[Federal Register Volume 83, Number 214 (Monday, November 5, 2018)]
[Notices]
[Pages 55439-55444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24069]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84504; File No. SR-NYSEArca-2018-43]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change Regarding Investments of the First Trust TCW Unconstrained 
Plus Bond ETF

October 30, 2018.
    On July 11, 2018, NYSE Arca, Inc. (``NYSE Arca'' 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 
seeking to modify investments of the First Trust TCW Unconstrained Plus 
Bond ETF, the shares of which are currently listed and traded on the 
Exchange pursuant to NYSE Arca Rule 8.600-E. The proposed rule change 
was published for comment in the Federal Register on August 1, 2018.\3\
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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. 83720 (July 26, 
2018), 83 FR 37560 (``Notice'').
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    On September 14, 2018, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission extended the time 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 comment letters on the 
proposed rule change. The Commission is publishing this order to 
institute proceedings under Section 19(b)(2)(B) of the Act \6\ to 
determine whether to approve or disapprove the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 84123 (September 14, 
2018), 83 FR 47654 (September 20, 2018). The Commission designated 
October 30, 2018, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal 7
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    \7\ The Commission notes that additional information regarding, 
among other things, the Shares, Fund, investment objective, 
permitted investments, investment strategies and methodology, 
investment restrictions, investment adviser and sub-adviser, 
creation and redemption procedures, availability of information, 
trading rules and halts, and surveillance procedures, can be found 
in the Notice (see supra note 3) and the Registration Statement (see 
infra note 8), as applicable.
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    The Exchange proposes to make changes to the investments of the 
First Trust TCW Unconstrained Plus Bond ETF (``Fund''), the shares 
(``Shares'') of which are currently listed and traded on the Exchange 
under NYSE Arca Rule 8.600-E, which governs the listing and trading of 
Managed Fund Shares on the Exchange. According to the Exchange, the 
Shares of the Fund commenced trading on the Exchange on June 5, 2018 
pursuant to the generic listing standards in Commentary .01 to NYSE 
Arca Rule 8.600-E.
    The Shares are offered by First Trust Exchange-Traded Fund VIII 
(``Trust''), which is registered with the Commission as an open-end 
management investment company.\8\ The Fund is a series of the Trust. 
First Trust Advisors L.P. is the investment adviser (``Adviser'') to 
the Fund. TCW Investment Management Company LLC (``TCW'' or the ``Sub-
Adviser''), serves as the Fund's investment sub-adviser.\9\ First Trust 
Portfolios L.P. is the distributor for the Fund's Shares. The Bank of 
New York Mellon acts as the administrator, custodian and transfer agent 
for the Fund.
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    \8\ The Exchange represents that the Trust is registered under 
the Investment Company Act of 1940 (``1940 Act''). On May 29, 2018, 
the Trust filed with the Commission its registration statement 
(``Registration Statement'') on Form N-1A under the Securities Act 
of 1933 and under the 1940 Act relating to the Fund (File Nos. 333-
210186 and 811-23147). In addition, the Exchange represents that the 
Trust has obtained an order from the Commission granting certain 
exemptive relief under the 1940 Act. See Investment Company Act 
Release No. 30029 (April 10, 2012) (File No. 812-13795).
    \9\ According to the Exchange, the Adviser and Sub-Adviser are 
not registered as broker-dealers. The Adviser is affiliated with 
First Trust Portfolios L.P., a broker-dealer, and has implemented 
and will maintain a fire wall with respect to its broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to the portfolio. The Sub-Adviser is affiliated with 
multiple broker-dealers and has implemented and will maintain a fire 
wall with respect to its broker-dealer affiliates regarding access 
to information concerning the composition and/or changes to the 
portfolio. In the event (a) the Adviser or the Sub-Adviser becomes 
registered as a broker-dealer or newly affiliated with a broker-
dealer, or (b) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with a broker-dealer, it will 
implement and maintain a fire wall with respect to relevant 
personnel and any broker-dealer affiliate regarding access to 
information concerning the composition and/or changes to the 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material non-public information regarding 
such portfolio.
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A. Principal Investments of the Fund

    According to the Exchange, the investment objective of the Fund is 
to seek to maximize long-term total return. Under normal market 
conditions,\10\ the Fund intends to invest at least 80% of its net 
assets (including investment

