[Federal Register Volume 79, Number 48 (Wednesday, March 12, 2014)]
[Notices]
[Pages 14092-14100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-05320]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71657; File No. SR-NASDAQ-2014-020]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Proposed Rule Change Relating to Listing and Trading of
Exchange-Traded Managed Fund Shares
March 6, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 26, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by Nasdaq. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) of the Act,\3\ and
Rule 19b-4 thereunder,\4\ Nasdaq is filing with the Commission a
proposed rule change to list and trade under proposed Nasdaq Rule 5745
the shares of a proposed new type of open-end management investment
company registered under the Investment Company Act of 1940, as amended
(``1940 Act''), called an Exchange-Traded Managed Fund (``ETMF''), and
to amend related references under Nasdaq Rules 4120, 5615 (and IM-5615-
4) and 5940.
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
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The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at Nasdaq's principal office, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of, and basis for, the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below, and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt Nasdaq Rule 5745 for the purpose of
permitting the listing and trading of ETMF Shares. Similar to Managed
Fund Shares as defined in Nasdaq Rule 5735,\5\ ETMF Shares would be
issued in specified aggregate unit quantities in return for a deposit
of a specified basket of securities and/or a cash amount with a value
equal to the product of the ETMF's net asset value per Share (``NAV'')
and the number of Shares issued. When aggregated in the same specified
unit quantities, ETMF Shares could be redeemed in exchange for a
specified basket of securities and/or cash with a value per Share equal
to the ETMF's NAV. Unlike Managed Fund Shares, ETMF Shares would trade
on Nasdaq using a new trading protocol called ``NAV-Based Trading.'' In
NAV-Based Trading, all bids, offers and execution prices would be
expressed as a premium/discount (which may be zero) to the ETMF's next-
determined NAV (e.g., NAV-$0.01; NAV+$0.01). An ETMF's NAV would be
determined each business day, normally as of 4:00 p.m. Eastern Time.
Trade executions using NAV-Based Trading would be binding at the time
orders are matched on Nasdaq's facilities, with the transaction prices
contingent upon the determination of the ETMF's NAV at the end of the
business day.
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\5\ The Commission approved Nasdaq Rule 5735 in Securities
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June
20, 2008) (SR-NASDAQ-2008-039).
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Proposed Listing Rules for Exchange-Traded Managed Fund Shares
Proposed Nasdaq Rule 5745(b)(1) provides that Nasdaq will file
separate proposals under Section 19(b) of the Act before the listing of
ETMF Shares. Proposed Nasdaq Rule 5745(b)(2) provides that transactions
in ETMF Shares will occur during Nasdaq's Regular Market Session
through 4:00 p.m.\6\ Proposed Nasdaq Rule 5745(b)(3) provides that ETMF
Shares will trade on Nasdaq at market-determined premiums or discounts
to the next-determined NAV, and that the minimum price variation for
quoting and entry of orders in ETMF Shares will be $0.01. Proposed Rule
Nasdaq 5745(b)(4) provides that Nasdaq will implement written
[[Page 14093]]
surveillance procedures for ETMF Shares. Proposed Nasdaq Rule
5745(b)(5) provides that, for ETMF Shares based on an international or
global portfolio, the statutory prospectus or the application for
exemption from provisions of the 1940 Act for such series of ETMF
Shares must state that such series must comply with the federal
securities laws in accepting securities for deposit and satisfying
redemptions with securities, including that the securities accepted for
deposit and the securities used to satisfy redemption requests are sold
in transactions that would be exempt from registration under the
Securities Act of 1933 (``Securities Act'').
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\6\ Nasdaq Rule 4120(b)(4) defines the Regular Market Session as
the trading session from 9:30 a.m. to 4:00 p.m. or 4:15 p.m. ETMF
Shares will trade until 4:00 p.m.
