[Federal Register Volume 83, Number 76 (Thursday, April 19, 2018)]
[Notices]
[Pages 17462-17467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08153]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83046; File No. SR-NASDAQ-2018-012]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Granting Approval of a Proposed Rule Change To List and Trade, Under 
Nasdaq Rule 5705, the Shares of the Horizons Russell 2000 Covered Call 
ETF

April 13, 2018.

I. Introduction

    On February 9, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``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 
Horizons Russell 2000 Covered Call ETF (``Fund''). The proposed rule 
change was published for comment in the Federal Register on February 
28, 2018.\3\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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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. 82761 (Feb. 22, 
2018), 83 FR 8719 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund under 
Rule 5705, which governs the listing and trading of Index Fund Shares 
on the Exchange. The Shares will be offered by the Fund, which will be 
a passively managed exchange-traded fund (``ETF'') that seeks to track 
the performance of the CBOE Russell 2000 30-Delta BuyWrite V2 Index 
(``Benchmark Index'').\4\ The Fund is a series of the Horizons ETF 
Trust I (``Trust'').\5\ Horizons ETF Management (US), LLC will serve as 
the investment adviser (``Adviser'') to the Fund.\6\ Foreside Fund

[[Page 17463]]

Services, LLC will serve as the principal underwriter and distributor 
of the Fund's Shares. U.S. Bank National Association will act as the 
custodian for the Fund. U.S. Bancorp Fund Services, LLC will serve as 
the administrator, transfer agent and fund accounting agent for the 
Fund. The Benchmark Index was developed by and is maintained by FTSE 
International Limited and Frank Russell Company (``Index 
Provider'').\7\
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    \4\ The Benchmark Index methodology is available at: https://www.cboe.com/products/strategy-benchmark-indexes/buywrite-indexes/cboe-russell-2000-30-delta-buywrite-index-bxrd. The Chicago Board 
Options Exchange, Incorporated (n/k/a Cboe Exchange, Inc.) 
(``CBOE'') is the index calculation agent for the Benchmark Index.
    \5\ The Trust is registered with the Commission as an open-end 
management investment company and has filed a post-effective 
amendment to its registration statement on Form N-1A (``Registration 
Statement'') on behalf of the Fund. See Registration Statement for 
the Trust, filed on June 22, 2017 (File No. 333-183155). In 
addition, the Commission has issued an order granting certain 
exemptive relief to the Trust under the 1940 Act. See Investment 
Company Act Release No. 31961 (Jan. 19, 2016) (File No. 812-14461) 
(``Exemptive Order'').
    \6\ The Exchange represents that the Adviser is not a broker-
dealer; however, it is affiliated with two broker-dealers. A fire 
wall exists around the respective personnel at the Adviser and 
affiliated broker-dealers who have access to information concerning 
changes and adjustments to the composition and/or changes to the 
Fund's portfolio. In addition, such personnel will be subject to 
procedures designed to prevent the use and dissemination of material 
non-public information regarding the Fund's portfolio. The Exchange 
represents that in the event (a) the Adviser, any sub-adviser, or 
the Index Provider (as discussed herein) becomes registered as a 
broker-dealer or is newly affiliated with a broker dealer, or (b) 
any new adviser, sub-adviser, or Index Provider is a registered 
broker-dealer or becomes affiliated with a broker dealer, then the 
Adviser, sub-adviser or Index Provider will implement a fire wall 
with respect to its relevant personnel or such broker dealer 
affiliate, as applicable, regarding access to information concerning 
the composition or changes to the portfolio or concerning changes 
and adjustments to the Benchmark Index and will be subject to 
procedures designed to prevent the use and dissemination of 
material, nonpublic information regarding the Fund's portfolio. 
According to the Exchange, the Fund does not currently intend to use 
a sub-adviser.
    \7\ The Exchange represents that the Index Provider is not a 
broker-dealer and it is not affiliated with a broker-dealer. A fire 
wall exists around its personnel who have access to information 
concerning changes and adjustments to the Benchmark Index. In 
addition, such personnel will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding the Benchmark Index.
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategies, including other 
assets and investment restrictions.\8\
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    \8\ Additional information regarding the Trust, the Fund, and 
the Shares, including information relating to the underlying Index, 
investment strategies, risks, net asset value (``NAV'') calculation, 
creation and redemption procedures, fees, portfolio holdings 
disclosure policies, distributions, and taxes, among other 
information, is included in the Notice and the Registration 
Statement, as applicable. See Notice, supra note 3 and Registration 
Statement, supra note 5.
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A. Exchange's Description of the Fund's Principal Investments