[[Page 55440]]

borrowings) in a portfolio of ``Fixed Income Securities'' (described 
below).
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    \10\ The term ``normal market conditions'' is defined in NYSE 
Arca Rule 8.600-E(c)(5). 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), the Fund may depart from its principal investment 
strategies; for example, it may hold a higher than normal proportion 
of its assets in cash. During such periods, the Fund may not be able 
to achieve its investment objective. The Fund may adopt a defensive 
strategy when the Adviser and/or the Sub-Adviser believes securities 
in which the Fund normally invests have elevated risks due to 
market, political or economic factors and in other extraordinary 
circumstances.
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    In managing the Fund's portfolio, TCW intends to employ a flexible 
approach that allocates the Fund's investments across a range of global 
investment opportunities and actively manage exposure to interest 
rates, credit sectors, and currencies. TCW seeks to utilize 
independent, bottom-up research to identify securities that are 
undervalued and that offer a superior risk/return profile. Pursuant to 
this investment strategy, the Fund may invest in the following Fixed 
Income Securities, which may be represented by derivatives relating to 
such securities, as discussed below:
     Securities issued or guaranteed by the U.S. government or 
its agencies, instrumentalities or U.S. government-sponsored entities;
     Treasury Inflation Protected Securities;
     agency and non-agency residential mortgage-backed 
securities (``RMBS''); agency and non-agency commercial mortgage-backed 
securities (``CMBS''); agency and non-agency asset-backed securities 
(``ABS''); \11\
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    \11\ Non-agency RMBS, CMBS, and ABS are referred to collectively 
herein as ``Private ABS/MBS.''
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     domestic corporate bonds;
     Fixed Income Securities issued by non-U.S. corporations 
and non-U.S. governments;
     bank loans, including first lien senior secured floating 
rate bank loans (``Senior Loans''), secured and unsecured loans, second 
lien or more junior loans, and bridge loans;
     fixed income convertible securities;
     fixed income preferred securities;
     municipal bonds;
     collateralized loan obligations; and
     Rule 144A securities.
    In addition, the Fund may invest in agency RMBS and CMBS by 
investing in to-be-announced transactions. The Fund may hold cash and 
cash equivalents,\12\ as well as the following short-term instruments 
with maturities of three months or more: Certificates of deposit; 
bankers' acceptances; repurchase agreements and reverse repurchase 
agreements; bank time deposits; and commercial paper. The Fund also may 
enter into short sales of any securities in which the Fund may invest.
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    \12\ For purposes of this filing, cash equivalents are the 
short-term instruments with maturities of less than 3 months 
enumerated in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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    The Fund may utilize exchange-listed and over-the-counter (``OTC'') 
traded derivatives instruments for duration/yield curve management and/
or hedging purposes, for risk management purposes, or as part of its 
investment strategies. The Fund will use derivative instruments 
primarily to hedge interest rate risk, actively manage interest rate 
exposure, hedge foreign currency risk, and actively manage foreign 
currency exposure. The Fund may also use derivative instruments to 
enhance returns, as a substitute for, or to gain exposure to, a 
position in an underlying asset, to reduce transaction costs, to 
maintain full market exposure, to manage cash flows, or to preserve 
capital. Derivatives may also be used to hedge risks associated with 
the Fund's other portfolio investments. Derivatives that the Fund may 
enter into are the following: Futures on interest rates, currencies, 
fixed income securities, and fixed income indices; exchange-traded and 
OTC options on interest rates, currencies, fixed income securities, and 
fixed income indices; swap agreements on interest rates, currencies, 
fixed income securities, and fixed income indices; credit default 
swaps; and currency forward contracts.

