[Federal Register Volume 78, Number 85 (Thursday, May 2, 2013)]
[Notices]
[Pages 25774-25777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10345]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69464; File No. SR-NASDAQ-2013-036]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change, as Modified by Amendment No. 2
Thereto, Relating to the Listing and Trading of the Shares of the First
Trust Senior Loan Fund of First Trust Exchange-Traded Fund IV
April 26, 2013.
I. Introduction
On February 21, 2013, The NASDAQ Stock Market LLC (``Exchange'' or
``Nasdaq'') 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 shares (``Shares'') of the First
Trust Senior Loan Fund of First Trust Exchange-Traded Fund IV
(``Fund''). On March 7, 2013, the Exchange filed Amendment No. 2 to the
proposed rule change, which superseded the original filing. The
Commission published for comment in the Federal Register notice of the
proposed rule change, as modified by Amendment No. 2, on March 13,
2013.\3\ The Commission received no comments on the proposed rule
change. This order approves the proposed rule change, as modified by
Amendment No. 2.
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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. 69072 (March 7,
2013), 78 FR 16006 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares pursuant to Nasdaq
Rule 5735, which governs the listing and trading of Managed Fund
Shares.\4\ The Exchange deems the Shares to be equity securities,
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities.\5\
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\4\ Under Nasdaq's Rules, a Managed Fund Share is a security
that (a) represents an interest in a registered investment company
(``Investment Company'') organized as an open-end management
investment company or similar entity, that invests in a portfolio of
securities selected by the Investment Company's investment adviser
consistent with the Investment Company's investment objectives and
policies; (b) is issued in a specified aggregate minimum number in
return for a deposit of a specified portfolio of securities and/or a
cash amount with a value equal to the next determined net asset
value; and (c) when aggregated in the same specified minimum number,
may be redeemed at a holder's request, which holder will be paid a
specified portfolio of securities and/or cash with a value equal to
the next determined net asset value. See Nasdaq Rule 5735(c)(1).
\5\ See Notice, supra note 3, 78 FR at 16017.
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The Shares will be offered by the First Trust Exchange Traded Fund
IV (``Trust''), which is organized as a Massachusetts business trust
and is registered with the Commission as an investment company.\6\
First Trust Advisors L.P. is the investment adviser (``Adviser'') to
the Fund. First Trust Portfolios L.P. is the principal underwriter and
distributor of the Shares (``Distributor''). The Bank of New York
Mellon Corporation will act as the administrator, accounting agent,
custodian and transfer agent to the Fund (``Custodian''). The Adviser
is affiliated with the Distributor, a broker-dealer. As required by
Nasdaq Rule 5735(g),\7\ the Adviser has implemented a firewall with
respect to its broker-dealer affiliate
[[Page 25775]]
regarding access to information concerning the composition and/or
changes to the portfolio.\8\
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\6\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). See Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A for the Trust, dated December
14, 2012 (File Nos. 333-174332 and 811-22559) (``Registration
Statement''). In addition, the Exchange represents that the Trust
has obtained certain exemptive relief under the 1940 Act. See
Investment Company Act Release No. 30029 (April 10, 2012) (File No.
812-13795) (``Exemptive Order'').
\7\ Nasdaq Rule 5735(g) also requires that Adviser personnel who
make decisions regarding the Fund's portfolio be subject to
procedures designed to prevent the use and dissemination of
material, non-public information regarding the Fund's portfolio.
\8\ Additionally, the Exchange represents that, in the event (a)
the 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 the portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material, non-
public information regarding such portfolio.
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Objectives of the Fund
The Fund's primary investment objective is to provide high current
income. The Fund's secondary investment objective is the preservation
of capital.
The Fund's Principal Investments \9\
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\9\ Additional information regarding the Fund, the Fund's
portfolio, and the Shares, including investment strategies, risks,
Senior Loan market, Primary and Secondary Indices, creation and
redemption procedures, fees, portfolio holdings disclosure policies,
distributions and taxes is included in the Notice and in the
Registration Statement. See supra, notes 3 and 6, respectively.
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In pursuing its investment objective, under normal market
conditions,\10\ the Fund will seek to outperform a primary and
secondary loan index (as described below) by investing at least 80% of
its net assets (plus any borrowings for investment purposes) in
``Senior Loans.'' \11\ It is anticipated that the Fund will invest
approximately 50% to 75% of its net assets in Senior Loans that are
eligible for inclusion in and meet the liquidity thresholds of the S&P/
LSTA U.S. Leveraged Loan 100 Index (``Primary Index'') or the Markit
iBoxx USD Leveraged Loan Index (``Secondary Index'').\12\ Each of the
Fund's Senior Loan investments is expected to have no less than $250
million USD par outstanding.
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\10\ In the Notice, the term ``under normal market conditions''
is defined and a description of what the Fund may hold during
periods of extreme market disturbance is provided. See Notice, supra
note 3, 78 FR at 16007, n.10.
