[Federal Register Volume 78, Number 220 (Thursday, November 14, 2013)]
[Notices]
[Pages 68490-68494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27203]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70828; File No. SR-NASDAQ-2013-121]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule Change To List and Trade Shares of
the First Trust Low Beta Income Fund of First Trust Exchange-Traded
Fund VI
November 7, 2013.
I. Introduction
On September 12, 2013, The NASDAQ Stock Market LLC (``Nasdaq'' or
the ``Exchange'') filed with the Securities and Exchange Commission
[[Page 68491]]
(``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 Low Beta Income ETF (``Fund'') under
Nasdaq Rule 5735. The proposed rule change was published for comment in
the Federal Register on September 26, 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. 70459 (Sept. 20,
2013), 78 FR 59394 (Sept. 26, 2013) (``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 Nasdaq Rule 5735, which governs the listing and trading of Managed
Fund Shares on the Exchange. The Shares will be offered by First Trust
Exchange-Traded Fund VI (``Trust''). The Trust is registered with the
Commission as an investment company.\4\ The Fund is a series of the
Trust.
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\4\ The Trust has filed a registration statement on Form N-1A
(``Registration Statement'') with the Commission. See Post-Effective
Amendment No. 4 to Registration Statement on Form N-1A for the
Trust, dated Jan. 16, 2013 (File Nos. 333-182308 and 811-22717). In
addition, 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. 28468
(Oct. 27, 2008) (File No. 812-13477).
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First Trust Advisors L.P. will be the investment adviser
(``Adviser'') to the Fund. First Trust Portfolios L.P.
(``Distributor'') will be the principal underwriter and distributor of
the Fund's Shares. Brown Brothers Harriman & Co. will act as the
administrator, accounting agent, custodian and transfer agent to the
Fund.
The Exchange represents that the Adviser is not a broker-dealer,
but is affiliated with the Distributor, 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 portfolio.\5\ The Exchange represents that the Shares
will be subject to Nasdaq Rule 5735, which sets forth the initial and
continued listing criteria applicable to Managed Fund Shares.\6\ The
Exchange represents that for initial and/or continued listing, the Fund
must be in compliance with Rule 10A-3 under the Act.\7\
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\5\ See Notice supra note 3, 78 FR at 59400. The Exchange states
that in the event (a) the 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 and/or
such broker-dealer affiliate, as applicable, 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. See id.
\6\ See id. at 59398.
\7\ See 17 CFR 240.10A-3. See also Notice, supra note 3, 78 FR
at 59398.
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Principal Investments
The Fund's investment objective is to provide current income. The
Fund will pursue its objective by investing in large-cap U.S. exchange-
traded equity securities and by utilizing an ``options strategy''
consisting of buying U.S. exchange-traded put options on the Standard &
Poor's 500 Index (``Index'') and writing (selling) U.S. exchange-traded
covered call options on the Index.
In pursuing its investment objective, under normal market
conditions,\8\ the Fund will invest primarily in large-cap U.S.
exchange-traded equity securities. The Fund will also employ an options
strategy in which it will write U.S. exchange-traded covered call
options on the Index in order to seek additional cash flow in the form
of premiums on the options. Those premiums may be distributed to
shareholders on a monthly basis or used to purchase U.S. exchange-
traded put options on the Index that seek to provide the Fund with
downside protection, and which are expected to reduce the Fund's price
sensitivity to declining markets. The market value of the options
strategy may be up to 20% of the Fund's overall net asset value.
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\8\ The term ``under normal market conditions'' includes, but is
not limited to, the absence of adverse market, economic, political
or other conditions, including extreme volatility or trading halts
in the securities 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. In periods of extreme market disturbance, the Fund may
take temporary defensive positions, by overweighting its portfolio
in cash/cash-like instruments; however, to the extent possible, the
Adviser would continue to seek to achieve the Fund's investment
objective.
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The equity securities in which the Fund will invest and the options
that the Fund will buy and/or write will be limited to U.S. exchange-
traded securities and options, respectively, that trade in markets that
are members of the Intermarket Surveillance Group (``ISG'') or are
parties to a comprehensive surveillance sharing agreement with the
Exchange.\9\
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\9\ A list of ISG members is available at www.isgportal.org.
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The equity securities held by the Fund will be selected using a
mathematical optimization process which attempts to tilt the Fund's
common stock portfolio toward higher dividend paying stocks. The equity
securities held by the Fund may include non-U.S. securities that are
listed on a U.S. securities exchange in the form of American Depositary
Receipts (``ADRs'') and Global Depositary Receipts (``GDRs,'' and
together with ADRs, ``Depositary Receipts''). The equity securities
will be periodically rebalanced.
