[Federal Register Volume 85, Number 70 (Friday, April 10, 2020)]
[Notices]
[Pages 20309-20312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07548]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88568; File No. SR-NASDAQ-2020-014]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to the First Trust California Municipal High Income ETF and
the First Trust Municipal High Income ETF
April 6, 2020.
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 March 27, 2020, 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
California Municipal High Income ETF (the ``California Fund'') and the
First Trust Municipal High Income ETF (the ``Municipal Fund''), each a
series of First Trust Exchange-Traded Fund III (the ``Trust''), the
shares of which have been approved by the Commission for listing and
trading under Nasdaq Rule 5735 (``Managed Fund Shares''). The
California Fund and the Municipal Fund are each, a ``Fund'' and
collectively, the ``Funds.'' The shares of the Funds 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
[[Page 20310]]
believes the proposed rule change reflects no significant issues not
previously addressed in the Prior Releases.
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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 each Fund. With respect to
the California Fund, see Securities Exchange Act Release No. 80745
(May 23, 2017), 82 FR 24755 (May 30, 2017) (SR-NASDAQ-2017-033)
(Order Granting Approval of a Proposed Rule Change, as Modified by
Amendments No. 1 and 2, To List and Trade Shares of the First Trust
California Municipal High Income ETF) (the ``California 2017
Release''). With respect to the Municipal Fund, see Securities
Exchange Act Release No. 78913 (September 23, 2016), 81 FR 69109
(October 5, 2016) (SR-NASDAQ-2016-002) (Notice of Filing of
Amendment No. 3, and Order Granting Accelerated Approval of Proposed
Rule Change, as Modified by Amendment No. 3, To List and Trade
Shares of the First Trust Municipal High Income ETF of First Trust
Exchange-Traded Fund III) (the ``Municipal 2016 Release'').
Subsequently, the Commission approved a proposed rule change
relating to the Municipal Fund, the primary purpose of which was to
modify certain representations included in the Municipal 2016
Release. See Securities Exchange Act Release No. 81265 (July 31,
2017), 82 FR 36460 (August 4, 2017) (SR-NASDAQ-2017-038) (Notice of
Filing of Amendment No. 1, and Order Granting Accelerated Approval
of a Proposed Rule Change, as Modified by Amendments No. 1 and 2,
Relating to the First Trust Municipal High Income ETF) (the
``Municipal 2017 Release''). The Municipal 2016 Release, together
with the Municipal 2017 Release, are referred to collectively as the
``Municipal 2016/2017 Release.'' In 2019, the Commission approved a
proposed rule change relating to each Fund, the primary purpose of
which was to modify certain representations included in the
Municipal 2017 Release and the California 2017 Release. See
Securities Exchange Act Release No. 85666 (April 16, 2019), 84 FR
16739 (April 22, 2019) (SR-NASDAQ-2019-021) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change to the First Trust
California Municipal High Income ETF and the First Trust Municipal
High Income ETF) (the ``2019 Release''). The Municipal 2016/2017
Release, together with the 2019 Release, are referred to
collectively as the ``Municipal Prior Release.'' The California 2017
Release, together with the 2019 Release, are referred to
collectively as the ``California Prior Release.'' The California
Prior Release and the Municipal Prior Release are each, a ``Prior
Release'' and collectively, the ``Prior Releases.''
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Each Fund is an actively-managed exchange-traded fund (``ETF'').
The Shares of each Fund are offered by the Trust, which was established
as a Massachusetts business trust on January 9, 2008. The Trust, which
is registered with the Commission as an investment company under the
Investment Company Act of 1940 (the ``1940 Act''), has, with respect to
each Fund, filed a post-effective amendment to its registration
statement on Form N-1A (``Registration Statement'') with the
Commission.\4\ Each Fund is a series of the Trust.
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\4\ See, with respect to each Fund, Post-Effective Amendment No.
