[Federal Register Volume 81, Number 129 (Wednesday, July 6, 2016)]
[Notices]
[Pages 44056-44063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15913]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78191; File No. SR-NYSEArca-2016-87]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Relating to Listing and Trading of Shares of 
First Trust Horizon Managed Volatility Domestic ETF and First Trust 
Horizon Managed Volatility Developed International ETF Under NYSE Arca 
Equities Rule 8.600

June 29, 2016.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on June 16, 2016, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the following 
under NYSE Arca Equities Rule 8.600 (``Managed Fund Shares''): First 
Trust Horizon Managed Volatility Domestic ETF and First Trust Horizon 
Managed Volatility Developed International ETF. The proposed rule 
change is available on the Exchange's Web site at www.nyse.com, at the 
principal office of

[[Page 44057]]

the Exchange, 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, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange proposes to list and trade the shares (``Shares'') of 
the following under NYSE Arca Equities Rule 8.600, which governs the 
listing and trading of Managed Fund Shares \4\ on the Exchange: First 
Trust Horizon Managed Volatility Domestic ETF and First Trust Horizon 
Managed Volatility Developed International ETF (each a ``Fund'' and, 
collectively, the ``Funds'').\5\ The Shares will be offered by First 
Trust Exchange-Traded Fund III (the ``Trust''), which is organized as a 
Massachusetts business trust and is registered with the Commission as 
an open-end management investment company.\6\
---------------------------------------------------------------------------

    \4\ 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) (``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 Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Equities Rule 
5.2(j)(3), 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.
    \5\ The Commission has previously approved listing and trading 
on the Exchange of a number of actively managed funds under Rule 
8.600. See, e.g., Securities Exchange Act Release Nos. 57801 (May 8, 
2008), 73 FR 27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order 
approving Exchange listing and trading of twelve actively-managed 
funds of the WisdomTree Trust); 60460 (August 7, 2009), 74 FR 41468 
(August 17, 2009) (SR-NYSEArca-2009-55) (order approving listing of 
Dent Tactical ETF); 62502 (July 15, 2010), 75 FR 42471 (July 21, 
2010) (SR-NYSEArca-2010-57)(order approving listing of AdvisorShares 
WCM/BNY Mellon Focused Growth ADR ETF); 69251 (March 28, 2013), 78 
FR 20162 (April 3, 2013) (SR-NYSEArca-2013-14) (order approving 
listing of Cambria Shareholder Yield ETF).
    \6\ The Trust is registered under the 1940 Act. On June 6, 2016, 
the Trust filed with the Commission an amendment to its registration 
statement on Form N-1A under the Securities Act of 1933 (``1933 
Act'') and under the 1940 Act relating to the Funds (File Nos. 333-
176976 and 811-22245) (``Registration Statement''). The description 
of the operation of the Trust and the Funds herein is based, in 
part, on the Registration Statement. In addition, the Commission has 
issued an order granting certain exemptive relief to the Trust under 
the 1940 Act. See Investment Company Act Release No. 28468 (October 
27, 2008) (File No. 812-13477 (``Exemptive Order'').
---------------------------------------------------------------------------

