[Federal Register Volume 78, Number 172 (Thursday, September 5, 2013)]
[Notices]
[Pages 54700-54704]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-21533]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70282; File No. SR-NYSEArca-2013-70]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change To List and Trade Shares of First
Trust Inflation Managed Fund
August 29, 2013.
I. Introduction
On July 8, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the First
Trust Inflation Managed Fund (``Fund'') under NYSE Arca Equities Rule
8.600. The proposed rule change was published for comment in the
Federal Register on July 25, 2013.\3\ The Commission received no
comments on the proposed rule change. 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. 70008 (July 19,
2013), 78 FR 45003 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant
to NYSE Arca Equities Rule 8.600, which governs the listing and trading
of Managed Fund Shares on the Exchange. The Shares will be offered by
First Trust Exchange-Traded Fund IV (``Trust''), which is organized as
a Massachusetts business trust and is registered with the Commission as
an open-end management investment company.\4\ The investment adviser to
the Fund will be First Trust Advisors L.P. (``Adviser'' or ``First
Trust''). First Trust Portfolios L.P. will be the principal underwriter
and distributor of the Fund's Shares. Bank of New York Mellon (``BNY'')
will serve as the administrator, custodian, and transfer agent for the
Fund. The Exchange states that the Adviser is not a broker-dealer but
is affiliated with a broker-dealer and has implemented a fire wall with
respect to its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the Fund's portfolio.\5\
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\4\ The Trust is registered under the Investment Company Act of
1940 (``1940 Act''). On December 7, 2012, the Trust filed with the
Commission an amendment to the Trust's registration statement on
Form N-1A under the Securities Act of 1933 (``1933 Act'') and under
the 1940 Act relating to the Fund (File Nos. 333-174332 and 811-
22559) (``Registration Statement''). In addition, the Commission has
issued an order granting certain exemptive relief to the Trust under
the 1940 Act. See Investment Company Act Release No. 28468 (October
27, 2008) (File No. 812-13477) (``Exemptive Order'').
\5\ See NYSE Arca Equities Rule 8.600, Commentary .06. In the
event (a) the Adviser or any sub-adviser becomes newly affiliated
with a broker-dealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with a broker-dealer,
it will implement a fire wall with respect to its relevant personnel
or its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio, and will
be subject to procedures designed to prevent the use and
dissemination of material non-public information regarding such
portfolio.
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The Fund's primary investment objective will be to seek long-term
capital appreciation, and its secondary investment objective will be to
seek current income. The Fund will be an actively managed exchange-
traded fund that will invest in: (1) Exchange-listed common stocks and
other equity securities described below (including ``Depositary
Receipts,'' as defined herein) of companies in the agriculture, energy,
metals, and mining sectors; (2) exchange-traded products (``Underlying
ETPs'') \6\ that hold commodities, such as
[[Page 54701]]
gold and silver, or futures on such commodities; (3) debt securities
and Underlying ETPs that invest in such securities; and (4) real estate
interests, including other exchange-traded funds that invest in such
interests.
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\6\ The term ``Underlying ETPs'' includes Investment Company
Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio
Depositary Receipts (as described in NYSE Arca Equities Rule 8.100);
Trust Issued Receipts (as described in NYSE Arca Equities Rule
8.200); Commodity-Based Trust Shares (as described in NYSE Arca
Equities Rule 8.201); Currency Trust Shares (as described in NYSE
Arca Equities Rule 8.202); Commodity Index Trust Shares (as
described in NYSE Arca Equities Rule 8.203); Trust Units (as
described in NYSE Arca Equities Rule 8.500); Managed Fund Shares (as
described in NYSE Arca Equities Rule 8.600); and closed-end funds.
The Underlying ETPs all will be listed and traded in the U.S. on
registered exchanges.
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The asset class allocation between equity securities, bonds,
commodities, and real estate will be performed on a quarterly basis by
First Trust. Changes to the asset allocation will be considered on a
shorter time frame if market conditions warrant.\7\ After the initial
asset class allocation, the securities for each asset type will be
selected as described below.
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\7\ Such market conditions could include periods of extreme
volatility and force majeure events including, but not limited to,
elements of nature or acts of God, earthquakes, strikes, riots, acts
of war, terrorism, or other national emergencies.
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Equity Allocation
The Fund may invest in equity securities, which include common
stocks; preferred securities; warrants to purchase common stocks or
preferred securities; securities convertible into common stocks or
preferred securities; and other securities with equity characteristics.
The Fund also may invest in U.S. dollar-denominated foreign equity
securities.\8\
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\8\ See infra note 10.