B. Other Investments of the Fund

    While the Fund, under normal market conditions, invests at least 
80% of its net assets in the principal investments described above, the 
Fund may invest its remaining assets in the following non-principal 
investments.
    The Fund may invest in exchange-traded common stock, exchange-
traded preferred stock, and exchange-traded real estate investment 
trusts (``REITs''), and securities of other investment companies 
registered under the 1940 Act, including money market funds, exchange-
traded funds (``ETFs''), open-end funds (other than money market funds 
and other ETFs), and U.S. exchange-traded closed-end funds.\13\
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    \13\ For purposes of this filing, the term ``ETFs'' includes 
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca 
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca 
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a 
national securities exchange. While the Fund may invest in inverse 
ETFs, the Fund will not invest in leveraged (e.g., 2X, -2X, 3X, or -
3X) ETFs.
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    In addition, the Fund may hold exchange-traded notes 
(``ETNs''),\14\ exchange-traded or OTC ``Work Out Securities,'' \15\ 
and exchange-traded or OTC equity securities issued upon conversion of 
fixed income convertible securities.
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    \14\ ETNs include Index-Linked Securities (as described in NYSE 
Arca Rule 5.2-E(j)(6)). While the Fund may invest in inverse ETNs, 
the Fund will not invest in leveraged or inverse leveraged ETNs 
(e.g., 2X or -3X).
    \15\ For purposes of this filing, Work Out Securities include 
U.S. or foreign equity securities of any type acquired in connection 
with restructurings related to issuers of Fixed Income Securities 
held by the Fund. Work Out Securities are generally traded OTC, but 
may be traded on a U.S. or foreign exchange.
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C. Investment Restrictions of the Fund 16
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    \16\ The Exchange represents that the Fund will not invest in 
securities or other financial instruments that have not been 
described in this proposed rule change.
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    The Exchange proposes that the Fund may invest up to 50% of its 
total assets (calculated as the aggregate gross notional value) in 
Private ABS/MBS, provided that the Fund may not invest more than 30% of 
its total assets (calculated as the aggregate gross notional value) in 
non-agency RMBS.
    The Exchange proposes that up to 25% of the Fund's assets may be 
invested in OTC derivatives that are used to reduce currency, interest 
rate or credit risk arising from the Fund's investments (that is, 
``hedge''). The Fund's investments in OTC derivatives other than OTC 
derivatives used to hedge the Fund's portfolio against currency, 
interest rate or credit risk will be limited to 20% of the assets in 
the Fund's portfolio. For purposes of these percentage limitations on 
OTC derivatives, the weight of such OTC derivatives will be calculated 
as the aggregate gross notional value of such OTC derivatives.
    The Fund's holdings of bank loans will not exceed 15% of the Fund's 
total assets, and the Fund's holdings of bank loans other than Senior 
Loans will not exceed 5% of the Fund's total assets. The Fund's 
holdings in fixed income convertible securities and in equity 
securities issued upon conversion of such convertible securities will 
not exceed 10% of the Fund's total assets. The Fund's holdings in Work 
Out Securities will not exceed 5% of the Fund's total assets.
    The Fund's investments, including derivatives, will be consistent 
with the Fund's investment objective and will not be used to enhance 
leverage (although certain derivatives and other investments may result 
in leverage). That is, the Fund's investments will not be used to seek 
performance that is the multiple or inverse multiple (e.g., 2X or -3X) 
of the Fund's primary broad-based securities benchmark index (as 
defined in Form N-1A).

D. Use of Derivatives by the Fund

    The Fund may invest in the types of derivatives described in the 
principal investments above. Investments in derivative instruments will 
be made in accordance with the Fund's investment objective and 
policies. To limit the potential risk associated with such 
transactions, the Fund will enter into

[[Page 55441]]

offsetting transactions or segregate or ``earmark'' assets determined 
to be liquid by the Adviser in accordance with procedures established 
by the Trust's Board of Trustees (``Board''). In addition, the Fund has 
included appropriate risk disclosure in its offering documents, 
including leveraging risk. Leveraging risk is the risk that certain 
transactions of the Fund, including the Fund's use of derivatives, may 
give rise to leverage, causing the Fund to be more volatile than if it 
had not been leveraged.

E. Impact on Arbitrage Mechanism

    The Adviser and the Sub-Adviser believe there will be minimal, if 
any, impact to the arbitrage mechanism as a result of the Fund's use of 
derivatives. The Adviser and the Sub-Adviser understand that market 
makers and participants should be able to value derivatives as long as 
the positions are disclosed with relevant information. The Adviser and 
the Sub-Adviser believe that the price at which Shares of the Fund 
trade will continue to be disciplined by arbitrage opportunities 
created by the ability to purchase or redeem Shares of the Fund at 
their net asset value (``NAV''), which should ensure that Shares of the 
Fund will not trade at a material discount or premium in relation to 
their NAV.
    The Adviser and Sub-Adviser do not believe there will be any 
significant impacts to the settlement or operational aspects of the 
Fund's arbitrage mechanism due to the use of derivatives.