103 to Registration Statement on Form N-1A for the Trust, dated
November 27, 2019 (File Nos. 333-176976 and 811-22245). The
descriptions of the Funds and the Shares contained herein are based,
in part, on information in the Registration Statement. 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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As described in more detail below, the purpose of this proposed
rule change is to delete a representation that was set forth (a) with
respect to the California Fund, the California 2017 Release (and not
subsequently modified in the 2019 Release) and (b) with respect to the
Municipal Fund, the Municipal 2016 Release (and not subsequently
modified in the Municipal 2017 Release or the 2019 Release) relating to
weighted average maturity (i.e., the ``Average Maturity
Representation,'' as defined below) in order to provide the Adviser
with additional flexibility in constructing and managing the applicable
Fund's portfolio. The Exchange believes that the proposed modification
would provide each Fund with greater ability to select ``Municipal
Securities'' (as defined below) that would support such Fund's
investment goals and should not raise concerns. In this regard, the
Exchange notes that the Commission has previously approved other
proposed rule changes involving ETFs investing in municipal securities
that did not include a representation comparable to the Average
Maturity Representation.\5\ In addition, the generic listing standards
for actively-managed ETFs that invest in fixed income securities (the
``Fixed Income GLS'') do not impose a requirement relating to the
average maturity of securities in a portfolio.\6\ Further, the 2019
Release includes certain representations that relate to each Fund's
diversity, liquidity and mitigation of risks associated with
manipulation that would not be affected by the proposed change.\7\
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\5\ See, e.g., Securities Exchange Act Release Nos. 84381
(October 5, 2018), 83 FR 51752 (October 12, 2018) (SR-NYSEArca-2018-
72) (Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Relating to Listing and Trading of Shares of the First Trust
Ultra Short Duration Municipal ETF Under NYSE Arca Rule 8.600-E);
84379 (October 5, 2018), 83 FR 51724 (October 12, 2018) (SR-
NYSEArca-2018-73) (Notice of Filing and Immediate Effectiveness of
Proposed Rule Change Relating to Listing and Trading of Shares of
the First Trust Short Duration Managed Municipal ETF Under NYSE Arca
Rule 8.600-E); 83982 (August 29, 2018), 83 FR 45168 (September 5,
2018) (SR-NYSEArca-2018-62) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change Relating to Listing and
Trading of Shares of the American Century Diversified Municipal Bond
ETF Under NYSE Arca Rule 8.600-E); and 71913 (April 9, 2014), 79 FR
21333 (April 15, 2014) (SR-NASDAQ-2014-019) (Notice of Filing of
Amendment No. 1 and Order Granting Accelerated Approval of Proposed
Rule Change, as Modified by Amendment No. 1 Thereto, Relating to the
Listing and Trading of the Shares of the First Trust Managed
Municipal Fund of First Trust Exchange-Traded Fund III)
(collectively, the ``Other Municipal Approvals'').
\6\ See Nasdaq Rule 5735(b)(1)(B).
\7\ See infra footnote 12 and accompanying text.
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As described in the California Prior Release,\8\ the primary
investment objective of the California Fund is to seek to provide
current income that is exempt from regular federal income taxes and
California income taxes, and its secondary objective is long-term
capital appreciation. As described in the Municipal Prior Release,\9\
the primary investment objective of the Municipal Fund is to generate
current income that is exempt from regular federal income taxes, and
its secondary objective is long-term capital appreciation. Under normal
market conditions, each Fund seeks to achieve its investment objectives
by investing at least 80% of its net assets (including investment
borrowings) in municipal debt securities (referred to as ``Municipal
Securities'') that pay interest that is exempt from regular federal
income taxes (and, in the case of the California Fund, California
income taxes).
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\8\ See the California 2017 Release and the 2019 Release.
\9\ See the Municipal 2016 Release and the 2019 Release.
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As discussed in the Prior Release for each Fund,\10\ the applicable
Fund may invest in Municipal Securities of any maturity. However, each
Prior Release \11\ also states that under normal market conditions,
except for the initial invest-up period and periods of high cash
inflows or outflows, the weighted average maturity of the applicable
Fund will be less than or equal to 14 years (the ``Average Maturity
Representation''). With respect to each Fund, the Average Maturity
Representation has not previously been modified.
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\10\ See, with respect to the California Fund, the California
2017 Release and with respect to the Municipal Fund, the Municipal
2016 Release.
\11\ See, with respect to the California Fund, the California
2017 Release and with respect to the Municipal Fund, the Municipal
2016 Release.
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In order to provide each Fund with greater ability to select
Municipal Securities that would support such Fund's investment goals,
the Exchange is proposing that, going forward, the Average Maturity
Representation be deleted. The Exchange does not believe that this
change should raise concerns. As noted above, the Other Municipal
Approvals did not include a similar representation and the Fixed Income
GLS do not impose a comparable requirement. Further, the Exchange notes
that the 2019 Release includes certain representations that relate to
each Fund's diversity, liquidity and mitigation of risks associated
with manipulation that would not be affected by the proposed
change.\12\
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\12\ As noted in the 2019 Release, under normal market
conditions, except for the initial invest-up period and periods of
high cash inflows or outflows, (a) for each Fund, no component fixed
income security (excluding specified U.S. government securities)
would represent more than 15% of such Fund's net assets, and the
five most heavily weighted component fixed income securities in each
Fund's portfolio (excluding U.S. government securities) would not,
in the aggregate, account for more than 25% of such Fund's net
assets; (b) each Fund's portfolio of Municipal Securities would
continue to be diversified among a minimum of 30 non-affiliated
issuers; (c) component securities that in the aggregate account for
at least 90% of the weight of each Fund's portfolio of Municipal
Securities would continue to be exempted securities as defined in
Section 3(a)(12) of the Act; and (d) each Fund's investments in
Municipal Securities would continue to provide exposure (based on
dollar amount invested) to at least 10 different industries (with no
more than 25% of the value of such Fund's net assets comprised of
Municipal Securities that provide exposure to any single industry).
