[Federal Register Volume 81, Number 84 (Monday, May 2, 2016)]
[Notices]
[Pages 26285-26294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10154]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77715; File No. SR-NASDAQ-2016-056]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change Relating to the Listing and 
Trading of the Shares of the PowerShares Variable Rate Investment Grade 
Portfolio, a Series of the PowerShares Actively Managed Exchange-Traded 
Fund Trust

April 26, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 13 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Nasdaq. 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.
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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 common shares of beneficial 
interest of the PowerShares Variable Rate Investment Grade Portfolio 
(the ``Fund''), a series of the PowerShares Actively Managed Exchange-
Traded Fund Trust (the ``Trust''), under Nasdaq Rule 5735 (``Rule 
5735''). The common shares of beneficial interest of the Fund are 
referred to herein as the ``Shares.''
    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.

[[Page 26286]]

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 Rule 5735, which rule governs the listing and trading of Managed 
Fund Shares \3\ on the Exchange.\4\ The Shares will be offered by the 
Fund, which will be an actively managed exchange-traded fund (``ETF''). 
The Fund is a series of the Trust. The Trust was established as a 
Delaware statutory trust on November 6, 2007. The Trust is registered 
with the Commission as an open-end management investment company and 
has filed a post-effective amendment to its registration statement on 
Form N-1A (the ``Registration Statement'') with the Commission to 
register the Fund and its Shares under the 1940 Act and the Securities 
Act of 1933.\5\
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    \3\ 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.
    \4\ The Commission approved Nasdaq Rule 5735 (formerly Nasdaq 
Rule 4420(o)) in Securities Exchange Act Release No. 57962 (June 13, 
2008), 73 FR 35175 (June 20, 2008) (SR-NASDAQ-2008-039). There are 
already multiple actively managed funds listed on the Exchange; see, 
e.g., Securities Exchange Act Release Nos. 69464 (April 26, 2013), 
78 FR 25774 (May 2, 2013) (SR-NASDAQ-2013-036) (order approving 
listing and trading of First Trust Senior Loan Fund); and 66489 
(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 funds on NYSE Arca, Inc. pursuant to Rule 8.600 of that 
exchange. See, e.g., Securities Exchange Act Release No. 68870 
(February 8, 2013), 78 FR 11245 (February 15, 2013) (SR-NYSEArca-
2012-139) (order approving listing and trading of First Trust 
Preferred Securities and Income ETF). Moreover, the Commission 
previously approved the listing and trading of other actively 
managed funds within the PowerShares family of ETFs. See, e.g., 
Securities Exchange Act Release Nos. 68158 (November 5, 2012), 77 FR 
67412 (November 9, 2012) (SR-NYSEArca-2012-101) (order approving 
listing and trading of PowerShares S&P 500 Downside Hedged 
Portfolio); 69915 (July 2, 2013), 78 FR 41145 (July 9, 2013) (SR-
NYSEArca-2013-56) (order approving listing of PowerShares China A-
Share Portfolio); and 72241 (May 23, 2014), 79 FR 31156 (May 30, 
2014) (SR-NASDAQ-2014-027) (order approving listing and trading of 
PowerShares Multi-Strategy Alternative Portfolio). The Exchange 
believes the proposed rule change raises no significant issues not 
previously addressed in those prior Commission orders.
    \5\ See Registration Statement for the Trust, filed on April 13, 
2015 (File Nos. 333-147622 and 811-22148). The descriptions of the 
Fund and the Shares contained herein are based, in part, on 
information in the Registration Statement. In addition, the 
Commission has issued an order granting certain exemptive relief to 
the Trust under the1940 Act. See Investment Company Act Release No. 
28171 (February 27, 2008) (File No. 812-13386) (``Exemptive 
Order'').
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    Invesco PowerShares Capital Management LLC will serve as the 
investment adviser (the ``Adviser'') to the Fund. Invesco Advisers, 
Inc. will serve as the sub-adviser to the Fund (``Sub-Adviser''). 
Invesco Distributors, Inc. (the ``Distributor'') will serve as the 
principal underwriter and distributor of the Fund's Shares. The Bank of 
New York Mellon will act as the administrator, accounting agent, 
custodian (the ``Custodian'') and transfer agent for the Fund.
    Paragraph (g) of Rule 5735 provides that, if the investment adviser 
to an 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 information concerning the composition and/or changes to such 
investment company's portfolio.\6\ In addition, paragraph (g) of Rule 
5735 further requires that personnel who make decisions on such 
investment company's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the investment company's portfolio.
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    \6\ 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 the 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 
the Advisers Act and Rule 204A-1 thereunder. In addition, Rule 
206(4)-7 under the Advisers Act makes it unlawful for an investment 
adviser to provide investment advice to clients unless such 
investment adviser has (i) adopted and implemented written policies 
and procedures reasonably designed to prevent violation, by the 
investment adviser and its supervised persons, of the Advisers Act 
and the Commission rules adopted thereunder; (ii) implemented, at a 
minimum, an annual review regarding the adequacy of the policies and 
procedures established pursuant to subparagraph (i) above and the 
effectiveness of their implementation; and (iii) designated an 
individual (who is a supervised person) responsible for 
administering the policies and procedures adopted under subparagraph 
(i) above.
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    Rule 5735(g) is similar to Nasdaq Rule 5705(b)(5)(A)(i), which 
applies to index-based funds and requires ``fire-walls'' between 
affiliated broker-dealers and investment advisers regarding the index-
based fund's underlying benchmark index. Rule 5735(g), however, applies 
to the establishment of a ``fire wall'' between affiliated investment 
advisers and the broker-dealers with respect to the investment 
company's portfolio and not with respect to an underlying benchmark 
index, as is the case with index-based funds. The Adviser and the Sub-
Adviser are not broker-dealers, but they are affiliated with the 
Distributor, a broker-dealer. The Adviser and the Sub-Adviser have 
therefore implemented, and will maintain, a fire wall between 
themselves and the Distributor with respect to access to information 
concerning the composition and/or changes to the Fund's portfolio. In 
the event (a) the Adviser or Sub-Adviser becomes newly affiliated with 
a different broker-dealer (or becomes a registered broker-dealer), or 
(b) any new adviser or sub-adviser to the Fund is a registered broker-
dealer or becomes affiliated with a broker-dealer, each will implement 
and maintain a fire wall with respect to its relevant personnel and/or 
such broker-dealer affiliate, if applicable, regarding access to 
information concerning the composition and/or changes to the Fund's 
portfolio and will be subject to procedures designed to prevent the use 
and dissemination of material non-public information regarding such 
portfolio.
Principal Investments
    The Fund will be an actively managed ETF, and its investment 
objectives are to seek to generate current income while maintaining low 
portfolio duration as a primary objective and capital appreciation as a 
secondary objective.
    The Fund will seek to achieve its investment objectives by 
investing, under normal market conditions,\7\ at