F. Application of Generic Listing Requirements

    The Exchange represents that the portfolio for the Fund will not 
meet all of the ``generic'' listing requirements of Commentary .01 to 
NYSE Arca Rule 8.600-E applicable to the listing of Managed Fund 
Shares. The Fund's portfolio will meet all such requirements except for 
those set forth in Commentary .01(a)(1), (a)(2), (b)(5), and (e), as 
described below.
    (1) Diversification Requirements for Investments in Equity 
Securities. According to the Exchange, the Fund will not comply with 
the requirements set forth in Commentary .01(a)(1) \17\ and (a)(2) \18\ 
to NYSE Arca Rule 8.600-E with respect to the Fund's investments in 
equity securities.\19\ Specifically, the Exchange proposes that the 
Fund's investments in equity securities will meet the requirements of 
Commentary .01(a) with the exception of (i) Commentary .01(a)(1)(C) and 
.01(a)(1)(D) (with respect to U.S. Component Stocks), and (ii) 
Commentary .01(a)(2)(C) and .01(a)(2)(D) (with respect to Non-U.S. 
Component Stocks). Any Fund investment in exchange-traded common 
stocks, preferred stocks, REITS, ETFs, ETNs, exchange-traded equity 
securities issued upon conversion of fixed income convertible 
securities, exchange-traded Work Out Securities, and U.S. exchange-
traded closed-end funds would provide for enhanced diversification of 
the Fund's portfolio and, in any case, would be non-principal Fund 
investments and would not exceed 20% of the Fund's net assets in the 
aggregate. With respect to any Fund holdings of exchange-traded equity 
securities issued upon conversion of fixed income convertible 
securities and exchange-traded Work Out Securities, such securities 
will not exceed 10% and 5%, respectively, of the Fund's total assets. 
The Adviser and Sub-Adviser represent that the Fund generally will not 
actively invest in equity securities issued upon conversion of fixed 
income convertible securities or Work Out Securities, but may, at 
times, receive a distribution of such securities in connection with the 
Fund's holdings in other securities. Therefore, the Fund's holdings in 
equity securities issued upon conversion of fixed income convertible 
securities and Work Out Securities generally would not be acquired as 
the result of the Fund's voluntary investment decisions. The Adviser 
and Sub-Adviser represent that, under these circumstances, application 
of the weighting requirements of Commentary .01(a)(1)(C) and Commentary 
.01(a)(2)(C) and the minimum number of components requirements of 
Commentary .01(a)(1)(D) and Commentary .01(a)(2)(D) would impose an 
unnecessary burden on the Fund's ability to hold such equity 
securities.
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    \17\ Commentary .01(a)(1) to NYSE Arca Rule 8.600-E provides 
that the component stocks of the equity portion of a portfolio that 
are U.S. Component Stocks shall meet the following criteria 
initially and on a continuing basis: (A) Component stocks (excluding 
Derivative Securities Products and Index-Linked Securities) that in 
the aggregate account for at least 90% of the equity weight of the 
portfolio (excluding such Derivative Securities Products and Index-
Linked Securities) each shall have a minimum market value of at 
least $75 million; (B) Component stocks (excluding Derivative 
Securities Products and Index-Linked Securities) that in the 
aggregate account for at least 70% of the equity weight of the 
portfolio (excluding such Derivative Securities Products and Index-
Linked Securities) 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 (excluding Derivative Securities Products 
and Index-Linked Securities) shall not exceed 30% of the equity 
weight of the portfolio, and, to the extent applicable, the five 
most heavily weighted component stocks (excluding Derivative 
Securities Products and Index-Linked Securities) 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; provided, however, that there shall be no minimum 
number of component stocks if (i) one or more series of Derivative 
Securities Products or Index-Linked Securities constitute, at least 
in part, components underlying a series of Managed Fund Shares, or 
(ii) one or more series of Derivative Securities Products or Index-
Linked Securities account for 100% of the equity weight of the 
portfolio of a series of Managed Fund Shares; (E) Except as provided 
herein, 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 Securities 
Exchange Act of 1934; and (F) American Depositary Receipts 
(``ADRs'') in a portfolio may be exchange-traded or non- exchange-
traded. However, no more than 10% of the equity weight of a 
portfolio shall consist of non-exchange-traded ADRs.
    \18\ Commentary .01(a)(2) to NYSE Arca Rule 8.600-E provides 
that the component stocks of the equity portion of a portfolio that 
are Non-U.S. Component Stocks shall 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; provided, however, that there 
shall be no minimum number of component stocks if (i) one or more 
series of Derivative Securities Products or Index-Linked Securities 
constitute, at least in part, components underlying a series of 
Managed Fund Shares, or (ii) one or more series of Derivative 
Securities Products or Index-Linked Securities account for 100% of 
the equity weight of the portfolio of a series of Managed Fund 
Shares; and (E) Each Non-U.S. Component Stock shall be listed and 
traded on an exchange that has last-sale reporting.
    \19\ The Exchange represents that, for purposes of these 
exceptions, investments in equity securities that are OTC Work Out 
Securities, OTC equity securities issued upon conversion of fixed 
income convertible securities, or non-exchange-traded securities of 
other open-end investment companies (e.g., mutual funds) are 
excluded.
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    (2) Investments in Private ABS/MBS. The Exchange further represents 
that the Fund will not comply with the requirement in Commentary 
.01(b)(5) to NYSE Arca Rule 8.600-E 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.\20\ Instead, the 
Exchange

