[Federal Register Volume 77, Number 207 (Thursday, October 25, 2012)]
[Notices]
[Pages 65237-65241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26253]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68073; File No. SR-NASDAQ-2012-098]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule Change Relating to the Listing and
Trading of Shares of the WisdomTree Global Corporate Bond Fund of the
WisdomTree Trust
October 19, 2012.
I. Introduction
On August 15, 2012, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade the shares (``Shares'') of the
WisdomTree Global Corporate Bond Fund (``Fund'') of the WisdomTree
Trust (``Trust'') under Nasdaq Rule 5735. The proposed rule change was
published for comment in the Federal Register on September 5, 2012.\3\
The Commission received no comments on the proposal. This order grants
approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 67750 (August 29,
2012), 77 FR 54640 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade the Shares of the Fund
under Nasdaq Rule 5735, which governs the listing and trading of
Managed Fund Shares on the Exchange. The Fund will be an actively
managed exchange-traded fund (``ETF''). The Shares will be offered by
the Trust, which was established as a Delaware statutory trust on
December 15, 2005. The Fund is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A
with the Commission.\4\ WisdomTree Asset Management, Inc. is the
investment adviser (``Adviser'') to the Fund,\5\ and Western Asset
Management Company serves as sub-adviser for the Fund (``Sub-
Adviser'').\6\ The Bank of New York Mellon is the administrator,
custodian, and transfer agent for the Trust, and ALPS Distributors,
Inc. serves as the distributor for the Trust.\7\ The Exchange
represents that neither the Adviser nor the Sub-Adviser are affiliated
with any broker-dealer.\8\
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\4\ See Post-Effective Amendment No. 56 to Registration
Statement on Form N-1A for the Trust, dated July 1, 2011 (File Nos.
333-132380 and 811-21864) (``Registration Statement'').
\5\ WisdomTree Investments, Inc. is the parent company of the
Adviser.
\6\ The Sub-Adviser is responsible for day-to-day management of
the Fund and, as such, typically makes all decisions with respect to
portfolio holdings. The Adviser has ongoing oversight
responsibility.
\7\ The Commission has issued an order granting certain
exemptive relief to the Trust under the Investment Company Act of
1940 (``1940 Act''). See Investment Company Act Release No. 28471
(October 27, 2008) (File No. 812-13458). In compliance with Nasdaq
Rule 5735(b)(5), which applies to Managed Fund Shares based on an
international or global portfolio, the Trust's application for
exemptive relief under the 1940 Act states that the Fund will comply
with the federal securities laws in accepting securities for
deposits and satisfying redemptions with redemption securities,
including that the securities accepted for deposits and the
securities used to satisfy redemption requests are sold in
transactions that would be exempt from registration under the
Securities Act of 1933.
\8\ See Nasdaq Rule 5735(g). The Exchange represents that, in
the event (a) the Adviser or the Sub-Adviser becomes newly
affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser becomes affiliated with a broker-dealer, it will implement a
fire wall with respect to such broker-dealer regarding access to
information concerning the composition and/or changes to a
portfolio, and will be subject to procedures designed to prevent the
use and dissemination of material, non-public information regarding
such portfolio. In addition, Adviser and/or Sub-Adviser personnel
who make decisions regarding the Fund's portfolio are subject to
procedures designed to prevent the use and dissemination of
material, non-public information regarding the Fund's portfolio.
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WisdomTree Global Corporate Bond Fund
The Fund seeks to provide a high level of total return consisting
of both income and capital appreciation. To achieve its objective, the
Fund will invest in debt securities of corporations that are domiciled
or economically tied to countries throughout the world.
Global Corporate Debt
Specifically, the Fund intends to achieve its investment objectives
through direct and indirect investments in Global Corporate Debt. With
respect to this proposal, Global Corporate Debt includes fixed-income
securities, such as bonds, notes, or other debt obligations, including
loan participation notes (``LPNs''),\9\ as well as other debt
instruments denominated in U.S. dollars or local currencies. Global
Corporate Debt also includes fixed income securities or debt
obligations that are issued by companies or agencies that may receive
financial support or backing from local government. Fixed income
securities include Money Market Securities as defined below.