    According to the Exchange, the Fund's investment objective is to 
seek to track the investment results that correspond (before fees and 
expenses) generally to the performance of the Benchmark Index provided 
by the Index Provider. The Fund will pursue its objective by investing 
at least 80% of its total assets in all of the equity securities in the 
Russell 2000 Index and a single written one-month out-of-the-money 
covered call option on the Russell 2000 Index. The market value of the 
option strategy may be up to 20% of the Fund's overall net asset value. 
The market value of the call options included in the Benchmark Index 
will not represent more than 10% of the total weight of the Benchmark 
Index. According to the Exchange, the component securities of the 
Benchmark Index meet all requirements of Nasdaq Rule 5705(b)(3)(A)(i) 
except that the Benchmark Index includes call options, which are not 
NMS Stocks as defined in Rule 600 of Regulation NMS.\9\
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    \9\ See Notice, supra note 3, 83 FR at 8720.
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    In pursuing its investment objective, under normal market 
conditions,\10\ the Fund will seek investment results that, before fees 
and expenses, generally correspond to the performance of the Benchmark 
Index. The Fund seeks correlation of 0.90 or better between its 
performance and the performance of the Benchmark Index. A figure of 
1.00 would represent perfect correlation. The call option written is at 
the strike nearest to the 30 Delta between 10:30 a.m. and 11:00 a.m. CT 
on the roll date (the third Friday of every month).
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    \10\ The term ``under normal market conditions'' as used herein 
includes, but is not limited to, the absence of adverse market, 
economic, political or other conditions, including extreme 
volatility or trading halts in the securities markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption or any similar intervening circumstance. In periods of 
extreme market disturbance, the Fund may take temporary defensive 
positions, by overweighting its portfolio in cash/cash-like 
instruments; however, to the extent possible, the Adviser would 
continue to seek to achieve the Fund's investment objective.
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    The Benchmark Index is a benchmark index that measures the 
performance of a theoretical portfolio that holds the stocks included 
in the Russell 2000 Index and writes (or sells) a single one-month out-
of-the-money Russell 2000 Index covered call option. The call option 
written for the Benchmark Index is at the strike nearest to the 30 
Delta between 10:30 a.m. and 11:00 a.m. CT on the roll date (the third 
Friday of every month). The Russell 2000 Index measures the performance 
of the small capitalization sector of the U.S. equity market, as 
defined by the Index Provider. The Russell 2000 Index is a subset of 
the Russell 3000 Index, which measures the performance of the broad 
U.S. equity market, as determined by the Index Provider. The Russell 
2000 Index is a float-adjusted capitalization-weighted index of equity 
securities issued by the approximately 2000 smallest issuers in the 
Russell 3000 Index. Preferred and convertible preferred stock, 
redeemable shares, participating preferred stock, warrants, rights, 
installment receipts and trust receipts are not included in the Russell 
2000 Index.
    According to the Exchange, because a covered call strategy 
generates income in the form of premiums on the written call options, 
the Benchmark Index is generally expected to provide higher total 
returns with lower volatility than the Russell 2000 Index in most 
market environments, with the exception of when the equity market is 
rallying rapidly. The Exchange states that each single call option in 
the Benchmark Index will be traded on national securities exchanges, 
such as the CBOE. According to the Exchange, as of October 31, 2017, 
the Russell 2000 Index included common stocks of 1984 companies, with 
an average market capitalization of approximately $2.3 billion.\11\
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    \11\ See Notice, supra note 3, 83 FR at 8721.
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    The Fund will generally use a replication methodology, meaning it 
will invest in all of the securities and the call option comprising the 
Benchmark Index in proportion to the weightings in the Benchmark Index. 
However, the Fund may, from time-to-time, utilize a sampling 
methodology under various circumstances where it may not be possible or 
practicable to purchase all of the equity securities comprising the 
Benchmark Index.
    The Exchange represents that the equity securities in which the 
Fund will invest and the option that the Fund will write will be 
limited to U.S. exchange-traded securities and call options, 
respectively, and that such securities will trade in markets that are 
members of the Intermarket Surveillance Group (``ISG'') or which are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange.\12\
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    \12\ See id. A list of ISG members is available at 
www.isgportal.org.
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    The equity securities held by the Fund will be rebalanced 
quarterly. The call option portion of the portfolio will consist of a 
single U.S. exchange-traded one-month covered call on the Russell 2000 
Index that is written by the Fund slightly out-of-the-money. A call 
option will give the holder the right to buy the securities underlying 
the call options written at a predetermined strike price from the Fund. 
The notional value of the covered call options written (including the 
financial instruments in the Exchange's description of the Fund's Other 
Investments below) will be generally 100% of the overall Fund.
    The Fund will utilize options in accordance with Rule 4.5 of the 
Commodity Exchange Act (``CEA''). The Trust, on behalf of the Fund, has 
filed a notice of eligibility for exclusion from the definition of the 
term ``commodity pool operator'' in accordance with Rule 4.5 so that 
the Fund is not subject to registration or regulation as a commodity 
pool operator under the CEA.