[[Page 55442]]

proposes that, in order to enable the portfolio to be more diversified 
and provide the Fund with an opportunity to earn higher returns, the 
Fund may invest up to 50% of its total assets in Private ABS/MBS 
(calculated as the aggregate gross notional value), provided that the 
Fund may not invest more than 30% of its total assets in non-agency 
RMBS (calculated as the aggregate gross notional value).
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    \20\ Commentary .01(b)(5) to NYSE Arca Rule 8.600-E provides 
that non-agency, non-GSE and privately-issued mortgage-related and 
other asset-backed securities components of a portfolio shall not 
account, in the aggregate, for more than 20% of the weight of the 
fixed income portion of the portfolio.
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    The Adviser and Sub-Adviser represent that the non-agency RMBS 
sector can be an important component of the Fund's investment strategy 
because of the potential for attractive risk-adjusted returns relative 
to other fixed income sectors and the potential to add significantly to 
the diversification in the Fund's portfolio. Similarly, the CMBS and 
ABS sectors also have the potential for attractive risk-adjusted 
returns and added portfolio diversification.
    (3) Investments in OTC Derivatives. The Fund's portfolio will not 
comply with the requirements set forth in Commentary .01(e) to NYSE 
Arca Rule 8.600-E.\21\ Specifically, the Fund's investments in OTC 
derivatives may exceed 20% of Fund assets, calculated as the aggregate 
gross notional value of such OTC derivatives. The Exchange proposes 
that up to 25% of the Fund's assets (calculated as the aggregate gross 
notional value) may be invested in OTC derivatives that are used to 
reduce currency, interest rate or credit risk arising from the Fund's 
investments (that is, ``hedge''). The Fund's investments in OTC 
derivatives other than OTC derivatives used to hedge the Fund's 
portfolio against currency, interest rate or credit risk will be 
limited to 20% of the assets in the Fund's portfolio, calculated as the 
aggregate gross notional value of such OTC derivatives.
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    \21\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that 
the portfolio may hold OTC derivatives, including forwards, options 
and swaps on commodities, currencies and financial instruments 
(e.g., stocks, fixed income, interest rates, and volatility) or a 
basket or index of any of the foregoing; however, on both an initial 
and continuing basis, no more than 20% of the assets in the 
portfolio may be invested in OTC derivatives. For purposes of 
calculating this limitation, a portfolio's investment in OTC 
derivatives will be calculated as the aggregate gross notional value 
of the OTC derivatives.
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    The Adviser and Sub-Adviser believe that it is important to provide 
the Fund with additional flexibility to manage risk associated with its 
investments. Depending on market conditions, it may be critical that 
the Fund be able to utilize available OTC derivatives for this purpose 
to attempt to reduce impact of currency, interest rate or credit 
fluctuations on Fund assets. Therefore, the Exchange believes it is 
appropriate to apply a limit of up to 25% of the Fund's assets to the 
Fund's investments in OTC derivatives (calculated as the aggregate 
gross notional value of such OTC derivatives), including forwards, 
options and swaps, that are used for hedging purposes.
    (4) Investments in OTC Equity Securities. As noted above, the Fund 
may hold equity securities that are Work Out Securities, which 
generally are traded OTC (but that may be traded on a U.S. or foreign 
exchange), exchange-traded or OTC equity securities issued upon 
conversion of fixed income convertible securities, and non-exchange-
