its investment objective by investing at least 80% of its net 
assets in a portfolio of the Principal Investments. The Fund may invest 
its remaining assets exclusively in: (i) U.S. or foreign exchange-
listed or OTC convertible fixed income securities; and (ii) OTC 
Derivatives and Exchange-Traded Derivatives that do not satisfy the 
Fund's primary uses for derivatives, which are to (A) provide exposure 
to such U.S. or foreign fixed income securities, Debt and other 
Principal Investments, (B) risk manage the Fund's holdings, and (C) 
enhance returns.

C. Investment Restrictions

    According to the Exchange, the Fund may invest up to 30% of its 
assets in Non-Convertible Preferred Securities, Equity-Related 
Warrants, and Work Out Securities. The Fund will not invest in equity 
securities other than Principal Investment Equities. Principal 
Investment Equities consist of (i) Non-Convertible Preferred 
Securities, Equity-Related Warrants, and Work Out Securities, which are 
limited to 30% of the Fund's assets in the aggregate, and (ii) shares 
of ETFs that provide exposure to fixed income securities, Debt, or 
other Principal Investments, which are subject to no limits.
    The Exchange states that while the Fund will invest principally in 
fixed income securities and Debt that are, at the time of purchase, 
investment grade, the Fund may invest up to 30% of its net assets in 
below investment grade fixed income securities and Debt. For these 
purposes, ``investment grade'' is defined as investments with a rating 
at the time of purchase in one of the four highest rating categories of 
at least one nationally recognized statistical ratings organization 
(``NRSRO'').\23\
---------------------------------------------------------------------------

    \23\ The Exchange states that unrated fixed income securities or 
Debt may be considered investment grade if, at the time of purchase, 
and under Normal Market Conditions, the applicable Sub-Adviser 
determines that such securities are of comparable quality based on a 
fundamental credit analysis of the unrated security or Debt 
instrument and comparable NRSRO-rated securities.
---------------------------------------------------------------------------

    According to the Exchange, the Fund may invest in fixed income 
securities, equity securities, or Debt issued by both U.S. and non-U.S. 
issuers (including issuers in emerging markets). However, the Fund will 
not invest: (i) More than 30% of its total assets directly in fixed 
income securities, equity securities, or Debt of non-U.S. issuers; or 
(ii) more than 25% of its total assets directly in non-U.S. dollar 
denominated fixed income securities, equity securities, or Debt.\24\
---------------------------------------------------------------------------

    \24\ The Exchange states that, for purposes of these 
concentration limits only, derivatives, warrants, and ETFs traded on 
U.S. exchanges that provide indirect exposure to fixed income 
securities, equity securities, or Debt (as applicable) of non-U.S. 
issuers or to fixed income securities, equity securities, or Debt 
(as applicable) denominated in currencies other than U.S. dollars 
will not be counted in calculating the Fund's holdings in non-U.S. 
issuers or in non-U.S. dollar denominated securities or Debt.
---------------------------------------------------------------------------

    The Exchange states that the Fund may invest a substantial portion 
of its

[[Page 15886]]

net assets in ABS and MBS. However, the Fund will not invest more than 
30% of the fixed income portion of the Fund's portfolio in non-agency, 
non-GSE, and privately-issued mortgage-related and other asset-backed 
securities (``Private ABS/MBS'').
    According to the Exchange, the Fund may not concentrate its 
investments (i.e., invest more than 25% of the value of its total 
assets) in securities of issuers in any one industry. The Exchange 
states that this restriction will be interpreted to permit investment 
without limit in the following: Obligations issued or guaranteed by the 
U.S. government, its agencies or instrumentalities; securities of 
state, territory, possession, or municipal governments and their 
authorities, agencies, instrumentalities, or political subdivisions; 
and repurchase agreements collateralized by any such obligations.
    In addition, the Exchange states that 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 Manager or the Sub-Advisers.\25\ 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 securities or other illiquid assets.
---------------------------------------------------------------------------

    \25\ In reaching liquidity decisions, the Manager or Sub-
Advisers (as applicable) 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).
---------------------------------------------------------------------------

