[Federal Register Volume 80, Number 196 (Friday, October 9, 2015)]
[Notices]
[Pages 61249-61253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25701]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76076; File No. SR-NASDAQ-2015-075]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2 Thereto, Relating to the Listing and Trading of Shares of 
the First Trust SSI Strategic Convertible Securities ETF of First Trust 
Exchange-Traded Fund IV

October 5, 2015.

I. Introduction

    On July 2, 2015, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the First Trust SSI Strategic Convertible Securities 
ETF of First Trust Exchange-Traded Fund IV (``Fund'') under Nasdaq Rule 
5735 (``Managed Fund Shares''). The proposed rule change was published 
for comment in the Federal Register on July 20, 2015.\3\ On September 
2, 2015, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to either approve the proposed 
rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On September 21, 2015, the Exchange filed Amendment No. 1 to 
the proposed rule change,\6\ and on September 28, 2015, the Exchange 
filed Amendment No. 2 to the proposed rule change.\7\ The Commission 
received no comments on the proposal. This order grants approval of the 
proposed rule change, as modified by Amendment Nos. 1 and 2 thereto.
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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. 75447 (July 14, 
2015), 80 FR 42847 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 75817, 80 FR 54351 
(Sept. 9, 2015). The Commission determined that it was appropriate 
to designate a longer period within which to take action on the 
proposed rule change so that it has sufficient time to consider the 
proposed rule change and the comments received. Accordingly, the 
Commission designated October 16, 2015 as the date by which it 
should approve, disapprove, or institute proceedings to determine 
whether to disapprove the proposed rule change.
    \6\ In Amendment No. 1 to the proposed rule change, the Exchange 
amended and replaced the filing, SR-NASDAQ-2015-075, in its 
entirety.
    \7\ In Amendment No. 2 to the proposed rule change, as modified 
by Amendment No. 1 thereto, the Exchange clarified the description 
of the daily disclosure of the Fund's portfolio by deleting 
references to ``commodity.'' Amendment Nos. 1 and 2 to the proposed 
rule change are also available on the Commission's Web site at: 
http://www.sec.gov/comments/sr-nasdaq-2015-075/nasdaq2015075.shtml.
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II. Description of the Proposal

    The Fund will be an actively-managed exchange-traded fund. The 
Shares will be offered by the First Trust Exchange-Traded Fund IV 
(``Trust''), which is registered with the Commission as an investment 
company and has filed a registration statement on Form N-1A with the 
Commission.\8\ First Trust Advisors L.P. will be the investment adviser 
(``Adviser'') to the Fund. SSI Investment Management Inc. will serve as 
investment sub-adviser (``Sub-Adviser'') to the Fund and provide day-
to-day portfolio management. 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.
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    \8\ See Post-Effective Amendment No. 120 to Registration 
Statement on Form N-1A for the Trust, dated June 25, 2015 (File Nos. 
333-174332 and 811-22559) (``Registration Statement''). The Exchange 
notes that the Commission has issued an order, upon which the Trust 
may rely, granting certain exemptive relief under the Investment 
Company Act of 1940 (``1940 Act''). See Investment Company Act 
Release No. 30029 (Apr. 10, 2012) (File No. 812-13795) (``Exemptive 
Relief''). In addition, the Exchange notes that the Commission has 
issued no-action relief, upon which the Trust may rely, regarding 
the Fund's ability to invest in options contracts, futures 
contracts, and swap agreements notwithstanding certain 
representations in the application for the Exemptive Relief. See 
Commission No-Action Letter from the Office of Exemptive 
Applications/Office of Investment Company Regulation entitled, 
``Derivatives Use by Actively-Managed ETFs'' (Dec. 6, 2012).
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategy, including the 
Fund's portfolio holdings and investment restrictions.\9\
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    \9\ The Commission notes that additional information regarding 
the Fund and the Shares, including investment strategies, risks, 
creation and redemption procedures, fees, Fund holdings disclosure 
policies, distributions, and taxes can be found in the Notice and 
the Registration Statement, as applicable. See Notice and 
Registration Statement, supra notes 3 and 8, respectively.
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A. The Exchange's Description of the Fund's Principal Investment 
Policies