[[Page 26287]]

least 80% of its net assets (plus any borrowings for investment 
purposes) in a portfolio of investment-grade, variable rate \8\ debt 
securities that are denominated in U.S. dollars and are issued by U.S. 
private sector entities or U.S. government agencies and 
instrumentalities. The Adviser or Sub-Adviser (as applicable) will 
select the following types of securities for the Fund: (i) Floating 
rate non-agency commercial mortgage-backed securities \9\ (``MBS''), 
variable rate non-agency residential MBS, variable rate agency \10\ 
MBS, and floating rate non-agency asset-backed \11\ securities 
(including floating rate non-agency commercial real estate 
collateralized loan obligations (``CLOs'')) (``ABS''); (ii) floating 
rate corporate debt securities, which will be comprised of corporate 
notes, bonds, debentures, or loans, and may include 144A securities; 
\12\ (iii) floating rate government sponsored enterprise (``GSEs'') 
credit risk transfers; \13\ (iv) variable rate preferred stock; \14\ 
(v) floating rate U.S government securities, including floating rate 
agency debt securities; \15\ and (vi) ETFs that invest primarily in any 
or all of the foregoing securities, to the extent permitted by the 1940 
Act \16\ (any or all of the foregoing securities, excluding variable 
rate preferred stock and ETFs, are collectively ``Variable Rate Debt 
Instruments''; Variable Rate Debt Instruments, variable rate preferred 
stock and ETFs are collectively ``Variable Rate Investments'').
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    \7\ 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. For temporary 
defensive purposes, during the initial invest-up period and during 
periods of high cash inflows or outflows, the Fund may depart from 
its principal investment strategies; for example, it may hold a 
higher than normal proportion of its assets in cash. During such 
periods, the Fund may not be able to achieve its investment 
objective. The Fund may adopt a defensive strategy when the Adviser 
or Sub-Adviser believes securities in which the Fund normally 
invests have elevated risks due to political or economic factors and 
in other extraordinary circumstances.
    \8\ For the avoidance of doubt, the term ``variable-rate'' shall 
also include similar terms, such as ``floating rate'' and 
``adjustable rate.''
    \9\ Mortgage-backed securities, which are securities that 
directly or indirectly represent a participation in, or are secured 
by and payable from, mortgage loans on real property, will consist 
of: (1) Residential mortgage-backed securities (``RMBS''); (2) 
commercial mortgage-backed securities (``CMBS''); (3) stripped 
mortgage-backed securities (``SMBS''), which are mortgage-backed 
securities where mortgage payments are divided between paying the 
loan's principal and paying the loan's interest; and (4) 
collateralized mortgage obligations (``CMOs'') and real estate 
mortgage investment conduits (``REMICs''), which are mortgage-backed 
securities that are divided into multiple classes, with each class 
being entitled to a different share of the principal and interest 
payments received from the pool of underlying assets.
    \10\ Agency securities for these purposes generally includes 
securities issued by the following entities: Government National 
Mortgage Association (Ginnie Mae), Federal National Mortgage 
Association (Fannie Mae), Federal Home Loan Banks (FHLBanks), 
Federal Home Loan Mortgage Corporation (Freddie Mac), Farm Credit 
System (FCS) Farm Credit Banks (FCBanks), Student Loan Marketing 
Association (Sallie Mae), Resolution Funding Corporation (REFCORP), 
Financing Corporation (FICO), and the FCS Financial Assistance 
Corporation (FAC). Agency securities can include, but are not 
limited to, mortgage-backed securities.
    \11\ Asset-backed securities are securities that are backed by a 
pool of assets. The Fund currently intends to invest in asset-backed 
securities that are consumer and corporate asset-backed securities.
    \12\ The Fund may invest in corporate securities, which 
represent debt obligations of corporate borrowers. Corporate 
securities may or may not be secured by collateral. The Fund will 
invest in floating rate corporate securities that have interest 
rates that reset periodically. The interest rates are based on a 
percentage above the London Interbank Offered Rate (LIBOR), a U.S. 
bank's prime or base rate, the overnight federal funds rate, or 
another rate. Corporate securities in which the Fund invests may be 
senior or subordinate obligations of the borrower. The Fund will not 
invest in senior or junior loans of a commercial nature. Senior 
secured and senior unsecured corporate securities generally rank at 
the top of a borrower's capital structure in terms of priority of 
payment, ahead of any subordinated unsecured debt securities or the 
