[Federal Register Volume 78, Number 220 (Thursday, November 14, 2013)]
[Notices]
[Pages 68482-68485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27204]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70829; File No. SR-NASDAQ-2013-122]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change To List and Trade Shares of 
the First Trust High Income Fund of First Trust Exchange-Traded Fund VI

November 7, 2013.

I. Introduction

    On September 12, 2013, The NASDAQ Stock Market LLC (``Nasdaq'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the First Trust High Income ETF (``Fund'') under Nasdaq 
Rule 5735. The proposed rule change was published for comment in the 
Federal Register on September 26, 2013.\3\ The Commission received no 
comments on the proposed rule change. This order grants approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 70460 (Sept. 20, 
2013), 78 FR 59402 (Sept. 26, 2013) (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund pursuant 
to Nasdaq Rule 5735, which governs the listing and trading of Managed 
Fund Shares on the Exchange. The Shares will be offered by First Trust 
Exchange-Traded Fund VI (``Trust''). The Trust is registered with the 
Commission as an investment company.\4\ The Fund is a series of the 
Trust.
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    \4\ The Trust has filed a registration statement on Form N-1A 
(``Registration Statement'') with the Commission. See Post-Effective 
Amendment No. 3 to Registration Statement on Form N-1A for the 
Trust, dated Jan. 16, 2013 (File Nos. 333-182308 and 811-22717). In 
addition, the Commission has issued an order granting certain 
exemptive relief to the Trust under the Investment Company Act of 
1940 (``1940 Act''). See Investment Company Act Release No. 28468 
(Oct. 27, 2008) (File No. 812-13477).
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    First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund. First Trust Portfolios L.P. 
(``Distributor'') will be the principal underwriter and distributor of 
the Fund's Shares. Brown Brothers Harriman & Co. will act as the 
administrator, accounting agent, custodian and transfer agent to the 
Fund.
    The Exchange represents that the Adviser is not a broker-dealer, 
but is affiliated with the Distributor, a broker-dealer, and 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.\5\ The Exchange represents that the Shares 
will be subject to Nasdaq Rule 5735, which sets forth the initial and 
continued listing criteria applicable to Managed Fund Shares.\6\ The 
Exchange represents that for initial and/or continued listing, the Fund 
must be in compliance with Rule 10A-3 under the Act.\7\
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    \5\ See Notice supra note 3, 78 FR at 59403. The Exchange states 
that in the event (a) the Adviser becomes newly affiliated with a 
broker-dealer, or (b) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with a broker-dealer, it will 
implement a fire wall with respect to its relevant personnel and/or 
such broker-dealer affiliate, as applicable, 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. See id.
    \6\ See id. at 59407.
    \7\ See 17 CFR 240.10A-3. See also Notice, supra note 3, 78 FR 
at 59407.
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Principal Investments

    The Fund's primary investment objective is to provide current 
income and its secondary investment objective is to provide capital 
appreciation. The Fund will pursue its objectives by investing in 
large-cap U.S. exchange-traded equity securities and by utilizing an 
options strategy consisting of writing (selling) U.S. exchange-traded 
covered call options on the Standard & Poor's 500 Index (``Index'').
    In pursuing its investment objectives, under normal market 
conditions,\8\ the

[[Page 68483]]