    The investment adviser to the Funds will be First Trust Advisors 
L.P. (the ``Adviser'' or ``First Trust''). Horizon Investments, LLC 
(``Sub-Adviser'') will be the sub-adviser to the Funds. First Trust 
Portfolios L.P. (the ``Distributor'') will be the principal underwriter 
and distributor of the Funds' Shares. Brown Brothers Harriman & Co. 
(``BBH'') will serve as administrator, custodian and transfer agent for 
the Funds.
    Commentary .06 to Rule 8.600 provides that, if the investment 
adviser to the investment company issuing Managed Fund Shares is 
affiliated with a broker-dealer, such investment adviser shall erect a 
``fire wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such investment company portfolio. In addition, Commentary 
.06 further requires that personnel who make decisions on the open-end 
fund's portfolio composition must be subject to procedures designed to 
prevent the use and dissemination of material nonpublic information 
regarding the open-end fund's portfolio.\7\ Commentary .06 to Rule 
8.600 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca 
Equities Rule 5.2(j)(3); however, Commentary .06 in connection with the 
establishment of a ``fire wall'' between the investment adviser and the 
broker-dealer reflects the applicable open-end fund's portfolio, not an 
underlying benchmark index, as is the case with index-based funds. The 
Adviser and Sub-Adviser are not broker-dealers, but the Adviser is 
affiliated with First Trust Portfolios L.P., a broker-dealer. The Sub-
Adviser is not currently affiliated with a broker-dealer. The Adviser 
has implemented a fire wall with respect to its broker-dealer affiliate 
regarding access to information concerning the composition and/or 
changes to the portfolios. In the event (a) the Adviser or the Sub-
Adviser becomes registered as a broker-dealer or newly affiliated with 
a broker-dealer, or (b) any new adviser or sub-adviser is a registered 
broker-dealer or becomes affiliated with a broker-dealer, it will 
implement a fire wall with respect to its relevant personnel or its 
broker-dealer affiliate regarding access to information concerning the 
composition and/or changes to the portfolio, and will be subject to 
procedures designed to prevent the use and dissemination of material 
non-public information regarding such portfolio.
---------------------------------------------------------------------------

    \7\ 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 Sub-Adviser and their related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
---------------------------------------------------------------------------

First Trust Horizon Managed Volatility Domestic ETF
    According to the Registration Statement, the investment objective 
of the Fund will be to provide capital appreciation. Under normal 
market conditions,\8\ the Fund will seek to achieve its investment 
objective by investing at least 80% of its net assets (including 
investment borrowings) in common stocks of domestic companies listed 
and traded on U.S. national securities exchanges that the Sub-Adviser 
believes exhibit low future expected volatility. The goal of this 
strategy will be to capture upside price movements in rising markets 
and reduce downside risk when markets decline. To implement this 
strategy, in selecting securities for the Fund from a portfolio of 
eligible securities, the Sub-Adviser will employ volatility forecasting 
models to forecast future expected volatility. The strategy will 
largely be quantitative and rules-based, but will

[[Page 44058]]

also include multiple parameters over which the Sub-Adviser may 
exercise discretion (including, but not limited to, the number of 
holdings and the weightings of particular holdings) in connection with 
its active management of the Fund.
---------------------------------------------------------------------------

    \8\ The term ``under normal market conditions'' includes, but is 
not limited to, the absence of extreme volatility or trading halts 
in the equity 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.
---------------------------------------------------------------------------

    To begin, the Sub-Adviser will gather pricing and generate return 
data for the starting universe. The Sub-Adviser then will conduct 
volatility forecasts for all constituents. The constituent securities 
will then be ranked from low to high based on their volatility 
forecasts for inclusion in the portfolio. The Sub-Adviser will target a 
subset of the starting universe as sorted by future expected 
volatility. Once the final portfolio is selected, the Sub-Adviser will 
measure co-movements of the selected securities using advanced 
statistical techniques designed to reduce estimation error. In the 
final portfolio construction, the Sub-Adviser will give larger weights 
to securities with lower future expected volatility and will use a 
``tuning'' parameter to adjust how aggressive the weighting scheme is 
depending on market conditions.
    The Fund is classified as ``non-diversified'' under the 1940 Act.
First Trust Horizon Managed Volatility Developed International ETF
    According to the Registration Statement, the investment objective 
of the Fund will be to provide capital appreciation. Under normal 
market conditions, the Fund will seek to achieve its investment 
objective by investing at least 80% of its net assets (including 
investment borrowings) in common stocks of developed market companies 
\9\ listed and traded on non-U.S. exchanges that the Sub-Adviser 
believes exhibit low future expected volatility. The goal of this 
strategy will be to capture upside price movements in rising markets 
and reduce downside risk when markets decline. To implement this 
strategy, in selecting securities for the Fund from a portfolio of 
eligible securities, the Sub-Adviser will employ volatility forecasting 
models to forecast future expected volatility. The strategy will 
largely be quantitative and rules-based, but will also include multiple 
parameters over which the Sub-Adviser may exercise discretion 
(including, but not limited to, the number of holdings and the 
weightings of particular holdings) in connection with its active 
management of the Fund.
---------------------------------------------------------------------------