borrower's common equity. The Fund will generally invest in floating 
rate corporate securities that the Adviser or Sub-Adviser (as 
applicable) deems to be liquid with readily available prices; 
notwithstanding the foregoing, the Fund may invest in corporate 
securities that are deemed illiquid so long as the Fund complies 
with the 15% limitation on investments of its net assets in illiquid 
assets described below under ``Investment Restrictions.''
    \13\ Credit risk transfers are unsecured obligations of GSEs 
such as Fannie Mae and Freddie Mac that are structured to provide 
credit protection to the issuer with respect to defaults and other 
credit events within pools of residential mortgage loans that 
collateralize MBS issued and guaranteed by the GSEs. This credit 
protection is achieved by allowing the GSEs to reduce the 
outstanding class principal balance of the securities as designated 
credit events on the loans arise. The GSEs make monthly payments of 
accrued interest and periodic payments of principal to the holders 
of the securities.
    \14\ The variable rate preferred stock 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, or exchanges that are parties to a comprehensive 
surveillance sharing agreement with the Exchange.
    \15\ 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.
    \16\ An ETF is an investment company registered under the 1940 
Act that holds a portfolio of securities. Many ETFs are designed to 
track the performance of a securities index, including industry, 
sector, country and region indexes. ETFs in which the Fund invests 
will be listed and traded in the U.S. on registered exchanges. The 
ETFs in which the Fund will invest include Index Fund Shares (as 
described in Nasdaq Rule 5705), Portfolio Depositary Receipts (as 
described in Nasdaq Rule 5705), and Managed Fund Shares (as 
described in Nasdaq Rule 5735). The shares of ETFs 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, or exchanges that are parties to a comprehensive 
surveillance sharing agreement with the Exchange. The ETFs in which 
the Fund will not invest include: (i) ``leveraged ETFs'' (i.e., ETFs 
operated in a manner designed to seek a multiple of the performance 
of an underlying reference index), and (ii) Index Fund Shares that 
seek to provide investment results that correspond to the inverse 
(opposite) of the performance of a specified domestic equity, 
international or global equity, or fixed income index or a 
combination thereof by a specified multiple.
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    At least 80% of the Fund's net assets will be invested in Variable 
Rate Debt Instruments or variable rate preferred stock that are, at the 
time of purchase, investment grade, or in ETFs that invest primarily in 
any or all of the foregoing securities. Under normal market conditions, 
Variable Rate Debt Instruments or variable rate preferred stock will be 
investment grade if, at the time of purchase they have a rating in one 
of the highest four rating categories of at least one nationally 
recognized statistical ratings organization (``NRSRO'') (e.g., BBB- or 
higher by Standard & Poor's Ratings Services (``S&P''), and/or Fitch 
Ratings (``Fitch''), or Baa3 or higher by Moody's Investors Service, 
Inc. (``Moody's'')).\17\ Unrated securities may be considered 
investment grade if at the time of purchase, and under normal market 
conditions, the Adviser or Sub-Adviser (as applicable) determines that 
such securities are of comparable quality based on a fundamental credit 
analysis of the unrated security and comparable NRSRO-rated securities. 
The Fund will not invest more than 20% of its net assets in the 
aggregate in Variable Rate Debt Instruments that are ABS or non-agency 
MBS.\18\
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    \17\ For the avoidance of doubt, if a security is rated by 
multiple NRSROs and receives different ratings, the Fund will treat 
the security as being rated in the highest rating category received 
from any one NRSRO.
    \18\ See note 25.
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    Under normal market conditions, the Fund will satisfy the following 
requirements on a continuous basis measured at the time of purchase: 
(i) At least 75% of the investments in the portfolio will be in 
Variable Rate Debt Instruments, with a minimum original principal 
amount outstanding of $100 million or more, variable rate preferred 
stock, or in ETFs that invest primarily in any or all of the foregoing 
securities; \19\ (ii) no Variable Rate Investment (excluding U.S. 
government securities) will represent more than 30% of the weight of 
the portfolio, and the five most heavily weighted portfolio securities 
will not in the aggregate account for more than 65% of the weight of 
the portfolio; (iii) the portfolio (excluding securities exempted by 
Section 3(a)(12) of the Exchange Act)

[[Page 26288]]