Fund will invest primarily in large-cap U.S. exchange-traded equity 
securities. The Fund will also employ an options strategy in which it 
will write U.S. exchange-traded covered call options on the Index in 
order to seek additional cash flow in the form of premiums on the 
options that may be distributed to shareholders on a monthly basis. The 
market value of the options strategy may be up to 20% of the Fund's 
overall net asset value.
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    \8\ The term ``under normal market conditions'' includes, but is 
not limited to, the absence of adverse market, economic, political 
or other conditions, including extreme volatility or trading halts 
in the securities markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance. In periods of extreme market disturbance, the Fund may 
take temporary defensive positions, by overweighting its portfolio 
in cash/cash-like instruments; however, to the extent possible, the 
Adviser would continue to seek to achieve the Fund's investment 
objectives.
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    The equity securities in which the Fund will invest and the options 
that the Fund will write will be limited to U.S. exchange-traded 
securities and options, respectively, that trade in markets that are 
members of the Intermarket Surveillance Group (``ISG'') or are parties 
to a comprehensive surveillance sharing agreement with the Exchange.\9\
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    \9\ A list of ISG members is available at www.isgportal.org.
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    The equity securities held by the Fund will be selected using a 
mathematical optimization process which attempts to tilt the Fund's 
common stock portfolio toward higher dividend paying stocks. The equity 
securities held by the Fund may include non-U.S. securities that are 
listed on a U.S. securities exchange in the form of American Depositary 
Receipts (``ADRs'') and Global Depositary Receipts (``GDRs,'' and 
together with ADRs, ``Depositary Receipts''). The equity securities 
will be periodically rebalanced.
    The options portion of the portfolio will generally consist of U.S. 
exchange-traded covered calls or covered call spreads on the Index 
written by the Fund. The call options written by the Fund will 
typically be a laddered portfolio of one week, one month, two months, 
and three months, and will typically be written at-the-money to 
slightly out-of-the-money. A call option will give the holder the right 
to buy the Index at a predetermined strike price from the Fund. The 
notional value of calls written (including calls and call spreads 
written on the Index and/or other indexes as described in Other 
Investments below) will generally be between 25% and 75% of the overall 
Fund.

Other Investments

    In addition to the options strategy described in Principal 
Investments above, the Fund may invest up to 10% of the market value of 
its net assets in futures, options, options on futures, total return 
swaps, credit default swaps, and forward contracts.\10\ The Fund may 
utilize such derivatives to enhance return, to hedge some of the risks 
of its investments in securities, as a substitute for a position in the 
underlying asset, to reduce transaction costs, to maintain full market 
exposure (which means to adjust the characteristics of its investments 
to more closely approximate those of the markets in which it invests), 
to manage cash flows, or to preserve capital. In attempting to enhance 
returns and/or hedge risks, the Fund may buy and/or write U.S. 
exchange-traded options on single stocks included in the portfolio, on 
the Index, and/or on other equity indexes. The Fund may also write 
covered call spreads on the Index and/or other equity indexes.
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    \10\ To the extent practicable, the Fund will invest in swaps 
cleared through the facilities of a centralized clearing house.
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    Under normal market conditions, the Fund may invest up to 10% of 
its net assets in short-term debt securities and cash equivalents, or 
it may hold cash. The percentage of the Fund's net assets invested in 
such holdings will vary and will depend on several factors, including 
market conditions.
    For temporary defensive purposes and during periods of high cash 
inflows or outflows, the Fund may depart from its principal investment 
strategies and invest part or all of its assets in short-term debt 
securities or cash equivalents or it may hold cash. During such 
periods, the Fund may not be able to achieve its investment objectives. 
The Fund may adopt a defensive strategy when the Adviser believes 
securities in which the Fund normally invests have elevated risks due 
to political or economic factors and in other extraordinary 
circumstances. The use of temporary investments will not be a part of a 
principal investment strategy of the Fund.
    Short-term debt securities are securities from issuers having a 
long-term debt rating of at least A by Standard & Poor's Ratings Group 
(``S&P Ratings''), Moody's Investors Service, Inc. (``Moody's''), or 
Fitch, Inc. (``Fitch''), and having a maturity of one year or less. 
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,\11\ 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. The Fund may 
only invest in commercial paper rated A-1 or higher by S&P Ratings, 
Prime-1 or higher by Moody's, or F2 or higher by Fitch.
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    \11\ The Fund intends to enter into 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 of Trustees of the Trust. The Adviser will review and 
monitor the creditworthiness of such institutions. The Adviser will 
monitor the value of the collateral at the time the transaction is 
entered into and at all times during the term of the repurchase 
agreement.
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    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment). 
The Fund will monitor its portfolio liquidity on an ongoing basis to 
determine whether, in light of current circumstances, an adequate level 
of liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid securities. Illiquid securities include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry or group of 
industries. This restriction does not apply to obligations issued or 
guaranteed by the U.S. government, its agencies or instrumentalities, 
or securities of other investment companies.
    The Fund's investments will be consistent with the Fund's 
investment objectives and will not be used to enhance leverage.
    Additional information regarding the Trust, Fund, and Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings, disclosure policies, 
distributions and taxes, calculation of net asset value per share 
(``NAV''), availability of information, trading rules