    According to the Exchange, the investment objective of the Fund 
will be to seek total return. To achieve its objective, the Fund will 
invest, under normal market conditions,\10\ at least

[[Page 61250]]

80% of its net assets (including investment borrowings) in the 
following convertible securities: \11\ Convertible notes, bonds, and 
debentures; convertible preferred securities; mandatory convertible 
securities; \12\ contingent convertible securities; \13\ synthetic 
convertible securities; \14\ corporate bonds and preferred securities 
with attached warrants; \15\ and convertible Rule 144A securities \16\ 
(collectively, ``Convertible Securities'').\17\
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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.
    \11\ Convertible securities are investment instruments that are 
normally convertible or exchangeable into equity securities (which 
are referred to as ``Underlying Securities'') or the cash equivalent 
thereof. These equity-linked instruments offer the potential for 
equity market participation with potential mitigated downside risk 
in periods of equity market declines.
    \12\ Mandatory convertible securities are distinguished as a 
subset of convertible securities because the conversion is not 
optional and the conversion price is based solely upon the market 
price of the underlying equity security. Mandatory convertible 
securities automatically convert on maturity.
    \13\ Contingent convertible securities (which generally provide 
for conversion under certain circumstances) are distinguished as a 
subset of convertible securities. Similar to mandatory convertible 
securities (and unlike traditional convertible securities), some 
contingent convertible securities provide for mandatory conversion 
under certain circumstances. In addition, various contingent 
convertible securities may contain features that limit an investor's 
ability to convert the security unless certain conditions are met.
    \14\ A synthetic convertible security will (i) consist of two or 
more distinct securities whose economic characteristics, when taken 
together, resemble those of traditional convertible securities 
(i.e., an income-producing security and the right to acquire an 
equity security through, for example, an option or a warrant) or 
(ii) be an exchangeable or equity-linked security issued by a 
broker-dealer, investment bank, or other financial institution with 
proceeds going directly to the broker-dealer, investment bank, or 
other financial institution, as applicable, that has economic 
characteristics similar to those of traditional convertible 
securities. The Exchange represents that the Fund's investments in 
options will be limited to options that represent a component of a 
synthetic convertible security, and any such options will be 
exchange-listed. In addition, the Fund will limit its investments in 
synthetic convertible securities to 10% of its net assets 
(calculated at the time of investment).
    \15\ Other than warrants that represent a component of a 
synthetic convertible security, the Fund's investments in warrants 
will be limited to such attached warrants, and all such attached 
warrants will be exchange-listed.
    \16\ Under normal market conditions, convertible Rule 144A 
securities will have at the time of original issuance $100 million 
or more principal amount outstanding to be considered eligible 
investments.
    \17\ The Adviser expects that, under normal market conditions, 
generally, for a Convertible Security to be considered as an 
eligible investment, after taking into account such an investment, 
at least 75% of the Fund's net assets that are invested in 
Convertible Securities will be invested in Convertible Securities 
that have at the time of original issuance $200 million or more par 
amount outstanding.
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    According to the Exchange, the Sub-Adviser, through its investment 
process, will attempt to identify attractive Convertible Securities 
based on its positive view of the Underlying Security or its view of 
the company's potential for credit improvement. The Sub-Adviser will 
begin its investment process by evaluating a large universe of 
available Convertible Securities and screening for liquidity and 
convexity. Convexity is the ratio of upside move in the Convertible 
Security in conjunction with appreciation of the Underlying Security 
relative to the downside move in the Convertible Security in 
conjunction with depreciation of the Underlying Security. The screening 
process will rely on the Sub-Adviser's fundamental credit evaluation of 
the issuers. This credit analysis will allow the Sub-Adviser to attempt 
to identify the downside risk of the Convertible Security, assess the 
value of the embedded equity, and understand the amount of 
participation expected with a change in the price of the Underlying 
Security.
    Once attractive Convertible Securities (i.e., Convertible 
Securities that are most highly ranked, based on a ranking system 
incorporating target characteristics) have been identified, the Sub-
Adviser will use fundamental equity analysis to determine which of the 
attractive Convertible Securities it believes have a sound Underlying 
Security with potential for increase in value. In conjunction with its 
analysis, the Sub-Adviser will review the overall economic situation. 
The Sub-Adviser will, at times, overweight or underweight different 
economic sectors, market capitalizations, and credit quality exposures 
relative to the available universe of Convertible Securities. The Sub-
Adviser may also adjust the sensitivity of the portfolio to movements 
in the equity market and to interest rates based on the macroeconomic 
outlook. The Fund may manage the market exposure defensively during 
periods of market distress.
    The Fund will invest in Convertible Securities of any credit 
quality (including unrated securities) and with effective or final 
maturities of any length. Convertible Securities may be issued by 
domestic or foreign entities.
    The Fund will hold debt securities (including, in the aggregate, 
Convertible Securities and the debt securities described below) of at 
least 13 non-affiliated issuers.

