[Federal Register Volume 84, Number 194 (Monday, October 7, 2019)]
[Notices]
[Pages 53542-53547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21726]
[[Page 53542]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87191; File No. SR-NASDAQ-2019-079]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to the First Trust Low Duration Opportunities ETF
October 1, 2019.
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 September 17, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. 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
The Exchange proposes a rule change relating to the First Trust Low
Duration Opportunities ETF (formerly known as the First Trust Low
Duration Mortgage Opportunities ETF) (the ``Fund'') of First Trust
Exchange-Traded Fund IV (the ``Trust''), the shares of which have been
approved by the Commission for listing and trading under Nasdaq Rule
5735 (``Managed Fund Shares''). The shares of the Fund are collectively
referred to herein as the ``Shares.''
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.com, at the principal office of
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 Exchange 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 these 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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Commission has approved the listing and trading of Shares under
Nasdaq Rule 5735, which governs the listing and trading of Managed Fund
Shares on the Exchange.\3\ The Exchange believes the proposed rule
change reflects no significant issues not previously addressed in the
Prior Release.
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\3\ The Commission approved Nasdaq Rule 5735 in Securities
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June
20, 2008) (SR-NASDAQ-2008-039). The Commission previously approved
the listing and trading of the Shares of the Fund. See Securities
Exchange Act Release Nos. 72281 (May 30, 2014), 79 FR 32586 (June 5,
2014) (the ``Prior Notice'') and 72607 (July 15, 2014), 79 FR 42386
(July 21, 2014) (the ``Prior Order'' and, together with the Prior
Notice, the ``Prior Release'') (SR-NASDAQ-2014-057).
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The Fund is an actively-managed exchange-traded fund (``ETF''). The
Shares are offered by the Trust, which was established as a
Massachusetts business trust on September 15, 2010. The Trust, which is
registered with the Commission as an investment company under the
Investment Company Act of 1940 (the ``1940 Act''), has filed a
registration statement on Form N-1A (``Registration Statement'')
relating to the Fund with the Commission.\4\ The Fund is a series of
the Trust. The Adviser is the investment adviser to the Fund. First
Trust Portfolios L.P. is the principal underwriter and distributor of
the Fund's Shares. The Bank of New York Mellon (``BNY'') acts as the
administrator, custodian, and fund accounting and transfer agent to the
Fund.
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\4\ See Post-Effective Amendment No. 163 to Registration
Statement on Form N-1A for the Trust, dated February 27, 2019 (File
Nos. 333-174332 and 811-22559). The descriptions of the Fund and the
Shares contained herein are based, in part, on information in the
Registration Statement, as amended. First Trust Advisors L.P. (the
``Adviser'') represents that the Adviser will not implement the
changes described herein until the instant proposed rule change is
operative.
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The purpose of this proposed rule change is to modify certain
provisions set forth in the Prior Notice that (1) under normal market
conditions, (a) require the Fund to invest at least 80% of its net
assets in ``Mortgage-Related Investments'' and (b) limit the Fund's
investments in certain debt securities, money market funds and other
cash equivalents, and cash (in the aggregate) to 20% of its net assets;
(2) pertain to the Fund's ability to invest in securitized products;
and (3) pertain to the Fund's ability to invest in derivative
instruments.
(1) Proposed Changes Pertaining to the Investment Requirement, Short-
Term/Cash Investments and Non-Mortgage Government Entity Securities
The Prior Notice stated that under normal market conditions, the
Fund would seek to achieve its investment objectives by investing at
least 80% of its net assets (including investment borrowings) in the
mortgage-related debt securities and other mortgage-related instruments
described therein (collectively referred to as ``Mortgage-Related
Investments'') (the ``Investment Requirement''). Further, as indicated
in the Prior Notice, the Mortgage-Related Investments in which the Fund
is permitted to invest may be, but are not required to be, issued and/
or guaranteed by Government Entities.\5\ The Exchange is proposing
that, going forward, (a) the Investment Requirement would be modified
to require that the Fund invest at least 60% (rather than at least 80%)
of its net assets in Mortgage-Related Investments, and (b) the Fund
would be permitted to invest up to 40% of its net assets (in the
aggregate) in Short-Term/Cash Investments (as defined below) and Non-
Mortgage Government Entity Securities (as defined below) \6\ (the ``40%
Limit''). The Adviser believes that these modifications, by permitting
the Fund to invest more conservatively, would enhance the Fund's
overall credit and liquidity profile, permit it to be more defensive in
nature in times of heightened market volatility, and facilitate its
ability to manage its intended low duration mandate.\7\
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\5\ As stated in the Prior Notice, the U.S. government, its
agencies and instrumentalities, and U.S. government-sponsored
entities are referred to collectively as ``Government Entities''.
