[Federal Register Volume 78, Number 49 (Wednesday, March 13, 2013)]
[Notices]
[Pages 16006-16019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05749]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69072; File No. SR-NASDAQ-2013-036]


Self-Regulatory Organizations; the NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
2 Thereto, Relating to the Listing and Trading of the Shares of the 
First Trust Senior Loan Fund of First Trust Exchange-Traded Fund IV

March 7, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on February 21, 2013, The NASDAQ Stock Market LLC 
(``Nasdaq'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change, which filing was 
amended and replaced in its entirety by Amendment No. 2 thereto on 
March 7, 2013, as described in Items I, II, and III below, which Items 
have been prepared by Nasdaq.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was filed on March 4, 2013 and withdrawn on 
March 5, 2013 to make a correction to a footnote.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to list and trade the shares of the First Trust 
Senior Loan Fund (the ``Fund'') of First Trust Exchange-Traded Fund IV 
(the ``Trust'') under Nasdaq Rule 5735 (``Managed Fund Shares'').\4\ 
The shares of the Fund are collectively referred to herein as the 
``Shares.''
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    \4\ The Commission approved Nasdaq Rule 5735 in Securities 
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June 
20, 2008) (SR-NASDAQ-2008-039). The Fund would not be the first 
actively-managed fund listed on the Exchange; see Securities 
Exchange Act Release No. 66175 (February 29, 2012), 77 FR 13379 
(March 6, 2012) (SR-NASDAQ-2012-004) (order approving listing and 
trading of WisdomTree Emerging Markets Corporate Bond Fund). 
Additionally, the Commission has previously approved the listing and 
trading of a number of actively managed WisdomTree funds on NYSE 
Arca, Inc. pursuant to Rule 8.600 of that exchange. See, e.g., 
Securities Exchange Act Release No. 64643 (June 10, 2011), 76 FR 
35062 (June 15, 2011) (SR-NYSE Arca-2011-21) (order approving 
listing and trading of WisdomTree Global Real Return Fund). The 
Exchange believes the proposed rule change raises no significant 
issues not previously addressed in those prior Commission orders.
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    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at Nasdaq's principal office, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade the Shares of the Fund 
under Nasdaq Rule 5735, which governs the listing and trading of 
Managed Fund Shares \5\ on the Exchange. The Fund will be an actively 
managed exchange-traded fund (``ETF''). The Shares will be offered by 
the Trust, which was established as a Massachusetts business trust on 
September 15, 2010. The Trust is registered with the Commission as an 
investment company and has filed a registration statement on Form N-1A 
(``Registration Statement'') with the Commission.\6\ The Fund is a 
series of the Trust.
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    \5\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') organized 
as an open-end investment company or similar entity that invests in 
a portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Index Fund Shares, listed 
and traded on the Exchange under Nasdaq Rule 5705, seeks to provide 
investment results that correspond generally to the price and yield 
performance of a specific foreign or domestic stock index, fixed 
income securities index or combination thereof.
    \6\ See Post-Effective Amendment No. 15 to Registration 
Statement on Form N-1A for the Trust, dated December 14, 2012 (File 
Nos. 333-174332 and 811-22559). The descriptions of the Fund and the 
Shares contained herein are based, in part, on information in the 
Registration Statement.
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Description of the Shares and the Fund
    First Trust Advisors L.P. is the investment adviser (``Adviser'') 
to the Fund. First Trust Portfolios L.P. (the ``Distributor'') is the 
principal underwriter and distributor of the Fund's Shares.\7\ The Bank 
of New York Mellon Corporation (``BNY'') will act as the administrator, 
accounting agent, custodian and transfer agent to the Fund.\8\
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    \7\ The Commission has issued an order granting certain 
exemptive relief to the Trust under the 1940 Act (the ``Exemptive 
Order''). See Investment Company Act Release No. 30029 (April 10, 
2012) (File No. 812-13795). In compliance with Nasdaq Rule 
5735(b)(5), which applies to Managed Fund Shares based on a fixed 
income portfolio (including without limitation exchange-traded notes 
and senior loans) or a portfolio invested in a combination of equity 
securities and fixed income securities, the Trust's application for 
exemptive relief under the 1940 Act states that the Fund will comply 
with the federal securities laws in accepting securities for 
deposits and satisfying redemptions with redemption securities, 
including that the securities accepted for deposits and the 
securities used to satisfy redemption requests are sold in 
transactions that would be exempt from registration under the 
Securities Act of 1933 (15 U.S.C. Sec.  77a).
    \8\ The investment banking and custodial services departments at 
BNY are segregated and independent departments. BNY will not 
exercise any investment discretion with respect to the Fund.
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    Paragraph (g) of Rule 5735 provides that if the investment adviser 
to the investment company issuing Managed Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect a ``fire 
wall'' between the investment adviser and the broker-dealer with 
respect to access to

[[Page 16007]]

information concerning the composition and/or changes to such 
investment company portfolio.\9\ In addition, paragraph (g) further 
requires that personnel who make decisions on the open-end fund's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material, non-public information regarding 
the open-end fund's portfolio. Rule 5735(g) is similar to Nasdaq Rule 
5705(b)(5)(A)(i); however, paragraph (g) in connection with the 
establishment of a ``fire wall'' between the investment adviser and the 
broker-dealer reflects the applicable open-end fund's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. The 
Adviser is affiliated with the Distributor, a broker-dealer. The 
Adviser has implemented a fire wall with respect to its broker-dealer 
affiliate regarding access to information concerning the composition 
and/or changes to the portfolio. In the event (a) the Adviser becomes 
newly affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser becomes affiliated with a broker-dealer, it will implement a 
fire wall with respect to such broker-dealer 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. The Fund does not currently intend to use a sub-advisor.
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    \9\ 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 Rule 204A-1 under the Advisers Act. 
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.
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First Trust Senior Loan Fund Principal Investments
    The Fund's primary investment objective is to provide high current 
income. The Fund's secondary investment objective is the preservation 
of capital.
    According to the Registration Statement, in pursuing its investment 
objective, the Fund, under normal market conditions,\10\ will seek to 
outperform a primary and secondary loan index (as described below), by 
investing at least 80% of its net assets (plus any borrowings for 
investment purposes) in ``Senior Loans,'' which are described further 
below in ``Description of Senior Loans and the Senior Loan Market.'' 
The S&P/LSTA U.S. Leveraged Loan 100 Index (the ``Primary Index'') is 
comprised of the 100 largest Senior Loans, as measured by the borrowed 
amounts outstanding. The Markit iBoxx USD Leveraged Loan Index (the 
``Secondary Index'') selects the 100 most liquid Senior Loans in the 
market. In addition to size, liquidity is also measured, in part, based 
on the number of market makers who trade a specific Senior Loan and the 
number and size of transactions in the context of the prevailing bid/
offer spread. Markit utilizes proprietary models for the Secondary 
Index composition and updates to the Secondary Index. The Fund will not 
seek to track either the Primary or Secondary Index, but rather will 
seek to outperform those indices. It is anticipated that the Fund, in 
accordance with its principal investment strategy, will invest 
approximately 50% to 75% of its net assets in Senior Loans that are 
eligible for inclusion in and meet the liquidity thresholds of the 
Primary and/or the Secondary Indices. Each of the Fund's Senior Loan 
investments is expected to have no less than $250 million USD par 
outstanding.
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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 fixed income 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. 
Specifically, the Fund would continue to invest in Senior Loans (as 
defined herein). In response to prolonged periods of constrained or 
difficult market conditions the Adviser will likely focus on 
investing in the largest and most liquid loans available in the 
market.
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    The Adviser considers Senior Loans to be first lien senior secured 
floating rate bank loans. A Senior Loan is an advance or commitment of 
funds made by one or more banks or similar financial institutions to 
one or more corporations, partnerships or other business entities and 
typically pays interest at a floating or adjusting rate that is 
determined periodically at a designated premium above a base lending 
rate, most commonly the London-Interbank Offered Rate (``LIBOR''). A 
Senior Loan is considered senior to all other unsecured claims against 
the borrower, senior to or pari passu with all other secured claims, 
meaning that in the event of a bankruptcy the Senior Loan, together 
with other first lien claims, is entitled to be the first to be repaid 
out of proceeds of the assets securing the loans, before other existing 
unsecured claims or interests receive repayment. However, in bankruptcy 
proceedings, there may be other claims, such as taxes or additional 
advances which take precedence.\11\
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    \11\ Senior Loans consist generally of obligations of companies 
and other entities (collectively, ``borrowers'') incurred for the 
purpose of reorganizing the assets and liabilities of a borrower; 
acquiring another company; taking over control of a company 
(leveraged buyout); temporary refinancing; or financing internal 
growth or other general business purposes. Senior Loans are often 
obligations of borrowers who have incurred a significant percentage 
of debt compared to equity issued and thus are highly leveraged.
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    The Fund will invest in Senior Loans that are made predominantly to 
businesses operating in North America, but may also invest in Senior 
Loans made to businesses operating outside of North America. The Fund 
may invest in Senior Loans directly, either from the borrower as part 
of a primary issuance or in the secondary market through assignments of 
portions of Senior Loans from third parties, or participations in 
Senior Loans, which are contractual relationships with an existing 
lender in a loan facility whereby the Fund purchases the right to 
receive principal and interest payments on a loan but the existing 
lender remains the record holder of the loan. Under normal market 
conditions, the Fund expects to maintain an average interest rate 
duration of less than 90 days.
    In selecting securities for the Fund, the Adviser will seek to 
construct a portfolio of loans that it believes is less volatile than 
the general loan market. In addition, when making investments, the 
Adviser will seek to maintain appropriate liquidity and price 
transparency for the Fund. On an on-going basis, the Adviser will add 
or remove those individual loans that it believes will cause the Fund 
to outperform or underperform, respectively, either the Primary or 
Secondary Index. The Fund will include borrowers that the Adviser 
believes