    According to the Exchange, the Fund's investments in derivatives 
will be consistent with the Fund's investment objective and will not be 
used for the purpose of seeking leveraged returns or performance that 
is the multiple or inverse multiple of a benchmark (although 
derivatives have embedded leverage). Although the Fund will be 
permitted to borrow as permitted under the 1940 Act, it will not be 
operated as a ``leveraged ETF,'' (i.e., it will not be operated in a 
manner designed to seek a multiple or inverse multiple of the 
performance of an underlying reference index).
    The Exchange states that under Normal Market Conditions, the Fund 
will satisfy the following requirements, on a continuous basis measured 
at the time of purchase: (i) Component securities that in the aggregate 
account for at least 75% of the fixed income weight of the Fund's 
portfolio each will have a minimum original principal amount 
outstanding of $100 million or more; (ii) no fixed income security held 
in the portfolio (excluding Treasury Securities and GSE Securities) 
\26\ will represent more than 30% of the fixed income weight of the 
Fund's portfolio, and the five most heavily weighted portfolio 
securities (excluding Treasury Securities and GSE Securities) will not 
in the aggregate account for more than 65% of the fixed income weight 
of the Fund's portfolio; (iii) the Fund's portfolio (excluding exempted 
securities) will include a minimum of 13 non-affiliated issuers; (iv) 
at least 75% of the investments in securities issued by emerging market 
issuers will have a minimum original principal amount outstanding of 
$200 million or more; and (v) at least 75% of investments in bank loans 
or corporate loan assets \27\ will be in senior loans with an initial 
deal size of $100 million or greater.
---------------------------------------------------------------------------

    \26\ The terms ``Treasury Securities'' and ``GSE Securities'' as 
used herein have the meanings set forth in Nasdaq Rule 
5735(b)(1)(B).
    \27\ These include senior loans, syndicated bank loans, junior 
loans, bridge loans, unfunded commitments, revolvers, and 
participation interests.
---------------------------------------------------------------------------

D. Application of Generic Listing Requirements

    The Exchange states that it submitted the proposed rule change 
because the Fund will not meet all of the ``generic'' listing 
requirements of Nasdaq Rule 5735(b)(1). The Exchange states that the 
Fund will meet all such requirements except those described below,\28\ 
and the Exchange has proposed that the Fund will comply with certain 
alternative limits described below.
---------------------------------------------------------------------------

    \28\ The Exchange notes that the Fund will comply with the 
applicable requirements of Nasdaq Rule 5735(b)(1) with respect to 
all commercial paper held by the Fund. In addition, in accordance 
with Nasdaq Rule 5735(b)(1)(B), to the extent that the Fund holds 
securities that convert into fixed income securities, the fixed 
income securities into which any such securities are converted will 
meet the criteria of Nasdaq Rule 5735(b)(1)(B) after converting.
---------------------------------------------------------------------------

    (i) The Fund will not comply with the requirements in Nasdaq Rule 
5735(b)(1) to use the aggregate gross notional value of derivatives 
when calculating the weight of such derivatives or the exposure that 
such derivatives provide to underlying reference assets, including the 
requirements in Rules 5735(b)(1)(D)(i) and (ii),\29\ 5735(b)(1)(E),\30\ 
and 5735(b)(1)(F).\31\ Instead, the Exchange proposed that for the 
purposes of any applicable requirements under Nasdaq Rule 5735(b)(1), 
and any alternative requirements proposed by the Exchange, the Fund 
will use the mark-to-market value or exposure of its derivatives in 
calculating the weight of such derivatives or the exposure that such 
derivatives provide to their reference assets.
---------------------------------------------------------------------------

    \29\ Rules 5735(b)(1)(D)(i) and (ii) impose certain limitations 
on investments in listed derivatives, and require that, for purposes 
of calculating such limitations, a portfolio's investment in listed 
derivatives will be calculated as the aggregate gross notional value 
of the listed derivatives.
    \30\ Rule 5735(b)(1)(E) imposes a 20% limitation on investments 
in OTC derivatives and requires that, for purposes of calculating 
such limitation, a portfolio's investments in OTC derivatives will 
be calculated as the aggregate gross notional value of the OTC 
derivatives.
    \31\ Rule 5735(b)(1)(F) requires that, to the extent listed or 
OTC derivatives are used to gain exposure to individual equities 
and/or fixed income securities, or to indexes of equities and/or 
indexes of fixed income securities, the aggregate gross notional 
value of such exposure shall meet the criteria set forth in Rule 
5735(b)(1)(A) (which contains generic listing standards for the 
equity components of the portfolio) and 5735(b)(1)(B) (which 
contains generic listing standards for the fixed income components 
of the portfolio), respectively.
---------------------------------------------------------------------------