\6\ As a related matter, with respect to footnote 16 of the
Prior Notice and the accompanying sentence regarding the Fund's
intention to invest primarily in investment grade securities, all
Short-Term/Cash Investments and Non-Mortgage Government Entity
Securities would be considered investment grade securities and no
Short-Term/Cash Investments or Non-Mortgage Government Entity
Securities would count toward the 20% limit that applies to
securities that are below investment grade and securities that are
unrated and have not been judged by the Adviser to be of comparable
quality to rated investment grade securities, as described in such
sentence.
\7\ In this regard, the Adviser notes that generally, in a
rising interest rate environment, mortgage rates also increase,
which may lead to a decrease in refinancing activity, causing
certain Mortgage-Related Investments to extend in duration and
average life.
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Under the heading ``Other Investments'', the Prior Notice stated,
among other things, that the Fund may invest up to 20% of its net
assets in short-term debt securities, money market funds and other cash
equivalents, or it may hold cash (the ``Short-Term/Cash Provision'').
In this
[[Page 53543]]
regard, the Prior Notice stated that short-term debt securities (a) are
securities from issuers having a long-term debt rating of at least A by
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. (currently known as S&P Global Ratings) (``S&P
Ratings''), Moody's Investors Service, Inc. (``Moody's'') or Fitch
Ratings (``Fitch'') and having a maturity of one year or less and (b)
are defined to include, without limitation, the following: (1) Fixed
rate and floating rate U.S. government securities, including bills,
notes and bonds differing as to maturity and rates of interest, which
are either issued or guaranteed by the U.S. Treasury or by U.S.
government agencies or instrumentalities (collectively, ``Short-Term
Government Securities''); (2) certificates of deposit issued against
funds deposited in a bank or savings and loan association; (3) bankers'
acceptances, which are short-term credit instruments used to finance
commercial transactions; (4) repurchase agreements,\8\ which involve
purchases of debt securities; (5) bank time deposits, which are monies
kept on deposit with banks or savings and loan associations for a
stated period of time at a fixed rate of interest; and (6) commercial
paper,\9\ which is short-term unsecured promissory notes (the short-
term debt securities in which the Fund may currently invest that are
listed in the preceding clauses (1) through (6) are referred to
collectively as ``Current Short-Term Debt Securities''). The Exchange
proposes that going forward, in lieu of the Short-Term/Cash Provision,
the Fund would be permitted, in accordance with the 40% Limit, to
invest up to 40% of its net assets (in the aggregate) in ``Short-Term/
Cash Investments'', which would include only the following: (a) Current
Short-Term Debt Securities and money market funds; (b) to the extent
not included in (a), any cash equivalents that are included in Nasdaq
Rule 5735(b)(1)(C) (``Generic Cash Equivalents''); and (c) cash.\10\
For the avoidance of doubt, to the extent a security or other
instrument in which the Fund invests meets both the definition of
``Short-Term/Cash Investment'' and the definition of ``Mortgage-Related
Investment'',\11\ such security or other instrument (a) would be taken
into account for purposes of the Investment Requirement and (b) would
not be taken into account for purposes of the 40% Limit.
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\8\ The Prior Notice stated that the Fund intends to enter into
repurchase agreements only with financial institutions and dealers
believed by the Adviser to present minimal credit risks in
accordance with criteria approved by the Board of Trustees of the
Trust.
\9\ The Prior Notice stated that the Fund may only invest in
commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or
higher by Moody's, or F1 or higher by Fitch.
\10\ To conform, the provision in the Prior Notice under the
heading ``Other Investments'' permitting the Fund to invest ``up to
20% of its net assets in the securities of other investment
companies, including money market funds . . . and other ETFs'' would
be revised to exclude money market funds from such 20% limitation.