will include a minimum of 13 non-affiliated issuers; and (iv) portfolio 
securities that in aggregate account for at least 90% of the weight of 
the portfolio, other than securities issued by certain issuers of non-
agency MBS and non-agency ABS, will be either (a) from issuers that are 
required to file reports pursuant to Sections 13 and 15(d) of the 
Exchange Act; (b) from issuers that have a worldwide market value of 
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; or (d) exempted securities as 
defined in Section 3(a)(12) of the Exchange Act.
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    \19\ Notwithstanding this limitation, the Fund's investment in 
ETFs that invest primarily in Variable Rate Debt Instruments, with a 
minimum original principal amount outstanding of $100 million or 
more, or variable rate preferred stock shall not be so limited.
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    In selecting Variable Rate Investments, for the Fund,\20\ the 
Adviser or Sub-Adviser (as applicable) will take a strategic approach 
to sector allocation by using overall sector investment return and risk 
outlook data. Specifically, the Fund will seek capital appreciation 
while mitigating excess risk from any one sector by using a strategic 
distribution of risk across multiple sectors. In addition, the Fund 
will allocate its investments within each sector in an attempt to 
improve expected returns based on inflation and growth outlook, as well 
as relative value across sub-sectors and individual securities.
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    \20\ The liquidity of a security, especially in the case of 
asset-backed and mortgage-backed securities, will be a substantial 
factor in the Fund's security selection process. Consistent with the 
discussion below under ``Investment Restrictions,'' the Fund will 
not purchase any Variable Rate Investments (including asset-backed 
securities and mortgage-backed securities) that, in the Adviser's 
opinion, are illiquid if, as a result, more than 15% of the value of 
the Fund's net assets will be invested in illiquid assets.
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    Under normal market conditions, the Fund will have investment 
exposure to a wide variety of Variable Rate Investments. During periods 
of market volatility, however, the Fund may allocate a significant 
portion of its net assets to floating rate U.S. Treasury debt 
securities and agency MBS. The Adviser expects that the Fund's 
portfolio will have average duration \21\ of one year or less.
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    \21\ Duration refers to the average life of a Variable Rate Debt 
Instrument and serves as a measure of a Variable Rate Debt 
Instrument's interest rate risk. In general, each year of duration 
represents an expected 1% change in the value of a security for 
every parallel 1% change in interest rates. To illustrate, if a 
portfolio of mortgage-backed securities has an average duration of 
three years, its value can be expected to fall approximately 3% if 
interest rates rise by 1%. Conversely, the portfolio's value can be 
expected to rise approximately 3% if interest rates fall by 1%. As a 
result, prices of instruments with shorter durations, such as the 
Variable Rate Debt Instruments in which the Fund invests, are 
expected to be less sensitive to interest rate changes than 
instruments with longer durations.
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Other Investments of the Fund
    According to the Registration Statement, under normal market 
conditions, the Fund will invest primarily in the Variable Rate 
Investments described above to meet its investment objectives. In 
addition, the Fund may invest up to 20% of its net assets in Variable 
Rate Debt Instruments or variable rate preferred stock that are rated 
below investment grade, and in fixed-rate debt instruments that are 
rated either investment grade or below investment grade. The Fund may 
invest in the following fixed-rate debt instruments: (i) Fixed-rate MBS 
and ABS (which includes fixed-rate commercial real estate CLOs); (ii) 
fixed-rate U.S. government and agency securities; (iii) fixed-rate 
corporate debt securities, which will be comprised of corporate notes, 
bonds, debentures, or loans, and may include 144A corporate securities; 
\22\ (iv) fixed-rate exchange traded preferred stock; \23\ and (v) ETFs 
that invest primarily in any or all of the foregoing securities \24\ 
(any or all of the foregoing securities (excluding fixed-rate exchange 
traded preferred stock, and ETFs that invest primarily in any or all of 
the foregoing) are collectively, ``Fixed Rate Debt Instruments''; Fixed 
Rate Debt Instruments, fixed-rate exchange traded preferred stock and 
ETFs that invest primarily in any or all of the foregoing securities 
are collectively ``Fixed Rate Investments''). The Fund will not invest 
more than 20% of its net assets in Fixed Rate Debt Instruments that are 
ABS or non-agency MBS.\25\ Below investment grade securities are 
commonly referred to as ``junk'' or ``high yield'' securities and are 
considered speculative with respect to the issuer's capacity to pay 
interest and repay principal.
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    \22\ The Fund may invest in fixed-rate corporate securities, 
which represent debt obligations of corporate borrowers. Corporate 
securities may or may not be secured by collateral. The Fund will 
generally invest in fixed-rate corporate securities that the Adviser 
or Sub-Adviser (as applicable) deems to be liquid with readily 
available prices; notwithstanding the foregoing, the Fund may invest 
in corporate securities that are deemed illiquid so long as the Fund 
complies with the 15% limitation on investments of its net assets in 
illiquid assets described below under ``Investment Restrictions.''
    \23\ The fixed rate preferred stock 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, 
or that are parties to a comprehensive surveillance sharing 
agreement with the Exchange.
    \24\ The shares of ETFs 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, or that 
are parties to a comprehensive surveillance sharing agreement with 
the Exchange.
    \25\ This 20% limitation will apply to all investments in ABS 
and MBS held by the Fund in the aggregate, whether fixed rate or 
variable rate.
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    The Fund may also take a temporary defensive position and hold a 
portion of its assets in cash and cash equivalents and money market 
instruments \26\ if there are inadequate investment opportunities 
available due to adverse market, economic, political or other 
conditions, or atypical circumstances such as unusually large cash 
inflows or redemptions. The Fund may invest in non-exchange listed 
securities of other investment companies (including money market funds) 
beyond the limits permitted under the 1940 Act, subject to certain 
terms and conditions set forth in a Commission exemptive order issued 
to the Trust pursuant to Section 12(d)(1)(J) of the 1940 Act.\27\
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    \26\ For the Fund's purposes, money market instruments will 
include: Short-term, high quality securities issued or guaranteed by 
non-U.S. governments, agencies, and instrumentalities; non-
convertible corporate debt securities with remaining maturities of 
not more than 397 days that satisfy ratings requirements under Rule 
2a-7 of the 1940 Act; money market mutual funds; and deposits and 
other obligations of U.S. and non-U.S. banks and financial 
institutions.
    \27\ See Investment Company Act Release No. 30238 (October 23, 
2012) (File No. 812-13820).
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Investment Restrictions of the Fund
    The Fund may not concentrate its investments (i.e., invest more 
than 25% of the value of its net assets) in securities of issuers in 
any one industry or group of industries. This restriction will not 
apply to obligations issued or guaranteed by the U.S. government, its 
agencies or instrumentalities.\28\
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    \28\ 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).
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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 corporate debt securities deemed illiquid by the 
Adviser.\29\ 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