[[Page 65238]]
Fixed income securities do not include derivatives.
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\9\ The Fund may invest in LPNs with a minimum outstanding
principal amount of $200 million that the Adviser or Sub-Adviser
deems to be liquid.
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Under normal circumstances,\10\ the Fund will invest at least 80%
of its net assets in Global Corporate Debt that are fixed income
securities. The Fund intends to provide exposure across geographic
regions and countries world-wide, including: North America, South
America, Asia, Australia and New Zealand, Latin America, Europe,
Africa, and the Middle East. The Fund intends to invest primarily in
countries with developed markets in corporate debt. The Fund intends to
invest up to 25% of its assets in emerging market countries, though
this may change from time to time in response to economic events and
changes to the credit ratings of the Global Corporate Debt of such
countries.\11\ The Fund's credit exposures are consistently monitored
from a risk perspective, and may be modified, reduced, or eliminated.
The Fund's exposure to any single issuer generally will be limited to
10% of the Fund's assets. The percentage of the Fund's assets in a
specific region, country, or issuer will change from time to time. The
Fund's exposure to any one country (other than the United States)
generally will be limited to 30% of the Fund's assets, though this
percentage may change from time to time in response to economic events
and changes to the credit ratings of the Global Corporate Debt of such
countries.
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\10\ The term ``under normal circumstances'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the fixed income markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
\11\ According to the Adviser, while there is no universally
accepted definition of what constitutes an ``emerging market,'' in
general, emerging market countries are characterized by developing
commercial and financial infrastructure with significant potential
for economic growth and increased capital market participation by
foreign investors. The Adviser and Sub-Adviser look at a variety of
commonly-used factors when determining whether a country is an
``emerging'' market. In general, the Adviser and Sub-Adviser
consider a country to be an emerging market if: (1) it is either (a)
classified by the World Bank in the lower middle or upper middle
income designation for one of the past 5 years (i.e., per capita
gross national product of less than U.S. $9,385), (b) has not been a
member of OECD for the past five years or (c) classified by the
World Bank as high income and a member in OECD in each of the last
five years, but with a currency that has been primarily traded on a
non-delivered basis by offshore investors (e.g., Korea and Taiwan);
and (2) the country's debt market is considered relatively
accessible by foreign investors in terms of capital flow and
settlement considerations. This definition could be expanded or
exceptions made depending on the evolution of market and economic
conditions.
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The universe of Global Corporate Debt currently includes securities
that are rated ``investment grade'' as well as ``non-investment
grade.'' \12\ The Fund intends to provide a broad exposure to Global
Corporate Debt and therefore will invest in both investment grade and
non-investment grade securities. The Fund intends to have 55% or more
of its assets invested in investment grade securities, though this
percentage may change in response to economic events and changes to the
credit ratings of such issuers. Within the non-investment grade
category, some issuers and instruments are considered to be of lower
credit quality and at higher risk of default. In order to limit its
exposure to these more speculative credits, the Fund will not invest
more than 15% of its assets in securities rated B or below by Moody's,
or equivalently rated by S&P or Fitch. The Fund does not intend to
invest in unrated securities. However, it may do so to a limited
extent, such as where a rated security becomes unrated, if such
security is determined by the Adviser and Sub-Adviser to be of
comparable quality. In determining whether a security is of
``comparable quality,'' the Adviser and Sub-Adviser will consider, for
example, whether the issuer of the security has issued other rated
securities.
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\12\ The Exchange states that the Adviser will interpret
``investment grade'' for purposes of this proposal to mean
securities rated in the Baa/BBB categories or above by one or more
nationally recognized securities rating organizations (``NRSROs'').
If a security is rated by multiple NRSROs and receives different
ratings, the Fund will treat the security as being rated in the
highest rating category received from an NRSRO. Rating categories
may include sub-categories or gradations indicating relative
standing.