B. Exchange's Description of the Fund's Other Investments

    According to the Exchange, the Fund may invest no more than 20% of 
its net

[[Page 17464]]

assets in the instruments described below.
    The Fund may invest in ETFs, which shall be registered as 
investment companies under the 1940 Act and trade on a U.S. national 
securities exchange. The Fund may also buy and sell individual large 
capitalization equity securities that do not comprise the Russell 2000 
Index and are traded on a U.S. national securities exchange.
    The Fund may invest in U.S. exchange-listed futures contracts based 
on (1) the Benchmark Index or Russell 2000 Index and (2) ETFs designed 
to track the Benchmark Index or Russell 2000 Index. In addition, the 
Fund may invest in forward contracts based on (1) the Benchmark Index 
or Russell 2000 Index and (2) ETFs designed to track the Benchmark 
Index or Russell 2000 Index. The Fund may also buy and sell OTC options 
on (1) the Benchmark Index or Russell 2000 Index and (2) ETFs designed 
to track the Benchmark Index or Russell 2000 Index. Moreover, the Fund 
may enter into dividend and total return swap transactions (including 
equity swap transactions) based on (1) the Benchmark Index or Russell 
2000 Index and (2) ETFs designed to track the Benchmark Index or 
Russell 2000 Index.\13\ The Fund also may engage in interest rate swap 
transactions. The Fund would use interest rate swap transactions to 
manage or hedge exposure to interest rate fluctuations.
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    \13\ The Exchange represents that the Fund will transact only 
with swap dealers that have in place an International Swaps and 
Derivatives Association (``ISDA'') agreement with the Fund. See id. 
at 8721 n.10. According to the Exchange, where practicable, the Fund 
intends to invest in swaps cleared through a central clearing house 
(``Cleared Swaps''). Currently, only certain of the interest rate 
swaps in which the Fund intends to invest are Cleared Swaps, while 
the dividend and total return swaps (including equity swaps) in 
which the Fund may invest are currently not Cleared Swaps. See id. 
at 8721 n.11.
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    The Exchange represents that the Fund's short positions and its 
investments in swaps, futures contracts, forward contracts and options 
based on the Benchmark Index and Russell 2000 Index and ETFs designed 
to track the Benchmark Index or Russell 2000 Index will be backed by 
investments in cash, high-quality short-term debt securities and money-
market instruments in an amount equal to the Fund's maximum liability 
under the applicable position or contract, or will otherwise be offset 
in accordance with Section 18 of the 1940 Act.\14\
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    \14\ The Exchange represents that the Fund will seek, where 
possible, to use counterparties, as applicable, whose financial 
status is such that the risk of default is reduced; however, the 
risk of losses resulting from default is still possible. The Adviser 
will evaluate the creditworthiness of counterparties on an ongoing 
basis. In addition to information provided by credit agencies, the 
Adviser will evaluate each approved counterparty using various 
methods of analysis, such as, for example, the counterparty's 
liquidity in the event of default, the counterparty's reputation, 
the Adviser's past experience with the counterparty, and the 
counterparty's share of market participation. See id. at 8721 n.12.
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    The Fund will attempt to limit counterparty risk in non-cleared 
swaps, forwards, and OTC option contracts by entering into such 
contracts only with counterparties the Adviser believes are 
creditworthy and by limiting the Fund's exposure to each counterparty. 
The Adviser will monitor the creditworthiness of each counterparty and 
the Fund's exposure to each counterparty on an ongoing basis.
    The Fund may invest in short-term debt securities, money market 