The options portion of the portfolio will generally consist of (i)
U.S. exchange-traded covered calls or covered call spreads on the Index
that are written by the Fund and (ii) U.S. exchange-traded puts on the
Index that are purchased by the Fund. The call options written by the
Fund will typically be a laddered portfolio of one-week, one-month,
two-month, and three-month call options written at-the-money to
slightly out-of-the-money. A call option will give the holder the right
to buy the Index at a predetermined strike price from the Fund. The
notional value of calls written (including calls and call spreads on
the Index and/or other indexes as described in Other Investments below)
will generally be between 25% and 75% of the overall Fund.
The put positions held by the Fund will generally average two to
three months to expiration (calculated at the time of purchase) and
will consist of out-of-the-money Index put options. A put option will
give the Fund the right to sell the Index at a predetermined strike
price to the writer of the put. The notional value of the put portfolio
held by the Fund (including puts on the Index and/or other indexes as
described in Other Investments below) will generally be between 10% and
75% of the overall Fund.
Other Investments
In addition to the options strategy described in Principal
Investments above, the Fund may invest up to 10% of the market value of
its net assets in futures, options, options on futures, total return
swaps, credit default swaps, and forward contracts.\10\ The Fund may
utilize such derivatives to enhance return, to hedge some of the risks
of its investments in securities, as a substitute
[[Page 68492]]
for a position in the underlying asset, to reduce transaction costs, to
maintain full market exposure (which means to adjust the
characteristics of its investments to more closely approximate those of
the markets in which it invests), to manage cash flows, or to preserve
capital. In attempting to enhance returns and/or hedge risks, the Fund
may buy and write U.S. exchange-traded options on single stocks
included in the portfolio, on the Index, and/or on other equity
indexes. The Fund may also write covered call spreads on the Index and/
or other equity indexes.
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\10\ To the extent practicable, the Fund will invest in swaps
cleared through the facilities of a centralized clearing house.
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Under normal market conditions, the Fund may invest up to 10% of
its net assets in short-term debt securities and cash equivalents, or
it may hold cash. The percentage of the Fund's net assets invested in
such holdings will vary and will 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 short-term debt
securities or cash equivalents or it may hold cash. During such
periods, the Fund may not be able to achieve its investment objective.
The Fund may adopt a defensive strategy when the Adviser believes
securities in which the Fund normally invests have elevated risks due
to political or economic factors and in other extraordinary
circumstances. The use of temporary investments will not be a part of a
principal investment strategy of the Fund.
Short-term debt securities are securities from issuers having a
long-term debt rating of at least A by Standard & Poor's Ratings Group
(``S&P Ratings''), Moody's Investors Service, Inc. (``Moody's''), or
Fitch, Inc. (``Fitch''), and having a maturity of one year or less.
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,\11\ 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 is short-term unsecured promissory notes. The Fund may
only invest in commercial paper rated A-1 or higher by S&P Ratings,
Prime-1 or higher by Moody's, or F2 or higher by Fitch.
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\11\ The Fund intends to enter into repurchase agreements only
with financial institutions and dealers believed by the Adviser to
present minimal credit risks in accordance with criteria approved by
the Board of Trustees of the Trust. The Adviser will review and
monitor the creditworthiness of such institutions. The Adviser will
monitor the value of the collateral at the time the transaction is
entered into and at all times during the term of the repurchase
agreement.
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The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment).
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 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,
or securities of other investment companies.
The Fund's investments will be consistent with the Fund's
investment objective and will not be used to enhance leverage.
Additional information regarding the Trust, Fund, and Shares,
including investment strategies, risks, creation and redemption
procedures, fees, portfolio holdings, disclosure policies,
distributions and taxes, calculation of net asset value per share
(``NAV''), availability of information, trading rules and halts, and
surveillance procedures, among other things, can be found in the Notice
or the Registration Statement, as applicable.\12\
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\12\ 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 \13\
and the rules and regulations thereunder applicable to a national
securities exchange.\14\ In particular, the Commission finds that the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act,\15\ 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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\13\ 15 U.S.C. 78f.
\14\ 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).
\15\ 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,\16\ 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 Nasdaq
proprietary quote and trade services, as well as in accordance with the
Unlisted Trading Privileges and the Consolidated Tape Association plans
for the Shares and any underlying exchange-traded products.\17\ In
addition, the Intraday Indicative Value (as defined in Nasdaq Rule
5735(c)(3)) will be based upon the current value of the components of
the Disclosed Portfolio (as defined in Nasdaq Rule 5735(c)(2)), will be
available on the NASDAQ OMX Information LLC proprietary index data
service,\18\ and will be updated and
[[Page 68493]]
widely disseminated and broadly displayed at least every 15 seconds
during the Regular Market Session.\19\ On each business day, before
commencement of trading in Shares in the Regular Market Session on the
Exchange, the Fund will disclose on its Web site the Disclosed
Portfolio, which will form the basis for the Fund's calculation of NAV
at the end of the business day.\20\ The NAV of the Fund will be
determined once each business day, normally as of the close of trading
on the New York Stock Exchange (normally 4:00 p.m. Eastern time).\21\
Information regarding market price and volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services.\22\
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.\23\ Intra-day, executable price
quotations for the 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, as applicable.\24\ Intra-day price information will
also be available through subscription services, such as Bloomberg,
Markit and Thomson Reuters, which can be accessed by authorized
participants and other investors.\25\ The Distributor's Web site will
include a form of the prospectus for the Fund and additional data
relating to NAV and other applicable quantitative information.\26\
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\16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\17\ See Notice, supra note 3, 78 FR at 59398.