\11\ The Adviser considers Senior Loans to be first lien senior
business loans that typically pay interest at a floating or
adjusting rate that is determined periodically at a designated
premium above a base lending rate, most commonly the London-
Interbank Offered Rate (``LIBOR''). See id. The Fund will invest in
Senior Loans that are made predominantly to businesses operating in
North America, but may also invest in Senior Loans made to
businesses operating outside of North America. See id. Generally,
each Senior Loan will be secured by collateral such as accounts
receivable; inventory; equipment; real estate; intangible assets
such as trademarks, copyrights and patents; and securities of
subsidiaries or affiliates. See id. at 16008.
\12\ The Primary Index comprises the 100 largest Senior Loans,
as measured by the borrowed amounts outstanding; the Secondary Index
selects the 100 most liquid Senior Loans in the market. In addition
to size, liquidity is also measured, in part, based on the number of
market makers who trade a specific Senior Loan and the number and
size of transactions in the context of the prevailing bid/offer
spread. Markit utilizes proprietary models for the Secondary Index
composition and updates to the Secondary Index. The Fund will not
seek to track either the Primary or Secondary Index but rather will
seek to outperform those indices.
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The Fund will primarily invest in securities (including Senior
Loans) rated below investment grade.
The Fund's Other Investments
In addition to the principal investments described above, the Fund
may invest in: (1) Fixed-rate or floating-rate income-producing
securities (including U.S. government debt securities and investment-
grade and below-investment-grade corporate debt securities); (2)
preferred securities; and (3) securities of other investment companies
registered under the 1940 Act.\13\ In addition, the Fund may invest a
portion of its assets in exchange-traded pooled investment vehicles
(other than investment companies) that invest primarily in securities
of the types in which the Fund may invest directly. The Fund may
receive equity, warrants, corporate bonds and other similar securities
as a result of the restructuring of the debt of an issuer or a
reorganization of a senior loan or bond or may acquire such securities
together with a high yield bond or senior loan(s) of an issuer. Such
investments will be subject to the Fund's investment objectives,
restrictions and strategies.
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\13\ The equity securities in which the Fund may invest,
including securities of other investment companies registered under
the 1940 Act, will be limited to securities that trade in markets
that are members of the Intermarket Surveillance Group (``ISG''),
which includes all U.S. national securities exchanges and certain
foreign exchanges, or are parties to a comprehensive surveillance
sharing agreement with the Exchange.
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The Fund may invest in secured loans that are not first lien loans
or in loans that are unsecured. These loans have the same
characteristics as Senior Loans except that such loans are not first in
priority of repayment and/or may not be secured by collateral.
Fund Investment Limitations
Under normal market conditions, up to 10% of the net assets of the
Fund may be denominated in currencies other than the U.S. dollar. The
Fund intends to hedge its non-U.S. dollar holdings.\14\
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\14\ See Notice, supra note 3, 78 FR at 16009.
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The Fund will not invest 25% or more of the value of its total
assets in securities of issuers in any one industry.\15\
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\15\ See id. at 16010.
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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 Rule 144A securities, junior subordinated loans, and
unsecured loans deemed illiquid by the Adviser.\16\ 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 the Fund 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.
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\16\ See id.
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Except for investments in ETFs that may hold non-U.S. issues, the
Fund will not otherwise invest in non-U.S. equity issues.\17\ The Fund
will not invest in options contracts, futures contracts, or swap
agreements.\18\
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\17\ See id.
\18\ See id.
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The Fund's investments will be consistent with the Fund's
investment objective and will not be used to enhance leverage.\19\
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\19\ See id.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change 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 Act,\22\ which
requires, among other things, that the Exchange's rules be designed to
promote just and equitable principles of trade, 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 Shares will be listed and
traded on the Exchange pursuant to the initial and continued listing
criteria in Nasdaq's Rule 5735.
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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\ 17 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
[[Page 25776]]
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. Information regarding market price and
trading volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other
electronic services, and quotation and last-sale information will be
available via Nasdaq proprietary quote and trade services, as well as
in accordance with the Unlisted Trading Privileges (``UTP'') and the
Consolidated Tape Association ``CTA'') plans for the Shares and any
underlying exchange-traded product.\24\ Intra-day, executable price
quotations of the Senior Loans, fixed income securities, and other
assets held by the Fund will be available from major broker-dealer
firms or on the exchange on which they are traded, if applicable.
Intra-day price information is also available through subscription
services, such as Bloomberg, Markit, and Thomson Reuters, which can be
accessed by authorized participants and other investors.
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\23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\24\ See email from Jonathan F. Cayne, Associate General
Counsel, The NASDAQ OMX Group, to Christopher Chow, Special Counsel,
and Kristie Diemer, Special Counsel, Division of Trading and
Markets, Commission, dated April 25, 2013, stating that quotation
and last-sale information will be available in accordance with the
UTP and the CTA plans for the Shares and any underlying exchange-
traded products, as well as via Nasdaq proprietary quote and trade
services.