    \9\ The term ``developed market companies'' means those 
companies (i) whose securities are traded principally on a stock 
exchange in a developed market country, (ii) that are organized 
under the laws of, or have a primary business office in, a developed 
market country, or (iii) that have at least 50% of their assets in, 
or derive at least 50% of their revenues or profits from, a 
developed market country.
---------------------------------------------------------------------------

    To begin, the Sub-Adviser will gather pricing and generate return 
data for the starting universe. The Sub-Adviser then will conduct 
volatility forecasts for all constituents. The constituent securities 
will then be ranked from low to high based on their volatility 
forecasts for inclusion in the portfolio. The Sub-Adviser will target a 
subset of the starting universe as sorted by future expected 
volatility. Once the final portfolio is selected, the Sub-Adviser will 
measure co-movements of the selected securities using advanced 
statistical techniques designed to reduce estimation error. In the 
final portfolio construction, the Sub-Adviser will give larger weights 
to securities with lower future expected volatility and will use a 
``tuning'' parameter to adjust how aggressive the weighting scheme is 
depending on market conditions.\10\ The Fund's investments in the 
common stocks of developed market companies may be in the form of 
``Depositary Receipts'', as described below.\11\
---------------------------------------------------------------------------

    \10\ The non-U.S. equity securities in the Fund's portfolio will 
meet the following criteria on a continual basis: (1) Non-U.S. 
equity securities each shall have a minimum market value of at least 
$100 million; (2) non-U.S. equity securities each shall have a 
minimum global monthly trading volume of 250,000 shares, or minimum 
global notional volume traded per month of $25,000,000, averaged 
over the last six months; (3) the most heavily weighted non-U.S. 
equity security shall not exceed 25% of the weight of the Fund's 
entire portfolio, and, to the extent applicable, the five most 
heavily weighted non-U.S. equity securities shall not exceed 60% of 
the weight of the Fund's entire portfolio; and (4) each non-U.S. 
equity security shall be listed and traded on an exchange that has 
last-sale reporting. For purposes of this filing, the term ``non-
U.S. equity securities'' includes common stocks of foreign 
corporations and ``Depositary Receipts'' (as described below, 
excluding Depositary Receipts that are listed on a U.S. exchange).
    \11\ Depositary Receipts include American Depositary Receipts 
(``ADRs''), Global Depositary Receipts (``GDRs'') and European 
Depositary Receipts (``EDRs''). ADRs are receipts typically issued 
by an American bank or trust company that evidence ownership of 
underlying securities issued by a foreign corporation. EDRs are 
receipts issued by a European bank or trust company evidencing 
ownership of securities issued by a foreign corporation. GDRs are 
receipts issued throughout the world that evidence a similar 
arrangement. ADRs, EDRs and GDRs may trade in foreign currencies 
that differ from the currency the underlying security for each ADR, 
EDR or GDR principally trades in. Global shares are the actual 
(ordinary) shares of a non-U.S. company which trade both in the home 
market and the United States. Generally, ADRs, in registered form, 
are designed for use in the U.S. securities markets. EDRs, in 
registered form, are used to access European markets. GDRs, in 
registered form, are tradable both in the United States and in 
Europe and are designed for use throughout the world. All Depositary 
Receipts in which the Fund invests will be traded on a U.S. or a 
non-U.S. exchange.
---------------------------------------------------------------------------

    The Fund is classified as ``non-diversified'' under the 1940 Act.
Non-Principal Investments
    According to the Registration Statement, while each Fund, under 
normal market conditions, will invest at least 80% of its net assets in 
the securities and financial instruments described above, a Fund may 
invest up to 20% of its net assets in the following securities and 
instruments.
    Each Fund may invest in cash and cash equivalents.\12\
---------------------------------------------------------------------------

    \12\ For purposes of this filing, cash equivalents are the 
following: (i) Short-term obligations issued by the U.S. Government 
that have remaining terms to maturity of not more than 397 days; 
(ii) negotiable certificates of deposit, fixed time deposits, and 
bankers' acceptances of U.S. and foreign banks and similar 
institutions; (iii) commercial paper rated at the date of purchase 
``Prime-1'' by Moody's Investors Service, Inc. or ``A-1+'' or ``A-
1'' by Standard & Poor's or, if unrated, of comparable quality as 
determined by the Adviser or Sub-Adviser; (iv) repurchase 
agreements; and (v) money market mutual funds.
---------------------------------------------------------------------------