    (ii) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(B)(v) that Private ABS/MBS in the Fund's portfolio account, 
in the aggregate, for no more than 20% of the weight of the fixed 
income portion of the Fund's portfolio. Instead, the Exchange proposed 
that the Fund will limit its holdings in Private ABS/MBS to no more 
than 30% of the weight of the fixed income portion of the Fund's 
portfolio. The Exchange states that, for purposes of this requirement, 
the weight of the Fund's exposure to Private ABS/MBS referenced 
indirectly through investments in derivatives held by the Fund will be 
calculated based on the mark-to-market value or exposure of such 
derivatives.
    (iii) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(B)(iv) that component securities that in aggregate account 
for at least 90% of the fixed income weight of the portfolio must be 
either: (a) From issuers that are required to file reports pursuant to 
Sections 13 and 15(d) of the Act; (b) from issuers that have a 
worldwide market value of its outstanding common equity held by non-
affiliates of $700 million or more; (c) from issuers that have 
outstanding securities that are notes, bonds debentures, or evidence of 
indebtedness having a total remaining principal

[[Page 15887]]

amount of at least $1 billion; (d) exempted securities as defined in 
Section 3(a)(12) of the Act; or (e) from issuers that are a government 
of a foreign country or a political subdivision of a foreign country. 
Instead, the Exchange proposed that the fixed income portion of the 
portfolio other than Private ABS/MBS will comply with the 90% 
requirement in Rule 5735(b)(1)(B)(iv), and that Private ABS/MBS held by 
the Fund will not comply with such requirement. The Exchange states 
that, for purposes of this requirement, the weight of the Fund's 
exposure to any fixed income securities referenced in derivatives held 
by the Fund will be calculated based on the mark-to-market value or 
exposure of such derivatives.
    (iv) The Fund will not comply with the requirements in Nasdaq Rule 
5735(b)(1)(A) \32\ with respect to the Fund's investments in Non-
Convertible Preferred Securities, Work Out Securities, and Equity-
Related Warrants. Instead, the Exchange proposed that (a) the Fund's 
investments in equity securities other than Non-Convertible Preferred 
Securities, Work Out Securities, and Equity-Related Warrants will 
comply with the requirements in Nasdaq Rule 5735(b)(1)(A); \33\ and (b) 
the aggregate weight of the Fund's investments in Non-Convertible 
Preferred Securities, Work Out Securities, and Equity-Related Warrants 
will not exceed 30% of the Fund's net assets.
---------------------------------------------------------------------------

    \32\ Rule 5735(b)(1)(A)(i) requires that U.S. Component Stocks 
(as such term is defined in Nasdaq Rule 5705) of the equity portion 
of the portfolio meet the following criteria initially and on a 
continuing basis (subject to certain exclusions for Exchange Traded 
Derivative Securities and Linked Securities, as such terms are 
defined in Nasdaq Rules 5735(c)(6) and 5710, respectively): (a) 
Component stocks that in the aggregate account for at least 90% of 
the equity weight of the portfolio each shall have a minimum market 
value of at least $75 million; (b) component stocks that in the 
aggregate account for at least 70% of the equity weight of the 
portfolio each shall have a minimum monthly trading volume of 
250,000 shares, or minimum notional volume traded per month of 
$25,000,000, averaged over the last six months; (c) the most heavily 
weighted component stock shall not exceed 30% of the equity weight 
of the portfolio, and, to the extent applicable, the five most 
heavily weighted component stocks shall not exceed 65% of the equity 
weight of the portfolio; (d) where the equity portion of the 
portfolio does not include Non-U.S. Component Stocks, the equity 
portion of the portfolio shall include a minimum of 13 component 
stocks; and (e) except for non-exchange traded American Depositary 
Receipts (which may consist of up to 10% of the equity weight of the 
portfolio), equity securities in the portfolio shall be U.S. 
Component Stocks listed on a national securities exchange and shall 
be NMS Stocks as defined in Rule 600 of Regulation NMS under the 
Act. Further, Rule 5735(b)(1)(A)(ii) requires that Non-U.S. 
Component Stocks (as such term is defined in Nasdaq Rule 5705) of 
the equity portion of the portfolio meet the following criteria 
initially and on a continuing basis: (a) Non-U.S. Component Stocks 
each shall have a minimum market value of at least $100 million; (b) 
Non-U.S. Component Stocks each shall have a minimum global monthly 
trading volume of 250,000 shares, or minimum global notional volume 
traded per month of $25,000,000, averaged over the last six months; 
(c) the most heavily weighted Non-U.S. Component Stock shall not 
exceed 25% of the equity weight of the portfolio, and, to the extent 
applicable, the five most heavily weighted Non-U.S. Component Stocks 
shall not exceed 60% of the equity weight of the portfolio; (d) 
where the equity portion of the portfolio includes Non-U.S. 
Component Stocks, the equity portion of the portfolio shall include 
a minimum of 20 component stocks (subject to certain exclusions for 
Exchange Traded Derivative Securities and Linked Securities); and 
(e) each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting.
    \33\ According to the Exchange, the other equity securities that 
the Fund will invest in will consist of ETFs (including money market 
ETFs) that provide exposure to fixed income securities, Debt, and 
other Principal Investments, and the weight of such ETFs in the 
Fund's portfolio will not be limited.
---------------------------------------------------------------------------