traded securities of other open-end investment company securities 
(e.g., mutual funds). The Exchange believes that it is appropriate and 
in the public interest to approve listing and trading of Shares of the 
Fund on the Exchange notwithstanding that the Fund would not meet the 
requirements of Commentary .01(a)(1)(A) through (E) to NYSE Arca Rule 
8.600-E with respect to the Fund's investments in non-exchange-traded 
securities of open-end investment company securities,\22\ and 
notwithstanding that the Fund's holdings of OTC equity securities 
issued upon conversion of fixed income convertible securities and OTC 
Work Out Securities would not meet the requirements of Commentary 
.01(a)(1)(A) through (E) and Commentary .01(a)(2) (A) through (E) to 
NYSE Arca Rule 8.600-E. Investments in non-exchange-traded securities 
of open-end investment company securities will not be principal 
investments of the Fund.\23\ Such investments, which may include mutual 
funds that invest, for example, principally in fixed income securities, 
would be utilized to help the Fund meet its investment objective and to 
equitize cash in the short term. With respect to any Fund holdings of 
OTC equity securities issued upon conversion of fixed income 
convertible securities and OTC Work Out Securities, such securities 
will not exceed 10% and 5%, respectively, of the Fund's total assets. 
According to the Exchange, the Adviser and Sub-Adviser represent that 
the Fund generally will not actively invest in OTC equity securities 
issued upon conversion of fixed income convertible securities or OTC 
Work Out Securities, but may, at times, receive a distribution of such 
securities in connection with the Fund's holdings in other securities. 
Therefore, the Fund's holdings in equity securities issued upon 
conversion of fixed income convertible securities and Work Out 
Securities generally would not be acquired as the result of the Fund's 
voluntary investment decisions.
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    \22\ Commentary .01 (a) to NYSE Arca Rule 8.600-E specifies the 
equity securities accommodated by the generic criteria in Commentary 
.01(a), namely, U.S. Component Stocks (as described in Rule 5.2-
E(j)(3)); Non-U.S. Component Stocks (as described in Rule 5.2-
E(j)(3)); Derivative Securities Products (i.e., Investment Company 
Units and securities described in Section 2 of Rule 8-E); and Index-
Linked Securities that qualify for Exchange listing and trading 
under Rule 5.2-E(j)(6).
    \23\ For purposes of this section of the filing, non-exchange-
traded securities of other registered investment companies do not 
include money market funds, which are cash equivalents under 
Commentary .01(c) to NYSE Arca Rule 8.600-E and for which there is 
no limitation in the percentage of the portfolio invested in such 
securities.
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    With respect to investments in non-exchange-traded investment 
company securities, because such securities have a net asset value 
based on the value of securities and financial assets the investment 
company holds, the Exchange believes it is both unnecessary and 
inappropriate to apply to such investment company securities the 
criteria in Commentary .01(a)(1). The Exchange notes that the 
Commission has previously approved listing and trading of an issue of 
Managed Fund Shares that may invest in equity securities that are non-
exchange-traded securities of other open-end investment company 
securities. The Exchange believes that it is appropriate to permit the 
Fund to invest in non-exchange-traded open-end management investment 
company securities.
    The Exchange notes that, other than Commentary .01(a)(1), (a)(2), 
(b)(5), and (e) to NYSE Arca Rule 8.600-E, the Fund's portfolio will 
meet all other requirements of NYSE Arca Rule 8.600-E.