In addition, to avoid inconsistency, the sentence in the Prior
Notice under the heading ``Other Investments'' stating that the
``use of temporary investments will not be a part of a principal
investment strategy of the Fund'' would be deleted.
\11\ Mortgage-Related Investments are not required to have
maturities that are greater than or less than any specific term.
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In addition to the Short-Term/Cash Provision, under the heading
``Other Investments'', the Prior Notice also stated that the Fund may,
in addition to its investments in Mortgage-Related Investments issued
or guaranteed by Government Entities and in Short-Term Government
Securities, invest up to 20% of its net assets in other direct
obligations of the U.S. government and in other securities issued or
guaranteed by Government Entities.\12\ In lieu of the foregoing 20%
limit, the Exchange proposes that, going forward, the Fund would be
permitted, in accordance with the 40% Limit, to invest up to 40% of its
net assets in Non-Mortgage Government Entity Securities.\13\ For the
avoidance of doubt, any Mortgage-Related Investments issued and/or
guaranteed by Government Entities \14\ (a) would be taken into account
for purposes of the Investment Requirement and (b) would not be taken
into account for purposes of the 40% Limit.
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\12\ As noted in the Prior Notice (see footnote 20 thereof and
the accompanying text), such investments may include, without
limitation, U.S. government inflation-indexed securities.
\13\ For purposes of this filing, direct obligations of the U.S.
government and other securities issued and/or guaranteed by
Government Entities that, in each case, are neither Mortgage-Related
Investments nor Short-Term/Cash Investments are collectively
referred to as ``Non-Mortgage Government Entity Securities''.
\14\ These would include, without limitation, Ginnie Mae
securities and Fannie Mae and Freddie Mac pass-through mortgage
certificates, as referenced in footnote 10 and the accompanying text
of the Prior Notice.
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As described in the Prior Notice under the heading ``Principal
Investments'', the Fund may invest in mortgage dollar rolls \15\ and
to-be-announced transactions (``TBA Transactions'' \16\) and, to the
extent required under applicable federal securities laws, rules, and
interpretations thereof, the Fund will ``set aside'' liquid assets or
engage in other measures to ``cover'' open positions held in connection
with such transactions. Further, as described in the Prior Notice under
the heading ``Other Investments'', the Fund may invest in exchange-
listed U.S. Treasury futures contracts.\17\ The Fund may invest in such
contracts for various purposes, such as to obtain net long or short
exposures to selected interest rates or durations or to hedge risks
associated with other Fund investments. In conjunction with, and in
furtherance of, the proposed changes described above, the Exchange is
proposing that going forward, to the extent the Fund ``sets aside'',
earmarks, holds or otherwise takes measures utilizing Short-Term/Cash
Investments for purposes of collateralizing or covering long positions
held in connection with mortgage dollar rolls and/or TBA Transactions
and/or other forward-settling Mortgage-Related Investments transactions
(i.e., purchase transactions involving Mortgage-Related Investments
that settle on a date that is later than the trade date/purchase date)
and/or exchange-listed U.S. Treasury futures contracts, such Short-
Term/Cash Investments would be counted toward the Investment
Requirement rather than the 40% Limit. As such, the Fund would be able
to maximize its ability to use Short-Term/Cash Investments included
within the 40% Limit for other purposes (e.g., providing income and
liquidity, and preserving capital for temporary or defensive purposes).
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\15\ As described in the Prior Notice, in a mortgage dollar
roll, the Fund will sell (or buy) mortgage-backed securities for
delivery on a specified date and simultaneously contract to
repurchase (or sell) substantially similar (same type, coupon and
maturity) securities on a future date. See footnote 13 of the Prior
Notice and accompanying text.
\16\ As described in the Prior Notice, a TBA Transaction is a
method of trading mortgage-backed securities. TBA Transactions
generally are conducted in accordance with widely-accepted
guidelines, which establish commonly observed terms and conditions
for execution, settlement and delivery. In a TBA Transaction, the
buyer and the seller agree on general trade parameters such as
agency, settlement date, par amount and price. The actual pools
delivered generally are determined two days prior to the settlement
date. See footnote 14 of the Prior Notice and accompanying text.
\17\ See infra with respect to proposed changes that would
expand the Fund's ability to hold derivative instruments.