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The Fund will invest only in corporate bonds that the Adviser or
Sub-Adviser deems to be sufficiently liquid. The Fund will only buy
performing debt securities and not distressed debt. Generally, a
corporate bond must have $200 million or more par amount outstanding
and significant par value traded to be considered as an eligible
investment. Economic and other conditions may lead to a decrease in the
average par amount outstanding of bond issuances. Therefore, although
the Fund does not intend to do so, the Fund may invest up to 5% of its
net assets in corporate bonds with less than $200 million par amount
outstanding if (1) The Adviser or Sub-Adviser deems such security to be
sufficiently liquid based on its analysis of the market for such
security (for example, broker-dealer quotations or trading history of
the security or other securities issued by the issuer), (2) such
investment is deemed by the Adviser or Sub-Adviser to be in the best
interest of the Fund, and (3) such investment is deemed consistent with
the Fund's goal of providing exposure to a broad range of countries and
issuers.
The Fund may invest in Global Corporate Debt with effective or
final maturities of any length but will seek to keep the average
effective duration of its portfolio between two and ten years under
normal market conditions. Effective duration is an indication of an
investment's interest rate risk or how sensitive an investment or a
fund is to changes in interest rates. Generally, a fund or instrument
with a longer effective duration is more sensitive to interest rate
fluctuations, and, therefore, more volatile, than a fund with a shorter
effective duration. The Fund's actual portfolio duration may be longer
or shorter depending on market conditions.
The Fund intends to invest in Global Corporate Debt of at least 13
non-affiliated issuers and will not concentrate 25% or more of the
value of its total assets (taken at market value at the time of each
investment) in any one industry, as that term is used in the 1940 Act
(except that this restriction does not apply to obligations issued by
the U.S. government or their respective agencies and instrumentalities
or government-sponsored enterprises).
Money Market Securities
The Fund intends to invest in Money Market Securities in order to
help manage cash flows in and out of the Fund, such as in connection
with payment of dividends or expenses, to satisfy margin requirements,
to provide collateral, or to otherwise back investments in derivative
instruments. Under normal circumstances,\13\ the Fund may invest up to
25% of its net assets in Money Market Securities, although it may
exceed this amount where the Adviser or Sub-Adviser deems such
investment to be necessary or advisable, due to market conditions. For
these purposes, ``Money Market Securities'' include: short-term, high
quality obligations issued or guaranteed by the U.S. Treasury or the
agencies or instrumentalities of the U.S. government; short-term, high
quality securities issued or guaranteed by non-U.S. governments,
agencies and instrumentalities; repurchase agreements backed by U.S.
government and non-U.S. government securities; money market mutual
funds; and deposit and other obligations of U.S.
[[Page 65239]]
and non-U.S. banks and financial institutions. All Money Market
Securities acquired by the Fund will be rated investment grade,\14\
except that the Fund may invest in unrated Money Market Securities that
are deemed by the Adviser or Sub-Adviser to be of comparable quality to
money market securities rated investment grade.
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\13\ See note 10, supra.
\14\ The term ``investment grade,'' for purposes of Money Market
Securities only, means securities rated A1 or A2 by one or more
NRSROs.
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The Fund Reserves the right to invest in U.S. government
securities, money market instruments, and cash, without limitation, as
determined by the Adviser or Sub-Adviser in response to adverse market,
economic, political, or other conditions. The Fund may also ``hedge''
or minimize its exposure to one or more foreign currencies in response
to such conditions. In the event the Fund engages in these temporary
defensive strategies that are inconsistent with its investment
strategies, the Fund's ability to achieve its investment objectives may
be limited.
Derivative Instruments and Other Investments
The Fund may use derivative instruments that are fully-
collateralized as part of its investment strategy. Examples of
derivative instruments include forward currency contracts, interest
rate swaps, total return swaps, credit linked notes, and combinations
of investments that provide similar exposure to local currency debt,
such as investment in U.S. dollar denominated bonds combined with
forward currency positions or swaps.\15\ Forward currency contracts and
swap positions can be incorporated with bonds denominated in non-U.S.
currencies to hedge bond exposures back into U.S. dollars. Conversely,
forward currency contracts and swap positions can be implemented in
combination with U.S. dollar denominated bonds to create local currency
bond exposures. Additionally, the Fund's use of forward contracts and
swaps will be combined with investments in short-term, high quality
U.S. money market instruments in a manner designed to provide exposure
to similar investments in local currency deposits.\16\
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\15\ To the extent practicable, the Fund will invest in swaps
cleared through the facilities of a centralized clearing house. The
Fund may also invest in Money Market Securities that may serve as
collateral for the futures contracts and swap agreements.