instruments and shares of money market funds to the extent permitted 
under the 1940 Act. Short-term debt securities and money market 
instruments include shares of fixed income or money market mutual 
funds, commercial paper, certificates of deposit, bankers' acceptances, 
U.S. government securities (including securities issued or guaranteed 
by the U.S. government or its authorities, agencies, or 
instrumentalities) and, repurchase agreements.\15\ Short-term debt 
securities include bonds that are rated BBB or higher.
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    \15\ The Fund may enter into repurchase agreements with banks 
and broker-dealers. A repurchase agreement is an agreement under 
which securities are acquired by a fund from a securities dealer or 
bank subject to resale at an agreed upon price on a later date. The 
acquiring fund bears a risk of loss in the event that the other 
party to a repurchase agreement defaults on its obligations and the 
fund is delayed or prevented from exercising its rights to dispose 
of the collateral securities.
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    The Exchange represents that the Fund's investments described above 
in this section will be consistent with the Fund's investment objective 
and with the requirements of the 1940 Act.\16\
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    \16\ The Exchange represents that, to limit the potential risk 
associated with such transactions, the Fund will segregate or 
``earmark'' assets determined to be liquid by the Adviser in 
accordance with procedures established by the Trust's Board of 
Trustees and in accordance with the 1940 Act (or, as permitted by 
applicable regulation, enter into certain offsetting positions) to 
cover its obligations arising from such transactions. In addition, 
the Fund will include appropriate risk disclosure in its offering 
documents, including leveraging risk. Leveraging risk is the risk 
that certain transactions of the Fund may give rise to leverage, 
causing the Fund to be more volatile than if it had not been 
leveraged. To mitigate leveraging risk, the Adviser will segregate 
or ``earmark'' liquid assets or otherwise cover the transactions 
that may give rise to such risk the 1940 Act. The Exchange further 
represents that the Fund will not make investments in securities to 
seek to achieve a multiple or inverse multiple of an index and they 
will not be used to enhance leverage. See Notice, supra note 3, 83 
FR at 8722 n.14.
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment). 
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. Illiquid securities include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets, as determined in 
accordance with Commission staff guidance.
    The Exchange states that the Fund will not invest in assets that 
are not described in this proposed rule change.
    The Fund seeks to track the Benchmark Index, which itself may have 
concentration in certain regions, economies, markets, industries or 
sectors. The Fund may concentrate its investments in a particular 
industry or group of industries to the extent that the Russell 2000 
Index concentrates in an industry or group of industries.\17\ According 
to the Exchange, by concentrating its investments in an industry or 
sector, the Fund faces more risks than if it were diversified broadly 
over numerous industries or sectors.
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    \17\ See Registration Statement, supra note 5, Item 9. The 
Commission has taken the position that a fund is concentrated if it 
invests more than 25% of the value of its total assets in any one 
industry. See, e.g., Investment Company Act Release No. 9011 
(October 30, 1975), 40 FR 54241 (November 21, 1975).
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \18\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\19\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\20\ which 
requires, among other things, that the Exchange's rules 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