[[Page 16008]]

have strong credit metrics, based on its evaluation of cash flows, 
collateral coverage and management teams. The key considerations of 
portfolio construction include liquidity, diversification and relative 
value.
    When identifying prospective investment opportunities in Senior 
Loans, the Adviser currently intends to invest primarily in Senior 
Loans that are below investment grade quality and will rely on 
fundamental credit analysis in an effort to attempt to minimize the 
loss of the Fund's capital and to select assets that provide attractive 
relative value.\12\ The Adviser expects to invest in Senior Loans or 
other debt of companies possessing the attributes described below, 
which it believes will help generate higher risk adjusted total 
returns.\13\ The Adviser does not intend to purchase Senior Loans that 
are in default. However, the Fund may hold a Senior Loan that has 
defaulted subsequent to its purchase by the Fund.
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    \12\ The Fund will primarily invest in securities (including 
Senior Loans) which typically will be rated below investment grade. 
Securities rated below investment grade, commonly referred to as 
``junk'' or ``high yield'' securities, include securities that are 
rated Ba1/BB+/BB+ or below by Moody's Investors Service, Inc. 
(``Moody's''), Fitch Inc., or Standard & Poor's, Inc. (``S&P''), 
respectively, and may involve greater risks than securities in 
higher rating categories.
    \13\ The loan market, as represented by the S&P/LSTA (Loan 
Syndications and Trading Association) Leveraged Loan Index, 
experienced significant growth in terms of number and aggregate 
volume of loans outstanding since the inception of the index in 
1997. In 1997, the total amount of loans in the market aggregated 
less than $10 billion. By April of 2000, it had grown to over $100 
billion, and by July of 2007 the market had grown to over $500 
billion. The size of the market peaked in November of 2008 at $594 
billion. During this period, the demand for loans and the number of 
investors participating in the loan market also increased 
significantly. Since 2008, the aggregate size of the market has 
contracted, characterized by limited new loan issuance and payoffs 
of outstanding loans. From the peak in 2008 through July 2010, the 
overall size of the loan market contracted by approximately 15%. The 
number of market participants also decreased during that period. 
Although the number of new loans being issued in the market since 
2010 is increasing, there can be no assurance that the size of the 
loan market, and the number of participants, will return to earlier 
levels. An increase in demand for Senior Loans may benefit the Fund 
by providing increased liquidity for such loans and higher sales 
prices, but it may also adversely affect the rate of interest 
payable on such loans acquired by the Fund and the rights provided 
to the Fund under the terms of the applicable loan agreement, and 
may increase the price of loans that the Fund wishes to purchase in 
the secondary market. A decrease in the demand for Senior Loans may 
adversely affect the price of loans in the Fund, which could cause 
the Fund's net asset value (``NAV'') to decline.
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    The Adviser intends to invest in Senior Loans or other debt of 
companies that it believes have developed strong positions within their 
respective markets and exhibit the potential to maintain sufficient 
cash flows and profitability to service their obligations in a range of 
economic environments. The Adviser will seek to invest in Senior Loans 
or other debt of companies that it believes possess advantages in 
scale, scope, customer loyalty, product pricing, or product quality 
versus their competitors, thereby minimizing business risk and 
protecting profitability.
    The Adviser will seek to invest in Senior Loans or other debt of 
established companies it believes have demonstrated a record of 
profitability and cash flows over several economic cycles. The Adviser 
does not intend to invest in Senior Loans or other debt of primarily 
start-up companies, companies in turnaround situations or companies 
with speculative business plans.
    The Adviser intends to focus on investments in which the Senior 
Loans or other debt of a target company has an experienced management 
team with an established track record of success. The Adviser will 
typically require companies to have in place proper incentives to align 
management's goals with the Fund's goals.
    The Adviser will seek to invest in a well-diversified portfolio of 
Senior Loans or other debt among borrowers and industries, thereby 
potentially reducing the risk of a downturn in any one company or 
industry having a disproportionate impact on the value of the Fund's 
holdings. Loans, and the collateral securing them, are typically 
monitored by agents for the lenders, which may be the originating bank 
or banks.\14\
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    \14\ The Fund may be reliant on the creditworthiness of the 
agent bank and other intermediate participants in a Senior Loan, in 
addition to the borrower, since rights that may exist under the loan 
against the borrower if the borrower defaults are typically asserted 
by or through the agent bank or intermediate participant. Agents are 
typically large commercial banks, although for Senior Loans that are 
not broadly syndicated they can also include thrift institutions, 
insurance companies or finance companies (or their affiliates). Such 
companies may be especially susceptible to the effects of changes in 
interest rates resulting from changes in U.S. or foreign fiscal or 
monetary policies, governmental regulations affecting capital 
raising activities or other economic or market fluctuations. It is 
the expectation that the Fund will only invest in broadly syndicated 
loans.
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    Historically, the amount of public information available about a 
specific Senior Loan has been less extensive than if the loan were 
registered or exchange-traded. As noted above, the loans in which the 
Fund will invest will, in most instances, be Senior Loans, which are 
secured and senior to other indebtedness of the borrower. Each Senior 
Loan will generally be secured by collateral such as accounts 
receivable, inventory, equipment, real estate, intangible assets such 
as trademarks, copyrights and patents, and securities of subsidiaries 
or affiliates. The value of the collateral generally will be determined 
by reference to financial statements of the borrower, by an independent 
appraisal, by obtaining the market value of such collateral, in the 
case of cash or securities if readily ascertainable, or by other 
customary valuation techniques considered appropriate by the Adviser. 
The value of collateral may decline after the Fund's investment, and 
collateral may be difficult to sell in the event of default. 
Consequently, the Fund may not receive all the payments to which it is 
entitled. By virtue of their senior position and collateral, Senior 
Loans typically provide lenders with the first right to cash flows or 
proceeds from the sale of a borrower's collateral if the borrower 
becomes insolvent (subject to the limitations of bankruptcy law, which 
may provide higher priority to certain claims such as employee 
salaries, employee pensions, and taxes). This means Senior Loans are 
generally repaid before unsecured bank loans, corporate bonds, 
subordinated debt, trade creditors, and preferred or common 
stockholders. To the extent that the Fund invests in unsecured loans, 
if the borrower defaults on such loan, there is no specific collateral 
on which the lender can foreclose. If the borrower defaults on a 
subordinated loan, the collateral may not be sufficient to cover both 
the senior and subordinated loans.
    There is no organized exchange on which loans are traded and 
reliable market quotations may not be readily available. A majority of 
the Fund's assets are likely to be invested in loans that are less 
liquid than securities traded on national exchanges. Loans with reduced 
liquidity involve greater risk than securities with more liquid 
markets. Available market quotations for such loans may vary over time, 
and if the credit quality of a loan unexpectedly declines, secondary 
trading of that loan may decline for a period of time. During periods 
of infrequent trading, valuing a loan can be more difficult and buying 
and selling a loan at an acceptable price can be more difficult and 
delayed. In the event that the Fund voluntarily or involuntarily 
liquidates Fund assets during periods of infrequent trading, it may not 
receive full value for those assets. Therefore, elements of judgment 
may play a greater role in valuation of loans. To the extent that a 
secondary market exists for certain loans, the market may be subject to 
irregular

[[Page 16009]]