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The Exchange does not believe that the proposed changes relating to
the Investment Requirement, the Short-Term/Cash Provision and the
Fund's ability to invest in Non-Mortgage Government Entity Securities
raise concerns. Rather, the Exchange believes that such proposed
changes, by expanding the Fund's ability to invest in Short-Term/Cash
Investments and Non-Mortgage Government Entity Securities
[[Page 53544]]
(and therefore, its ability to invest more conservatively), would
enhance the Fund's overall credit and liquidity profile, permit it to
be more defensive in nature in times of heightened market volatility,
and facilitate its ability to manage its intended low duration mandate.
In this regard, the Exchange notes that Short-Term/Cash Investments are
generally short-term, liquid and of high credit quality,\18\ and that
Non-Mortgage Government Entity Securities are generally liquid and of
high credit quality,\19\ making them less susceptible than other asset
classes both to price manipulation and volatility.
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\18\ In addition, under Nasdaq Rule 5735(b)(1)(C)(i), there is
no limitation on the percentage of a portfolio invested in cash and
Generic Cash Equivalents. Investments in Short-Term/Cash Investments
that are not Generic Cash Equivalents may not comply with the fixed
income generic listing provisions of Nasdaq Rule 5735(b)(1)(B)
(collectively, the ``Fixed Income GLS''). However, the Exchange
notes that the Commission has previously approved proposed rule
changes to permit investments in high-quality short-term fixed
income securities with maturities of up to 397 days that would not
necessarily comply with the applicable requirements of the generic
listing provisions for fixed income instruments of NYSE Arca, Inc.
and Cboe BZX Exchange, Inc. See, e.g., Securities Exchange Act
Release Nos. 86698 (August 16, 2019), 84 FR 43823 (August 22, 2019)
(SR-NYSEArca-2018-83) (iShares Bloomberg Roll Select Commodity
Strategy ETF); and 83014 (April 9, 2018), 83 FR 16150 (April 13,
2018) (SR-CboeBZX-2017-023) (iShares Gold Strategy ETF).
\19\ In addition, the Exchange notes that under the Prior Order,
the Fund may invest without limitation in securities issued and/or
guaranteed by Government Entities (referred to herein as
``Government Securities'') if they are also Mortgage-Related
Investments. In conjunction with the proposed changes to the
Investment Requirement described above, the proposed changes
relating to Non-Mortgage Government Entity Securities would merely
permit the Fund to invest to a greater extent in Government
Securities that are not mortgage-related. In addition, the Exchange
notes that Nasdaq Rule 5735(b)(1)(B)(ii), which generally requires
that no component fixed income security represent more than 30% of
the fixed income weight of a portfolio and that the five most
heavily weighted component fixed income securities in a portfolio
not in the aggregate account for more than 65% of the fixed income
weight of the portfolio, includes exclusions for ``Treasury
Securities'' and ``GSE Securities'' as defined in Nasdaq Rule
5735(b)(1)(B), which indicates that significant investments in such
securities do not raise manipulation concerns.
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(2) Proposed Changes to Provisions Pertaining to Investments in
Securitized Products
To provide the Fund with additional flexibility in seeking exposure
to the securitized product marketplace, the Exchange is proposing that,
going forward, the Fund would be permitted to invest up to 5% of its
net assets in asset-backed securities (other than Mortgage-Related
Investments) that are not Government Securities (such asset-backed
securities are referred to as ``ABS''). Currently, as described in the
Prior Notice, the Fund is required to limit its investments in
Mortgage-Related Investments that are not Government Securities to 20%
of its net assets (the ``20% Non-Government Limit''). Going forward,
the Exchange is proposing that the 20% Non-Government Limit would be
modified to provide that the Fund may invest up to 20% of its net
assets, in the aggregate, in (a) Mortgage-Related Investments that are
not Government Securities and (b) ABS; however, the Fund's investments
in ABS would not exceed 5% of the Fund's net assets.\20\
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\20\ As a related matter, as a conforming change, the sentence
set forth in footnote 11 of the Prior Notice would be modified to
provide that (a) investments in Mortgage-Related Investments that
are not Government Securities would be included for purposes of the
Investment Requirement and (b) ABS are not Mortgage-Related
Investments and, therefore, would not be included for purposes of
the Investment Requirement.