[[Page 68484]]

and halts, and surveillance procedures, among other things, can be 
found in the Notice or the Registration Statement, as applicable.\12\
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    \12\ See Notice and Registration Statement, supra notes 3 and 4, 
respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \13\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\14\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act,\15\ which requires, among other things, that the 
Exchange's rules be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The Commission notes that the Fund and the Shares must comply with the 
requirements of Nasdaq Rule 5735 to be listed and traded on the 
Exchange.
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    \13\ 15 U.S.C. 78f.
    \14\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\16\ which sets forth Congress's finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities. Quotation and last 
sale information for the Shares will be available via Nasdaq 
proprietary quote and trade services, as well as in accordance with the 
Unlisted Trading Privileges and the Consolidated Tape Association plans 
for the Shares and any underlying exchange-traded products.\17\ In 
addition, the Intraday Indicative Value (as defined in Nasdaq Rule 
5735(c)(3)) will be based upon the current value of the components of 
the Disclosed Portfolio (as defined in Nasdaq Rule 5735(c)(2)), will be 
available on the NASDAQ OMX Information LLC proprietary index data 
service,\18\ and will be updated and widely disseminated and broadly 
displayed at least every 15 seconds during the Regular Market 
Session.\19\ On each business day, before commencement of trading in 
Shares in the Regular Market Session on the Exchange, the Fund will 
disclose on its Web site the Disclosed Portfolio, which will form the 
basis for the Fund's calculation of NAV at the end of the business 
day.\20\ The NAV of the Fund will be determined once each business day, 
normally as of the close of trading on the New York Stock Exchange 
(normally 4:00 p.m. Eastern time).\21\ Information regarding market 
price and volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other 
electronic services.\22\ 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.\23\ Intra-day, 
executable price quotations for the 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, as applicable.\24\ Intra-day price 
information will also be available through subscription services, such 
as Bloomberg, Markit, and Thomson Reuters, which can be accessed by 
authorized participants and other investors.\25\ The Distributor's Web 
site will include a form of the prospectus for the Fund and additional 
data relating to NAV and other applicable quantitative information.\26\
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    \16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \17\ See Notice, supra note 3, 78 FR at 59407.
    \18\ According to the Exchange, the NASDAQ OMX Global Index Data 
Service is the NASDAQ OMX global index data feed service, offering 
real-time updates, daily summary messages, and access to widely 
followed indexes and Intraday Indicative Values for exchange-traded 
funds. See id. at 59406.
    \19\ See id.
    \20\ On a daily basis, the Disclosed Portfolio will include for 
each portfolio security and other financial instrument of the Fund 
the following information: Ticker symbol (if applicable), name of 
security and financial instrument, number of shares (if applicable) 
and dollar value of securities and financial instruments held by 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. See id.
    \21\ See id. at 59404.
    \22\ See id. at 50407.
    \23\ See id.
    \24\ See id. at 59408.
    \25\ See id.
    \26\ See id.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV will be 
calculated daily and that the NAV and the Disclosed Portfolio will be 
made available to all market participants at the same time.\27\ In 
addition, a basket composition file, which includes the security names, 
amounts and share quantities, as applicable, required to be delivered 
in exchange for one Creation Unit of the Shares, together with 
estimates and actual cash components, will be publicly disseminated 
daily prior to the opening of Nasdaq via the National Securities 
Clearing Corporation.\28\ Further, trading in the Shares will be 
subject to Nasdaq 5735(d)(2)(D), which sets forth circumstances under 
which trading in the Shares of the Fund may be halted.\29\ The Exchange 
may halt trading in the Shares if trading is not occurring in the 
securities or the financial instruments constituting the Disclosed 
Portfolio of the Fund or if other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.\30\ Further, the Commission notes that the Reporting Authority 
that provides the Disclosed Portfolio must implement and maintain, or 
be subject to, procedures designed to prevent the use and dissemination 
of material, non-public information regarding the actual components of 
the portfolio.\31\ The Exchange states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.\32\ The Exchange also states that the Adviser is affiliated 
with a broker-dealer and has implemented a firewall with respect to its 
broker-dealer affiliate regarding access to information concerning the 
composition of or changes to the portfolio.\33\ The Exchange states 
that the