\16\ The Adviser or Sub-Adviser will also attempt to mitigate
the Fund's credit risk by transacting only with large, well-
capitalized institutions using measures designed to determine the
creditworthiness of the counterparty. The Adviser or Sub-Adviser
will take various steps to limit counterparty credit risk which will
be described in the Registration Statement. The Fund will enter into
swap agreements only with financial institutions that meet certain
credit quality standards and monitoring policies. The Fund may also
use various techniques to minimize credit risk, including early
termination or reset and payment, using different counterparties,
and limiting the net amount due from any individual counterparty.
The Fund generally will collateralize swap agreements with cash and/
or certain securities. Such collateral will generally be held for
the benefit of the counterparty in a segregated tri-party account at
the custodian to protect the counterparty against non-payment by the
Fund. In the event of a default by the counterparty, and the Fund is
owed money in the swap transaction, the Fund will seek withdrawal of
the collateral from the segregated account and may incur certain
costs exercising its right with respect to the collateral.
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The Fund expects that no more than 20% of the value of the Fund's
net assets will be invested in derivative instruments. Such investments
will be consistent with the Fund's investment objective and will not be
used to enhance leverage. For example, the Fund may engage in swap
transactions that provide exposure to corporate debt or interest rates.
The Fund also may buy or sell listed currency futures contracts.\17\
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\17\ The exchange-listed futures contracts in which the Fund may
invest will be listed on exchanges in the U.S., London, Hong Kong,
or Singapore. Each of the United Kingdom's primary financial markets
regulator, the Financial Services Authority, Hong Kong's primary
financial markets regulator, the Securities and Futures Commission,
and Singapore's primary financial markets regulator, the Monetary
Authority of Singapore, are signatories to the International
Organization of Securities Commissions (``IOSCO'') Multilateral
Memorandum of Understanding (``MMOU''), which is a multi-party
information sharing arrangement among financial regulators. Both the
Commission and the Commodity Futures Trading Commission are
signatories to the IOSCO MMOU.
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With respect to certain kinds of derivative transactions entered
into by the Fund that involve obligations to make future payments to
third parties, including, but not limited to, futures and forward
contracts, swap contracts, the purchase of securities on a when-issued
or delayed delivery basis, or reverse repurchase agreements, the Fund,
in accordance with applicable federal securities laws, rules, and
interpretations thereof, will ``set aside'' liquid assets, or engage in
other measures to ``cover'' open positions with respect to such
transactions.
The Fund may engage in foreign currency transactions, and may
invest directly in foreign currencies in the form of bank and financial
institution deposits, and certificates of deposit denominated in a
specified non-U.S. currency. The Fund may enter into forward currency
contracts in order to ``lock in'' the exchange rate between the
currency it will deliver and the currency it will receive for the
duration of the contract.\18\
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\18\ The Fund will invest only in currencies, and instruments
that provide exposure to such currencies, which have significant
foreign exchange turnover and are included in the Bank for
International Settlements Triennial Central Bank Survey, December
2010 (``BIS Survey''). The Fund may invest in currencies, and
instruments that provide exposure to such currencies, selected from
the top 40 currencies (as measured by percentage share of average
daily turnover for the applicable month and year) included in the
BIS Survey.
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The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including (1) Rule 144A securities and (2) loan interests (such as loan
participations and assignments, but not including LPNs). The Fund will
monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid securities. Illiquid securities 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.
The Fund will not invest in any non-U.S. equity securities. In
addition, the Fund intends to qualify each year as a regulated
investment company (``RIC'') under Subchapter M of the Internal Revenue
Code of 1986, as amended.