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Proposed Definitions. Proposed Nasdaq Rule 5745(c)(1) defines the
term ``ETMF Share'' as a security that: (1) Represents an interest in a
registered investment company organized as an open-end management
investment company that invests in a portfolio of securities and other
assets selected and managed by the ETMF's investment adviser consistent
with the ETMF's investment objectives and policies; (2) is issued in
specified aggregate unit quantities in return for a deposit of a
specified portfolio of securities and/or a cash amount with a value per
Share equal to the ETMF's NAV; (3) when aggregated in the same
specified unit quantities, may be redeemed in exchange for a specified
portfolio of securities and/or cash with a value per Share equal to the
ETMF's NAV; and (4) is traded on Nasdaq or another national securities
exchange using NAV-Based Trading, including pursuant to UTP.
In addition, proposed Nasdaq Rule 5745(c)(2) defines the term
``Intraday Indicative Value'' (``IIV'') as the estimated indicative
value of an ETMF Share based on current information regarding the value
of the securities and other assets held by the ETMF. Proposed Nasdaq
Rule 5745(c)(3) defines the term ``Composition File'' as the specified
portfolio of securities and/or cash that an ETMF will accept as a
deposit in issuing ETMF Shares and the specified portfolio of
securities and/or cash that an ETMF will deliver in a redemption of
ETMF Shares. The current Composition File will be disseminated through
the National Securities Clearing Corporation (``NSCC'') once each
business day before the open of trading in ETMF Shares on Nasdaq on
such day. To maintain the confidentiality of current portfolio trading,
an ETMF's Composition File generally will not be a pro rata reflection
of the ETMF's securities positions. Each security included in the
Composition File will be a current holding of the ETMF, but the
Composition File generally will not include all of the securities in
the ETMF's portfolio or match the weightings of the included securities
in the portfolio. The Composition File also may consist entirely of
cash, in which case it will not include any of the securities in the
ETMF's portfolio.
Proposed Nasdaq Rule 5745(c)(4) defines the term ``Reporting
Authority'' as Nasdaq, an institution or a reporting service designated
by Nasdaq as the official source for calculating and reporting
information relating to such series of ETMF Shares, including, but not
limited to, the IIV, the amount of any cash distribution to holders of
ETMF Shares, NAV, the Composition File or other information relating to
the issuance, redemption or trading of ETMF Shares. A series of ETMF
Shares may have more than one Reporting Authority, each having
different functions.
Initial and Continued Listing. Proposed Nasdaq Rule 5745(d) sets
forth the initial and continued listing criteria applicable to ETMF
Shares.\7\ Proposed Nasdaq Rule 5745(d)(1)(A) provides that, for each
series of ETMF Shares, Nasdaq will establish a minimum number of ETMF
Shares required to be outstanding at the time of commencement of
trading. In addition, under proposed Nasdaq Rule 5745(d)(1)(B), Nasdaq
must obtain a representation from the issuer of each series of ETMF
Shares that the NAV for such series will be calculated on each business
day that the New York Stock Exchange is open for trading and that the
NAV will be made available to all market participants at the same time.
Under proposed Nasdaq Rule 5745(d)(1)(C), the Reporting Authority that
provides the Composition File must implement and maintain, or be
subject to, procedures designed to prevent the use and dissemination of
material non-public information regarding the ETMF's portfolio
positions and changes in positions.
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\7\ An investment adviser to an ETMF would be registered under
the Investment Advisers Act of 1940 (the ``Advisers Act''). As a
result, the investment adviser and any subadviser and their related
personnel would be 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. The Exchange
represents that, for initial and/or continued listing, an ETMF must
be in compliance with Rule 10A-3 under the Act. 17 CFR 240.10A-3.