    The First Trust Horizon Managed Volatility Domestic ETF may invest 
in exchange-traded ADRs.
Creation and Redemption of Shares
    Each Fund will issue and redeem Shares on a continuous basis at net 
asset value (``NAV'') \13\ only in large blocks of Shares (``Creation 
Units'') in transactions with authorized participants, generally 
including broker-dealers and large institutional investors 
(``Authorized Participants''). Creation Units generally will consist of 
50,000 Shares, although this may change from time to time. Creation 
Units, however, are not expected to consist of less than 50,000 Shares. 
As described in the Registration Statement and consistent with the 
Exemptive Order, a Fund will issue and redeem Creation Units in 
exchange for an in-kind portfolio of instruments and/or cash in lieu of 
such instruments (the ``Creation Basket'').\14\ In addition, if there 
is a difference between the NAV attributable to a Creation Unit and the 
market value of the Creation Basket exchanged for the Creation Unit, 
the party conveying instruments (which may include cash-in-lieu 
amounts) with the lower value will pay to the other an amount in cash

[[Page 44059]]

equal to the difference (referred to as the ``Cash Component'').
---------------------------------------------------------------------------

    \13\ The NAV of a Fund's Shares generally will be calculated 
once daily Monday through Friday as of the close of regular trading 
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m., 
Eastern Time. NAV per Share will be calculated by dividing a Fund's 
net assets by the number of Fund Shares outstanding.
    \14\ It is expected that the Funds will typically issue and 
redeem Creation Units on an in-kind basis; however, subject to, and 
in accordance with, the provisions of the Exemptive Order, the Funds 
may, at times, issue and redeem Creation Units on a cash (or 
partially cash) basis.
---------------------------------------------------------------------------

    Creations and redemptions must be made by or through an Authorized 
Participant that has executed an agreement that has been agreed to by 
the Distributor and BBH with respect to creations and redemptions of 
Creation Units. All standard 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., Eastern 
Time) (the ``Closing Time'') in each case on the date such order is 
placed in order for the creation of Creation Units to be effected based 
on the NAV of Shares as next determined on such date after receipt of 
the order in proper form. Shares may be redeemed only in Creation Units 
at their NAV next determined after receipt not later than the Closing 
Time of a redemption request in proper form by a Fund through the 
transfer agent and only on a business day. A Fund's custodian, through 
the National Securities Clearing Corporation, will make available on 
each business day, prior to the opening of business of the Exchange, 
the list of the names and quantities of the instruments comprising the 
Creation Basket, as well as the estimated Cash Component (if any), for 
that day. The published Creation Basket will apply until a new Creation 
Basket is announced on the following business day prior to commencement 
of trading in the Shares.
Investment Restrictions
    On a temporary basis, including for defensive purposes, during the 
initial invest-up period and during periods of high cash inflows or 
outflows, a 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, a Fund may not be able to achieve its 
investment objective. A Fund may adopt a defensive strategy when the 
Adviser and/or the Sub-Adviser believes securities in which such Fund 
normally invests have elevated risks due to political or economic 
factors and in other extraordinary circumstances.
    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) deemed 
illiquid by the Adviser and/or the Sub-Adviser.\15\ Each 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 a 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.\16\
---------------------------------------------------------------------------

    \15\ In reaching liquidity decisions, the Adviser and/or 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 
trades (e.g., the time needed to dispose of the security, the method 
of soliciting offers, and the mechanics of transfer).
    \16\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the 1933 Act).
---------------------------------------------------------------------------

    Each Fund intends to qualify annually and to elect to be treated as 
a regulated investment company (``RIC'') under the Internal Revenue 
Code.\17\
---------------------------------------------------------------------------