[[Page 17465]]

investors and the public interest. The Commission also finds that the 
proposal to list and trade the Shares on the Exchange is consistent 
with Section 11A(a)(1)(C)(iii) of the Act,\21\ 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.
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    \18\ 15 U.S.C. 78f.
    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Quotation and last-sale information for the Shares will be 
available via Nasdaq proprietary quote and trade services, as well as 
in accordance with the Unlisted Trading Privileges and the Consolidated 
Tape Association plans for the Shares. With respect to the securities 
and other assets held by the Fund, the intra-day, executable price 
quotations on such securities will be available from major broker-
dealer firms or on the exchange on which they are traded, as 
applicable. Intra-day price information will also be available through 
subscription services, such as Bloomberg, Markit and Thomson Reuters, 
which can be accessed by Authorized Participants and other investors. 
Specifically, the intra-day, closing and settlement prices of the 
portfolio securities and other Fund investments, including exchange-
listed equity securities, exchange-listed futures, and exchange-listed 
options, will be readily available from the national securities 
exchanges trading such securities, automated quotation systems, 
published or other public sources, and, with respect to OTC options, 
swaps, and forwards, from third party pricing sources, or on-line 
information services such as Bloomberg or Reuters. Price information 
regarding ETFs will be available from on-line information services and 
from the website for the applicable investment company security. The 
intra-day, closing and settlement prices of short-term debt securities 
and money market instruments will be readily available from published 
and other public sources or on-line information services. Money market 
funds are typically priced once each business day and their prices will 
be available through the applicable fund's website or from major market 
data vendors.
    The value of the Benchmark Index will be published by one or more 
major market data vendors every 15 seconds during the Regular Market 
Session.\22\ Information about the Benchmark Index constituents, the 
weighting of the constituents, the Benchmark Index's methodology, and 
the Benchmark Index's rules will be available at no charge on the Index 
Provider's website. In addition, for the Fund, an estimated value, 
defined in Rule 5705(b)(3)(C) as the ``Intraday Indicative Value,'' 
that reflects an estimated intraday value of the Fund's portfolio, will 
be disseminated. The Intraday Indicative Value, available on the NASDAQ 
Information LLC proprietary index data service,\23\ will be based upon 
the current value for the components of the Disclosed Portfolio (as 
discussed herein) and will be updated and widely disseminated and 
broadly displayed at least every 15 seconds during the Regular Market 
Session. The Intraday Indicative Value will be based on quotes and 
closing prices from the assets' local market and may not reflect events 
that occur subsequent to the local market's close. Premiums and 
discounts between the Intraday Indicative Value and the market price 
may occur.
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    \22\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m. Eastern time; (2) Regular Market Session from 9:30 a.m. to 4 
p.m. or 4:15 p.m. Eastern time; and (3) Post-Market Session from 4 
p.m. or 4:15 p.m. to 8 p.m. Eastern time).
    \23\ Currently, the NASDAQ Global Index Data Service (``GIDS'') 
is the NASDAQ global index data feed service, offering real-time 
updates, daily summary messages, and access to widely followed 
indexes and Intraday Indicative Values for ETFs. GIDS provides 
investment professionals with the daily information needed to track 
or trade NASDAQ indexes, listed ETFs, or third-party partner indexes 
and ETFs.
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    On each business day, before commencement of trading in Shares in 
the Regular Market Session on the Exchange, the Fund will disclose on 
its website the identities and quantities of the portfolio of 
securities and other assets (the ``Disclosed Portfolio'') held by the 
Fund that will form the basis for the Fund's calculation of NAV at the 
end of the business day.\24\ The NAV of the Fund's Shares generally 
will be calculated once daily Monday through Friday as of the close of 
regular trading on the Nasdaq Stock Exchange, generally 4:00 p.m. 
Eastern time. In addition, a basket composition file, which includes 
the asset names, amounts and share quantities, as applicable, required 
to be delivered in exchange for the Fund's Shares, together with 
estimates and actual cash components, will be publicly disseminated 
daily prior to the opening of Nasdaq, via the National Securities 
Clearing Corporation. The basket will represent one Creation Unit of 
the Fund.
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    \24\ On a daily basis, the Fund will disclose on the Fund's 
website (www.us.horizonsetfs.com) the following information 
regarding each portfolio holding, as applicable to the type of 
holding: Ticker symbol; CUSIP number or other identifier, if any; a 
description of the holding (including the type of holding); with 
respect to holdings in derivatives, the identity of the security, 
index, or other asset upon which the derivative is based; for 
options, the option strike price, quantity held (as measured by, for 
example, par value, notional value or number of shares, contracts or 
units), and expiration of call option; maturity date, if any; coupon 
rate; if any; effective date, if any; market value of the holding; 
percentage weighting of the holding in the Fund's portfolio; and 
cash equivalents and the amount of cash held. The website 
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, and 
information regarding the previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers. The Fund's website will include a form 
of the prospectus for the Fund that may be downloaded and additional 
data relating to NAV and other applicable quantitative information.
    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange will obtain a representation from the issuer of 
the Shares that the NAV per Share will be calculated daily and that the 
NAV and the Disclosed Portfolio will be made available to all market 
participants at the same time.\25\ Nasdaq will halt or pause trading in 
the Shares under the conditions specified in Nasdaq Rules 4120 and 
4121, including the trading pauses under Nasdaq Rules 4120(a)(11) and 
(12). Trading may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable.\26\ If the Intraday Indicative Value, the Benchmark Index 
value or the value of the Disclosed Portfolio is not being disseminated 
as required, the Exchange may halt trading during the day in which the 
disruption occurs; if the interruption persists past the day in which 
it occurred, the Exchange will