In addition, each Fund's investments in illiquid assets (calculated
at the time of investment), including Rule 144A securities deemed
illiquid by the Adviser, would continue to be limited to 15% of such
Fund's net assets and, subject to certain exceptions, each Fund
would not invest 25% or more of the value of its total assets in
securities of issuers in any one industry. Further, with respect to
the Municipal Fund, under normal market conditions, except for the
initial invest-up period and periods of high cash inflows or
outflows, such Fund's investments in Municipal Securities would
continue to provide exposure (based on dollar amount invested) to at
least 15 different states (with no more than 30% of the value of
such Fund's net assets comprised of Municipal Securities that
provide exposure to any single state). The foregoing representations
set forth in this footnote 12 are referred to collectively as the
``2019 Representations.''
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[[Page 20311]]
Continued Listing Representations
For each Fund, 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
applicable Shares on the Exchange. In addition, 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
with respect to such Fund under the Nasdaq 5800 Series.
The Adviser represents that there would be no change to either
Fund's investment objectives. Except as provided herein, with respect
to each Fund, all currently effective representations (i.e.,
representations that have not previously been modified or superseded)
made in the applicable Prior Releases (collectively, the ``Prior
Release Representations'') would remain unchanged, including but not
limited to such currently effective representations 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.\13\ Except for the
generic listing provisions of Nasdaq Rule 5735(b)(1) (the ``generic
listing standards''),\14\ the Funds and the Shares would continue to
comply with the requirements applicable to Managed Fund Shares under
Nasdaq Rule 5735.
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\13\ The Exchange notes, however, that certain statements in the
Prior Releases include references that are no longer current and has
not specifically updated such statements in this filing. For
example, the Municipal 2016 Release includes references to Form N-
SAR (under the heading ``Availability of Information'') and a
``minimum price variation'' provision in Nasdaq Rule 5735(b)(3)
(under the heading ``Trading Rules''), neither of which is currently
in effect.
\14\ With respect to the Municipal Fund, the generic listing
standards were specifically discussed in the Municipal 2017 Release
and the 2019 Release. With respect to the California Fund, the
generic listing standards were specifically discussed in the
California 2017 Release and the 2019 Release. The Exchange notes,
however, that references to Nasdaq Rule 5735(b)(1)(B)(v) in the
Municipal 2017 Release and the California 2017 Release did not
reflect a change to such rule that was effected in 2019. See
Securities Exchange Release No. 86399 (July 17, 2019), 84 FR 35446
(July 23, 2019) (SR-NASDAQ-2019-054).
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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 this proposed rule change is to delete the Average
Maturity Representation in order to provide the Adviser with additional
flexibility in constructing and managing each Fund's portfolio. The
Exchange believes that the proposed modification would provide each
Fund with greater ability to select Municipal Securities that would
support such Fund's investment goals. Except as provided herein, with
respect to each Fund, all currently effective Prior Release
Representations would remain unchanged. Except for the generic listing
standards,\15\ the Funds and the Shares would continue to comply with
the requirements applicable to Managed Fund Shares under Nasdaq Rule
5735.
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\15\ See supra note 14.
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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 also notes the continued listing
representations set forth above. The Exchange represents that trading
in the Shares would continue to be subject to the existing trading
surveillances, administered by both Nasdaq and also 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 proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the deletion of the Average Maturity Representation is intended to
provide each Fund with greater ability to select from Municipal
Securities that would support such Fund's investment goals. The
Exchange notes that the 2019 Representations would not be affected by
the proposed modification. Additionally, the Exchange notes that the
Other Municipal Approvals did not include a representation similar to
the Average Maturity Representation and the Fixed Income GLS do not
impose a comparable requirement.
In addition, a large amount of information would continue to be
publicly available regarding the Funds 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 by one or more major market data vendors 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, each Fund would continue
to disclose on its website the Disclosed Portfolio (as defined in
Nasdaq Rule 5735(c)(2)) that will form the basis for such Fund's
calculation of net asset value (``NAV'') at the end of the business
day.
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 each
Fund's ability to meet its investment goals, to the benefit of
investors. In addition, NAV per Share would continue to be calculated
daily and each Fund's Disclosed Portfolio would continue to be made
available to all
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market participants at the same time. Further, investors would continue
to have ready access to information regarding each 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 in managing the Funds, thereby helping each Fund to achieve
its investment goals. As such, it is expected that each 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 \16\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\17\
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\16\ 15 U.S.C. 78s(b)(3)(A)(iii).
\17\ 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-2020-014 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-2020-014. 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-2020-014 and should be submitted
on or before May 1, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07548 Filed 4-9-20; 8:45 am]
BILLING CODE 8011-01-P