[[Page 26289]]

in values, net assets, or other circumstances, more than 15% of the 
Fund's net assets are held in illiquid securities or other illiquid 
assets. Illiquid securities and other illiquid assets include those 
subject to contractual or other restrictions on resale and other 
instruments or assets that lack readily available markets as determined 
in accordance with Commission staff guidance.\30\ The Fund will not 
invest in futures, options, forwards, swaps or other derivatives.
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    \29\ In reaching liquidity decisions, the 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).
    \30\ 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), FN 
34. See also Investment Company Act Release Nos. 5847 (October 21, 
1969), 35 FR 19989 (December 31, 1970) (Statement Regarding 
``Restricted Securities''); and 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 
Nos. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); and 17452 (April 23, 
1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the 
Securities Act of 1933).
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    The Fund intends to qualify for and to elect to be treated as a 
regulated investment company under Subchapter M of the Internal Revenue 
Code.\31\
---------------------------------------------------------------------------

    \31\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Fund's investments will be consistent with the Fund's 
investment objectives. Additionally, the Fund may engage in frequent 
and active trading of portfolio securities to achieve its investment 
objective. The Fund does not presently intend to engage in any form of 
borrowing for investment purposes, and will not be operated as a 
``leveraged ETF,'' i.e., it will not be operated in a manner designed 
to seek a multiple of the performance of an underlying reference index.
Net Asset Value
    The Fund's administrator will calculate the Fund's net asset value 
(``NAV'') per Share as of the close of regular trading (normally 4:00 
p.m., Eastern time (``E.T.'')) on each day the New York Stock Exchange 
(``NYSE'') is open for business (a ``Business Day''). NAV per Share 
will be calculated for the Fund by taking the value of the Fund's total 
assets, including interest or dividends accrued but not yet collected, 
less all liabilities, and dividing such amount by the total number of 
Shares outstanding. The result, rounded to the nearest cent, will be 
the NAV per Share (although creations and redemptions will be processed 
using a price denominated to the fifth decimal point, meaning that 
rounding to the nearest cent may result in different prices in certain 
circumstances).
    A market valuation generally means a valuation (i) obtained from an 
exchange, an independent pricing service (``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).
    Securities listed or traded on an exchange generally are valued at 
the last sales price or official closing price that day as of the close 
of the exchange where the security is primarily traded. However, 
certain securities, including some Variable Rate Debt Instruments (and 
Fixed Rate Debt Instruments, to the extent applicable), in which the 
Fund may invest will not be listed on any securities exchange or board 
of trade. Such securities will typically be bought and sold by 
institutional investors in individually negotiated private transactions 
that function in many respects like an over-the-counter secondary 
market, although typically no formal market makers will exist. Certain 
securities, particularly debt securities, will have few or no trades, 
or trade infrequently, and information regarding a specific security 
may not be widely available or may be incomplete. Accordingly, 
determinations of the fair value of debt securities may be based on 
infrequent and dated information. Because there is less reliable, 
objective data available, elements of judgment may play a greater role 
in valuation of debt securities than for other types of securities.
    Typically, Variable Rate Debt Instruments, Fixed Rate Debt 
Instruments and other debt securities in which the Fund may invest 
(other than those specifically described below) will be valued using 
information provided by a Pricing Service. Debt securities having a 
remaining maturity of 60 days or less when purchased will be valued at 
cost adjusted for amortization of premiums and accretion of discounts, 
provided the Adviser has determined that the use of amortized cost is 
an appropriate reflection of fair value given market and issuer-
specific conditions existing at the time of the determination.
    ABS and MBS will generally be valued by using a Pricing Service. If 
a Pricing Service does not cover a particular asset-backed or mortgage-
backed security, or discontinues covering a particular asset-backed or 
mortgage-backed security, the security will be priced using broker 
quotes generally provided by brokers that make or participate in 
markets in the security. To derive values, Pricing Services and broker-
dealers may use matrix pricing and valuation models, as well as recent 
market transactions for the same or similar assets. As it deems 
appropriate, the Adviser may determine that a Pricing Service price 
does not represent an accurate value of an ABS or MBS, based on broker 
quotes it receives, a recent trade in the security by the Fund, 
information from a portfolio manager, or other market information. In 
the event that the Adviser determines that the Pricing Service price is 
unreliable or inaccurate based on such other information, broker quotes 
may be used. Additionally, if the Adviser determines that the price of 
an asset-backed or mortgage-backed security obtained from a Pricing 
Service and available broker quotes is unreliable or inaccurate due to 
market conditions or other reasons, or if a Pricing Service price or 
broker quote is unavailable, the security will be valued using fair 
value pricing, as described below.
    Shares of open-end registered investment companies (i.e., money 
market mutual funds) will be valued at net asset value; shares of 
preferred stock and ETFs will be valued at the last sale price or 
official closing price on the exchange on which they primarily trade. 
Deposits, other obligations of U.S. and non-U.S. banks and financial 
institutions, and cash equivalents will be valued at their daily 
account value.
    Certain securities, including certain Variable Rate Debt 
Instruments and Fixed Rate Debt Instruments, in which the Fund will 
invest will not be able to be priced by pre-established pricing 
methods. Such securities may be valued by the Trust's Board or its 
delegate at fair value. The use of fair value pricing by the Fund will 
be governed by the valuation policies and procedures and conducted in 
accordance with the provisions of the 1940 Act. Valuing the Fund's 
securities using fair value pricing will result in using prices for 
those securities that may differ from current market valuations or 
official closing prices on the applicable exchange. All valuations will 
be subject to review by the Board of Trustees of the Trust (``Board'') 
or its delegate.
    In determining NAV, expenses will be accrued and applied daily and 
securities and other assets for which market quotations are readily 
available will be valued at market value. The NAV for the Fund will be 
calculated and disseminated daily. If a security's market price is not 
readily available, the security will be valued using pricing provided 
from independent pricing services or by another method that the 
Adviser, in its judgment, believes will