trading activity, wide bid/ask spreads and extended trade settlement 
periods.
    Senior Loans will usually require, in addition to scheduled 
payments of interest and principal, the prepayment of the Senior Loan 
from free cash flow. The degree to which borrowers prepay Senior Loans, 
whether as a contractual requirement or at their election, may be 
affected by general business conditions, the financial condition of the 
borrower and competitive conditions among loan investors, among others. 
As such, prepayments cannot be predicted with accuracy. Recent market 
conditions, including falling default rates among others, have led to 
increased prepayment frequency and loan renegotiations. These 
renegotiations are often on terms more favorable to borrowers. Upon a 
prepayment, either in part or in full, the actual outstanding debt on 
which the Fund derives interest income will be reduced. However, the 
Fund may receive a prepayment penalty fee assessed against the 
prepaying borrower.
Other Investments
    According to the Registration Statement, in addition to the 
principal investments described above, the Fund may invest in other 
investments, as described below. The Fund may invest in (1) fixed-rate 
or floating-rate income-producing securities (including U.S. government 
debt securities, investment grade and below-investment grade corporate 
debt securities), (2) preferred securities and (3) securities of other 
investment companies registered under the 1940 Act.\15\
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    \15\ The equity securities in which the Fund may invest will be 
limited to securities that trade in markets that are members of the 
Intermarket Surveillance Group (``ISG''), which includes all U.S. 
national securities exchanges and certain foreign exchanges, or are 
parties to a comprehensive surveillance sharing agreement with the 
Exchange.
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    The Fund will not invest in floating rate loans of companies whose 
financial condition is troubled or uncertain and that have defaulted on 
current debt obligations, as measured at the time of investment. 
Although many of the Fund's investments will consist of securities 
rated between the categories of BB and B as rated by S&P, the Fund 
reserves the right to invest in debt securities, including Senior 
Loans, of any credit quality, maturity and duration.
    The Fund may invest in corporate debt securities issued by U.S. and 
non-U.S. companies of all kinds, including those with small, mid and 
large capitalizations. Corporate debt securities are issued by 
businesses to finance their operations. Notes, bonds, debentures and 
commercial paper are the most common types of corporate debt 
securities, with the primary difference being their maturities and 
secured or unsecured status. Commercial paper has the shortest term and 
is usually unsecured. Corporate debt may be rated investment grade \16\ 
or below investment grade and may carry fixed or floating rates of 
interest.
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    \16\ According to the Adviser, ``investment grade'' means 
securities rated in the Baa/BBB categories or above by one or more 
Nationally Recognized Statistical Rating Organizations (``NRSROs''). 
If a security is rated by multiple NRSROs and receives different 
ratings, the Fund will treat the security as being rated in the 
lowest rating category received from an NRSRO. Rating categories may 
include sub-categories or gradations indicating relative standing.
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    The Fund may invest in debt securities issued by non-U.S. companies 
that are traded over-the-counter or listed on an exchange. Non-U.S. 
debt securities in which the Fund may invest include debt securities 
issued or guaranteed by companies organized under the laws of countries 
other than the United States, debt securities issued or guaranteed by 
foreign, national, provincial, state, municipal or other governments 
with taxing authority or by their agencies or instrumentalities and 
debt obligations of supranational governmental entities such as the 
World Bank or European Union. These debt securities may be U.S. dollar-
denominated or non-U.S. dollar-denominated. Non-U.S. debt securities 
also include U.S. dollar-denominated debt obligations, such as ``Yankee 
Dollar'' obligations, of foreign issuers and of supranational 
government entities. Yankee Dollar obligations are U.S. dollar-
denominated obligations issued in the U.S. capital markets by foreign 
corporations, banks and governments. Foreign debt securities also may 
be traded on foreign securities exchanges or in over-the-counter 
capital markets.
    The Fund may invest in U.S. government securities. U.S. government 
securities include U.S. Treasury obligations and securities issued or 
guaranteed by various agencies of the U.S. government, or by various 
instrumentalities which have been established or sponsored by the U.S. 
government. U.S. Treasury obligations are backed by the ``full faith 
and credit'' of the U.S. government. Securities issued or guaranteed by 
federal agencies and U.S. government-sponsored instrumentalities may or 
may not be backed by the full faith and credit of the U.S. government.
    The Fund may invest in short-term debt securities (as described 
herein), money market funds and other cash equivalents, or it may hold 
cash. The percentage of the Fund invested in such holdings may vary and 
depends on several factors, including market conditions.
    Short-term debt securities are defined to include, without 
limitation, the following: (1) U.S. Government securities, including 
bills, notes and bonds differing as to maturity and rates of interest, 
which are either issued or guaranteed by the U.S. Treasury or by U.S. 
Government agencies or instrumentalities; (2) certificates of deposit 
issued against funds deposited in a bank or savings and loan 
association; (3) bankers' acceptances, which are short-term credit 
instruments used to finance commercial transactions; (4) repurchase 
agreements,\17\ which involve purchases of debt securities; (5) bank 
time deposits, which are monies kept on deposit with banks or savings 
and loan associations for a stated period of time at a fixed rate of 
interest; and (6) commercial paper, which is short-term unsecured 
promissory notes, including variable rate master demand notes issued by 
corporations to finance their current operations.
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    \17\ The Fund may invest in repurchase agreements with 
commercial banks, brokers or dealers to generate income from its 
excess cash balances and its securities lending cash collateral. A 
repurchase agreement is an agreement under which the Fund acquires a 
financial instrument (e.g., a security issued by the U.S. government 
or an agency thereof, a banker's acceptance or a certificate of 
deposit) from a seller, subject to resale to the seller at an agreed 
upon price and date (normally, the next business day). A repurchase 
agreement may be considered a loan collateralized by securities. In 
addition, the Fund may enter into reverse repurchase agreements, 
which involve the sale of securities with an agreement to repurchase 
the securities at an agreed upon price, date and interest payment 
and have the characteristics of borrowing. According to the 
Registration Statement, the Fund intends to enter into repurchase 
and reverse repurchase agreements only with financial institutions 
and dealers believed by the Adviser to present minimal credit risks 
in accordance with criteria approved by the Board. The Adviser will 
review and monitor the creditworthiness of such institutions. The 
Adviser will monitor the value of the collateral at the time the 
action is entered into and at all times during the term of the 
agreement.
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    Under normal market conditions, up to 10% of the net assets of the 
Fund may be denominated in currencies other than the U.S. dollar. The 
Fund intends to hedge its non-U.S. dollar holdings. The Fund's currency 
exchange transactions will be conducted on a spot (i.e., cash) basis at 
the spot rate prevailing in the currency exchange market. The cost of 
the Fund's currency exchange transactions will generally be the 
difference between the bid and offer spot rate of the currency being 
purchased or sold. In order to protect against uncertainty in the level 
of future

[[Page 16010]]

currency exchange rates, the Fund is authorized to enter into various 
currency exchange transactions.
    As noted above, the Fund may invest in securities of other 1940 Act 
registered open-end or closed-end investment companies, including 
ETFs,\18\ in the amounts that are permitted by the 1940 Act and the 
applicable Exemptive Order from the Commission granted to the Trust, on 
behalf of the Fund, but not to exceed 20% of the Fund's net assets. To 
the extent that an investment company invests primarily in a specified 
asset class held by the Fund, such an investment in the investment 
company will be deemed to be an investment in the underlying asset 
class for purposes of the Fund's investment limitations. In addition, 
the Fund may invest a portion of its assets in exchange-traded pooled 
investment vehicles (other than investment companies) that invest 
primarily in securities of the types in which the Fund may invest 
directly.
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    \18\ As described in the Registration Statement, an ETF is an 
investment company registered under the 1940 Act that holds a 
portfolio of securities generally designed to track the performance 
of a securities index, including industry, sector, country and 
region indexes. Such ETFs all will be listed and traded in the U.S. 
on registered exchanges. The Fund may invest in the securities of 
ETFs in excess of the limits imposed under the 1940 Act pursuant to 
the Exemptive Order. The ETFs in which the Fund may invest include 
Index Fund Shares and Portfolio Depositary Receipts (as described in 
NASDAQ Rule 5705); and Managed Fund Shares (as described in Nasdaq 
Rule 5735). While the Fund may invest in inverse ETFs, the Fund will 
not invest in leveraged or inverse leveraged (e.g., 2X or 3X) ETFs.
---------------------------------------------------------------------------

    The Fund may receive equity, warrants, corporate bonds and other 
such securities as a result of the restructuring of the debt of an 
issuer, or a reorganization of a senior loan or bond, or acquired 
together with a high yield bond or senior loan(s) of an issuer. Such 
investments will be subject to the Fund's investment objectives, 
restrictions and strategies as described herein.
    Subject to limitations, the Fund may invest in secured loans that 
are not first lien loans or loans that are unsecured. These loans have 
the same characteristics as Senior Loans except that such loans are not 
first in priority of repayment and/or may not be secured by collateral. 
Accordingly, the risks associated with these loans are higher than the 
risks for loans with first priority over the collateral. Because these 
loans are lower in priority and/or unsecured, they are subject to the 
additional risk that the cash flow of the borrower may be insufficient 
to meet scheduled payments after giving effect to the secured 
obligations of the borrower or in the case of a default, recoveries may 
be lower for unsecured loans than for secured loans.\19\
---------------------------------------------------------------------------

    \19\ Secured loans that are not first lien and loans that are 
unsecured generally have greater price volatility than Senior Loans 
and may be less liquid. There is also a possibility that originators 
will not be able to sell participations in these loans, which would 
create greater credit risk exposure for the holders of such loans. 
Secured loans that are not first lien and loans that are unsecured 
share the same risks as other below investment grade instruments.
---------------------------------------------------------------------------

    The Fund will not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry.\20\
---------------------------------------------------------------------------

    \20\ See Form N-1A, 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).
---------------------------------------------------------------------------

    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment), 
including Rule 144A securities, junior subordinated loans and unsecured 
loans deemed illiquid by the Adviser. 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.\21\
---------------------------------------------------------------------------

    \21\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the 1933 Act).
---------------------------------------------------------------------------

    Except for investments in ETFs that may hold non-U.S. issues, the 
Fund will not otherwise invest in non-U.S. equity issues.
    The Fund will not invest in options contracts, futures contracts or 
swap agreements.
    In certain situations or market conditions, the Fund may 
temporarily depart from its normal investment policies and strategies 
provided that the alternative is consistent with the Fund's investment 
objective and is in the best interest of the Fund. For example, the 
Fund may hold a higher than normal proportion of its assets in cash in 
times of extreme market stress.\22\ The Fund may borrow money from a 
bank as permitted by the 1940 Act or other governing statute, by 
applicable rules thereunder, or by Commission or other regulatory 
agency with authority over the Fund, but only for temporary or 
emergency purposes. The use of temporary investments is not a part of a 
principal investment strategy of the Fund.
---------------------------------------------------------------------------

    \22\ See supra note 10.
---------------------------------------------------------------------------

    The Fund will be classified as a ``non-diversified'' investment 
company under the 1940 Act.\23\
---------------------------------------------------------------------------

    \23\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act (15 U.S.C. 80a-5).
---------------------------------------------------------------------------

    The Fund intends to qualify for and to elect treatment as a 
separate regulated investment company (``RIC'') under Subchapter M of 
the Internal Revenue Code.\24\
---------------------------------------------------------------------------

    \24\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.
Criteria To Be Applied to the Fund
    While the Fund, which would be listed pursuant to the criteria 
applicable to actively managed funds under Nasdaq Rule 5735, is not 
eligible for listing under Nasdaq Rule 5705(b) applicable to listing 
and trading of Index Fund Shares based on a securities index, the 
Adviser represents that, under normal market conditions, the Fund would 
generally satisfy the generic fixed income initial listing requirements 
in Nasdaq Rule 5705(b)(4) on a continuous basis measured at the time of 
purchase, as described below.\25\
---------------------------------------------------------------------------