B. The Exchange's Description of the Fund's Non-Principal Investment 
Policies

    The Fund may invest up to 20% of its net assets in short-term debt 
securities and other short-term debt instruments described below, as 
well as cash equivalents, or it may hold cash. Short-term debt 
instruments are issued by issuers having a long-term debt rating of at 
least A by Standard & Poor's Ratings Services (``S&P Ratings''), 
Moody's Investors Service, Inc. (``Moody's'') or Fitch Ratings 
(``Fitch'') and have a maturity of one year or less. The Fund may 
invest in the following short-term debt instruments: (1) Fixed rate and 
floating rate 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,\18\ 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; (6) commercial 
paper, which is short-term unsecured promissory notes; \19\ and (7) 
corporate debt obligations.
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    \18\ The Fund intends to enter into repurchase agreements only 
with financial institutions and dealers believed by the Adviser or 
the Sub-Adviser to present minimal credit risks in accordance with 
criteria approved by the Board of Trustees of the Trust. The Adviser 
or the Sub-Adviser will review and monitor the creditworthiness of 
such institutions. The Adviser or the Sub-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.
    \19\ 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 F1 or higher 
by Fitch.
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    The Fund may invest up to 20% of its net assets in exchange-traded 
notes (``ETNs'').
    The Fund may invest up to 20% of its net assets in exchange-listed 
equity securities (``Equity Securities'').\20\ In addition to U.S. 
exchange-listed equity securities of domestic issuers, Equity 
Securities may include securities of foreign issuers that are listed on 
U.S. or

[[Page 61251]]

foreign exchanges as well as investments in equity securities that are 
in the form of American Depositary Receipts (``ADRs'') or Global 
Depositary Receipts (``GDRs,'' and together with ADRs, ``Depositary 
Receipts'').\21\
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    \20\ The Fund may hold Equity Securities either through direct 
investment or upon conversion of a Convertible Security into its 
corresponding Underlying Security (referred to as a ``Post-
Conversion Underlying Security'').
    \21\ The Fund will not invest in any unsponsored Depositary 
Receipts. In addition, for the avoidance of doubt, the term ``Equity 
Securities'' may include exchange-listed equity securities of 
business development companies (``BDCs'').
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    The Fund may invest in exchange-listed equity index futures 
contracts, in exchange-listed and over-the-counter (``OTC'') index 
credit default swaps, and in forward foreign currency exchange 
contracts; however, the Exchange represents that the Fund will limit 
the aggregate notional value of its positions in these instruments 
(calculated at the time of investment) to 20% of the value of its net 
assets. The use of futures contracts may allow the Fund to obtain net 
long or short exposures to selected equity indexes. Index credit 
default swaps may be used to gain exposure to a basket of credit risk 
by ``selling protection'' against default or other credit events, or to 
hedge a broad market credit risk by ``buying protection.'' Forward 
foreign currency exchange contracts may be used to protect the value of 
the Fund's portfolio against uncertainty in the level of future 
currency exchange rates.\22\ The Fund's investments in derivative 
instruments will be consistent with the Fund's investment objective and 
the 1940 Act and will not be used to seek to achieve a multiple or 
inverse multiple of an index. The Fund will only enter into 
transactions in OTC index credit default swaps and forward foreign 
currency exchange contracts with counterparties that the Adviser or the 
Sub-Adviser reasonably believes are capable of performing under the 
applicable agreement.\23\
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    \22\ The Fund may also enter into foreign currency transactions 
on a spot (i.e., cash) basis.
    \23\ The Fund will seek, where possible, to use counterparties, 
as applicable, whose financial status is such that the risk of 
default is reduced; however, the risk of losses resulting from 
default is still possible. The Adviser or the Sub-Adviser will 
evaluate the creditworthiness of counterparties on an ongoing basis. 
In addition to information provided by credit agencies, the 
Adviser's or Sub-Adviser's analysis will evaluate each approved 
counterparty using various methods of analysis and may consider the 
Adviser's or Sub-Adviser's past experience with the counterparty, 
its known disciplinary history and its share of market 
participation.
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C. The Exchange's Description of the Fund's Investment Restrictions