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Under normal market conditions,\9\ the Fund will invest, in
addition to common stocks, in U.S. dollar-denominated sponsored
depositary receipts, which will include American Depositary Receipts
(``ADRs''), Global Depositary Receipts (``GDRs''), European Depositary
Receipts (``EDRs''), and American Depositary Shares (``ADSs'')
(collectively ``Depositary Receipts''),\10\ of agriculture, energy,
metals, and mining companies.
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\9\ The term ``under normal market conditions'' includes, but is
not limited to, the absence of extreme volatility or trading halts
in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
\10\ The equity securities, including Depositary Receipts, in
which the Fund will invest will trade in markets that are members of
the Intermarket Surveillance Group (``ISG'') or are parties to
comprehensive surveillance sharing agreements with the Exchange.
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The Adviser anticipates that the equities portion of the portfolio
initially will represent 60% of the net assets of the Fund, although
this percentage may vary over time.
An initial universe of inflation-related stocks will be created by
selecting stocks of agricultural, energy, metals, and mining companies
that trade on a U.S. stock exchange and have adequate liquidity for
investment. The Fund's portfolio will be selected by examining the
historical financial results of the securities from the initial
universe. Companies that do not produce positive cash flow or companies
with credit quality issues will be eliminated. The securities will then
be evaluated by fundamental factors such as sales, earnings, and cash
flow growth; valuation factors such as price/earnings, price/cash flow,
price/sales, and price/book; and technical factors such as price
momentum and earnings surprises. An estimated value will be calculated
for each of the companies. The companies that currently trade at an
attractive market price relative to their estimated value will be
favored over companies that do not. The final portfolio will then be
selected by the Adviser based on the security's fundamentals, valuation
and technical factors, the security's relative valuation, and other
qualitative factors such as competitive advantages, new products, and
quality of management.
Bond Allocation
The Fund will invest in the types of bonds described below
primarily through investing in Underlying ETPs that concentrate in
these types of holdings. Bonds with fixed coupons during periods of
rising inflation expectations may likely experience price depreciation
due to the impact of rising interest rates. The negative effects of
inflation on bonds may be offset through Underlying ETPs that invest in
inflation-linked bonds. Inflation-linked government bonds, commonly
known in the U.S. as Treasury Inflation-Protected Securities
(``TIPS''), are securities issued by governments that are designed to
provide inflation protection to investors. The coupon payments and
principal value on these securities are adjusted according to inflation
over the life of the bonds. The Underlying ETPs chosen to represent the
bond portion of the portfolio will be reviewed for capitalization,
liquidity, expenses, tracking error, and taxation structure factors.
First Trust anticipates that the bond portion of the portfolio will
initially represent approximately 20% of the net assets of the Fund,
although this percentage may vary over time.
The Fund, through investments in Underlying ETPs, will invest
primarily in investment grade debt securities with respect to the bond
portion of its portfolio and may invest up to 15% of its net assets in
high yield debt securities, including leveraged loans,\11\ that are
rated below investment grade at the time of purchase, or unrated
securities deemed by the Fund's Adviser to be of comparable quality.
``Below investment grade'' is defined as those securities that have a
long-term credit rating below ``BBB-'' by Standard & Poor's Rating
Group, a division of McGraw Hill Companies, Inc. (``S&P''), or below
``Baa3'' by Moody's Investors Service, Inc. (``Moody's''), or
comparably rated by another nationally recognized statistical rating
organization.
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\11\ Under normal market conditions, the Fund may invest up to
15% of its net asset value (``NAV'') in leveraged loans, including
senior secured bank loans, unsecured and/or subordinated bank loans,
loan participations, and unfunded contracts. The Fund may invest in
such loans by purchasing assignments of all or a portion of loans or
loan participations from third parties. These loans are made by or
issued to corporations primarily to finance acquisitions, refinance
existing debt, support organic growth, or pay out dividends, and are
typically originated by large banks and are then syndicated out to
institutional investors as well as to other banks.
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The Fund, or the Underlying ETPs in which it may invest, may invest
in a variety of debt securities, including corporate debt securities,
U.S. government securities, and non-U.S. debt securities. Corporate
debt securities are fixed-income securities issued by businesses to
finance their operations. Notes, bonds, debentures, and commercial
paper are the most common types of corporate debt securities, with the
primary difference being their maturities and secured or unsecured
status. Commercial paper has the shortest term and is usually
unsecured. Certain debt securities held by the Fund may include debt
instruments that have economic characteristics that are similar to
preferred securities. Such debt instruments are typically issued by
corporations, generally in the form of interest bearing notes, or by an
affiliated business trust of a corporation, generally in the form of
(i) beneficial interests in subordinated debentures or similarly
structured securities or (ii) more senior debt securities that pay
income and trade in a manner similar to preferred securities. Such debt
instruments that have economic characteristics similar to preferred
securities include trust preferred securities, hybrid trust
[[Page 54702]]
preferred securities, and senior notes/baby bonds.