[[Page 17466]]

halt trading no later than the beginning of the trading day following 
the interruption. The Exchange also states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.\27\ In addition, the Exchange states that the Adviser is not 
a broker-dealer; however, it is affiliated with two broker-dealers. The 
Exchange states that the Adviser represents that a fire wall exists 
around the respective personnel at the Adviser and affiliated broker-
dealers who have access to information concerning changes and 
adjustments to the composition and/or changes to the Fund's 
portfolio.\28\ In addition, the Exchange represents that such personnel 
will be subject to procedures designed to prevent the use and 
dissemination of material non-public information regarding the Fund's 
portfolio.\29\ The Exchange further states that the Index Provider is 
not a broker-dealer and it is not affiliated with a broker-dealer, and 
it has represented that a fire wall exists around personnel who have 
access to information concerning changes and adjustments to the 
Benchmark Index, and such personnel will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the Benchmark Index.\30\
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    \25\ See Notice, supra note 3, 83 FR at 8724.
    \26\ These may include: (1) The extent to which trading is not 
occurring in the securities and/or the financial instruments 
constituting the Disclosed Portfolio of the Fund; or (2) whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. With respect 
to trading halts, the Exchange may consider all relevant factors in 
exercising its discretion to halt or suspend trading in the Shares 
of the Fund. Trading in the Shares also will be subject to Nasdaq 
Rule 5705(b)(1)(B)(iv), which sets forth circumstances under which 
Shares of the Fund may be halted.
    \27\ See Notice, supra note 3, 83 FR at 8725.
    \28\ See supra note 6. The Commission also notes that an 
investment adviser to an open-end fund is required to be registered 
under the Investment Advisers Act of 1940 (the ``Advisers Act''). As 
a result, the Adviser and its related personnel are subject to the 
provisions of Rule 204A-1 under the Advisers Act relating to codes 
of ethics. This Rule requires investment advisers to adopt a code of 
ethics that reflects the fiduciary nature of the relationship to 
clients as well as compliance with other applicable securities laws. 
Accordingly, procedures designed to prevent the communication and 
misuse of non-public information by an investment adviser must be 
consistent with the Advisers Act and Rule 204A-1 thereunder. In 
addition, Rule 206(4)-7 under the Advisers Act makes it unlawful for 
an investment adviser to provide investment advice to clients unless 
such investment adviser has (i) adopted and implemented written 
policies and procedures reasonably designed to prevent violation, by 
the investment adviser and its supervised persons, of the Advisers 
Act and the Commission rules adopted thereunder; (ii) implemented, 
at a minimum, an annual review regarding the adequacy of the 
policies and procedures established pursuant to subparagraph (i) 
above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
    \29\ See Notice, supra note 3, 83 FR at 8720.
    \30\ See id.
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    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by both Nasdaq and 
also the Financial Industry Regulatory Authority (``FINRA'') on behalf 
of the Exchange, which are designed to detect violations of Exchange 
rules and applicable federal securities laws.\31\ FINRA, on behalf of 
the Exchange, will communicate as needed regarding trading in the 
Shares, in the equity securities in which the Fund will invest, and in 
the U.S. exchange-traded options and futures which the Fund will buy 
and write with other markets and other entities that are members of the 
ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement,\32\ and FINRA may obtain trading 
information regarding trading in the Shares and in such equity 
securities and U.S. exchange-traded options and futures from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares and in such equity 
securities and U.S. exchange-traded options and futures from markets 
and other entities that are members of the ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
The Exchange may also obtain information from the Trade Reporting and 
Compliance Engine (``TRACE''), which is the FINRA developed vehicle 