Additional information regarding the Shares and the Fund, including
investment strategies, risks, creation and redemption procedures, fees,
portfolio holdings disclosure policies, availability of Fund values and
other information, and distributions and taxes, among other things, can
be found in the Notice and/or Registration Statement, as
applicable.\19\
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\19\ See supra notes 3 and 4, and accompanying text,
respectively.
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III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act \20\ and the rules and regulations thereunder applicable to a
national securities exchange.\21\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the
[[Page 65240]]
Act,\22\ which requires, among other things, that the Exchange's rules
be 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, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. The
Commission notes that the Fund and the Shares must comply with the
requirements of Nasdaq Rule 5735 to be listed and traded on the
Exchange.
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\20\ 15 U.S.C. 78f.
\21\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\23\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via UTP Level 1, as
well as Nasdaq proprietary quote and trade services. On each business
day, before commencement of trading in Shares in the Regular Market
Session \24\ on the Exchange, the Trust will disclose on its Web site
the identities and quantities of the portfolio of securities and other
assets (``Disclosed Portfolio'') 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.\25\ The NAV of the 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, generally 4:00 p.m.
Eastern time.\26\ Moreover, the Intraday Indicative Value, available on
the NASDAQ OMX Information LLC proprietary index data service,\27\ will
be based upon the current value for the components of the Disclosed
Portfolio and will be updated and widely disseminated by one or more
major market data vendors at least every 15 seconds during the Regular
Market Session. During hours when the markets for local debt in the
Fund's portfolio are closed, the Intraday Indicative Value will be
updated at least every 15 seconds during the Regular Market Session to
reflect currency exchange fluctuations. In addition, 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 the
previous day's closing price and trading volume information for the
Shares will be published daily in the financial section of newspapers.
Intra-day, executable price quotations on Global Corporate Debt, as
well as derivative instruments, will be available from major broker-
dealer firms. Intra-day price information is available through
subscription services, such as Bloomberg and Thomson Reuters, which can
be accessed by authorized participants and other investors. The Web
site for the Fund will include a form of the prospectus for the Fund
and additional data relating to NAV and other applicable quantitative
information.
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\23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\24\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 7:00 a.m. to
9:30 a.m.; (2) Regular Market Session from 9:30 a.m. to 4:00 p.m. or
4:15 p.m.; and (3) Post-Market Session from 4:00 p.m. or 4:15 p.m.
to 8:00 p.m.).
\25\ The Disclosed Portfolio will include, as applicable, the
names, quantity, percentage weighting, and market value of fixed
income securities and other assets held by the Fund and the
characteristics of such assets.
\26\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1'').
Notwithstanding the foregoing, portfolio trades that are executed
prior to the opening of the Exchange on any business day may be
booked and reflected in NAV on such business day. Accordingly, the
Fund will be able to disclose at the beginning of the business day
the portfolio that will form the basis for the NAV calculation at
the end of the business day.
\27\ Currently, the NASDAQ OMX Global Index Data Service
(``GIDS'') is the NASDAQ OMX global index data feed service,
offering real-time updates, daily summary messages, and access to
widely followed indexes and ETFs. GIDS provides investment
professionals with the daily and historical information needed to
track or trade NASDAQ OMX indexes, listed ETFs, or third-party
partner indexes and ETFs.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes 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, the Exchange will halt trading in the Shares under the
conditions specified in Nasdaq Rules 4120 and 4121. Trading 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 the Fund; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present. Trading in the Shares also will be subject to Rule
5735(d)(2)(D), which sets forth circumstances under which Shares of the
Fund may be halted. The Exchange will consider the suspension of
trading in or removal from listing of the Shares if the Intraday
Indicative Value is no longer calculated or available or the Disclosed
Portfolio is not made available to all market participants at the same
time.\28\ The Exchange represents that neither the Advisor nor the Sub-
Adviser is affiliated with any broker-dealer.\29\ The Commission notes
that the Reporting Authority that provides the Disclosed Portfolio must
implement and maintain, or be subject to, procedures designed to
prevent the use and dissemination of material, non-public information
regarding the actual components of the portfolio.\30\ The Exchange
states that trading of the Shares through Nasdaq will be subject to
FINRA's surveillance procedures for derivative products, including
Managed Fund Shares.\31\ The Exchange may obtain information via the
Intermarket
[[Page 65241]]
Surveillance Group (``ISG'') from other exchanges who are members or
affiliates of the ISG. Further, the Exchange states that it prohibits
the distribution of material, non-public information by its employees.