    \25\ Nasdaq Rule 5705(b)(4) sets forth generic listing criteria 
applicable to listing under Rule 19b-4(e) under the Exchange Act of 
Index Fund Shares (``IF Shares'' or ``Index Fund Shares'') based on 
an index or portfolio of ``Fixed Income Securities,'' which are debt 
securities that are notes, bonds, debentures or evidence of 
indebtedness that include, but are not limited to, U.S. Department 
of Treasury securities (``Treasury Securities''), government-
sponsored entity securities (``GSE Securities''), municipal 
securities, trust preferred securities, supranational debt and debt 
of a foreign country or a subdivision thereof. Nasdaq Rule 
5705(b)(4)(A) is as follows: Eligibility Criteria for Index 
Components. Upon the initial listing of a series of Index Fund 
Shares pursuant to Rule 19b-4(e) under the Act, each component of an 
index or portfolio underlying a series of Index Fund Shares shall 
meet the following criteria: (i) The index or portfolio must consist 
of Fixed Income Securities; (ii) Components that in aggregate 
account for at least 75% of the weight of the index or portfolio 
each shall have a minimum original principal amount outstanding of 
$100 million or more; (iii) A component may be a convertible 
security, however, once the convertible security component converts 
to the underlying equity security, the component is removed from the 
index or portfolio; (iv) No component fixed-income security 
(excluding Treasury Securities) will represent more than 30% of the 
weight of the index or portfolio, and the five most heavily weighted 
component fixed-income securities do not in the aggregate account 
for more than 65% of the weight of the index or portfolio; (v) An 
underlying index or portfolio (excluding exempted securities) must 
include a minimum of 13 non-affiliated issuers; and (vi) Component 
securities that in aggregate account for at least 90% of the weight 
of the index or 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 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.

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

[[Page 16011]]

    With respect to the requirement of Nasdaq Rule 5705(b)(4)(A)(i), as 
noted in the Registration Statement, the Fund will invest at least 80% 
of its net assets (plus any borrowings for investment purposes) in 
Senior Loans. The Adviser expects that substantially all of the Fund's 
assets will be invested in Fixed Income Securities or cash/cash-like 
instruments. With respect to the requirement of Nasdaq Rule 
5705(b)(4)(A)(ii), the Adviser expects that substantially all, but at 
least 75% of the Fund's portfolio will be invested in loans that have 
an aggregate outstanding exposure of greater than $100 million. With 
respect to the requirement of Nasdaq Rule 5705(b)(4)(A)(iii), the 
Adviser represents that the Fund will not typically invest in 
convertible securities; however, should the Fund make such investments, 
the Adviser would direct the Fund to divest any converted equity 
security as soon as practicable.
    With respect to the requirement of Nasdaq Rule 5705(b)(4)(A)(iv), 
the Adviser represents that the Fund will not concentrate its 
investments in excess of 30% in any one security (excluding Treasury 
Securities), and will not invest more than 65% of its assets in five or 
fewer securities (excluding Treasury Securities).
    With respect to the requirement of Nasdaq Rule 5705(b)(4)(A)(v), 
the Adviser represents that the Fund will invest in Senior Loans issued 
to at least 13 non-affiliated borrowers.
    With respect to the requirements of Nasdaq Rule 5705(b)(4)(A)(vi), 
the Adviser represents that the Fund may make investments on a 
continuous basis in compliance with such requirement at the time of 
purchase; however, the market for Senior Loans differs in several 
material respects from the market of other fixed income securities 
(e.g., bonds). A significant percentage of the Senior Loan market would 
not meet the criteria set forth in Nasdaq Rule 5705(b)(4)(A)(vi), but 
would be readily tradable in the secondary market. For the 12 month 
period ending August 12, 2012, 53.4% of the borrowers of primary Senior 
Loans (also known as leveraged loans) had total indebtedness of $1 
billion or less and Senior Loans outstanding of $250 million or more. 
(Source: S&P). In order to add to the Fund's diversification and to 
expand the Fund's investment universe, the Fund may invest in Senior 
Loans borrowed by entities that would not meet the criteria set forth 
in Nasdaq Rule 5705(b)(4)(A)(vi) above provided the borrower has at 
least $250 million outstanding in Senior Loans. The Senior Loans 
borrowed by such entities would be well known to participants in the 
Senior Loan markets, would typically attract multiple market makers, 
and would share liquidity and transparency characteristics of senior 
secured debt borrowed by entities meeting the criteria in the generic 
listing criteria of Nasdaq Rule 5705(b)(4)(A).
Description of Senior Loans and the Senior Loan Market
    The Adviser represents that Senior Loans represent debt obligations 
of sub-investment grade corporate borrowers, similar to high yield 
bonds; however, Senior Loans are different from traditional high yield 
bonds in several important respects. First, Senior Loans are typically 
senior to other obligations of the borrower and secured by the assets 
of the borrower. Senior Loans rank at the top of a borrower's capital 
structure in terms of priority of payment, ahead of any subordinated 
debt (high yield) or the borrower's common equity. These loans are also 
secured, as the holders of these loans have a lien on most if not all 
of the corporate borrower's plant, property, equipment, receivables, 
cash balances, licenses, trademarks, etc. Furthermore, the corporate 
borrower of Senior Loans executes a credit agreement that typically 
restricts what it can do (debt incurrence, asset dispositions, etc.) 
without the lenders' approval, and, in addition, often requires the 
borrower to meet certain ongoing financial covenants (EBITDA, leverage 
tests, etc.). Finally, Senior Loans are floating rate obligations which 
typically pay a fixed spread over 3 month LIBOR.
    Institutional investors access the market today primarily through 
commingled funds or separately managed accounts. Individual investors 
have gained exposure to Senior Loans primarily through registered open-
end or closed-end mutual funds and business development companies or 
occasionally through limited partnerships.
    The performance of a Senior Loans portfolio is driven by credit 
selection. Investing in Senior Loans involves detailed credit analysis 
and sound investment judgment culminating in the timely payout of 
interest and ultimate return of principal. Loans are generally 
prepayable at any time, typically without penalty. Loans are typically 
purchased at close to 100 (``par'') and are also typically repaid at 
100; the return to the investor comes from the quarterly interest 
coupons and the return of principal. Underperformance comes from making 
investment misjudgments whereby the corporate borrower fails to repay 
the loan at maturity or otherwise defaults on the obligation.\26\
---------------------------------------------------------------------------

    \26\ Additional capital features inherent to Senior Loans 
include the following: such loans are subject to mandatory and 
discretionary prepayments and can be prepaid in full, often without 
penalty, for a variety of reasons; companies may opt to refinance an 
existing loan at a lower spread or repay the loan with a high yield 
bond issuance; required excess cash flow sweeps; covenants requiring 
loan prepayment from proceeds of asset sales; and quarterly 
amortization.
---------------------------------------------------------------------------

    The Adviser represents that the Senior Loan market, in terms of 
total outstanding loans by dollar volume is approximately equal in size 
to the high yield corporate bond market in the U.S.--between $1.2 
trillion and $1.5 trillion. The market for Senior Loans is almost 
exclusively comprised of non-investment grade corporate borrowers. The 
Loan Syndication and Trading Association (``LSTA''), a trade group 
sponsored by both underwriters of and institutional investors in senior 
bank loans, has been tracking trading volumes and bid-offer spreads for 
the asset class since 2007. For the month ended June 30, 2012--a 
representative period--$30 billion of Senior Loans changed hands 
representing 1,109 individual transactions. (Source: LSTA.) Average 
quarterly Senior Loan trading volume exceeded $100 billion during 2011. 
Quarterly trading volumes fell modestly to $98 billion in the second 
calendar quarter of 2012.\27\
---------------------------------------------------------------------------

    \27\ As of October 2012, 195 open-ended loan funds and open-
ended bond funds were invested in the Senior Loan market as a 
primary or secondary asset class. (Source: Morningstar.) As of 
October 2012, there were approximately $65 billion of assets under 
management in 39 open-ended loan funds and approximately $252 
billion of assets under management in 158 open-ended high yield bond 
funds. Eighty-six of the 158 open-ended high yield bond funds made 
an allocation to Senior Loans, and, among high yield bond funds that 
had an allocation to Senior Loans, such allocation was 4.99% on 
average. (Source: Morningstar Direct.)

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

[[Page 16012]]

    The Fund, as noted above, will primarily invest in the more liquid 
and higher rated segment of the Senior Loan market. The average credit 
rating of the Senior Loans that the Fund typically will hold will be 
rated between the categories of BB and B as rated by S&P. The most 
actively traded loans will generally have a tranche size outstanding 
(or total float of the issue) in excess of $250 million. The borrowers 
of these broadly syndicated bank loans will typically be followed by 
many ``buy-side'' and ``sell-side'' credit analysts who will in turn 
rely on the borrower to provide transparent financial information 
concerning its business performance and operating results. The Adviser 
represents that such borrowers typically provide significant financial 
transparency to the market through the delivery of financial statements 
on at least a quarterly basis as required by the executed credit 
agreements. Additionally, bid and offers in the Senior Loans are 
available throughout the trading day on larger Senior Loans issues with 
multiple dealer quotes available.
    The Adviser represents that the underwriters, or agent banks, which 
distribute, syndicate and trade Senior Loans are among the largest 
global financial institutions, including JPMorgan, Bank of America, 
Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo, Deutsche Bank, 
Barclays, Credit Suisse and others. It is common for multiple firms to 
act as underwriters and market makers for a specific Senior Loan issue. 
For example, two underwriters may co-underwrite and fund a Senior Loan 
that has a $1 billion institutional tranche. One of the underwriters 
acting as syndication agent for the financing, will then draft an 
offering memorandum (similar to a prospectus for an initial public 
offering of equity securities), distribute it to potential investors, 
schedule management meetings with the largest loan investors and 
arrange a bank meeting that includes management presentations along 
with a question and answer session. The investor audience attends in 
person as well as via telephone with both live and recorded conference 
call options. After a two week syndication process where investors can 
complete their due diligence work with access to company management and 
underwriter bankers to answer credit questions, investors' commitments 
are collected by the underwriter. The underwriter will typically 
allocate the loan to 80-120 investors within the following week, with 
the largest position representing 3-5% of the tranche size in a 
successful syndication. The underwriters will both make executable two 
sided markets in the loan with eighth to a quarter point bid/ask 
spreads on sizes in the $2 million to $20 million range, depending on 
the issue. Other banks also have Senior Loan trading desks that make 
secondary bid/ask markets in the loans after they are allocated. Senior 
Loan investors can also obtain information on Senior Loans and their 
borrowers from numerous public sources, including Bloomberg, FactSet, 
public financial statement filings (Forms 10-K and 10-Q), and sell side 
research analysts.
    The Adviser represents that the segment of the Senior Loan market 
that the Fund will focus on is highly liquid. Senior Loans of $250 
million or more in issuance are typically quite liquid and will have 
multiple market makers and typically 75 or more institutional holders. 
The standard bid/offer spreads for such loans are \1/4\ to \1/2\ point, 
although the largest firms can transact on a 1/8th point market across 
dealers for Senior Loans of $250 million or more outstanding.\28\
---------------------------------------------------------------------------