    (v) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(E) that, on both an initial and continuing basis, no more 
than 20% of the assets in the Fund's portfolio may be invested in over-
the-counter derivatives. Instead, the Exchange proposed that: (a) There 
be no limit on the Fund's investments in ``Interest Rate Derivatives'' 
\34\ and ``Currency Derivatives'' \35\ entered into with broker-
dealers, banks, and other financial intermediaries; and (b) the 
aggregate weight of the Fund's investments in all other OTC Derivatives 
(excluding Interest Rate Derivatives and Currency Derivatives) will not 
exceed 10% of the Fund's net assets (calculated based on the mark-to-
market value or exposure of such other OTC Derivatives).
---------------------------------------------------------------------------

    \34\ The Exchange states that ``Interest Rate Derivatives'' are 
comprised of interest rate swaps, swaptions (i.e., options on 
interest rate swaps), rate options, and other similar derivatives, 
and may be Exchange-Traded Derivatives or OTC Derivatives.
    \35\ The Exchange states that ``Currency Derivatives'' are 
comprised of deliverable and non-deliverable currency forwards, 
swaps and options on currencies, and similar currency or foreign 
exchange derivatives, and may be Exchange-Traded Derivatives or OTC 
Derivatives.
---------------------------------------------------------------------------

    (vi) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(i) that, in the aggregate, at least 90% of the weight of 
the Fund's holdings in futures, exchange-traded options, and listed 
swaps shall, on both an initial and continuing basis, consist of 
futures, options and swaps for which the Exchange may obtain 
information via the ISG, from other members or affiliates of the ISG, 
or for which the principal market is a market with which the Exchange 
has a comprehensive surveillance sharing agreement. Instead, the 
Exchange proposed that no more than 10% of the net assets of the Fund 
will be invested in Exchange-Traded Derivatives whose principal market 
is not a member of ISG or is a market with which the Exchange does not 
have a comprehensive surveillance sharing agreement. The Exchange 
states that, for purposes of this 10% limit, the weight of such 
Exchange-Traded Derivatives will be calculated based on the mark-to-
market value or exposure of such Exchange-Traded Derivatives.
    (vii) The Fund will not comply with the requirement in Nasdaq Rule 
5735(b)(1)(D)(ii) that the aggregate gross notional value of listed 
derivatives based on any five or fewer underlying reference assets 
shall not exceed 65% of the weight of the Fund's portfolio (including 
gross notional exposures), and the aggregate gross notional value of 
listed derivatives based on any single underlying reference asset shall 
not exceed 30% of the weight of the Fund's portfolio (including gross 
notional exposures). Instead, the Exchange proposed that (a) the Fund's 
investments in futures and options contracts (including options on 
futures) referencing Eurodollars and sovereign debt issued by the 
United States (i.e., Treasury Securities) and other ``Group of Seven'' 
countries \36\ that are listed on an exchange that is an ISG member or 
an exchange with which the Exchange has a comprehensive surveillance 
sharing agreement (``Eurodollar and G-7 Sovereign Futures and 
Options'') will not be subject to the requirements in Nasdaq Rule 
5735(b)(1)(D)(ii); and (b) the Fund's investments in Exchange-Traded 
Derivatives other than Eurodollar and G-7 Sovereign Futures and Options 
will comply with the concentration requirements in Nasdaq Rule 
5735(b)(1)(D)(ii) (for purposes of this requirement, the weight of the 
applicable Exchange-Traded Derivatives will be calculated based on the 
mark-to-market value or exposure of such Exchange-Traded Derivatives).
---------------------------------------------------------------------------