The Fund will invest in Underlying ETPs that are designed to track
government bond indexes, bank loan indexes, and floating rate security
indexes.
Commodities Allocation
The Fund will invest in commodities through investing in Underlying
ETPs that invest in commodities or futures on such commodities, such as
gold, silver, and commodity indexes. In general, commodities have
relatively high correlations with inflation, and the prices of real
assets, such as gold, silver, oil, and copper, often rise along with
increasing interest rates and inflation. Additionally, commodities
normally move in the opposite direction of the U.S. dollar. First Trust
anticipates that the commodities portion of the portfolio will
represent 10% of the initial net assets of the Fund, although this
percentage may vary over time.
Real Estate Allocation
The Fund will invest in U.S. exchange-listed securities of real
estate investment trusts (``REITS''). In general, real estate prices
have generated a correspondingly large increase in return and largely
preserved the purchasing power of the original investment during
periods of high inflation. The real estate portion of the portfolio
will represent 10% of the initial net assets of the Fund, although this
percentage may vary over time. The Fund also may invest in exchange-
traded funds designed to track real estate indexes.
Other Investments
Normally, the Fund will invest substantially all of its assets in
the securities allocations described above to meet its investment
objectives. The Fund may invest the remainder of its assets in
securities with maturities of less than one year or cash equivalents,
or it may hold cash. The percentage of the Fund invested in such
holdings may vary and depend on several factors, including market
conditions. For temporary defensive purposes and during periods of high
cash inflows or outflows, the Fund may depart from its principal
investment strategies and invest part or all of its assets in these
securities or it may hold cash.\12\ During such periods, the Fund may
not be able to achieve its investment objectives. The Fund may adopt a
defensive strategy when the portfolio manager believes securities in
which the Fund normally invests have elevated risks due to political or
economic factors and in other extraordinary circumstances.
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\12\ The Fund may, without limit as to percentage of assets,
purchase U.S. government securities or short-term debt securities to
keep cash on hand fully invested or for temporary defensive
purposes. Short-term debt securities are securities from issuers
having a long-term debt rating of at least A by S&P, Moody's, or
Fitch, Inc. (``Fitch'') and having a maturity of one year or less.
The use of these temporary investments will not be a part of a
principal investment strategy of the Fund. Short-term debt
securities are defined to include, without limitation, the
following: (1) 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; (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, 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, which are short-term
unsecured promissory notes, including variable rate master demand
notes issued by corporations to finance their current operations.
Master demand notes are direct lending arrangements between the Fund
and a corporation. The Fund may only invest in commercial paper
rated A-1 or higher by S&P, Prime-1 or higher by Moody's, or F2 or
higher by Fitch.
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The Fund may invest up to 15% of its net assets in U.S. exchange-
listed futures, interest rate swaps, total return swaps, non-U.S.
currency swaps, credit default swaps,\13\ U.S. exchange-listed options,
forward contracts, and other derivative instruments in the aggregate to
seek to enhance returns,\14\ to hedge some of the risks of its
investments in securities,\15\ as a substitute for a position in the
underlying asset, to reduce transaction costs, to maintain full market
exposure in a given asset class, to manage cash flows, to limit
exposure to losses due to changes to non-U.S. currency exchange rates,
or to preserve capital.\16\
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\13\ To the extent practicable, the Fund will invest in swaps
cleared through the facilities of a centralized clearing house.
\14\ For example, the Fund may sell exchange-listed covered
calls on equity positions in the portfolio in order to enhance its
income.
\15\ The Fund may use derivative investments to hedge against
interest rate and market risks. The Fund may engage in various
interest rate and currency hedging transactions, including buying or
selling U.S. exchange-listed options or entering into other
transactions including forward contracts, fully collateralized
swaps, and other derivatives transactions.
\16\ The Fund will not enter into futures and options
transactions if the sum of the initial margin deposits and premiums
paid for unexpired options or futures exceeds 5% of the Fund's total
assets.
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The Fund will only enter into transactions in derivative
instruments with counterparties that First Trust reasonably believes
are capable of performing under the contract \17\ and will post as
collateral at least $250,000 each day.
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\17\ The Fund will seek, where possible, to use counterparties,
as applicable, whose financial status is such that the risk of
default is reduced; however, the risk of losses resulting from
default is still possible. The Adviser's Execution Committee will
evaluate the creditworthiness of counterparties on an ongoing basis.