[[Page 26290]]

better reflect the security's fair value, in each case in accordance 
with the Trust's valuation policies and procedures (which may be 
revised from time to time) as adopted by the Trust's Board and in 
accordance with the 1940 Act.
Creation and Redemption of Shares
    The Trust will issue Shares of the Fund at NAV only with authorized 
participants (``APs'') and only in aggregations of 50,000 shares (each 
aggregation is called a ``Creation Unit'') or multiples thereof, on a 
continuous basis through the Distributor, without a sales load, at the 
NAV next determined after receipt, on any Business Day, of an order in 
proper form.
    The consideration an AP must provide for purchase of Creation Units 
of the Fund may consist of (i) cash in lieu of all or a portion of the 
Deposit Securities, as defined below, in an amount calculated based on 
the NAV per Share, multiplied by the number of Shares representing a 
Creation Unit (``Deposit Cash''), plus certain transaction fees; or 
(ii) an ``in-kind'' deposit of a designated portfolio of securities 
determined by the Adviser that generally will conform to the holdings 
of the Fund consistent with its investment objective (the ``Deposit 
Securities'') per each Creation Unit and generally an amount of cash 
(the ``Cash Component'') computed as described below. Together, the 
Deposit Securities and the Cash Component (including the cash in lieu 
amount) will constitute the ``Fund Deposit,'' which will represent the 
minimum initial and subsequent investment amount for a Creation Unit of 
the Fund.
    The Cash Component is sometimes also referred to as the Balancing 
Amount. The Cash Component will serve the function of compensating for 
any differences between the NAV per Creation Unit and the Deposit 
Amount (as defined below). For example, for a creation the Cash 
Component will be an amount equal to the difference between the NAV of 
Fund Shares (per Creation Unit) and the ``Deposit Amount''--an amount 
equal to the market value of the Deposit Securities and/or cash in lieu 
of all or a portion of the Deposit Securities. If the Cash Component is 
a positive number (i.e., the NAV per Creation Unit exceeds the Deposit 
Amount), the AP will deliver the Cash Component. If the Cash Component 
is a negative number (i.e., the NAV per Creation Unit is less than the 
Deposit Amount), the AP will receive the Cash Component. 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 
Custodian and only on a Business Day. The Fund will not redeem Shares 
in amounts less than a Creation Unit. APs must accumulate enough Shares 
in the secondary market to constitute a Creation Unit in order to have 
such Shares redeemed by the Trust. The redemption proceeds for a 
Creation Unit generally consist of (i) cash, in lieu of all or a 
portion of the Fund Securities as defined below, in an amount 
calculated based on the NAV per Share, multiplied by the number of 
Shares representing a Creation Unit, less any redemption transaction 
fees; or (ii) a designated portfolio of securities determined by the 
Adviser that generally will conform to the holdings of the Fund 
consistent with its investment objective per each Creation Unit (``Fund 
Securities'')--as announced on the Business Day of the request for 
redemption received in proper form--plus or minus 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, less any redemption transaction fees. In 
the event that the Fund Securities have a value greater than the NAV of 
the Shares, a compensating Cash Component payment equal to the 
difference is required to be made by or through an AP by the redeeming 
shareholder.
    Creation Units of the Fund generally will be sold partially in cash 
and partially in-kind plus a fixed and/or variable transaction fee.
    To the extent that the Fund permits Creation Units to be issued 
principally or partially in-kind, the Custodian, through the National 
Securities Clearing Corporation (``NSCC''), will make available on each 
Business Day, prior to the opening of business of the NYSE (currently, 
9:30 a.m., E.T.), the list of the names and the quantity of each 
Deposit Security to be included in the current Fund Deposit (based on 
information at the end of the previous Business Day), plus any 
estimated Cash Component, for the Fund. Such Fund Deposit will be 
applicable, subject to any adjustments as described below, to effect 
creations of Creation Units of the Fund until such time as the next-
announced composition of the Deposit Securities is made available. 
Information on the specific names and holdings in a Fund Deposit also 
will be available at www.pstrader.net.
    To the extent that the Fund permits Creation Units to be redeemed 
in-kind, the Custodian, through the NSCC, will make available on each 
Business Day, prior to the opening of business of NYSE (currently, 9:30 
a.m., E.T.), the identity of the Fund Securities that will be 
applicable (subject to possible amendment or correction) to redemption 
requests received in proper form on that day. Fund Securities received 
on redemption may not be identical to Deposit Securities that are 
applicable to creations of Creation Units.
    When applicable, during times that the Fund permits in-kind 
creations, the identity and quantity of the Deposit Securities required 
for a Fund Deposit for the Shares may change as rebalancing adjustments 
and corporate action events occur and are reflected within the Fund 
from time to time by the Adviser, consistent with the investment 
objective of the Fund.
    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 NSCC or 
(ii) a Depository Trust Company (``DTC'') Participant (a ``DTC 
Participant''). In addition, each Participating Party or DTC 
Participant (each, an AP) must execute an agreement that has been 
agreed to by the Distributor and the Custodian with respect to 
purchases and redemptions of Creation Units.
    All orders to create Creation Units must be received by the 
transfer agent no later than the closing time of the regular trading 
session on the NYSE (ordinarily, 4:00 p.m., E.T.) in each case on the 
date such order is placed in order for creations of Creation Units to 
be effected based on the NAV of Shares of the Fund as next determined 
on such date after receipt of the order in proper form.
    In order to redeem Creation Units of the Fund, an AP must submit an 
order to redeem for one or more Creation Units. All such orders must be 
received by the Fund's transfer agent in proper form no later than the 
close of regular trading on the NYSE (ordinarily, 4:00 p.m. E.T.) in 
order to receive that day's closing NAV per Share.
Availability of Information
    The Fund's Web site (www.invescopowershares.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 
Fund's Web site will include the ticker symbol for the Shares, CUSIP 
and exchange information, along with additional quantitative 
information updated on a daily basis, including, for the Fund: (1) 
Daily trading volume, the prior Business