    \36\ The ``Group of Seven'' (or ``G-7'') countries consist of 
the United States, Canada, France, Germany, Italy, Japan, and the 
United Kingdom.
---------------------------------------------------------------------------

II. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2017-128 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \37\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the

[[Page 15888]]

proposed rule change. Institution of proceedings does not indicate that 
the Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide comments on the proposed rule 
change.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\38\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, . . . to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.'' \39\
---------------------------------------------------------------------------

    \38\ Id.
    \39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\40\
---------------------------------------------------------------------------

    \40\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved May 3, 2018. Any person who wishes to file a rebuttal to 
any other person's submission must file that rebuttal by May 17, 2018. 
The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\41\ in addition to any other comments they may wish to 
submit about the proposed rule change. Specifically, the Commission 
seeks comment on the statements of the Exchange contained in the Notice 
and any other issues raised by the proposed rule change.
---------------------------------------------------------------------------

    \41\ See Notice supra note 3.
---------------------------------------------------------------------------

    In this regard, the Commission specifically seeks comment on the 
proposed cutoff time for redemption requests and creation orders. In 
the Notice, the Exchange states that all redemption requests and 
creation orders for creation units of the Fund must be received by the 
Distributor within one hour after the closing time of the regular 
trading session on the Exchange (ordinarily between 4:00 p.m., E.T. and 
5:00 p.m., E.T.) in order to receive the net asset value (``NAV'') on 
the next business day immediately following the date the order was 
placed.\42\ The Exchange also states that the Fund will cause to be 
published, through the National Securities Clearing Corporation, on 
each business day, prior to the opening of trading on the Exchange 
(currently, 9:30 a.m., E.T.), the identity and the required number (as 
applicable) of deposit/redemption securities and the amount of cash 
applicable to creation orders and redemption requests received in 
proper form.\43\ Based on this description, the Commission notes that 
market participants that submit redemption requests or creation orders 
on a given business day will not know the contents of the deposit/
redemption securities that will be applicable to their request until 
the following business day and will receive the following business 
day's NAV. Accordingly, the Commission seeks comment on how the 
proposed cutoff time for redemption requests and creation orders would 
affect the opportunity for an effective and efficient arbitrage process 
and whether the proposed cutoff time is consistent with the maintenance 
of fair and orderly markets and the requirements of Section 6(b)(5) of 
the Act.
---------------------------------------------------------------------------

    \42\ See Notice, supra note 3, at 1072.
    \43\ See id.
---------------------------------------------------------------------------

    In addition, the Commission specifically seeks comment on whether 
the proposed portfolio composition, including the limitations thereon, 
is sufficient to support a determination that the proposal is 
consistent with the Act. For example, as discussed above, the Exchange 
notes that the Fund will not meet the requirement in Nasdaq Rule 
5735(b)(1)(B)(v) that Private ABS/MBS, in the aggregate, account for no 
more than 20% of the weight of the fixed income portion of the Fund's 
portfolio. Instead, the Exchange proposes to limit the Fund's 
investments in Private ABS/MBS to 30% of the weight of the fixed income 
portion of its portfolio. In addition, the Exchange states that the 
Fund's investments in Non-Convertible Preferred Securities, Work Out 
Securities, and Equity-Related Warrants, which may constitute up to 30% 
of the Fund's net assets, will not comply with the generic listing 
requirements for portfolio investments in equity securities set forth 
in Nasdaq Rule 5735(b)(1)(A). The Commission seeks commenters' views on 
these aspects of the proposal, and whether the Exchange's statements 
and representations support a determination that the listing and 
trading of the Shares would be consistent with Section 6(b)(5) of 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 [email protected]. Please include 
File Number SR-NASDAQ-2017-128 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-2017-128. 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official

[[Page 15889]]

business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from submissions. 
You should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NASDAQ-2017-
128 and should be submitted on or before May 3, 2018. Rebuttal comments 
should be submitted by May 17, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-07527 Filed 4-11-18; 8:45 am]
 BILLING CODE 8011-01-P