    \17\ 26 U.S.C. 851.
---------------------------------------------------------------------------

    The Funds will not invest in options, futures, or swaps.
    Each Fund's investments will be consistent with such Fund's 
investment objective and will not be used to enhance leverage. That is, 
while a Fund will be permitted to borrow as permitted under the 1940 
Act, such Fund's investments will not be used to seek performance that 
is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of such Fund's 
broad-based securities market index (as defined in Form N-1A).
Net Asset Value
    Each Fund's NAV will be determined as of the close of regular 
trading on the NYSE on each day the NYSE is open for trading. If the 
NYSE closes early on a valuation day, the NAV will be determined as of 
that time. NAV per Share will be calculated for a Fund by taking the 
value of a Fund's total assets, including interest or dividends accrued 
but not yet collected, less all liabilities, including accrued expenses 
and dividends declared but unpaid, and dividing such amount by the 
total number of Shares outstanding. The result, rounded to the nearest 
cent, will be the NAV per Share. All valuations will be subject to 
review by the Board of Trustees of the Trust (``Trust Board'') or its 
delegate.
    Each Fund's investments will be valued daily. As described more 
specifically below, investments traded on an exchange (i.e., a 
regulated market), will generally be valued at market value prices that 
represent last sale or official closing prices. In addition, as 
described more specifically below, non-exchange traded investments will 
generally be valued using prices obtained from third party pricing 
services (each, a ``Pricing Service'').\18\ If, however, valuations for 
any of the Funds' investments cannot be readily obtained as provided in 
the preceding manner, or the Pricing Committee of the Adviser (the 
``Pricing Committee'') \19\ questions the accuracy or reliability of 
valuations that are so obtained, such investments will be valued at 
fair value, as determined by the Pricing Committee, in accordance with 
valuation procedures (which may be revised from time to time) adopted 
by the Trust Board (the ``Valuation Procedures''), and in accordance 
with provisions of the 1940 Act. The Pricing Committee's fair value 
determinations may require subjective judgments about the value of an 
investment. The fair valuations attempt to estimate the value at which 
an investment could be sold at the time of pricing, although actual 
sales could result in price differences, which could be material. 
Valuing the Funds' investments using fair value pricing can result in 
using prices for those investments (particularly, as applicable, 
investments that trade in foreign markets) that may differ from current 
market valuations.
---------------------------------------------------------------------------

    \18\ The Adviser may use various Pricing Services or discontinue 
the use of any Pricing Services, as approved by the Trust Board from 
time to time.
    \19\ The Pricing Committee will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding each Fund's portfolio.
---------------------------------------------------------------------------

    Certain securities in which a 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

[[Page 44060]]