that facilitates mandatory reporting of OTC secondary market 
transactions in eligible fixed income securities.
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    \31\ FINRA surveils trading on the Exchange pursuant to a 
regulatory services agreement. The Exchange is responsible for 
FINRA's performance under this regulatory services agreement.
    \32\ For a list of the current members of ISG, see supra note 
12.
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    The Commission notes that the Shares and the Fund must comply with 
the initial and continued listing criteria in Rule 5705 for the Shares 
to be listed and traded on the Exchange.
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. In support of this 
proposal, the Exchange has made the following representations:
    (1) The Shares will be subject to Rule 5705, which sets forth the 
initial and continued listing criteria applicable to Index Fund 
Shares.\33\
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    \33\ See Notice, supra note 3, 83 FR at 8724.
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    (2) The component securities of the Benchmark Index meet all 
requirements of Nasdaq Rule 5705(b)(3)(A)(i) except that the Benchmark 
Index includes call options, which are not NMS Stocks as defined in 
Rule 600 of Regulation NMS.\34\
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    \34\ See id. at 8720.
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    (3) The Exchange has the appropriate rules to facilitate 
transactions in the Shares during all trading sessions.\35\
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    \35\ See id. at 8724.
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    (4) Trading in the Shares will be subject to the existing trading 
surveillances, administered by Nasdaq and FINRA on behalf of the 
Exchange.\36\ The Exchange represents that these procedures are 
adequate to properly monitor Exchange trading of the Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and applicable federal securities laws.\37\
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    \36\ See id.
    \37\ See id. at 8725.
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    (5) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares, in the equity securities in which the 
Fund will invest, and in the U.S. exchange-traded options and futures 
which the Fund will buy and write with other markets and other entities 
that are members of the ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. FINRA may obtain trading 
information regarding trading in the Shares and in such equity 
securities and U.S. exchange-traded options and futures from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares and in such equity 
securities and U.S. exchange-traded options and futures from markets 
and other entities that are members of the ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
The Exchange may also obtain information from FINRA's TRACE.\38\
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    \38\ See id.
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    (6) For initial and/or continued listing, the Fund must be in 
compliance with Rule 10A-3 \39\ under the Act.\40\
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    \39\ See 17 CFR 240.10A-3.
    \40\ See Notice, supra note 3, 83 FR at 8724.
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    (7) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how information regarding 
the Benchmark Index value and Intraday Indicative Value is 
disseminated; (d) the risks involved in trading the Shares during the 
Pre-Market and Post-Market

[[Page 17467]]

Sessions when an updated Benchmark Index value and Intraday Indicative 
Value will not be calculated or publicly disseminated; (e) the 
requirement that members deliver a prospectus to investors purchasing 
newly issued Shares prior to or concurrently with the confirmation of a 
transaction; and (f) trading information.\41\
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    \41\ See id. at 8725.
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    (8) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of 
investment).\42\
---------------------------------------------------------------------------

    \42\ See id. at 8722.
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    (9) Each single call option in the Benchmark Index will be traded 
on national securities exchanges.\43\
---------------------------------------------------------------------------