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\28\ See Nasdaq Rule 5735(d)(2)(C)(ii).
\29\ See Nasdaq Rule 5735(g), supra note 8 and accompanying
text. The Commission notes that an investment adviser to an open-end
fund is required to be registered under the Investment Advisers Act
of 1940 (``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.
\30\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\31\ The Exchange states that FINRA surveils trading on Nasdaq
pursuant to a regulatory services agreement. Nasdaq is responsible
for FINRA's performance under this regulatory services agreement.
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The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will be subject to Nasdaq Rule 5735, which sets
forth the initial and continued listing criteria applicable to Managed
Fund Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange's surveillance procedures are adequate to properly
monitor the trading of the Shares on Nasdaq during all trading sessions
and to deter and detect violations of Exchange rules and the applicable
federal securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable); (b) Nasdaq Rule 2310, which imposes
suitability obligations on Nasdaq members with respect to recommending
transactions in the Shares to customers; (c) how information regarding
the Intraday Indicative Value is disseminated; (d) the risks involved
in trading the Shares during the Pre-Market and Post-Market Sessions
when an updated Intraday Indicative Value will not be calculated or
publicly disseminated; (e) the requirement that members deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (f) trading
information.
(5) For initial and/or continued listing, the Fund must be in
compliance with Rule 10A-3 under the Act.\32\
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\32\ See 17 CFR 240.10A-3.
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(6) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including: (a) Rule 144A securities and (b) loan interests (such as
loan participations and assignments, but not including LPNs). The Fund
may invest in LPNs with a minimum outstanding principal amount of $200
million that the Adviser or Sub-Adviser deems to be liquid.
(7) The Fund will not invest in any non-U.S. registered equity
securities.
(8) The Fund expects that no more than 20% of the value of the
Fund's net assets will be invested in derivative instruments. Such
investments will be consistent with the Fund's investment objective and
will not be used to enhance leverage. To the extent practicable, the
Fund will invest in swaps cleared through the facilities of a
centralized clearing house. In addition, the Adviser or Sub-Adviser
will also attempt to mitigate the Fund's credit risk by transacting
only with large, well-capitalized institutions using measures designed
to determine the creditworthiness of the counterparty.
(9) Under normal circumstances, the Fund may invest up to 25% of
its net assets in Money Market Securities, although it may exceed this
amount where the Adviser or Sub-Adviser deems such investment to be
necessary or advisable, due to market conditions.
(10) The Fund intends to have 55% or more of its assets invested in
investment grade securities, though this percentage may change from
time to time in response to economic events and changes to the credit
ratings of such issuers. Within the non-investment grade category, some
issuers and instruments are considered to be of lower credit quality
and at higher risk of default. In order to limit its exposure to these
more speculative credits, the Fund will not invest more than 15% of its
assets in securities rated B or below by Moody's, or equivalently rated
by S&P or Fitch.
(11) The Fund will invest only in corporate bonds that the Adviser
or Sub-Adviser deems to be sufficiently liquid. The Fund will only buy
performing debt securities and not distressed debt. Generally, a
corporate bond must have $200 million or more par amount outstanding
and significant par value traded to be considered as an eligible
investment.
(12) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
This approval order is based on all of the Exchange's representations,
including those set forth above and in the Notice, and the Exchange's
description of the Fund.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \33\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\33\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\34\ that the proposed rule change (SR-NASDAQ-2012-098) be, and it
hereby is, approved.
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\34\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-26253 Filed 10-24-12; 8:45 am]
BILLING CODE 8011-01-P