    \28\ The Exchange notes that the PowerShares Senior Loan 
Portfolio (Symbol: BKLN), is an index-based ETF listed on NYSE Arca 
since March 5, 2011 under NYSE Arca Equities Rule 5.2(j)(3). The 
underlying index for BKLN is the S&P/LSTA U.S. Leveraged Loan 100 
Index, the Fund's Primary Index. As of November 20, 2012, BKLN had 
assets under management of approximately $1.28 billion. Since 
inception, BKLN's average daily trading volume has been 545,065 
shares, with an average premium/discount to NAV of 0.43%.
---------------------------------------------------------------------------

    The Adviser represents that, while Senior Loans are not reported 
through TRACE,\29\ there is significant transparency with dealers 
updating investors on trades and trading activity throughout the day. 
Dealers update their ``trading runs'' of Senior Loans throughout the 
day and distribute these via electronic messaging to the institutional 
investor community. The Adviser represents further that, upon 
commencement of trading in the Fund, the Adviser would ensure that all 
``Authorized Participants'' (as described below) for the Fund were 
added to these intraday market maker Senior Loan ``trading runs.''
---------------------------------------------------------------------------

    \29\ TRACE (Trade Reporting and Compliance Engine), is a vehicle 
developed by the Financial Industry Regulatory Authority (``FINRA'') 
that facilitates the mandatory over-the-counter secondary market 
transactions in eligible fixed income securities.
---------------------------------------------------------------------------

Description of the S&P/LSTA U.S. Leveraged Loan 100 Index \30\
---------------------------------------------------------------------------

    \30\ The description herein of the Primary Index is based on 
information in ``S&P LSTA U.S. Leveraged Loan 100 Index Methodology, 
August 2011'' (``Primary Index Description''). S&P is not a broker-
dealer or affiliated with a broker-dealer and has implemented 
procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Primary Index.
---------------------------------------------------------------------------

    The Primary Index is a market value-weighted index designed to 
measure the performance of the largest segment of the U.S. syndicated 
leveraged loan market. The Primary Index consists of 100 loan 
facilities drawn from a larger benchmark--the S&P/LSTA Leveraged Loan 
Index (``LLI''), which covers more than 900 facilities and, as of June 
30, 2011, had a market value of more than US$ 490 billion. As of June 
30, 2011, the Primary Index had a total market value of US$ 183.4 
billion.
    The Primary Index is designed to reflect the largest facilities in 
the leveraged loan market. It mirrors the market-weighted performance 
of the largest institutional leveraged loans based upon market 
weightings, spreads and interest payments.
    The Primary Index is rules based, although the S&P/LSTA U.S. 
Leveraged Loan 100 Index Committee (the ``Index Committee,'' described 
below) reserves the right to exercise discretion when necessary.
    The Primary Index is rebalanced semi-annually to avoid excessive 
turnover, but reviewed weekly to reflect pay-downs and ensure that the 
Primary Index portfolio maintains 100 loan facilities. The constituents 
of the Primary Index (the ``Index Loans'') are drawn from a universe of 
syndicated leveraged loans representing over 90% of the leveraged loan 
market.
    All syndicated leveraged loans covered by the LLI universe are 
eligible for inclusion in the Primary Index. Term loans from syndicated 
credits must meet the following criteria at issuance in order to be 
eligible for inclusion in the LLI:

--Senior secured
--Minimum initial term of one year
--Minimum initial spread of LIBOR + 125 basis points
--US dollar denominated

    All Primary Index loans must have a publicly assigned CUSIP.
    According to the Primary Index Description, the Primary Index is 
designed to include the largest loan facilities from the LLI universe. 
Par outstanding is a key criterion for loan selection. Loan facilities 
are included if they are among the largest first lien facilities from 
the Primary Index in

[[Page 16013]]

terms of par amount outstanding. There is no minimum size requirement 
on individual facilities in the Primary Index, but the LLI universe 
minimum is US$ 50 million. Only the 100 largest first lien facilities 
from the LLI that meet all eligibility requirements are considered for 
inclusion. The Primary Index covers all borrowers regardless of origin; 
however, all facilities must be denominated in U.S. dollars.
    A Primary Index addition is generally made only if a vacancy is 
created by a Primary Index deletion. Primary Index additions are 
reviewed on a weekly basis and are made according to par outstanding 
and overall liquidity. Liquidity is determined by the par outstanding 
and number of market bids available. Facilities are retired when they 
are no longer priced by ``LSTA/LPC Mark-to-Market Pricing'' or when the 
facility is repaid.\31\
---------------------------------------------------------------------------

    \31\ LSTA/LPC Mark-to-Market Pricing is used to price each loan 
in the index. LSTA/LPC Mark-to-Market Pricing is based on bid/ask 
quotes gathered from dealers and is not based upon derived pricing 
models. The Primary Index uses the average bid for its market value 
calculation.
---------------------------------------------------------------------------

    Each loan facility's total return is calculated by aggregating the 
interest return, reflecting the return due to interest paid and accrued 
interest, and price return, reflecting the gains or losses due to 
changes in end-of-day prices and principal prepayments.
    The Primary Index is maintained in accordance with the following 
rules:

--The Primary Index is reviewed each week to ensure that it includes 
100 Index Loans.
--A complete review and rebalancing of all Primary Index constituents 
is completed on a semi-annual basis coinciding with the last weekly 
rebalance in June and in December.
--Eligible loan facilities approved by the Primary Index Committee are 
added to the Primary Index during the semi-annual rebalancing. Eligible 
loan facilities are added to the Primary Index at the weekly review 
only if other facilities are repaid or otherwise drop out of the 
Primary Index, in order to maintain 100 Index Loans.
--Any loan facility that fails to meet any of the eligibility criteria 
or that has a term to maturity less than or equal to 12 months plus 1 
calendar day, as of the weekly rebalancing date, will not be included 
in the Primary Index.
--Par amounts of Primary Index loans will be adjusted on the weekly 
rebalancing date to reflect any changes that have occurred since the 
previous rebalancing date, due, for example, to partial pre-payments 
and pay-downs.\32\
---------------------------------------------------------------------------

    \32\ The Adviser represents that loan prepayments in 2011 were 
40% of the LLI and LTM September 30, 2012 are 28% (Source: LCD 
Quarterly Review, Third Quarter 2012). As a result of prepayments, 
the weighted average life of a loan is typically 2-3 years versus 
average maturity of 5-7 years. Existing investors in the Senior Loan 
may decline to participate in a loan refinancing that occurs at a 
lower spread in which case the loan would be repaid.
---------------------------------------------------------------------------

--Constituent facilities are capped at 2% of the Primary Index and 
drawn- down at the weekly rebalancing. When a loan facility exceeds the 
2% cap, the weight is reduced to 1.90% and the proceeds are invested in 
the other Primary Index components on a relative-weight basis.

    The Primary Index is normally reviewed and rebalanced on a weekly 
basis to maintain 100 constituents. The Primary Index Committee (as 
described below), nevertheless, reserves the right to make adjustments 
to the Primary Index at any time that it believes appropriate.
    Weekly Primary Index rebalancing maintenance (additions, deletions, 
pay-downs, and other changes to the Primary Index) is based on data as 
of Friday (or the last business day of the week in the case of 
holidays) and is announced the following Wednesday (or Tuesday in the 
case of a holiday) for implementation on the following Friday. Publicly 
available information, up to and including each Wednesday's close, is 
considered in each weekly rebalancing.
    Primary Index changes published in the announcement generally are 
not subject to revision and will become effective on the date listed in 
the announcement.
The Primary Index Committee
    The Primary Index Committee maintains the Primary Index.\33\ The 
Primary Index Committee is comprised of employees of S&P. The Primary 
Index Committee is chaired by the Managing Director and Primary Index 
Committee Chairman at S&P.
---------------------------------------------------------------------------

    \33\ The Primary Index Committee has implemented procedures 
designed to prevent the use and dissemination of material, non-
public information regarding the Primary Index.
---------------------------------------------------------------------------

    Meetings are held annually and, from time to time, as needed. It is 
the sole responsibility of the Primary Index Committee to decide on all 
matters relating to methodology, maintenance, constituent selection and 
index procedures. The Primary Index Committee makes decisions based on 
all available information and Primary Index Committee discussions are 
kept confidential to avoid any unnecessary impact on market trading.
Markit iBoxx USD Liquid Leveraged Loan Index \34\
---------------------------------------------------------------------------