    The Fund may not invest 25% or more of the value of its total 
assets in securities of issuers in any one industry. This restriction 
does not apply to obligations issued or guaranteed by the U.S. 
government or its agencies or instrumentalities or to securities of 
other investment companies.\24\
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    \24\ 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 (Oct. 30, 1975), 40 FR 54241 
(Nov. 21, 1975).
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    The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser or the 
Sub-Adviser.\25\ The Fund will monitor its portfolio liquidity on an 
ongoing basis to determine whether, in light of current circumstances, 
an adequate level of liquidity is being maintained, and will consider 
taking appropriate steps in order to maintain adequate liquidity if, 
through a change in values, net assets, or other circumstances, more 
than 15% of the Fund's net assets are held in illiquid assets. Illiquid 
assets 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.\26\
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    \25\ In reaching liquidity decisions, the Adviser and the Sub-
Adviser may consider the following factors: The frequency of trades 
and quotes for the security; the number of dealers wishing to 
purchase or sell the security and the number of other potential 
purchasers; dealer undertakings to make a market in the security; 
and the nature of the security and the nature of the marketplace in 
which it trades (e.g., the time needed to dispose of the security, 
the method of soliciting offers, and the mechanics of transfer).
    \26\ 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 (Mar. 11, 2008), 73 FR 
14618 (Mar. 18, 2008), footnote 34. See also Investment Company Act 
Release No. 5847 (Oct. 21, 1969), 35 FR 19989 (Dec. 31, 1970) 
(Statement Regarding ``Restricted Securities''); Investment Company 
Act Release No. 18612 (Mar. 12, 1992), 57 FR 9828 (Mar. 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 (Mar. 12, 
1986), 51 FR 9773 (Mar. 21, 1986) (adopting amendments to Rule 2a-7 
under the 1940 Act); Investment Company Act Release No. 17452 (Apr. 
23, 1990), 55 FR 17933 (Apr. 30, 1990) (adopting Rule 144A under the 
Securities Act of 1933).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\27\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act,\28\ which requires, among other things, that the Exchange's rules 
be designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Commission also finds that the 
proposal to list and trade the Shares on the Exchange is consistent 
with Section 11A(a)(1)(C)(iii) of the Exchange Act,\29\ which sets 
forth the finding of Congress that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities.
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    \27\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78f(b)(5).
    \29\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Quotation and last sale information for the Shares will be 
available via Nasdaq proprietary quote and trade services, as well as 
in accordance with the Unlisted Trading Privileges and the Consolidated 
Tape Association (``CTA'') plans for the Shares. Quotation and last 
sale information for U.S. exchange-listed equity securities will be 
available from the exchanges on which they are traded as well as in 
accordance with any applicable CTA plans. On each business day, before 
commencement of trading in Shares in the Regular Market Session \30\ on 
the Exchange, the Fund will disclose on its 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 net 
asset value (``NAV'') at the end of the business day.\31\ The NAV of 
the

[[Page 61252]]