[[Page 26291]]

Day's reported NAV, closing price and mid-point of the bid/ask spread 
at the time of calculation of such NAV (the ``Bid/Ask Price''),\32\ 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 the most recently 
completed calendar year and each of the four most recently completed 
calendar quarters since that year (or the life of the Fund if shorter). 
On each Business Day, before commencement of trading in Shares in the 
Regular Market Session \33\ 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 such term 
is 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.\34\ In addition to disclosing the identities and quantities of the 
portfolio of securities and other assets in the Disclosed Portfolio, 
the Fund also will disclose on a daily basis on its Web site the 
following information, as applicable to the type of holding: ticker 
symbol, if any, CUSIP number or other identifier, if any; a description 
of the holding (including the type of holding), quantity held (as 
measured by, for example, par value, number of shares or units); 
maturity date, if any; coupon rate, if any; market value of the 
holding; and percentage weighting of the holding in the Fund's 
portfolio. The Web site and information will be publicly available at 
no charge.
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    \32\ The Bid/Ask Price of the Fund will be determined using the 
mid-point 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.
    \33\ See Nasdaq Rule 4120(b)(4) (describing the three trading 
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30 
a.m. 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.).
    \34\ 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.
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    In addition, to the extent the Fund permits full or partial 
creations in-kind, a basket composition file, which will include the 
security names and share quantities to deliver (along with requisite 
cash in lieu) in exchange for Shares, together with estimates and 
actual Cash Components, will be publicly disseminated daily prior to 
the opening of the Exchange via the NSCC and at www.pstrader.net. The 
basket will represent the securities component of the Shares of the 
Fund, and when added to the Cash Components will equal a Creation Unit.
    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 \35\ 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.
---------------------------------------------------------------------------

    \35\ Currently, the NASDAQ OMX Global Index Data Service 
(``GIDS'') 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 ETFs. 
GIDS provides investment professionals with the daily information 
needed to track or trade NASDAQ OMX indexes, listed ETFs, or third-
party partner indexes and ETFs.
---------------------------------------------------------------------------

    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 will provide 
a close estimate of that value throughout the trading day.
    Intraday executable price quotations on exchange listed securities, 
certain Variable Rate Debt Instruments, Fixed Rate Debt Instruments and 
other assets not traded on an exchange will be available from major 
broker-dealer firms or market data vendors, as well as from automated 
quotation systems, published or other public sources, or online 
information services. Additionally, the Trade Reporting and Compliance 
Engine (``TRACE'') of the Financial Industry Regulatory Authority 
(``FINRA'') will be a source of price information for corporate bonds, 
privately-issued securities, MBS and ABS to the extent transactions in 
such securities are reported to TRACE.\36\ Intra-day, executable price 
quotations on the securities and other assets held by the Fund, as well 
as closing price information, will be available from major broker-
dealer firms or on the exchange on which they are traded, as 
applicable. Intra-day and closing price information related to U.S. 
government securities, money market mutual funds, and other short-term 
investments held by the Fund also will be available through 
subscription services, such as Bloomberg, Markit and Thomson Reuters, 
which can be accessed by APs and other investors.
---------------------------------------------------------------------------

    \36\ Broker-dealers that are FINRA member firms have an 
obligation to report transactions in specified debt securities to 
TRACE to the extent required under applicable FINRA rules. 
Generally, such debt securities will have at issuance a maturity 
that exceeds one calendar year.
---------------------------------------------------------------------------

    Investors also will be able to obtain the Fund's Statement of 
Additional Information (``SAI''), the Fund's Shareholder Reports, and 
its Trust's Form N-CSR and Form N-SAR, each of which is filed twice a 
year, except the SAI, which is filed at least annually. The Fund's SAI 
and Shareholder Reports will be 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 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, as well as in accordance with the Unlisted Trading Privileges 
and the Consolidated Tape Association plans for the Shares. Quotation 
and last sale information for any exchange-traded instruments 
(including preferred stocks and ETFs) also will be available via the 
quote and trade service of their respective primary exchanges, as well 
as in accordance with the Unlisted Trading Privileges and the 
Consolidated Tape Association plans.
    Additional information regarding the Fund and the Shares, including 
investment strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, distributions and taxes, will 
be included in the Registration Statement.
Initial and Continued Listing of the Fund's Shares
    The Shares will conform to the initial and continued listing 
criteria applicable to Managed Fund Shares, as set forth under Rule 
5735. The Exchange represents that, for initial and/or continued 
listing, the Fund will be in compliance with Rule 10A-3 \37\ under the 
Exchange Act. A minimum of 100,000 Shares will be outstanding at

[[Page 26292]]

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.
---------------------------------------------------------------------------