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The Exchange does not believe that the proposed changes raise
concerns given that they would not increase the percentage of the
Fund's net assets restricted by the 20% Non-Government Limit. Rather, a
small portion of the Fund's assets could be allocated to ABS in order
to give the Fund more diversified exposure to the securitized product
marketplace, thereby potentially mitigating risk and permitting the
Fund to benefit from relative value opportunities within the
securitized product marketplace.\21\ Further, the Exchange notes that
the Fund would comply with Nasdaq Rule 5735(b)(1)(B)(v), which permits
an actively-managed ETF to invest in non-agency, non-government-
sponsored entity (``non-GSE'') and privately-issued mortgage-related
and other asset-backed securities (collectively, ``Private ABS/MBS''),
provided that such components do not account, in the aggregate, for
more than 20% of the weight of the portfolio.\22\
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\21\ For the avoidance of doubt, however, the Fund could
continue to invest up to 20% of its net assets in Mortgage-Related
Investments that are not Government Securities so long as such
investments, when aggregated with investments in ABS, do not exceed
the 20% Non-Government Limit. Except as permitted by the 20% Non-
Government Limit, the Fund's investments in Mortgage-Related
Investments would consist of investments in Mortgage-Related
Investments that are Government Securities.
\22\ See Securities Exchange Act Release No. 86399 (July 17,
2019), 84 FR 35446 (July 23, 2019) (SR-NASDAQ-2019-054).
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(3) Proposed Changes to Provisions Pertaining to Investments in
Derivative Instruments
Under the heading ``Other Investments'', the Prior Notice provided
that under normal market conditions, the Fund may invest up to 20% of
the value of its net assets in exchange-listed options on U.S. Treasury
securities, exchange-listed options on U.S. Treasury futures contracts
and exchange-listed U.S. Treasury futures contracts (the ``Derivatives
Provision'').\23\ Going forward, the Exchange is proposing that to
provide the Fund with additional flexibility, the Derivatives Provision
would be deleted and instead, the Fund would be permitted to hold
listed and over-the-counter (``OTC'') derivatives to the extent
permitted by the generic listing provisions of Nasdaq Rules
[[Page 53545]]
5735(b)(1)(D),\24\ (E) \25\ and (F) \26\ (collectively, the
``Derivatives GLS''). The Adviser believes that expanding the listed
derivatives in which the Fund may invest and permitting it to invest in
OTC derivatives will help the Fund more effectively target, manage and
mitigate risk.\27\ For example, while the Fund could currently mitigate
and limit exposure to the U.S. Treasury curve through investing in
permitted derivatives, it could not utilize derivatives to target,
manage and mitigate various other risks. The Exchange does not believe
that the proposed changes to the Derivatives Provision should raise
concerns since expanding the Fund's ability to utilize derivatives is
expected to enhance the Fund's ability to target, manage and mitigate
risk and would be consistent with the parameters of the Derivatives
GLS. Further, as stated in the Prior Notice, the Fund's investments in
derivative instruments would be consistent with the Fund's investment
objectives and the 1940 Act and would not be used to seek to achieve a
multiple or inverse multiple of an index.
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\23\ The Derivatives Provision also included footnote 18 of the
Prior Notice which stated, among other things, that the Fund would
limit its direct investments in futures and options on futures to
the extent necessary for the Adviser to claim the exclusion from
regulation as a ``commodity pool operator'' with respect to the Fund
under Rule 4.5 promulgated by the Commodity Futures Trading
Commission (``CFTC''), as such rule may be amended from time to
time, and described certain related tests.