\18\ According to the Exchange, the NASDAQ OMX Global Index Data
Service is the NASDAQ OMX global index data feed service, offering
real-time updates, daily summary messages, and access to widely
followed indexes and Intraday Indicative Values for exchange-traded
funds. See id. at 59400.
\19\ See id.
\20\ On a daily basis, the Disclosed Portfolio will include for
each portfolio security and other financial instrument of the Fund
the following information: Ticker symbol (if applicable), name of
security and financial instrument, number of shares (if applicable)
and dollar value of securities and financial instruments held by the
Fund, and percentage weighting of the security and financial
instrument in the Fund. The Web site information will be publicly
available at no charge. See id. at 59398.
\21\ See id.
\22\ See id.
\23\ See id.
\24\ See id.
\25\ See id.
\26\ See id. at 59400.
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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 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, a basket composition file, which includes the security names,
amounts and share quantities, as applicable, required to be delivered
in exchange for one Creation Unit of the Shares, together with
estimates and actual cash components, will be publicly disseminated
daily prior to the opening of Nasdaq via the National Securities
Clearing Corporation.\28\ Further, trading in the Shares will be
subject to Nasdaq 5735(d)(2)(D), which sets forth circumstances under
which trading in the Shares of the Fund may be halted.\29\ The Exchange
may halt trading in the Shares if trading is not occurring in the
securities or the financial instruments constituting 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.\30\ 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.\31\ The Exchange states that it has a general policy
prohibiting the distribution of material, non-public information by its
employees.\32\ The Exchange also states that the Adviser is affiliated
with a broker-dealer and has implemented a firewall with respect to its
broker-dealer affiliate regarding access to information concerning the
composition of or changes to the portfolio.\33\ The Exchange states
that the Financial Industry Regulatory Authority (``FINRA''), on behalf
of the Exchange, will communicate as needed regarding trading in the
Shares, in the equity securities in which the Fund will invest, and in
the U.S. exchange-traded options that the Fund will buy and write, with
other markets and other entities that are members of the ISG, and that
FINRA may obtain trading information regarding trading in the Shares
and in such equity securities and U.S. exchange-traded options from
such markets and other entities.\34\ In addition, the Exchange may
obtain information regarding trading in the Shares and in such equity
securities and U.S. exchange-traded options from markets and other
entities that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.\35\
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\27\ See id.
\28\ See id. at 59398.
\29\ See id. at 59399.
\30\ See id. See also 5735(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. Nasdaq will halt or pause trading in the Shares under
the conditions specified in Nasdaq Rules 4120 and 4121, including
the trading pauses under Nasdaq Rules 4120(a)(11) and (12). 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.
See Notice, supra note 3, 78 FR at 59399.
\31\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\32\ See Notice, supra note 3, 78 FR at 59399.
\33\ See supra note 5 and accompanying text. 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.
\34\ See Notice, supra note 3, 78 FR at 59399.
\35\ See id.
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The Exchange further 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.\36\ In support of this proposal, the Exchange has made
representations, including:
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\36\ See id. at 56399.
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(1) The Shares will be subject to 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 represents that trading in the Shares will be
subject to the existing trading surveillances, administered by both
Nasdaq and 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
[[Page 68494]]
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 2111A, 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 must be in
compliance with Rule 10A-3 under the Exchange Act.\37\
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\37\ 17 CFR 240.10A-3.
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(6) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on 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);
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.
(8) The equity securities in which the Fund will invest and the
options that the Fund will buy and write will be limited to U.S.
exchange-traded securities and options, respectively, that trade in
markets that are members of the 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.
(9) Under normal market conditions, the Fund will invest primarily
in large-cap U.S. exchange-traded equity securities. The Fund will also
utilize an options strategy consisting of buying U.S. exchange-traded
put options on the Index and writing U.S. exchange-traded covered call
options on the Index. The market value of the options strategy may be
up to 20% of the Fund's overall net asset value.
(10) In addition to the options strategy that is part of the Fund's
principal investment strategy, the Fund may invest up to 10% of the
market value of its net assets in futures, options, options on futures,
total return swaps, credit default swaps, and forward contracts. To the
extent practicable, the Fund will invest in swaps cleared through the
facilities of a centralized clearing house.
(11) The Fund's investments will be consistent with the Fund's
investment objective and will not be used to enhance leverage.
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.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \38\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\38\ 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,\39\ that the proposed rule change (SR-NASDAQ-2013-121) be, and it
hereby is, approved.
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\39\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27203 Filed 11-13-13; 8:45 am]
BILLING CODE 8011-01-P