In addition to information provided by credit agencies, the
Adviser's analysts will evaluate each approved counterparty using
various methods of analysis, including the counterparty's liquidity
in the event of default, the broker-dealer's reputation, the
Adviser's past experience with the broker-dealer, the Financial
Industry Regulatory Authority's (``FINRA'') BrokerCheck and
disciplinary history, and its share of market participation.
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The Fund may invest in shares of money market funds to the extent
permitted by the 1940 Act.
The Fund may not invest 25% or more of the value of its total
assets in securities of issuers in any one industry or group of
industries. This restriction does not apply to obligations issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
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 deemed illiquid by the Adviser \18\ and
master demand notes. 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.
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\18\ In reaching liquidity decisions, the Adviser may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer).
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The Fund intends to qualify annually and to elect to be treated as
a regulated investment company under the Internal Revenue Code.\19\
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\19\ 26 U.S.C. 851.
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The Fund may invest up to 10% of its net assets in inverse
Underlying ETPs, but it will not invest in leveraged or inverse
leveraged Underlying ETPs.
The Fund's investments will be consistent with the Fund's
investment objectives and will not be used to enhance leverage. That
is, while the Fund will be permitted to borrow as
[[Page 54703]]
permitted under the 1940 Act, the Fund's investments will not be used
to seek performance that is the multiple or inverse multiple (i.e., 2Xs
and 3Xs) of the Fund's broad-based securities market index (as defined
in Form N-1A) (i.e., S&P 500).
Additional information regarding the Trust and the Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings disclosure policies,
distributions, and taxes, among other things, is included in the Notice
and Registration Statement, as applicable.\20\
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\20\ See Notice and Registration Statement, supra notes 3 and 4,
respectively.
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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 \21\
and the rules and regulations thereunder applicable to a national
securities exchange.\22\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\23\
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 NYSE Arca
Equities Rule 8.600 for the Shares to be listed and traded on the
Exchange.
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\21\ 15 U.S.C. 78f.
\22\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\23\ 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,\24\ which sets forth Congress's 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 the Consolidated
Tape Association (``CTA'') high-speed line. In addition, the Portfolio
Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3),
will be widely disseminated every 15 seconds throughout the Exchange's
Core Trading Session by one or more major market data vendors.\25\ On
each business day, before commencement of trading in Shares in the Core
Trading Session on the Exchange, the Fund will disclose on its Web site
the Disclosed Portfolio, as defined in NYSE Arca Equities Rule
8.600(c)(2), that will form the basis for the Fund's calculation of NAV
at the end of the business day.\26\ The Fund's NAV will be determined
as of the close of trading (normally 4:00 p.m. Eastern Time) on each
day the New York Stock Exchange is open for business. A basket
composition file, which will include the security names and share
quantities required to be delivered in exchange for the Fund's Shares,
together with estimates and actual cash components, will be publicly
disseminated daily prior to the opening of the New York Stock Exchange
via the National Securities Clearing Corporation. Information regarding
market price and trading volume of the Shares will be continually
available on a real-time basis throughout the day on brokers' computer
screens and other electronic services. Information regarding the
previous day's closing price and trading volume information for the
Shares will be published daily in the financial section of newspapers.
The intra-day, closing, and settlement prices of the portfolio
securities will also be readily available from the national securities
exchanges trading such securities, automated quotation systems,
published or other public sources, or on-line information services such
as Bloomberg or Reuters. The Fund's Web site 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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\24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\25\ According to the Exchange, several major market data
vendors widely disseminate Portfolio Indicative Values taken from
the CTA or other data feeds. In addition, the Exchange represents
that the price of a non-U.S. security that is primarily traded on a
non-U.S. exchange will be updated, using the last sale price, every
15 seconds throughout the trading day, provided, that upon the
closing of such non-U.S. exchange, the closing price of the
security, after being converted to U.S. dollars, will be used.
Further, in calculating the Portfolio Indicative Value of the Fund's
Shares, exchange rates may be used throughout the Core Trading
Session that may differ from those used to calculate the NAV per
Share of the Fund and consequently may result in differences between
the NAV and the Portfolio Indicative Value.
\26\ On a daily basis, the Fund will disclose for each portfolio
security and other financial instrument of the Fund the following
information on the Fund's Web site: ticker symbol (if applicable);
name of security and financial instrument; number of shares, if
applicable, and dollar value of securities and financial instruments
held in the portfolio; and percentage weighting of the security and
financial instrument in the portfolio. The Web site information will
be publicly available at no charge.