\24\ Under Nasdaq Rule 5735(b)(1)(D), a portfolio may hold
listed derivatives, including futures, options and swaps on
commodities, currencies and financial instruments (e.g., stocks,
fixed income, interest rates, and volatility) or a basket or index
of any of the foregoing. There shall be no limitation to the
percentage of the portfolio invested in such holdings, subject to
the following requirements: (i) In the aggregate, at least 90% of
the weight of such holdings invested in futures, exchange-traded
options, and listed swaps shall, on both an initial and continuing
basis, consist of futures, options, and swaps for which the Exchange
may obtain information via the Intermarket Surveillance Group
(``ISG''), from other members or affiliates of ISG, or for which the
principal market is a market with which the Exchange has a
comprehensive surveillance sharing agreement. (For purposes of
calculating this limitation (referred to herein as the ``90%
Requirement''), a portfolio's investment in listed derivatives will
be calculated as the aggregate gross notional value of the listed
derivatives.); and (ii) the aggregate gross notional value of listed
derivatives based on any five or fewer underlying reference assets
shall not exceed 65% of the weight of the portfolio (including gross
notional exposures), and the aggregate gross notional value of
listed derivatives based on any single underlying reference asset
shall not exceed 30% of the weight of the portfolio (including gross
notional exposures). In light of the 90% Requirement, the provision
set forth in footnote 17 of the Prior Notice and repeated under the
heading ``Surveillance'' in the Prior Notice (requiring that at
least 90% of the Fund's net assets that are invested in exchange-
traded equity securities and exchange-traded derivatives (in the
aggregate) will be invested in investments that trade in markets
that are members of ISG or are parties to a comprehensive
surveillance sharing agreement with the Exchange) would be deleted.
The Exchange notes that the only exchange-traded equity securities
in which the Fund is permitted to invest are ETFs that are listed
and traded in the U.S. on registered exchanges. See footnote 21 of
the Prior Notice and accompanying text.
\25\ Nasdaq Rule 5735(b)(1)(E) provides that a portfolio may
hold OTC derivatives, including forwards, options, and swaps on
commodities, currencies and financial instruments (e.g., stocks,
fixed income, interest rates, and volatility) or a basket or index
of any of the foregoing; however, on both an initial and continuing
basis, no more than 20% of the assets in the portfolio may be
invested in OTC derivatives. For purposes of calculating this
limitation, a portfolio's investment in OTC derivatives will be
calculated as the aggregate gross notional value of the OTC
derivatives.
\26\ Nasdaq Rule 5735(b)(1)(F) provides that to the extent that
listed or OTC derivatives are used to gain exposure to individual
equities and/or fixed income securities, or to indexes of equities
and/or indexes of fixed income securities, the aggregate gross
notional value of such exposure shall meet the criteria set forth in
Nasdaq Rules 5735(b)(1)(A) and 5735(b)(1)(B), respectively.
\27\ The Prior Notice indicated that the Fund's use of
derivative transactions may allow it to obtain net long or short
exposures to selected interest rates or durations, and that
derivatives may also be used to hedge risks associated with the
Fund's other portfolio investments. For the avoidance of doubt, the
Fund's use of derivatives is not limited to the foregoing purposes.
In this regard, among other things, the Fund may use listed and OTC
derivatives to gain exposure to individual equities and/or fixed
income securities, or to indexes of equities and/or indexes of fixed
income securities in accordance with Nasdaq Rule 5735(b)(1)(F).
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Availability of Information
On each business day, before commencement of trading of Shares in
the Regular Market Session on the Exchange, the Fund would continue to
disclose on its website the Disclosed Portfolio (as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the
Fund's calculation of net asset value (``NAV'') at the end of the
business day in compliance with Nasdaq Rule 5735(c)(2). The Fund's
disclosure of derivative positions in the Disclosed Portfolio would
continue to include information that market participants can use to
value these positions intraday.
Intraday executable price information for the Short-Term/Cash
Investments, Non-Mortgage Government Entity Securities, ABS, other
fixed income securities, exchange-traded equity securities, and
exchange-traded and OTC derivatives held by the Fund would be available
from major broker-dealer firms and/or major market data vendors.
Additionally, the Trade Reporting and Compliance Engine (``TRACE'') of
the Financial Industry Regulatory Authority (``FINRA'') would continue
to be a source of price information for the Mortgage-Related
Investments held by the Fund. For exchange-traded assets, including
listed derivatives, intraday price information would continue to be
available directly from the applicable listing venues. Intraday price
information for the fixed income securities held by the Fund would also
continue to be generally available through subscription services which
can be accessed by Authorized Participants (as defined in the Prior
Notice) and other investors. Registered open-end management investment
companies (other than ETFs) would continue to be generally priced once
each business day and such prices would continue to be available
through the applicable fund's website or major market data vendors.