    \34\ The description herein of the Secondary Index is based on 
``Markit iBoxx USD Liquid Leveraged Loan Index--Index Guide,'' 
September 2011 (``Secondary Index Description'').
---------------------------------------------------------------------------

    According to the Secondary Index Description, the Markit iBoxx USD 
Liquid Leveraged Loan Index is a subset of the benchmark Markit iBoxx 
USD Leveraged Loan Index (USD LLI). The Secondary Index limits the 
number of constituent loans by selecting larger and more liquid loans 
from the wider USD LLI index universe as determined by the Liquidity 
Ranking Procedure, described below. The procedure utilizes daily 
liquidity scores from the Markit Loan Pricing Service, which is a 
broader measure of liquidity, summarizing the performance of each loan 
across several liquidity metrics, such as number of quotes, or bid-
offer sizes.\35\
---------------------------------------------------------------------------

    \35\ Markit is not a broker-dealer or affiliated with a broker-
dealer and has implemented procedures designed to prevent the use 
and dissemination of material, non-public information regarding the 
Secondary Index.
---------------------------------------------------------------------------

    The selection process for the Secondary Index will be used on the 
index inception date and at every monthly rebalancing (``Secondary 
Index Selection Date''). The selection process will involve the 
identification of the eligible universe using the eligibility criteria 
set out below. If the size of the eligible universe is greater than the 
target number of loans, the Liquidity Ranking Procedure will be used to 
determine the final index constituents. Once the index members are 
selected, they are automatically carried forward to the following 
month's selection, unless they no longer satisfy the eligibility 
criteria or enter a prolonged period of relative illiquidity. The 
Secondary Index eligibility criteria and the liquidity ranking 
procedure are described in further detail below.
    The following six selection criteria are used to derive the 
eligible universe from the MarkitWSO USD- denominated loan universe: 
Loan type; minimum size; liquidity/depth of market; spread; credit 
rating; and minimum time to maturity.\36\
---------------------------------------------------------------------------

    \36\ MarkitWSO is a corporate loan data base that Markit 
maintains using information provided by agent banks on each 
constituent Senior Loan in its data base of approximately 4,300 
Senior Loans.
---------------------------------------------------------------------------

    Only USD-denominated loans are eligible for the Secondary Index.
    Eligible loan types are fully funded term loans (fixed and floating 
rate) and defaulted loans. Ineligible loan types are 364-day facility; 
delayed term loans; deposit-funded tranche; letters of credit; 
mezzanine; PIK Toggle; PIK; pre-funded

[[Page 16014]]

acquisition; revolving credit; strips; synthetic lease; and unfunded 
loans.
    A minimum facility size of $500 million USD nominal is required to 
be eligible for the Secondary Index. A constituent is removed at the 
next rebalancing if its nominal outstanding falls below $500 million 
USD.
    According to the Secondary Index Description, liquidity and depth 
of the market can be measured by the number of prices available for a 
particular loan and the length of time prices have been provided by the 
minimum required number of price contributors. The liquidity check is 
based on the 3-month period prior to the rebalancing cut-off date 
(liquidity test period). Only loans with a minimum liquidity/depth of 2 
for at least 50% of trading days of the liquidity test period are 
eligible. Loans issued less than 3 months prior to the rebalancing cut-
off date require a minimum liquidity/depth of 3 for at least 50% of 
trading days in the period from the issue date to the rebalancing cut-
off date.
    Only sub-investment grade loans are eligible for the Secondary 
Index. Each rated loan is assigned a composite index rating based on 
the ratings from Moody's and S&P's. If more than one agency publishes a 
rating for a loan, the average of the ratings determines the composite 
rating. The average rating is calculated as the numerical average of 
the ratings provided. To calculate the average, each rating assigned an 
integer number as follows: AAA/Aaa is assigned a 1, AA+/Aa1 a 2 etc. 
The resulting average is rounded to the nearest integer with .5 rounded 
up. Loans designated as ``Not Rated'' by both Moody's and S&P must have 
a minimum current spread of 125 basis points over LIBOR to be eligible 
for the Secondary Index. Loans designated as ``Not Rated'' are not 
assigned an index rating. Defaulted loans are eligible for the 
Secondary Index provided they meet all other criteria.\37\
---------------------------------------------------------------------------

    \37\ While the Secondary Index can include defaulting Senior 
Loans, the Adviser does not intend to invest in such loans.
---------------------------------------------------------------------------

    The initial time to maturity is measured from the loan's issue date 
to its maturity date. A minimum initial time to maturity of one year is 
required for potential constituents. The minimum time to maturity 
threshold reduces the Secondary Index turnover and transaction costs 
associated with short-dated loans. Existing constituents with time to 
maturities of less than 1 year remain in the Secondary Index until 
maturity provided they meet all other eligibility criteria.

    In order to determine the final Secondary Index constituents, the 
loans in the eligible universe are ranked according to their liquidity 
scores, as provided by the Markit Loan Pricing Service. Each loan in 
the MarkitWSO database \38\ is assigned a daily score based on the 
loan's performance on the following liquidity metrics:
---------------------------------------------------------------------------

    \38\ See supra note 36.

--Sources Quote: The number of dealers sending out runs.
--Frequency of Quotes: total number of dealer runs.
--Number of Sources with Size: The number of dealer runs with 
associated size.
--Bid-offer spreads: The average bid-offer spread in dealer runs.
--Average quote size: The average size parsed from quotes.
--Movers Count: The end of day composite contributions which have moved 
on that day.

    Each loan carries a score ranging from 1 to 5 in ascending order of 
liquidity, depending on the daily values for the above components. A 
loan with a score of 1 will have the best performance in each of the 
categories above. In the liquidity ranking procedure described below, 
average liquidity scores are calculated for each loan, over a calendar 
one or three month period immediately preceding each rebalancing date.
    On the Secondary Index inception day, the target number of loans 
will be 100. Loans will be removed from the Secondary Index if they are 
no longer present in the current eligible universe or are not ranked 
within the first 125 places in terms of 3 month average liquidity 
score. On every subsequent rebalancing, the number of new loans to be 
selected will be equal to the number of loans which will be removed 
from the Secondary Index.
    According to the Secondary Index Description, the parameters used 
in the selection process, including the target number of loans and the 
eligibility criteria, are subject to an annual review process to ensure 
that the Secondary Index continues to reflect the underlying loans 
market. The results of the analysis are submitted to the oversight 
committee for the Markit iBoxx USD Leveraged Loan Indices (``Oversight 
Committee'').\39\ The review will consist of a qualitative and 
quantitative assessment of any developments in the loans market in 
terms of market size, depth and overall liquidity conditions of the 
market together with a recommendation whether current index rules 
should be modified. Factors that will be considered in the assessment 
will include: size of the market; new issuance patterns and trends; 
outstanding number of loans and borrowers; and liquidity conditions.
---------------------------------------------------------------------------

    \39\ The Oversight Committee has implemented procedures designed 
to prevent the use and dissemination of material, non-public 
information regarding the Secondary Index.
---------------------------------------------------------------------------

    All Markit iBoxx USD Leveraged Loan Indices are calculated at the 
end of each business day and re-balanced at the end of each month.
    The Markit iBoxx USD Leveraged Loans Indices are calculated on the 
basis of end-of-day prices provided by Markit Loan Pricing services on 
each recommended Securities Industry and Financial Markets Association 
(``SIFMA'') U.S. trading day.
    On each pricing day, end-of-day bid, mid and ask price quotes for 
the applicable loans are received from Markit Loan Pricing. Prices for 
all loans are taken at 4:15 p.m. Eastern time (``E.T.''). Secondary 
Index data is published and distributed on the next day by 8:00 a.m. 
E.T. and is available on the Markit index Web site, http://indices.markit.com, and through Bloomberg and Reuters.
    Markit will provide bid, mid and ask prices for all eligible loans 
at the end of each index calculation day. Reference loan data will be 
provided by Markit, which represents up-to-date reference and 
transactional information on over 1,000 leveraged loans.
The Shares
    The Fund will issue and redeem Shares only in Creation Units at the 
NAV next determined after receipt of an order on a continuous basis 
every day except weekends and specified holidays. The NAV of the Fund 
will be determined once each business day, normally as of the close of 
trading of the New York Stock Exchange (``NYSE''), generally, 4:00 p.m. 
E.T. Creation Unit sizes will be 50,000 Shares per Creation Unit. The 
Trust will issue and sell Shares of the Fund only in Creation Units on 
a continuous basis through the Distributor, without a sales load (but 
subject to transaction fees), at their NAV per Share next determined 
after receipt of an order, on any business day, in proper form pursuant 
to the terms of the Authorized Participant agreement (as referred to 
below).
    The consideration for purchase of a Creation Unit of the Fund 
generally will consist of either (i) the in-kind deposit of a 
designated portfolio of securities (primarily Senior Loans) (the 
``Deposit Securities'') per each Creation Unit and the Cash Component 
(defined below), computed as described below or (ii) the cash value of 
the Deposit Securities

[[Page 16015]]