Fund will be determined as of the close of trading (normally 4:00 p.m., 
E.T.) on each day the New York Stock Exchange is open for business.\32\ 
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. Pricing information for Exchange-Listed 
Convertible Securities; ETNs; Depositary Receipts, BDCs, Post-
Conversion Underlying Securities, and other Equity Securities; 
exchange-listed equity index futures contracts; and exchange-listed 
index credit default swaps will be available from the applicable 
listing exchange and from major market data vendors. Pricing 
information for OTC Convertible Securities (including convertible 
notes, bonds, and debentures; convertible preferred securities; 
mandatory convertible securities; contingent convertible securities; 
synthetic convertible securities; corporate bonds and preferred 
securities with attached warrants; \33\ and convertible Rule 144A 
securities); Short-Term Debt Instruments (including short-term U.S. 
government securities, commercial paper, bankers' acceptances, and 
short-term corporate debt obligations, all as set forth under ``Other 
Investments of the Fund''); repurchase agreements; OTC index credit 
default swaps; and forward foreign currency exchange contracts will be 
available from major broker-dealer firms or major market data vendors 
or pricing services. The Fund's Web site will include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information.
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    \30\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4:00 a.m. to 
9:30 a.m., E.T.; (2) Regular Market Session from 9:30 a.m. to 4:00 
p.m. or 4:15 p.m., E.T.; and (3) Post-Market Session from 4:00 p.m. 
or 4:15 p.m. to 8:00 p.m., E.T.).
    \31\ On a daily basis, the Fund will disclose on the Fund's Web 
site the following information regarding each portfolio holding, as 
applicable to the type of holding: Ticker symbol, CUSIP number or 
other identifier, if any; a description of the holding (including 
the type of holding, such as the type of swap); the identity of the 
security, index, or other asset or instrument underlying the 
holding, if any; for options, the option strike price; quantity held 
(as measured by, for example, par value, notional value, or number 
of shares, contracts, or units); maturity date, if any; coupon rate, 
if any; effective date, if any; market value of the holding; and 
percentage weighting of the holding in the Fund's portfolio.
    \32\ NAV will be calculated for the Fund by taking the market 
price of the Fund's total assets, including interest or dividends 
accrued but not yet collected, minus all liabilities, and dividing 
this amount by the total number of Shares outstanding.
    \33\ Although the attached warrants will be exchange-listed, for 
purposes of obtaining pricing information, these Convertible 
Securities will typically be treated as single non-exchange-listed 
instruments.
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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 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. Trading in the Shares will be halted 
under the conditions specified in Nasdaq Rules 4120 and 4121, including 
the trading pause provisions under Nasdaq Rules 4120(a)(11) and (12). 
Trading in the Shares may be halted because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the Shares 
inadvisable,\34\ and trading in the Shares will be subject to Nasdaq 
Rule 5735(d)(2)(D), which sets forth circumstances under which trading 
in the Shares may be halted. The Exchange states that it has a general 
policy prohibiting the distribution of material, non-public information 
by its employees. Further, the Commission notes that the Reporting 
Authority \35\ 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.\36\ In addition, the Exchange states that 
neither the Adviser nor the Sub-Adviser is a broker-dealer, although 
the Adviser is affiliated with the Distributor, a broker-dealer. The 
Adviser has implemented a fire wall with respect to its affiliation 
with the Distributor regarding access to information concerning the 
composition of or changes to the portfolio, and personnel who make 
decisions on the Fund's portfolio composition will be subject to 
procedures designed to prevent the use and dissemination of material 
non-public information regarding the Fund's portfolio. The Exchange 
represents that trading in the Shares will be subject to the existing 
trading surveillances, administered by both Nasdaq and also the 
Financial Industry Regulatory Authority (``FINRA'') on behalf of the 
Exchange, and that these surveillances are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\37\ The Exchange further 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. Moreover, prior to the 
commencement of trading, the Exchange states that it will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares.
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    \34\ These reasons may include: (1) The extent to which trading 
is not occurring in the securities or the other assets constituting 
the Disclosed Portfolio of the Fund; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present. With respect to trading halts, the 
Exchange may consider all relevant factors in exercising its 
discretion to halt or suspend trading in the Shares.
    \35\ Nasdaq Rule 5730(c)(4) defines ``Reporting Authority.''
    \36\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \37\ The Exchange states that FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement and that the 
Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
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    The Exchange 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. 
In support of this proposal, the Exchange has also made the following 
representations:
    (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) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares and the exchange-traded securities and 
instruments held by the Fund (including Exchange-Listed Convertible 
Securities; ETNs; Depositary Receipts, BDCs, Post-Conversion Underlying 
Securities, and other Equity Securities; exchange-listed equity index 
futures contracts; and exchange-listed index credit default swaps) with 
other markets and other entities that are members of the Intermarket 
Surveillance Group (``ISG''),\38\ and FINRA may obtain trading 
information regarding trading in the Shares and the exchange-traded 
securities and instruments held by the Fund from these markets and 
other entities. In addition, the Exchange may obtain information 
regarding trading in the Shares and the exchange-traded securities and 
instruments held by the Fund from markets and other entities that are 
members of ISG, which includes securities and futures exchanges, or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
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    \38\ 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.
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    (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.