Surveillance
The Exchange represents that trading in the Shares would be subject
to the existing trading surveillances, administered by both Nasdaq and
also FINRA, on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\28\ 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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\28\ 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, or the Exchange, or both, would
communicate as needed, and may obtain trading information, regarding
trading in the Shares and the exchange-listed instruments held by the
Fund with other markets and other entities that are members of ISG.\29\
The Exchange may also obtain information regarding trading in the
Shares and the exchange-listed instruments held by the Fund from
markets and other entities with which the Exchange has in place a
comprehensive surveillance sharing agreement. Moreover, FINRA, on
behalf of the Exchange, would be able to access, as needed, trade
information for certain fixed income securities held by the Fund
reported to FINRA's TRACE.
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\29\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio may trade on markets that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
[[Page 53546]]
Continued Listing Representations
All statements and representations made in this filing regarding
(a) the description of the portfolio or reference assets, (b)
limitations on portfolio holdings or reference assets, (c)
dissemination and availability of the reference asset or intraday
indicative values, or (d) the applicability of Exchange listing rules
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.
The Adviser represents that there would be no change to the Fund's
investment objectives. Except as provided herein, all representations
made in the Prior Notice regarding (a) the description of the portfolio
or reference assets, (b) limitations on portfolio holdings or reference
assets, (c) dissemination and availability of the reference asset or
intraday indicative values, or (d) the applicability of Exchange
listing rules (collectively, ``Prior Notice Continued Listing
Representations'') would remain unchanged. Except for the Fixed Income
GLS, the Fund and the Shares would comply with the requirements
applicable to Managed Fund Shares under Nasdaq Rule 5735.\30\
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\30\ Although the Fund may not comply with the fixed income
generic listing provisions of Nasdaq Rule 5735(b)(1)(B)(i)-(iv), it
will comply with the fixed income generic listing provisions of
Nasdaq Rule 5735(b)(1)(B)(v).
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2. Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b)
of the Act in general and Section 6(b)(5) of the 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. The purpose of the proposed rule
change is to modify certain provisions included in the Prior Notice
pertaining to (1) the Investment Requirement, Short-Term/Cash
Investments and Non-Mortgage Government Entity Securities; (2) the
Fund's ability to invest in securitized products; and (3) the Fund's
ability to invest in derivative instruments. Except as provided herein,
the Prior Notice Continued Listing Representations would remain
unchanged. Except for the Fixed Income GLS, the Fund and the Shares
would comply with the requirements applicable to Managed Fund Shares
under Nasdaq Rule 5735.
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares would continue to be listed and traded on the Exchange pursuant
to Nasdaq Rule 5735. The Exchange represents that trading in the Shares
would continue to be subject to the existing trading surveillances,
administered by both Nasdaq and also FINRA, on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws. FINRA, on behalf of the Exchange,
or the Exchange, or both, would communicate as needed, and may obtain
trading information, regarding trading in the Shares and the exchange-
listed instruments held by the Fund with other markets and other
entities that are members of ISG. The Exchange may also obtain
information regarding trading in the Shares and the exchange-listed
instruments held by the Fund from markets and other entities with which
the Exchange has in place a comprehensive surveillance sharing
agreement. Moreover, FINRA, on behalf of the Exchange, would be able to
access, as needed, trade information for certain fixed income
securities held by the Fund reported to FINRA's TRACE.
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 Adviser represents that the primary purpose of the proposed
changes is to provide it with greater flexibility in meeting the Fund's
investment objectives by modifying certain provisions in the Prior
Notice.
With respect to the proposed changes relating to the Investment
Requirement, the Short-Term/Cash Provision and Non-Mortgage Government
Entity Securities, the Exchange does not believe that such changes
raise concerns. Rather, the Exchange believes that the proposed
changes, by expanding the Fund's ability to invest in Short-Term/Cash
Investments and Non-Mortgage Government Entity Securities (and
therefore, its ability to invest more conservatively), would enhance
the Fund's overall credit and liquidity profile, permit it to be more
defensive in nature in times of heightened market volatility, and
facilitate its ability to manage its intended low duration mandate. In
this regard, the Exchange notes that Short-Term/Cash Investments are
generally short-term, liquid and of high credit quality,\31\ and that
Non-Mortgage Government Entity Securities are generally liquid and of
high credit quality,\32\ making them less susceptible than other asset
classes both to price manipulation and volatility.