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 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.
    The information summarized below is based on the Valuation 
Procedures as currently in effect; however, as noted above, the 
Valuation Procedures are amended from time to time and, therefore, such 
information is subject to change.
    In determining NAV, the Funds' investments will typically be valued 
as follows:
    (1) Common stocks and other equity securities listed on any 
national or foreign exchange other than The NASDAQ Stock Market 
(``NASDAQ'') and the London Stock Exchange Alternative Investment 
Market (``AIM'') will typically be valued at the last sale price on the 
exchange on which they are principally traded on the business day as of 
which such value is being determined. Securities listed on NASDAQ or 
AIM will typically be valued at the official closing price on the 
business day as of which such value is being determined. If there has 
been no sale on such day, or no official closing price in the case of 
securities listed on NASDAQ or AIM, such securities will typically be 
valued using fair value pricing.
    Equity securities traded on more than one securities exchange will 
typically be valued at the last sale price or official closing price, 
as applicable, on the business day as of which such value is being 
determined at the close of the exchange representing the principal 
market for such securities.
    (2) The following cash equivalents will typically be valued using 
information provided by a Pricing Service: Except as provided in (3) 
below, short-term obligations issued by the U.S. Government; bankers' 
acceptances and commercial paper. Debt instruments may be valued at 
evaluated mean prices, as provided by Pricing Services. Pricing 
Services typically value non-exchange traded instruments utilizing a 
range of market-based inputs and assumptions, including readily 
available market quotations obtained from broker-dealers making markets 
in such instruments, cash flows, and transactions for comparable 
instruments. In pricing certain instruments, the Pricing Services may 
consider information about an instrument's issuer or market activity 
provided by the Adviser and/or the Sub-Adviser.
    (3) Short-term obligations issued by the U.S. Government, bankers' 
acceptances and commercial paper having a remaining maturity of 60 days 
or less when purchased will typically be valued at cost adjusted for 
amortization or premiums and accretion of discounts, provided the 
Pricing Committee has determined that the use of amortized cost is an 
appropriate reflection of value given market and issuer-specific 
conditions existing at the time of the determination.
    (4) Repurchase agreements will typically be valued as follows: 
Overnight repurchase agreements will be valued at amortized cost when 
it represents the best estimate of value. Term repurchase agreements 
(i.e., those whose maturity exceeds seven days) will be valued at the 
average of the bid quotations obtained daily from at least two 
recognized dealers.
    (5) Certificates of deposit and fixed time deposits will typically 
be valued at cost.
    (6) Money market mutual funds will typically be valued at their net 
asset values as reported by such funds to Pricing Services.
    Because foreign exchanges may be open on different days than the 
days during which an investor may purchase or sell Shares, the value of 
certain assets may change on days when investors are not able to 
purchase or sell Shares. Assets denominated in foreign currencies will 
be translated into U.S. dollars at the exchange rate of such currencies 
against the U.S. dollar as provided by a Pricing Service. The value of 
assets denominated in foreign currencies will be converted into U.S. 
dollars at the exchange rates in effect at the time of valuation.
Availability of Information
    The Funds' Web site (www.ftportfolios.com), which will be publicly 
available prior to the public offering of Shares, will include a form 
of the prospectus for the Funds that may be downloaded. The Funds' Web 
site will include additional quantitative information updated on a 
daily basis, including, for each Fund, (1) daily trading volume, the 
prior business day's reported closing price, NAV and mid-point of the 
bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask 
Price''),\20\ and a calculation of the premium and discount of the Bid/
Ask Price against the NAV, and (2) data in chart format displaying the 
frequency distribution of discounts and premiums of the daily Bid/Ask 
Price against the NAV, within appropriate ranges, for each of the four 
previous calendar quarters. On each business day, before commencement 
of trading in Shares in the Core Trading Session (9:30 a.m. to 4:00 
p.m. E.T.) on the Exchange, a Fund will disclose on its Web site the 
Disclosed Portfolio as defined in NYSE Arca Equities Rule 8.600(c)(2) 
that will form the basis for such Fund's calculation of NAV at the end 
of the business day.\21\
---------------------------------------------------------------------------

    \20\ The Bid/Ask Price of Shares of each 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 a Fund's NAV. The records 
relating to Bid/Ask Prices will be retained by each Fund and its 
service providers.
    \21\ Under accounting procedures followed by a Fund, trades made 
on the prior business day (``T'') will be booked and reflected in 
NAV on the current business day (``T+1''). Accordingly, a 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.
---------------------------------------------------------------------------

    On a daily basis, each Fund will disclose on its 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); the identity of the security, commodity, index or other asset 
or instrument underlying the holding, if any; maturity date, if any; 
coupon rate, if any; effective date, if any; market value of the 
holding; and the percentage weighting of the holding in a Fund's 
portfolio. The Web site information will be publicly available at no 
charge.
    In addition, a basket composition file, which will include the 
security names and share quantities required to be delivered in 
exchange for a Fund's Shares, together with estimates and actual cash 
components, will be publicly disseminated daily prior to the opening of 
the NYSE via the NSCC. The basket will represent one Creation Unit of a 
Fund.
    Information regarding the intra-day value of the Shares of each 
Fund, which is the Portfolio Indicative Value (``PIV'') as defined in 
NYSE Arca Equities Rule 8.600 (c)(3), will be widely disseminated every 
15 seconds throughout the Exchange's Core Trading Session by one or 
more major market data vendors.\22\ The PIV should not be viewed as a 
``real-time'' update of the NAV per Share of a Fund because the PIV may 
not be calculated in the same