[[Page 61253]]

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 Act.\39\
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    \39\ See 17 CFR 240.10A-3.
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    (6) Under normal market conditions, the Fund will invest at least 
80% of its total assets in Convertible Securities.
    (7) The Adviser expects that, under normal market conditions, 
generally, for a Convertible Security to be considered as an eligible 
investment, after taking into account such an investment, at least 75% 
of the Fund's net assets that are invested in Convertible Securities 
will be invested in Convertible Securities that will have at the time 
of original issuance $200 million or more par amount outstanding.
    (8) At least 90% of the Fund's net assets that are invested in 
Exchange-Listed Convertible Securities; ETNs; Depositary Receipts, 
BDCs, Post-Conversion Underlying Securities, and other Equity 
Securities; exchange-listed equity index futures contracts; and 
exchange-listed index credit default swaps (in the aggregate) will be 
invested in investments that trade in markets that are members of ISG 
or are parties to a comprehensive surveillance sharing agreement with 
the Exchange. Further, at least 90% of the Underlying Securities 
corresponding to the pre-conversion Convertible Securities held by the 
Fund (measured by par value) will trade in markets that are members of 
ISG or parties to a comprehensive surveillance sharing agreement with 
the Exchange.
    (9) The Fund's investments in options will be limited to options 
that represent a component of a synthetic convertible security, and any 
such options will be exchange-listed. The Fund will limit its 
investments in synthetic convertible securities to 10% of its net 
assets (calculated at the time of investment).
    (10) The Fund may invest in exchange-listed equity index futures 
contracts, in exchange-listed and OTC index credit default swaps, and 
in forward foreign currency exchange contracts; however, the Fund will 
limit the aggregate notional value of its positions in these 
instruments (calculated at the time of investment) to 20% of the value 
of its net assets.
    (11) The Fund intends to enter into repurchase agreements only with 
financial institutions and dealers believed by the Adviser or the Sub-
Adviser to present minimal credit risks in accordance with criteria 
approved by the Board of Trustees of the Trust. The Adviser or the Sub-
Adviser will review and monitor the creditworthiness of such 
institutions. The Adviser or the Sub-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.
    (12) 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 F1 or higher by 
Fitch.
    (13) Under normal market conditions, convertible Rule 144A 
securities will have at the time of original issuance $100 million or 
more principal amount outstanding to be considered eligible 
investments.
    (14) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), 
including Rule 144A securities deemed illiquid by the Adviser or the 
Sub-Adviser.\40\ 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 assets.
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    \40\ In reaching liquidity decisions, the Adviser and the Sub-
Adviser may consider the following factors: The frequency of trades 
and quotes for the security; the number of dealers wishing to 
purchase or sell the security and the number of other potential 
purchasers; dealer undertakings to make a market in the security; 
and the nature of the security and the nature of the marketplace in 
which it trades (e.g., the time needed to dispose of the security, 
the method of soliciting offers and the mechanics of transfer).
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    (15) The Fund will only enter into transactions in OTC index credit 
default swaps and forward foreign currency exchange contracts with 
counterparties that the Adviser or the Sub-Adviser reasonably believes 
are capable of performing under the applicable agreement, and the Fund 
will seek, where possible, to use counterparties whose financial status 
is such that the risk of default is reduced.
    (16) The Fund's investments in derivative instruments will be 
consistent with the Fund's investment objective and the 1940 Act and 
will not be used to seek to achieve a multiple or inverse multiple of 
an index.
    (17) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in Amendment Nos. 
1 and 2 to the proposal, and the Exchange's description of the Fund.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 1 and 2 thereto, is 
consistent with Section 6(b)(5) of the Act \41\ and the rules and 
regulations thereunder applicable to a national securities exchange.
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    \41\ 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,\42\ that the proposed rule change (SR-NASDAQ-2015-075), as 
modified by Amendment Nos. 1 and 2 thereto, be, and it hereby is, 
approved.
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    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25701 Filed 10-8-15; 8:45 am]
BILLING CODE 8011-01-P