[[Page 68485]]

Financial Industry Regulatory Authority (``FINRA''), on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares, 
in the equity securities in which the Fund will invest, and in the U.S. 
exchange-traded options that the Fund will buy and write, with other 
markets and other entities that are members of the ISG, and that FINRA 
may obtain trading information regarding trading in the Shares and in 
such equity securities and U.S. exchange-traded options from such 
markets and other entities.\34\ In addition, the Exchange may obtain 
information regarding trading in the Shares and in such equity 
securities and U.S. exchange-traded options from markets and other 
entities that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.\35\
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    \27\ See id.
    \28\ See id. at 59406-7.
    \29\ See id. at 59407.
    \30\ See id. See also 5735(d)(2)(C) (providing additional 
considerations for the suspension of trading in or removal from 
listing of Managed Fund Shares on the Exchange). 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 or pause trading in the Shares under 
the conditions specified in Nasdaq Rules 4120 and 4121, including 
the trading pauses under Nasdaq Rules 4120(a)(11) and (12). Trading 
also may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
See Notice, supra note 3, 78 FR at 59407.
    \31\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \32\ See Notice, supra note 3, 78 FR at 59407.
    \33\ See supra note 5 and accompanying text. An investment 
adviser to an open-end fund is required to be registered under the 
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the 
Adviser and Sub-Adviser and their 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.
    \34\ See Notice, supra note 3, 78 FR at 59407.
    \35\ See id.
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    The Exchange further represents that the Shares are deemed to be 
equity securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity 
securities.\36\ In support of this proposal, the Exchange has made 
representations, including:
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    \36\ See id.
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    (1) The Shares will be subject to Rule 5735, which sets forth the 
initial and continued listing criteria applicable to Managed Fund 
Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by both 
Nasdaq and FINRA on behalf of the Exchange, which are designed to 
detect violations of Exchange rules and applicable federal securities 
laws, and 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.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Nasdaq Rule 2111A, which imposes 
suitability obligations on Nasdaq members with respect to recommending 
transactions in the Shares to customers; (c) how information regarding 
the Intraday Indicative Value is disseminated; (d) 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; (e) the requirement that members deliver a 
prospectus to investors purchasing newly issued Shares prior to or 
concurrently with the confirmation of a transaction; and (f) trading 
information.
    (5) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Exchange Act.\37\
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    \37\ 17 CFR 240.10A-3.
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    (6) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    (7) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid securities (calculated at the time of investment); 
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.
    (8) The equity securities in which the Fund will invest and the 
options that the Fund will write will be limited to U.S. exchange-
traded securities and options, respectively, 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.
    (9) Under normal market conditions, the Fund will invest primarily 
in large-cap U.S. exchange-traded equity securities. The Fund will also 
utilize an options strategy in which it will write U.S. exchange-traded 
covered call options on the Index. The market value of the options 
strategy may be up to 20% of the Fund's overall net asset value.
    (10) In addition to the options strategy that is part of the Fund's 
principal investment strategy, the Fund may invest up to 10% of the 
market value of its net assets in futures, options, options on futures, 
total return swaps, credit default swaps, and forward contracts. To the 
extent practicable, the Fund will invest in swaps cleared through the 
facilities of a centralized clearing house.
    (11) The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage.
    This approval order is based on all of the Exchange's 
representations and description of the Fund, including those set forth 
above and in the Notice.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \38\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \38\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-NASDAQ-2013-122) be, and it 
hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27204 Filed 11-13-13; 8:45 am]
BILLING CODE 8011-01-P