[[Page 44061]]

manner as the NAV, which is computed once a day, generally at the end 
of the business day. The price of a non-U.S. security that is primarily 
traded on a non-U.S. exchange shall be updated, using the last sale 
price, every 15 seconds throughout the trading day, provided, that upon 
the closing of such non-U.S. exchange, the closing price of the 
security, after being converted to U.S. dollars, will be used. 
Furthermore, in calculating the PIV of a Fund's Shares, exchange rates 
may be used throughout the Core Trading Session that may differ from 
those used to calculate the NAV per Share of a Fund and consequently 
may result in differences between the NAV and the PIV.
---------------------------------------------------------------------------

    \22\ Currently, it is the Exchange's understanding that several 
major market data vendors widely disseminate PIVs taken from the 
Consolidated Tape Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    Quotation and last sale information for the Shares and U.S. 
exchange-traded equity securities will be available via the CTA high-
speed line, and from the national securities exchange on which they are 
listed. Price information regarding non-U.S. equities held by a Fund 
will be available from the exchanges trading such assets and from major 
market data vendors. Price information for cash and cash equivalents 
will be available from major market data vendors. Price information 
regarding each asset class in which a Fund will invest will generally 
be available through nationally recognized data service providers 
through subscription agreements.
    Investors can also obtain each Fund's Statement of Additional 
Information (``SAI''), Shareholder Reports, and Form N-CSR and Form N-
SAR, filed twice a year. Each Fund's SAI and Shareholder Reports will 
be available free upon request from such Fund, and those documents and 
the Form N-CSR and Form N-SAR may be viewed on-screen or downloaded 
from the Commission's Web site at www.sec.gov. Information regarding 
market price and trading volume of the Shares will be continually 
available on a real-time basis throughout the day on brokers' computer 
screens and other electronic services. Information regarding the 
previous day's closing price and trading volume information for the 
Shares will be published daily in the financial section of newspapers. 
Quotation and last sale information for the Shares will be available 
via the CTA high-speed line. The intra-day, closing and settlement 
prices of the portfolio securities are also readily available from the 
national securities exchanges trading such securities (as applicable), 
automated quotation systems, published or other public sources, or on-
line information services such as Bloomberg or Reuters.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of a Fund.\23\ Trading in Shares of a Fund will 
be halted if the circuit breaker parameters in NYSE Arca Equities Rule 
7.12 have been reached. 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 comprising the Disclosed Portfolio of a 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 will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which 
sets forth circumstances under which Shares of a Fund may be halted.
---------------------------------------------------------------------------

    \23\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in 
accordance with NYSE Arca Equities Rule 7.34 (Opening, Core, and Late 
Trading Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price 
variation (``MPV'') for quoting and entry of orders in equity 
securities traded on the NYSE Arca Marketplace is $0.01, with the 
exception of securities that are priced less than $1.00 for which the 
MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Equities Rule 8.600. The Exchange represents 
that, for initial and/or continued listing, each Fund will be in 
compliance with Rule 10A-3 \24\ under the Act, as provided by NYSE Arca 
Equities Rule 5.3. A minimum of 100,000 Shares for each Fund will be 
outstanding at the commencement of trading on the Exchange. The 
Exchange will obtain a representation from the issuer of the Shares 
that the NAV per Share will be calculated daily and that the NAV and 
the Disclosed Portfolio will be made available to all market 
participants at the same time.
---------------------------------------------------------------------------

    \24\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances administered by the Exchange, as 
well as cross-market surveillances administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws. 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 federal securities laws applicable to trading on the 
Exchange.\25\
---------------------------------------------------------------------------

    \25\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations. The Exchange 
or FINRA, on behalf of the Exchange, or both, will communicate as 
needed regarding trading in the Shares and certain exchange-traded 
equity securities with other markets and other entities that are 
members of the Intermarket Surveillance Group (``ISG''), and the 
Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading in the Shares and certain 
exchange-traded equity securities from such markets and other 
entities.\26\ In addition, the Exchange may obtain information 
regarding trading in the Shares and certain exchange-traded equity 
securities from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    \26\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio may trade on markets that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(a) the description of the portfolio, (b)

[[Page 44062]]