(``Deposit Cash'') and the ``Cash Component,'' computed as described 
below. The primary method of creation and redemption transactions will 
be in cash. In-kind creation and redemption transactions will be 
available only if requested by an Authorized Participant and approved 
by the Trust.
    When accepting purchases of Creation Units for cash, the Fund may 
incur additional costs associated with the acquisition of Deposit 
Securities that would otherwise be provided by an in-kind purchaser. 
Together, the Deposit Securities or Deposit Cash, as applicable, and 
the Cash Component will constitute the ``Fund Deposit,'' which 
represents the minimum initial and subsequent investment amount for a 
Creation Unit of the Fund. The ``Cash Component'' will be an amount 
equal to the difference between the NAV of the Shares (per Creation 
Unit) and the market value of the Deposit Securities or Deposit Cash, 
as applicable. If the Cash Component is a positive number (i.e., the 
NAV per Creation Unit exceeds the market value of the Deposit 
Securities or Deposit Cash, as applicable), the Cash Component will be 
such positive amount. If the Cash Component is a negative number (i.e., 
the NAV per Creation Unit is less than the market value of the Deposit 
Securities or Deposit Cash, as applicable), the Cash Component will be 
such negative amount and the creator will be entitled to receive cash 
in an amount equal to the Cash Component. The Cash Component will serve 
the function of compensating for any differences between the NAV per 
Creation Unit and the market value of the Deposit Securities or Deposit 
Cash, as applicable.
    According to the Registration Statement, to be eligible to place 
orders with respect to creations and redemptions of Creation Units, an 
entity must be (i) a ``Participating Party,'' i.e., a broker-dealer or 
other participant in the clearing process through the Continuous Net 
Settlement System of the National Securities Clearing Corporation 
(``NSCC''); or (ii) a Depository Trust Company (``DTC'') participant. 
In addition, each Participating Party or DTC Participant (each, an 
``Authorized Participant'') must execute an agreement that has been 
agreed to by the Principal Underwriter and the Transfer Agent, and that 
has been accepted by the Trust, with respect to purchases and 
redemptions of Creation Units.
    The Custodian, through the NSCC, will make available on each 
business day, immediately prior to the opening of business on the 
Exchange's Regular Market Session (currently 9:30 a.m., E.T), the list 
of the names and the required number of shares of each Deposit Security 
or the required amount of Deposit Cash, as applicable, to be included 
in the current Fund Deposit (based on information at the end of the 
previous business day) for the Fund. Such Fund Deposit is subject to 
any applicable adjustments as described below, in order to effect 
purchases of Creation Units of the Fund until such time as the next-
announced composition of the Deposit Securities or the required amount 
of Deposit Cash, as applicable, is made available.
    Shares may be redeemed only in Creation Units at their NAV next 
determined after receipt of a redemption request in proper form by the 
Fund through the Transfer Agent and only on a business day.
    With respect to the Fund, the Custodian, through the NSCC, will 
make available immediately prior to the opening of business on the 
Exchange (9:30 a.m. E.T.) on each business day, the list of the names 
and share quantities of the Fund's portfolio securities (``Fund 
Securities'') or the required amount of Deposit Cash that will be 
applicable (subject to possible amendment or correction) to redemption 
requests received in proper form (as defined below) on that day. Fund 
Securities received on redemption may not be identical to Deposit 
Securities.
    Redemption proceeds for a Creation Unit will be paid either in-kind 
or in cash or a combination thereof, as determined by the Trust. With 
respect to in-kind redemptions of the Fund, redemption proceeds for a 
Creation Unit will consist of Fund Securities as announced by the 
Custodian on the business day of the request for redemption received in 
proper form plus cash in an amount equal to the difference between the 
NAV of the Shares being redeemed, as next determined after a receipt of 
a request in proper form, and the value of the Fund Securities (the 
``Cash Redemption Amount''), less a fixed redemption transaction fee 
and any applicable additional variable charge as set forth in the 
Registration Statement. In the event that the Fund Securities have a 
value greater than the NAV of the Shares, a compensating cash payment 
equal to the differential will be required to be made by or through an 
Authorized Participant by the redeeming shareholder. Notwithstanding 
the foregoing, at the Trust's discretion, an Authorized Participant may 
receive the corresponding cash value of the securities in lieu of the 
in-kind securities value representing one or more Fund Securities.
    The creation/redemption order cut-off time for the Fund is expected 
to be 4:00 p.m. E.T. for purchases of Shares. On days when the Exchange 
closes earlier than normal, the Fund may require orders for Creation 
Units to be placed earlier in the day.
Net Asset Value
    The NAV per Share for the Fund will be computed by dividing the 
value of the net assets of the Fund (i.e., the value of its total 
assets less total liabilities) by the total number of Shares 
outstanding, rounded to the nearest cent. Expenses and fees, including 
the management fees, are accrued daily and taken into account for 
purposes of determining NAV.\40\ The NAV of the Fund will be calculated 
by the Custodian and determined at the close of the regular trading 
session on the NYSE (ordinarily 4:00 p.m., E.T.) on each day that such 
exchange is open, provided that fixed-income assets (and, accordingly, 
the Fund's NAV) may be valued as of the announced closing time for 
trading in fixed-income instruments on any day that SIFMA (or the 
applicable exchange or market on which the Fund's investments are 
traded) announces an early closing time. Creation/redemption order cut-
off times may also be earlier on such days.
---------------------------------------------------------------------------

    \40\ Markit will be the primary price source for Senior Loans in 
calculating the Fund's NAV. To the extent ``Other Investments'' are 
held, International Data Corporation (``IDC'') will be the primary 
price source for such investments.
---------------------------------------------------------------------------

    In calculating the Fund's NAV per Share, investments will generally 
be valued by using market valuations. A market valuation generally 
means a valuation (i) obtained from an exchange, a pricing service, or 
a major market maker (or dealer) or (ii) based on a price quotation or 
other equivalent indication of value supplied by an exchange, a pricing 
service, or a major market maker (or dealer). The Adviser may use 
various pricing services, or discontinue the use of any pricing 
service, as approved by the Trust's Board from time to time. A price 
obtained from a pricing service based on such pricing service's 
valuation matrix may be considered a market valuation. Any assets or 
liabilities denominated in currencies other than the U.S. dollar will 
be converted into U.S. dollars at the current market rates on the date 
of valuation as quoted by one or more sources.
    In the event that current market valuations are not readily 
available or such valuations do not reflect current market value, the 
Trust's procedures

[[Page 16016]]

require the Adviser's Pricing Committee to determine a security's fair 
value if a market price is not readily available.\41\ In determining 
such value the Adviser's Pricing Committee may consider, among other 
things, (i) price comparisons among multiple sources, (ii) a review of 
corporate actions and news events, and (iii) a review of relevant 
financial indicators (e.g., movement in interest rates, market indices, 
and prices from the Fund's index providers). In these cases, the Fund's 
NAV may reflect certain portfolio securities' fair values rather than 
their market prices. Fair value pricing involves subjective judgments 
and it is possible that the fair value determination for a security is 
materially different than the value that could be realized upon the 
sale of the security.
---------------------------------------------------------------------------

    \41\ The Valuation Committee of the Trust's Board of Trustees is 
responsible for the oversight of the pricing procedures of the Fund 
and the valuation of the Fund's portfolio. The Valuation Committee 
has delegated day-to-day pricing responsibilities to the Adviser's 
Pricing Committee, which is composed of officers of the Adviser. The 
Pricing Committee is responsible for the valuation and revaluation 
of any portfolio investments for which market quotations or prices 
are not readily available. The Fund has implemented procedures 
designed to prevent the use and dissemination of material, non-
public information regarding valuation and revaluation of any 
portfolio investments.
---------------------------------------------------------------------------

Availability of Information
    The Distributor's Web site (www.ftportfolios.com), which will be 
publicly available prior to the public offering of Shares, will include 
a form of the prospectus for the Fund that may be downloaded. The Web 
site will include additional quantitative information updated on a 
daily basis, including, for the Fund: (1) The prior business day's 
reported NAV, mid-point of the bid/ask spread at the time of 
calculation of such NAV (the ``Bid/Ask Price''),\42\ and a calculation 
of the premium and discount of the Bid/Ask Price against the NAV; and 
(2) data in chart format displaying the frequency distribution of 
discounts and premiums of the daily Bid/Ask Price against the NAV, 
within appropriate ranges, for each of the four previous calendar 
quarters. On each business day, before commencement of trading in 
Shares in the Regular Market Session \43\ on the Exchange, the Fund 
will disclose on the Distributor's Web site the identities and 
quantities of the portfolio of securities and other assets (the 
``Disclosed Portfolio'') (as defined in Nasdaq Rule 5735(c)(2)) held by 
the Fund that will form the basis for the Fund's calculation of NAV at 
the end of the business day.\44\ On a daily basis, the Disclosed 
Portfolio will include each portfolio security, including Senior Loans, 
and other financial instruments of the Fund with the following 
information on the Fund's Web site: ticker symbol (if applicable), name 
of security and financial instrument, number of shares (if applicable) 
and dollar value of securities (including Senior Loans) and financial 
instruments held in the Fund, and percentage weighting of the security 
and financial instrument in the Fund. The Web site information will be 
publicly available at no charge.
---------------------------------------------------------------------------

    \42\ The Bid/Ask Price of the Fund will be determined using the 
midpoint of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of the Fund's NAV. The records relating 
to Bid/Ask Prices will be retained by the Fund and its service 
providers.
    \43\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 7 a.m. to 9:30 
a.m. E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or 
4:15 p.m. E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 p.m. 
to 8 p.m. E.T.).
    \44\ Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). 
Notwithstanding the foregoing, portfolio trades that are executed 
prior to the opening of the Exchange on any business day may be 
booked and reflected in NAV on such business day. Accordingly, the 
Fund will be able to disclose at the beginning of the business day 
the portfolio that will form the basis for the NAV calculation at 
the end of the business day.
---------------------------------------------------------------------------