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Proposed Nasdaq Rule 5745(d)(2)(A) provides that each series of
ETMF Shares could continue to be listed and traded if the IIV for the
ETMF Shares is widely disseminated by one or more major market data
vendors at intervals of not more than 15 minutes during the Regular
Market Session when the ETMF Shares trade on Nasdaq. Proposed Nasdaq
Rule 5745(d)(2)(B) provides that Nasdaq will consider the suspension of
trading in, or removal from listing of, a series of ETMF Shares under
any of the following circumstances: (1) If, following the initial
twelve-month period after commencement of trading on the Exchange of a
series of ETMF Shares, there are fewer than 50 beneficial holders of
the series of ETMF Shares for 30 or more consecutive trading days; (2)
if the ETMF's IIV or NAV is no longer calculated or if its IIV, NAV or
Composition File is no longer available to all market participants at
the same time; (3) if the ETMF has failed to submit any filings
required by the Commission or if Nasdaq is aware that the ETMF is not
in compliance with the conditions of any exemptive order or no-action
relief granted by the Commission with respect to the series of ETMF
Shares; or (4) if such other event shall occur or condition exists
which, in the opinion of Nasdaq, makes further dealings on Nasdaq
inadvisable.
Proposed Nasdaq Rule 5745(d)(2)(C) provides that, if the IIV of a
series of ETMF Shares is not being disseminated as required, Nasdaq may
halt trading during the day in which the interruption to the
dissemination of the IIV occurs. If the interruption to the
dissemination of the IIV persists past the trading day in which it
first occurred, Nasdaq will halt trading no later than the beginning of
the trading day following the interruption. In addition, if the
Exchange becomes aware that the NAV with respect to a series of ETMF
Shares is not calculated on each business day that the New York Stock
Exchange is open for trading and disseminated to all market
participants at the same time, it will halt trading in such series
until such time as the NAV is available to all market participants. If
Nasdaq becomes aware that the
[[Page 14094]]
Composition File with respect to a series of ETMF Shares is not
disseminated to all market participants at the same time, it will halt
trading in such series until such time as the Composition File is
available to all market participants.
In addition, proposed Nasdaq Rule 5745(d)(2)(D) provides that, upon
termination of an ETMF, the ETMF Shares issued in connection with such
entity must be removed from listing on Nasdaq. Proposed Nasdaq Rule
5745(d)(2)(E) provides that voting rights must be as set forth in the
applicable ETMF prospectus.
Additional Provisions. Proposed Nasdaq Rule 5745(e) provides that
neither Nasdaq, the Reporting Authority nor any agent of Nasdaq shall
have any liability for damages, claims, losses or expenses caused by
any errors, omissions or delays in calculating or disseminating any of
the following: the current portfolio value; the current value of the
securities and other assets required to be deposited in connection with
issuance of ETMF Shares; the amount of any dividend-equivalent payment
or cash distribution to holders of ETMF Shares; NAV; the Composition
File; or other information relating to the purchase, redemption or
trading of ETMF Shares, resulting from any negligent act or omission by
Nasdaq, the Reporting Authority or any agent of Nasdaq, or any act,
condition or cause beyond the reasonable control of Nasdaq, its agent
or the Reporting Authority, including, but not limited to, an act of
God, fire, flood, extraordinary weather conditions, war, insurrection,
riot, strike, accident, action of government, communications or power
failure, equipment or software malfunction, or any error, omission or
delay in the reports of transactions in one or more underlying
securities.
Proposed Nasdaq Rule 5745(f) applies only to series of ETMF Shares
that are the subject of an order by the Commission exempting such
series from certain prospectus delivery requirements under Section
24(d) of the 1940 Act and are not otherwise subject to prospectus
delivery requirements under the Securities Act. Nasdaq will inform its
members regarding application of Proposed Nasdaq Rule 5745(f) to a
particular series of ETMF Shares by means of an information circular
prior to commencement of trading in such series. Under the proposed
rule, Nasdaq requires that members provide to all purchasers of a
series of ETMF Shares a written description of the terms and
characteristics of those securities, in a form prepared by the open-end
management investment company issuing such securities, not later than
the time a confirmation of the first transaction in such series is
delivered to such purchaser. In addition, members shall include such a
written description with any sales material relating to a series of
ETMF Shares that is provided to customers or the public. Any other
written materials provided by a member to customers or the public
making specific reference to a series of ETMF Shares as an investment
vehicle must include a statement in substantially the following form:
``A circular describing the terms and characteristics of (the series of
ETMF Shares) has been prepared by the (open-end management investment
company name) and is available from your broker. It is recommended that
you obtain and review such circular before purchasing (the series of
ETMF Shares).'' A member carrying an omnibus account for a non-member
broker-dealer is required to inform such non-member that execution of
an order to purchase a series of ETMF Shares for such omnibus account
will be deemed to constitute agreement by the non-member to make such a
written description available to its customers on the same terms as are
directly applicable to members under this rule. Upon request of a
customer, a member shall also provide a prospectus for the particular
series of ETMF Shares.