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 of the 
Funds on the Exchange.
    The issuer has represented to the Exchange that it will advise the 
Exchange of any failure by a 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 a Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under NYSE Arca Equities Rule 5.5(m).
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
Equity Trading Permit (``ETP'') Holders in an Information Bulletin 
(``Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Bulletin will discuss the 
following: (1) The procedures for purchases and redemptions of Shares 
in Creation Units (and that Shares are not individually redeemable); 
(2) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due 
diligence on its ETP Holders to learn the essential facts relating to 
every customer prior to trading the Shares; (3) the risks involved in 
trading the Shares during the Opening and Late Trading Sessions when an 
updated PIV will not be calculated or publicly disseminated; (4) how 
information regarding the PIV will be disseminated; (5) the requirement 
that ETP Holders 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 Bulletin will reference that the Funds will be 
subject to various fees and expenses described in the Registration 
Statement. The Bulletin will discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act. The Bulletin will also disclose that the NAV for the Shares will 
be calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \27\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Equities Rule 
8.600. The Adviser has implemented a fire wall with respect to its 
broker-dealer affiliate regarding access to information concerning the 
composition and/or changes to the portfolio. The Exchange has in place 
surveillance procedures that are adequate to properly monitor trading 
in the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws. 
The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and certain 
exchange-traded equity securities with other markets and other entities 
that are members of the ISG, and the Exchange or FINRA, on behalf of 
the Exchange, or both, may obtain trading information regarding trading 
in the Shares and certain exchange-traded equity securities from such 
markets and other entities. In addition, the Exchange may obtain 
information regarding trading in the Shares and certain exchange-traded 
equity securities from markets and other entities that are members of 
ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. Each Fund's investments will be 
consistent with such Fund's investment objective and will not be used 
to enhance leverage. The non-U.S. equity securities in the portfolio of 
the First Trust Horizon Managed Volatility Developed International ETF 
will meet the following criteria on a continual basis: (1) Non-U.S. 
equity securities each shall have a minimum market value of at least 
$100 million; (2) non-U.S. equity securities each shall have a minimum 
global monthly trading volume of 250,000 shares, or minimum global 
notional volume traded per month of $25,000,000, averaged over the last 
six months; (3) the most heavily weighted non-U.S. equity security 
shall not exceed 25% of the weight of such Fund's entire portfolio, 
and, to the extent applicable, the five most heavily weighted non-U.S. 
equity securities shall not exceed 60% of the weight of such Fund's 
entire portfolio; and (4) each non-U.S. equity security shall be listed 
and traded on an exchange that has last-sale reporting.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV per Share will be calculated daily and that the NAV 
and the Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Funds and the Shares, 
thereby promoting market transparency. Moreover, the PIV will be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the Exchange's Core Trading Session. On each business 
day, before commencement of trading in Shares in the Core Trading 
Session on the Exchange, each Fund will disclose on its Web site the 
Disclosed Portfolio that will form the basis for such 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 will be available via the CTA high-speed 
line. The Web site for the Funds will include a form of the prospectus 
for the Funds and additional data relating to NAV and other applicable 
quantitative information. Moreover, prior to the commencement of 
trading, the Exchange will inform its ETP Holders in a Bulletin of the 
special characteristics and risks associated with trading the Shares. 
Trading in Shares of a Fund will be halted if the circuit breaker 
parameters in NYSE Arca Equities Rule 7.12 have been reached or because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable, and trading in the Shares will 
be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth 
circumstances under which Shares of a Fund may be halted. In addition, 
as noted above, investors will have ready access to information 
regarding each Fund's holdings, the PIV, 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 
additional types of actively-managed exchange-traded products that will 
enhance competition among market participants, to the benefit of 
investors

[[Page 44063]]

and the marketplace. As noted above, the Exchange has in place 
surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding each Fund's holdings, 
the PIV, the Disclosed Portfolio, and quotation and last sale 
information for the Shares.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of 
additional types of actively-managed exchange-traded products that 
primarily hold equity securities, which 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 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 the 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-NYSEArca-2016-87 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2016-87. 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 the Exchange. 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-NYSEArca-2016-87 and should 
be submitted on or before July 27, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15913 Filed 7-5-16; 8:45 am]
 BILLING CODE 8011-01-P