    \37\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts of the Fund's Shares
    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, 
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. These may include: (1) The extent to which trading is not 
occurring in the securities and/or the financial instruments 
constituting the Disclosed Portfolio of the Fund; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present. 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 4:00 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 both Nasdaq and 
FINRA, on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\38\ 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.
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    \38\ 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.
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    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 and other exchange-traded securities (including ETFs and 
preferred stock) and instruments held by the Fund with other markets 
and other entities that are members of the ISG,\39\ and FINRA may 
obtain trading information regarding trading in the Shares and other 
exchange-traded securities (including ETFs and preferred stock) and 
instruments held by the Fund from such markets and other entities. 
Moreover, FINRA, on behalf of the Exchange, will be able to access, as 
needed, trade information for certain Variable Rate Debt Instruments, 
Fixed Rate Debt Instruments, and other debt securities held by the Fund 
reported to FINRA's TRACE.
---------------------------------------------------------------------------

    \39\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Fund 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 may obtain information regarding trading 
in the Shares and other exchange-traded securities (including ETFs and 
preferred stock) and instruments held by the Fund from markets and 
other entities that are members of ISG, which includes securities 
exchanges, 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 2111A, 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 and the Disclosed Portfolio 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 purchasing Shares from the Fund for resale to 
investors 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 
Exchange Act.
    Additionally, the Information Circular will reference that the Fund 
is subject to various fees and expenses. The Information Circular will 
also discuss any exemptive, no-action and interpretive relief granted 
by the Commission from any rules under the Exchange Act. 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 Fund's Web site.
    All statements and representations made in this filing regarding 
(a) the description of the portfolio, (b) limitations on portfolio 
holdings or reference assets, or (c) the applicability of Exchange 
rules and surveillance procedures shall constitute continued listing 
requirements for listing the Shares on the Exchange. In addition, the 
issuer has represented to the Exchange that it will advise the Exchange 
of any failure by the Fund to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Act, the Exchange will monitor for compliance with the continued 
listing requirements. If the Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under the Nasdaq 5800 Series.

[[Page 26293]]

2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b) 
of the Exchange Act in general, and Section 6(b)(5) \40\ of the 
Exchange Act 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, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78(f)(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 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 deter and detect 
violations of Exchange rules and applicable federal securities laws and 
are adequate to properly monitor trading in the Shares in all trading 
sessions. The Adviser and the Sub-Adviser are affiliated with a broker-
dealer and have implemented, and will maintain, a fire wall with 
respect to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the Fund's portfolio. In 
addition, paragraph (g) of Nasdaq Rule 5735 further requires that 
personnel who make decisions on an 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.
    FINRA may obtain information via ISG from other exchanges that are 
members of ISG. In addition, the Exchange may obtain information 
regarding trading in the Shares and other exchange-traded securities 
(including ETFs and preferred stock) and instruments held by the Fund 
from markets and other entities that are members of ISG, which includes 
securities exchanges, or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. The Fund will limit its 
investments in illiquid securities or other illiquid assets to an 
aggregate amount of 15% of its net assets (calculated at the time of 
investment). The Fund also may invest directly in ETFs. The ETFs in 
which the Fund will not invest include: (i) ``leveraged ETFs'' (i.e., 
ETFs operated in a manner designed to seek a multiple of the 
performance of an underlying reference index), and (ii) Index Fund 
Shares that seek to provide investment results that correspond to the 
inverse (opposite) of the performance of a specified domestic equity, 
international or global equity, or fixed income index or a combination 
thereof by a specified multiple.
    Additionally, the Fund may engage in frequent and active trading of 
portfolio securities to achieve its investment objective. The Fund does 
not presently intend to engage in any form of borrowing for investment 
purposes, and will not be operated as a ``leveraged ETF,'' i.e., it 
will not be operated in a manner designed to seek a multiple of the 
performance of an underlying reference index. The Fund will not invest 
in futures, options, forwards, swaps or other derivatives.
    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 every day that 
the Fund is traded, 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 will be publicly available 
regarding the Fund and the Shares, thereby promoting market 
transparency. Moreover, 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 at least 
every 15 seconds during the Exchange's 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 its Web site 
the Disclosed Portfolio of the Fund 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, as well as in accordance with the 
Unlisted Trading Privileges and the Consolidated Tape Association plans 
for the Shares. Quotation and last sale information for any exchange-
traded instruments (including preferred stocks and ETFs) also will be 
available via the quote and trade service of their respective primary 
exchanges, as well as in accordance with the Unlisted Trading 
Privileges and the Consolidated Tape Association plans. Intraday 
executable price quotations on exchange listed securities, certain 
Variable Rate Debt Instruments, Fixed Rate Debt Instruments and other 
assets not traded on an exchange will be available from major broker-
dealer firms or market data vendors, as well as from automated 
quotation systems, published or other public sources, or online 
information services. Additionally, FINRA's TRACE will be a source of 
price information for corporate bonds, privately-issued securities, MBS 
and ABS to the extent transactions in such securities are reported to 
TRACE. For exchange-traded assets, intraday pricing information will be 
available directly from the applicable listing exchange.
    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. Moreover, 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. Trading in Shares of the Fund will be halted under 
the conditions specified in Nasdaq Rules 4120 and 4121 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.
    For the above reasons, Nasdaq believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Exchange 
Act.

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

    The Exchange does not believe that the proposed rule change will 
impose

[[Page 26294]]

any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The Exchange believes 
that the proposed rule change 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.

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 up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(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-2016-056 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-056. 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-2016-056 and should 
be submitted on or before May 23, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-10154 Filed 4-29-16; 8:45 am]
 BILLING CODE 8011-01-P