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The Commission 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
NAV of the Fund will be calculated by the Custodian and determined at
the close of the regular trading session on the New York Stock Exchange
(ordinarily 4:00 p.m., E.T.) on each day that such exchange is open,
provided that fixed-income assets (and, accordingly, the Fund's NAV)
may be valued as of the announced closing time for trading in fixed-
income instruments on any day that the Securities Industry and
Financial Markets Association (or the applicable exchange or market on
which the Fund's investments are traded) announces an early closing
time. On each business day, before commencement of trading in Shares in
the Regular Market Session \25\ on the Exchange, the Fund will disclose
on the Distributor's Web site the identities and quantities of the
portfolio of securities and other held by the Fund that will form the
basis for the Fund's calculation of NAV at the end of the business day
assets (``Disclosed Portfolio,'' as defined in Nasdaq Rule
5735(c)(2)).\26\ 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. Additionally, the Intraday
Indicative Value, available on the NASDAQ OMX Information LLC
proprietary index data service will be widely disseminated by one or
more major market data vendors and broadly displayed at least every 15
seconds during the Regular Market Session.
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\25\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30
a.m. E.T.; (2) Regular Market Session from 9:30 a.m. to 4 p.m. or
4:15 p.m. E.T.; and (3) Post-Market Session from 4 p.m. or 4:15 p.m.
to 8 p.m. E.T.).
\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.
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Trading in Shares will be halted if the circuit breaker parameters
in Nasdaq Rule 4120(a)(11) have been reached or because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable, and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances
under which trading in the Shares may be halted. The Exchange states
that it has a general policy prohibiting the distribution of material,
non-public information by its employees. Further, 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.\27\ The Adviser is
affiliated with a broker-dealer and has implemented a firewall with
respect to that broker-dealer regarding access to information
concerning the composition and/or changes to the Fund's portfolio.\28\
The Exchange has represented that S&P and Markit are not broker-dealers
or affiliated with a broker-dealer and that each has implemented
procedures designed to prevent the use and dissemination of material,
non-public information regarding the Primary Index and Secondary Index,
respectively.\29\
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\27\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\28\ See note 7, supra 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
\29\ See Notice, supra note 3, 78 FR at 16018.
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Under normal market conditions, the Fund generally will satisfy the
generic fixed income listing requirements in Nasdaq Rule 5705(b)(4) on
a continuous basis measured at the time of purchase. The Exchange
states that trading in the Shares will be subject to the existing
trading surveillances, administered by FINRA on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws. Further, 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.\30\ The Commission believes that the Exchange's procedures,
combined with the Fund's general adherence to the generic fixed income
listing requirements in Nasdaq Rule 5705(b)(4) on a continuous basis
measured at the time of purchase are designed to mitigate the potential
for price manipulation of the Shares.
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\30\ See id. at 16017.
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In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will conform to the initial and continued listing
criteria under Nasdaq Rule 5735.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.\31\
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\31\ See id.
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[[Page 25777]]
(3) The Exchange represents that trading in the Shares will be
subject to the existing trading surveillances, administered by FINRA on
behalf of the Exchange, which are designed to detect violations of
Exchange rules and applicable federal securities laws and 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.
(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 continued listing, the Fund will 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) It is anticipated that the Fund, in accordance with its
principal investment strategy, will invest approximately 50% to 75% of
its net assets in Senior Loans that are eligible for inclusion in and
meet the liquidity thresholds of the Primary or the Secondary Indices.
Each of the Fund's Senior Loan investments is expected to have no less
than $250 million USD par outstanding. While the Fund may hold a Senior
Loan that has defaulted subsequent to its purchase by the Fund, the
Adviser does not intend to purchase Senior Loans that are in default.
(7) Under normal market conditions, the Fund would generally
satisfy the generic fixed income listing requirements in Nasdaq Rule
5705(b)(4) on a continuous basis measured at the time of purchase.
(8) The Fund will not invest in non-U.S.-registered equity issues
(except for underlying ETFs that may hold non-U.S. issues). 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 Rule 144A
securities, junior subordinated loans, and unsecured loans deemed
illiquid by the Adviser. The Fund will not invest in options contracts,
futures contracts, or swap agreements.
(9) The Fund's investments will be consistent with the Fund's
investment objectives and will not be used to enhance leverage.
(10) A minimum of 100,000 Shares will be outstanding at the
commencement of trading. This approval order is based on all of the
Exchange's representations, including those set forth in the Notice.
IV. Conclusion
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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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\34\ that the proposed rule change (SR-NASDAQ-2013-036), as
modified by Amendment No. 2, be, and it hereby is, approved.
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\34\ 15 U.S.C. 78s(b)(2).
\35\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-10345 Filed 5-1-13; 8:45 am]
BILLING CODE 8011-01-P