II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-43 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \24\ 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 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

[[Page 55443]]

provide comments on the proposed rule change.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\25\ 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, and ``to protect investors and the public 
interest.'' \26\
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    \25\ Id.
    \26\ 15 U.S.C. 78f(b)(5).
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    1. In its filing, the Exchange proposes that the Fund may invest up 
to 50% of its total assets (calculated as the aggregate gross notional 
value) in Private ABS/MBS, provided that the Fund may not invest more 
than 30% of its total assets (calculated as the aggregate gross 
notional value) in non-agency RMBS. Accordingly, the Exchange states 
that the Fund will not comply with the requirement in Commentary 
.01(b)(5) to NYSE Arca Rule 8.600-E 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. The Exchange also 
represents that, other than Commentary .01(a)(1), (a)(2), (b)(5), and 
(e) to NYSE Arca Rule 8.600-E, the Fund's portfolio will meet all other 
requirements of NYSE Arca Rule 8.600-E.
    a. The Commission seeks commenters' views on whether the Private 
ABS/MBS will meet the requirements of Commentary .01(b)(4) to NYSE Arca 
Rule 8.600-E, which requires that ``[c]omponent 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 Securities Exchange 
Act of 1934; (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 amount of at least $1 billion; (d) exempted securities as 
defined in Section 3(a)(12) of the Securities Exchange Act of 1934; or 
(e) from issuers that are a government of a foreign country or a 
political subdivision of a foreign country.''
    b. The Commission further seeks commenters' views on whether the 
Fund will meet the requirements of Commentary .01(f) to NYSE Arca Rule 
8.600-E, which requires that ``[to] the extent that 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 Commentary .01(a) and 
.01(b) (including gross notional exposures), respectively.''
    2. With respect to the Fund's permitted investments in Private ABS/
MBS, the Exchange claims that it is appropriate and in the public 
interest to approve listing and trading of Shares of the Fund 
notwithstanding that the Fund's holdings in such Private ABS/MBS do not 
comply with the requirements set forth in Commentary .01(b)(5) to NYSE 
Arca Rule 8.600-E because the Fund's investment in Private ABS/MBS is 
expected to provide the Fund with benefits associated with increased 
diversification, as Private ABS/MBS investments tend to be less 
correlated to interest rates than many other fixed income securities. 
The Exchange further states that the Fund's investment in Private ABS/
MBS will be subject to the Fund's liquidity procedures as adopted by 
the Board, and the Adviser and Sub-Adviser do not expect that 
investments in Private ABS/MBS of up to 50% of the total assets of the 
Fund will have any material impact on the liquidity of the Fund's 
investments. In addition, according to the Exchange, the non-agency 
RMBS sector can be an important component of the Fund's investment 
strategy because of the potential for attractive risk-adjusted returns 
relative to other fixed income sectors and the potential to add 
significantly to the diversification in the Fund's portfolio. 
Similarly, the CMBS and ABS sectors also have the potential for 
attractive risk-adjusted returns and added portfolio diversification.
    a. The Commission seeks commenters' views on an investor's ability 
to evaluate or discern pricing accuracy of the underlying Private ABS/
MBS to be held by the Fund.
    b. The Commission seeks commenters' views on the potential for 
susceptibility to manipulation or other fraudulent behavior of the 
Private ABS/MBS in the Fund's portfolio.
    c. Given the potentially significant holdings in Private ABS/MBS of 
the Fund, the Commission seeks commenters' views on possible factors 
that might impair the ability of the arbitrage mechanism to keep the 
trading price of the Shares tied to the NAV of the Fund. Specifically, 
the Commission seeks commenters' views on whether or how these 
potential impairments of the arbitrage mechanism may affect the Fund's 
ability to ensure adequate participation by Authorized Participants. 
What are commenters' views on the potential effects on investors if the 
arbitrage mechanism is impaired?

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.\27\
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    \27\ 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).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by November 26, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 10, 2018.
    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-NYSEArca-2018-43 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.


[[Page 55444]]


All submissions should refer to File Number SR-NYSEArca-2018-43. 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 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 comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2018-43 and should be submitted 
by November 26, 2018. Rebuttal comments should be submitted by December 
10, 2018.
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    \28\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24069 Filed 11-2-18; 8:45 am]
 BILLING CODE 8011-01-P