    \43\ See id. at 8721.
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    (10) The equity securities in which the Fund will invest, and the 
option that the Fund will write, will be limited to U.S. exchange-
traded securities and call options, respectively, and such securities 
will trade in markets that are members of the ISG or which are parties 
to a comprehensive surveillance sharing agreement with the 
Exchange.\44\
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    \44\ See id.
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    (11) The Fund will invest at least 80% of its total assets in all 
of the equity securities in the Russell 2000 Index and a single written 
one-month out-of-the-money covered call option on the Russell 2000 
Index, and the market value of the option strategy may be up to 20% of 
the Fund's overall net asset value.\45\
---------------------------------------------------------------------------

    \45\ See id. at 8720.
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    (12) The Fund will utilize options in accordance with Rule 4.5 of 
the CEA.\46\
---------------------------------------------------------------------------

    \46\ See id. at 8721.
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    (13) The Fund will transact only with swap dealers that have in 
place an ISDA agreement with the Fund.\47\
---------------------------------------------------------------------------

    \47\ See id. at 8721 n.10.
---------------------------------------------------------------------------

    (14) The Fund's short positions and its investments in swaps, 
futures contracts, forward contracts and options based on the Benchmark 
Index and Russell 2000 Index and ETFs designed to track the Benchmark 
Index or Russell 2000 Index will be backed by investments in cash, 
high-quality short-term debt securities and money-market instruments in 
an amount equal to the Fund's maximum liability under the applicable 
position or contract, or will otherwise be offset in accordance with 
Section 18 of the 1940 Act.\48\
---------------------------------------------------------------------------

    \48\ See id. at 8721.
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    (15) The Fund will attempt to limit counterparty risk in non-
cleared swaps, forwards, and OTC option contracts by entering into such 
contracts only with counterparties the Adviser believes are 
creditworthy and by limiting the Fund's exposure to each counterparty. 
The Adviser will monitor the creditworthiness of each counterparty and 
the Fund's exposure to each counterparty on an ongoing basis.\49\
---------------------------------------------------------------------------

    \49\ See id. at 8722.
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    (16) To limit the potential risk associated with such transactions, 
the Fund will segregate or ``earmark'' assets determined to be liquid 
by the Adviser in accordance with procedures established by the Trust's 
Board of Trustees and in accordance with the 1940 Act (or, as permitted 
by applicable regulation, enter into certain offsetting positions) to 
cover its obligations arising from such transactions. In addition, the 
Fund will include appropriate risk disclosure in its offering 
documents, including leveraging risk.\50\
---------------------------------------------------------------------------

    \50\ See id. at 8722 n.14.
---------------------------------------------------------------------------

    (17) The Fund will not make investments in securities to seek to 
achieve a multiple or inverse multiple of an index and they will not be 
used to enhance leverage.\51\
---------------------------------------------------------------------------

    \51\ See id.
---------------------------------------------------------------------------

    (18) The Fund will not invest in assets that are not described in 
the proposed rule change.\52\
---------------------------------------------------------------------------

    \52\ See id. at 8722.
---------------------------------------------------------------------------

    (19) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.\53\
---------------------------------------------------------------------------

    \53\ See id. at 8724.
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    The Exchange further represents that all statements and 
representations made in this filing regarding the description of the 
portfolio, limitations on portfolio holdings or reference assets, 
dissemination and availability of the reference asset and intraday 
indicative values, and the applicability of Exchange listing rules 
shall constitute continued listing requirements for listing the Shares 
on the Exchange. The issuer has represented to the Exchange that it 
will advise the Exchange of any failure by the Fund to comply with the 
continued listing requirements, and, pursuant to its obligations under 
Section 19(g)(1) of the Act, the Exchange will monitor for compliance 
with the continued listing requirements. If the Fund is not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under the Nasdaq 5800 Series.\54\
---------------------------------------------------------------------------

    \54\ See id. at 8725.
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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. For 
the foregoing reasons, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act \55\ and the rules 
and regulations thereunder applicable to a national securities 
exchange.
---------------------------------------------------------------------------

    \55\ 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,\56\ that the proposed rule change (SR-NASDAQ-2018-012) be, and it 
hereby is, approved.
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    \56\ 15 U.S.C. 78s(b)(2).
    \57\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08153 Filed 4-18-18; 8:45 am]
 BILLING CODE 8011-01-P