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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.\27\
In addition, trading in the Shares will be subject to NYSE Arca
Equities Rule 8.600(d)(2)(D), which sets forth circumstances under
which Shares of the Fund may be halted. The Exchange may halt trading
in the Shares if trading is not occurring in the securities and/or the
financial instruments comprising the Disclosed Portfolio of the Fund,
or if other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.\28\ 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.\29\ The Commission notes that the Financial Industry
Regulatory Authority (``FINRA''), on behalf of the Exchange,\30\ will
communicate as needed regarding trading in the Shares, equity
securities, futures contracts, and options contracts with other markets
and other entities that are members of the ISG, and FINRA, on behalf of
the Exchange, may obtain trading information regarding trading in the
[[Page 54704]]
Shares, equity securities, futures contracts, and options contracts
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in the Shares, equity securities,
futures contracts, and options contracts from markets and other
entities that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement. The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees. The Exchange also
states that the Adviser is not a broker-dealer but is affiliated with a
broker-dealer, and the Adviser has implemented a fire wall with respect
to its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio.\31\
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\27\ See NYSE Arca Equities Rule 8.600(d)(1)(B).
\28\ See NYSE Arca Equities Rule 8.600(d)(2)(C) (providing
additional considerations for the suspension of trading in or
removal from listing of Managed Fund Shares on the Exchange). With
respect to trading halts, the Exchange may consider all relevant
factors in exercising its discretion to halt or suspend trading in
the Shares of the Fund. Trading in Shares of the Fund will be halted
if the circuit breaker parameters in NYSE Arca Equities Rule 7.12
have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
\29\ See NYSE Arca Equities Rule 8.600(d)(2)(B)(ii). In
addition, the Adviser represents that the Trust, First Trust, and
BNY will not disseminate non-public information concerning the
Trust.
\30\ The Exchange states that, while 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.
\31\ See supra note 5. 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 its 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.
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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 conform to the initial and continued listing
criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(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 Equity Trading Permit (``ETP'') Holders in an Information Bulletin
of the special characteristics and risks associated with trading the
Shares. Specifically, the Information Bulletin will discuss the
following: (a) the procedures for purchases and redemptions of Shares
in Creation Units (and that Shares are not individually redeemable);
(b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due
diligence on its ETP Holders to learn the essential facts relating to
every customer prior to trading the Shares; (c) the risks involved in
trading the Shares during the Opening and Late Trading Sessions when an
updated Portfolio Indicative Value will not be calculated or publicly
disseminated; (d) how information regarding the Portfolio Indicative
Value will be disseminated; (e) the requirement that ETP Holders
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; and (f)
trading information.
(5) For initial and/or continued listing, the Fund will be in
compliance with Rule 10A-3 under the Exchange Act,\32\ as provided by
NYSE Arca Equities Rule 5.3.
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\32\ 17 CFR 240.10A-3.
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(6) The equity securities in which the Fund will invest, including
Underlying ETPs, Depositary Receipts, REITs, common stocks, preferred
securities, warrants, convertible securities, and U.S. dollar-
denominated foreign securities, as well as certain derivatives such as
options and futures contracts, will trade in markets that are ISG
members or are parties to a comprehensive surveillance sharing
agreement with the Exchange.
(7) 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 deemed illiquid by the Adviser and
master demand notes.
(8) A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange.
(9) The Fund's investments will be consistent with the Fund's
investment objectives and will not be used to enhance leverage. The
Fund may invest up to 10% of its net assets in inverse Underlying ETPs,
but it will not invest in leveraged or inverse leveraged Underlying
ETPs.
(10) The Fund will only enter into transactions in derivative
instruments with counterparties that First Trust reasonably believes
are capable of performing under the contract \33\ and will post as
collateral at least $250,000 each day. In addition, to the extent
practicable, the Fund will invest in swaps cleared through the
facilities of a centralized clearing house.
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\33\ See supra note 17.
This approval order is based on all of the Exchange's representations
and description of the Fund, including those set forth above and in the
Notice.\34\
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\34\ The Commission notes that it does not regulate the market
for futures in which the Fund plans to take positions. Limits on the
positions that any person may take in futures may be directly set by
the Commodity Futures Trading Commission or by the markets on which
the futures are traded. The Commission has no role in establishing
position limits on futures even though such limits could impact an
exchange-traded product that is under the jurisdiction of the
Commission.
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For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \35\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\35\ 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,\36\ that the proposed rule change (SR-NYSEArca-2013-70) be, and it
hereby is, approved.
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\36\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-21533 Filed 9-4-13; 8:45 am]
BILLING CODE 8011-01-P