    In addition, for the Fund, an estimated value, defined in Rule 
5735(c)(3) as the ``Intraday Indicative Value,'' that reflects an 
estimated intraday value of the Fund's portfolio, will be disseminated. 
Moreover, the Intraday Indicative Value, available on the NASDAQ OMX 
Information LLC proprietary index data service, will be based upon the 
current value for the components of the Disclosed Portfolio and will be 
updated and widely disseminated by one or more major market data 
vendors and broadly displayed at least every 15 seconds during the 
Regular Market Session. In addition, during hours when the markets for 
local debt in the Fund's portfolio are closed, the Intraday Indicative 
Value will be updated at least every 15 seconds during the Regular 
Market Session to reflect currency exchange fluctuations. The Intraday 
Indicative Value will be based on quotes and closing prices from the 
securities' 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. This 
should not be viewed as a ``real-time'' update of the NAV per Share of 
the Fund, which is calculated only once a day.
    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of the Fund on a daily basis and to provide a 
close estimate of that value throughout the trading day.
    Intra-day, executable price quotations of the Senior Loans, fixed 
income securities and other assets held by the Fund will be available 
from major broker-dealer firms or on the exchange on which they are 
traded, if applicable. Intra-day price information is available through 
subscription services, such as Bloomberg, Markit and Thomson Reuters, 
which can be accessed by Authorized Participants and other investors.
    In addition, a basket composition file, which includes the security 
names, amount 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 NSCC. The basket represents one Creation 
Unit of the Fund.
    The Primary Index description and Secondary Index description are 
publicly available. Primary and Secondary Index information, including 
values, components, and weightings, is updated and provided daily on a 
subscription basis by S&P and Markit. Complete methodologies for the 
Primary and Secondary Index are made available on the Web sites of S&P 
and Markit, respectively.
    Investors can also obtain the Trust's Statement of Additional 
Information (``SAI''), the Fund's Shareholder Reports, and its Form N-
CSR and Form N-SAR, filed twice a year. The Trust's SAI and Shareholder 
Reports are available free upon request from the Trust, and those 
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or 
downloaded from the Commission's Web site at www.sec.gov. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last sale information for the 
Shares will be available via Nasdaq proprietary quote and trade 
services.
    Additional information regarding the Trust and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, Fund holdings disclosure policies, distributions and 
taxes is included in

[[Page 16017]]

the Registration Statement. All terms relating to the Fund that are 
referred to, but not defined in, this proposed rule change are defined 
in the Registration Statement.
Initial and Continued Listing
    The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and/or continued 
listing, the Fund must be in compliance with Rule 10A-3 \45\ under the 
Act. A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange. 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.
---------------------------------------------------------------------------

    \45\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    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. Nasdaq will halt trading in the 
Shares under the conditions specified in Nasdaq Rules 4120 and 4121; 
for example, the Shares of the Fund will be halted if the ``circuit 
breaker'' parameters in Nasdaq Rule 4120(a)(11) are reached. Trading 
may be halted because of market conditions or for reasons that, in the 
view of the Exchange, make trading in the Shares inadvisable. These may 
include: (1) The extent to which trading is not occurring in the 
securities and/or the financial instruments comprising 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. Trading in the Shares also will be subject to Rule 
5735(d)(2)(D), which sets forth circumstances under which Shares of the 
Fund may be halted.
Trading Rules
    Nasdaq deems the Shares to be equity securities, thus rendering 
trading in the Shares subject to Nasdaq's existing rules governing the 
trading of equity securities. Nasdaq will allow trading in the Shares 
from 7:00 a.m. until 8:00 p.m. E.T. The Exchange has appropriate rules 
to facilitate transactions in the Shares during all trading sessions. 
As provided in Nasdaq Rule 5735(b)(3), the minimum price variation for 
quoting and entry of orders in Managed Fund Shares traded on the 
Exchange is $0.01.
Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by FINRA on behalf 
of the Exchange, which are designed to detect violations of Exchange 
rules and applicable federal securities laws.\46\ 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.
---------------------------------------------------------------------------

    \46\ 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.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations. FINRA, on 
behalf of the Exchange, will communicate as needed regarding trading in 
the Shares with other markets that are members of the ISG or with which 
the Exchange has in place a comprehensive surveillance sharing 
agreement.\47\
---------------------------------------------------------------------------

    \47\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Circular
    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: (1) The procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Nasdaq Rule 2310, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (3) how information regarding 
the Intraday Indicative Value is disseminated; (4) the risks involved 
in trading the Shares during the Pre-Market and Post-Market Sessions 
when an updated Intraday Indicative Value will not be calculated or 
publicly disseminated; (5) the requirement that members deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (6) trading 
information.
    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Fund. Members purchasing Shares from the Fund for 
resale to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Fund and the applicable NAV calculation time 
for the Shares. The Information Circular will disclose that information 
about the Shares of the Fund will be publicly available on the 
Distributor's Web site.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Act\48\ in general and Section 6(b)(5) of the Act\49\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f.
    \49\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Nasdaq Rule 5735. The 
Exchange has in place surveillance procedures that are adequate to 
properly monitor trading in the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws. The equity securities in which the Fund may invest 
will be limited to securities that trade in markets that are members of 
the ISG, which includes all U.S. national securities exchanges and 
certain foreign exchanges, or are parties to a

[[Page 16018]]

comprehensive surveillance sharing agreement with the Exchange. The 
Exchange may obtain information via ISG from other exchanges that are 
members of ISG or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement. In pursuing its 
investment objective, the Fund seeks to outperform the Primary and 
Secondary Indices by normally investing at least 80% of its net assets 
(plus any borrowings for investment purposes) in Senior Loans. It is 
anticipated that the Fund, in accordance with its principal investment 
strategy, will invest 50% to 75% of its net assets in Senior Loans that 
are eligible for inclusion and meet the liquidity thresholds of the 
Primary and/or the Secondary Indices. Each of the Fund's Senior Loan 
investments will have no less than $250 million USD par outstanding. 
The Fund will not invest 25% or more of the value of its total assets 
in securities of borrowers in any one industry.\50\ The Fund may hold 
up to an aggregate amount of 15% of its net assets in illiquid 
securities (calculated at the time of investment), including Rule 144A 
securities, junior subordinated loans and unsecured loans deemed 
illiquid by the Adviser. The Fund may also invest in (1) fixed-rate or 
floating-rate income-producing securities (including, without 
limitation, U.S. government debt securities, investment grade and 
below-investment grade corporate debt securities), (2) preferred 
securities, and (3) securities of other investment companies registered 
under the 1940 Act.\51\ The Adviser is affiliated with a broker-dealer 
and has implemented a ``fire wall'' with respect to such broker-dealer 
regarding access to information concerning the composition and/or 
changes to the Fund's portfolio. In addition, paragraph (g) of Nasdaq 
Rule 5735 further requires that personnel who make decisions on the 
open-end fund's portfolio composition must be subject to procedures 
designed to prevent the use and dissemination of material, non-public 
information regarding the open-end fund's portfolio. The Fund's 
investments will be consistent with the Fund's investment objectives 
and will not be used to enhance leverage. The Fund will not invest in 
options contracts, futures contracts or swap agreements. The Adviser 
represents that, under normal market conditions, the Fund would 
generally satisfy the generic fixed income listing requirements in 
Nasdaq Rule 5705(b)(4) on a continuous basis measured at the time of 
purchase, as described above. Except for Underlying ETFs that may hold 
non-U.S. issues, the Fund will not otherwise invest in non-U.S. equity 
issues. The Primary Index Committee has implemented procedures designed 
to prevent the use and dissemination of material, non-public 
information regarding the Primary Index. The Oversight Committee has 
implemented procedures designed to prevent the use and dissemination of 
material, non-public information regarding the Secondary Index.
---------------------------------------------------------------------------

    \50\ See supra note 20.
    \51\ The equity securities in which the Fund may invest will be 
limited to securities that trade in markets that are members of the 
ISG, which includes all U.S. national securities exchanges and 
certain foreign exchanges, or are parties to a comprehensive 
surveillance sharing agreement with the Exchange.
---------------------------------------------------------------------------

    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that 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. In addition, a large amount of 
information is publicly available regarding the Fund and the Shares, 
thereby promoting market transparency. S&P and Markit are not broker-
dealers or affiliated with a broker-dealer and each has implemented 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the Primary Index and Secondary Index, 
respectively.
    The Intraday Indicative Value, available on the NASDAQ OMX 
Information LLC proprietary index data service will be widely 
disseminated by one or more major market data vendors and broadly 
displayed at least every 15 seconds during the Regular Market Session. 
On each business day, before commencement of trading in Shares in the 
Regular Market Session on the Exchange, the Fund will disclose on the 
Distributor's Web site the Disclosed Portfolio that will form the basis 
for the Fund's calculation of NAV at the end of the business day. 
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 
quotation and last sale information for the Shares will be available 
via Nasdaq proprietary quote and trade services. Intra-day, executable 
price quotations of the Senior Loans, fixed-income securities and other 
assets held by the Fund will be available from major broker-dealer 
firms or on the exchange on which they are traded, if applicable. 
Intra-day price information is available through subscription services, 
such as Bloomberg, Markit and Thomson Reuters, which can be accessed by 
Authorized Participants and other investors.
    The Distributor's Web site for the Fund will include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information. Trading in Shares of the Fund will 
be halted if the circuit breaker parameters in Nasdaq Rule 4120(a)(11) 
have been reached or because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable, 
and trading in the Shares will be subject to Nasdaq Rule 5735(d)(2)(D), 
which sets forth circumstances under which Shares of the Fund may be 
halted. In addition, as noted above, investors will have ready access 
to information regarding the Fund's holdings, the Intraday Indicative 
Value, the Disclosed Portfolio, and quotation and last sale information 
for the Shares.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the Fund's holdings, 
the Intraday Interactive Value, the Disclosed Portfolio, and quotation 
and last sale information for the Shares.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will facilitate the listing and trading of an 
additional type of actively-managed exchange-traded fund that will 
enhance competition among market

[[Page 16019]]

participants, to the benefit of investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2013-036 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2013-036. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site http://www.sec.gov/rules/sro.shtml. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of Nasdaq. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2013-036 and should be submitted 
on or before April 3, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
Kevin M. O'Neill,
Deputy Secretary.
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    \52\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-05749 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P