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\31\ As stated above, the Current Short-Term Debt Securities are
securities from issuers having a long-term debt rating of at least A
by S&P Ratings, Moody's or Fitch and having a maturity of one year
or less. The other Short-Term/Cash Investments would consist of
money market funds, cash, and, to the extent not previously
referenced in this footnote, Generic Cash Equivalents. See also
footnote 18, supra.
\32\ See supra footnote 19.
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With respect to the proposed changes to permit the Fund to invest
up to 5% of its net assets in ABS, the Exchange does not believe that
such changes raise concerns given that they would not increase the
percentage of the Fund's net assets restricted by the 20% Non-
Government Limit. Rather, a small portion of the Fund's assets could be
allocated to ABS in order to give the Fund more diversified exposure to
the securitized product marketplace, thereby potentially mitigating
risk and permitting the Fund to benefit from relative value
opportunities within the securitized product marketplace. Further,
taking into account the proposed changes, the 20% Non-Government Limit
would be consistent with the fixed income generic listing provisions of
Nasdaq Rule 5735(b)(1)(B)(v), as recently modified.\33\
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\33\ See supra footnote 22.
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With respect to the proposed changes relating to the Derivatives
Provision, the Exchange does not believe that such changes raise
concerns since expanding the Fund's ability to utilize derivatives is
expected to enhance the Fund's ability to target, manage and mitigate
risk and would be consistent with the parameters of the Derivatives
GLS. Further, as stated in the Prior Notice, the Fund's investments in
derivative instruments would be consistent with the Fund's investment
objectives and the 1940 Act and would not be used to seek to achieve a
multiple or inverse multiple of an index.
Based on the foregoing, the Exchange does not believe that the
proposed changes would adversely affect investors or Exchange trading.
In addition, a large amount of information would continue to be
publicly available regarding the Fund
[[Page 53547]]
and the Shares, thereby promoting market transparency. For example, the
Intraday Indicative Value (as defined in Nasdaq Rule 5735(c)(3)),
available on the Nasdaq Information LLC proprietary index data service,
would continue to be widely disseminated and broadly displayed at least
every 15 seconds during the Regular Market Session. On each business
day, before commencement of trading in Shares in the Regular Market
Session on the Exchange, the Fund would continue to disclose on its
website the Disclosed Portfolio that will form the basis for the Fund's
calculation of NAV at the end of the business day. Intraday executable
price information for the Short-Term/Cash Investments, Non-Mortgage
Government Entity Securities, ABS, other fixed income securities,
exchange-traded equity securities, and exchange-traded and OTC
derivatives held by the Fund would be available from major broker-
dealer firms and/or major market data vendors. Additionally, FINRA's
TRACE would continue to be a source of price information for the
Mortgage-Related Investments held by the Fund. For exchange-traded
assets, including listed derivatives, intraday price information would
continue to be available directly from the applicable listing venues.
Intraday price information for fixed income securities held by the Fund
would also continue to be generally available through subscription
services which can be accessed by Authorized Participants and other
investors. Registered open-end management investment companies (other
than ETFs) would continue to be generally priced once each business day
and such prices would continue to be available through the applicable
fund's website or major market data vendors.
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 the additional flexibility to be afforded to
the Adviser under the proposed rule change is intended to enhance its
ability to meet the Fund's investment objectives, to the benefit of
investors. In addition, consistent with the Prior Notice, NAV per Share
would continue to be calculated daily, and NAV and the Disclosed
Portfolio would continue to be made available to all market
participants at the same time. Further, investors would continue to
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.
For the above reasons, Nasdaq believes the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposed rule change would provide the Adviser with additional
flexibility, thereby helping the Fund to achieve its investment
objectives. As such, it is expected that the Fund may become a more
attractive investment product in the marketplace and, therefore, that
the proposed rule change would not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \34\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\35\
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\34\ 15 U.S.C. 78s(b)(3)(A)(iii).
\35\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-2019-079 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-NASDAQ-2019-079. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2019-079 and should be submitted
on or before October 28, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21726 Filed 10-4-19; 8:45 am]
BILLING CODE 8011-01-P