Proposed Nasdaq Rule 5745(g) provides that, if the investment
adviser to an ETMF issuing Shares is a registered broker-dealer or
affiliated with a broker-dealer, such investment adviser shall erect a
``fire wall'' between the investment adviser and the broker-dealer
personnel or broker-dealer affiliate, as applicable, with respect to
access to information concerning the composition and/or changes to such
ETMF's portfolio holdings. Personnel who make decisions on the ETMF's
portfolio composition must be subject to procedures designed to prevent
the use and dissemination of material nonpublic information regarding
the applicable ETMF portfolio.
Other Proposed Rule Changes
The Exchange also proposes to amend: (1) Nasdaq Rule 4120(a)(9) and
(10) to add provisions applicable to ETMF Shares with respect to
trading halts; (2) Nasdaq Rule 4120(b)(4)(A) and (E) to modify certain
defined terms to include references to ETMF Shares; (3) Nasdaq Rule
5615(a)(5) and IM-5615-4 to add references to ETMFs for purposes of
certain corporate governance requirements; and (4) Nasdaq Rule 5940(a)
and (b) to add references to ETMF Shares to those securities already
covered under the rule relating to both entry fees and annual fees.\8\
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\8\ The Exchange also proposes to make certain other minor
technical changes to these rules unrelated to ETMFs. Specifically,
the Exchange proposes to amend Rule 4120(a)(9), (b)(4)(A), and
(b)(4)(E) to include appropriate references to various derivative
securities defined in Rule 5711, and to make certain other
typographical corrections and clarifications.
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Key Features of ETMF Shares
Open-End Registered Investment Company. An ETMF Share means a
security that represents an interest in an open-end investment company
registered under the 1940 Act that invests in a portfolio of securities
and other assets selected and managed by its investment adviser
consistent with its investment objectives and policies and which is
traded on a national securities exchange using NAV-Based Trading.
1940 Act Exemptive Relief. The 1940 Act contemplates management
investment companies that either (1) issue redeemable securities (i.e.,
open-end investment companies) or (2) do not issue redeemable
securities (i.e., closed-end investment companies). ETMF Shares are
redeemable, but only in large blocks of shares, not individually.
Because exchange-traded funds (``ETFs'') issuing Managed Fund Shares
(``Active ETFs'') do not fit neatly into either the open-end category
or the closed-end category, Active ETFs have had to seek exemptive
relief from the Commission to permit registration as an open-end
investment company. ETMFs share some key structural features with
Active ETFs, including creations and redemptions only in large blocks
of shares, and require exemptive relief from the Commission from
substantially the same provisions of the 1940 Act.
Creations and Redemptions. As with Managed Fund Shares, ETMF Shares
will be issued and redeemed on a daily basis at NAV \9\ in specified
blocks of Shares called ``Creation Units.'' Creation Units may be
purchased and redeemed by or through ``Authorized Participants.'' \10\
Purchases and sales of
[[Page 14095]]
Shares in amounts smaller than the number of Shares required for a
Creation Unit may be effected only in the secondary market through NAV-
based transactions, as described below, and not directly with the ETMF.
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\9\ As with other registered open-end investment companies, the
NAV of ETMF Shares generally would be calculated daily Monday
through Friday as of the close of regular trading on the New York
Stock Exchange, normally 4:00 p.m. Eastern Time. NAV would be
calculated by dividing the ETMF's net asset value by the number of
ETMF Shares outstanding. Information regarding the valuation of
investments in calculating the ETMF's NAV would be contained in the
registration statement for the ETMF Shares.
\10\ ``Authorized Participants'' would be either: (1)
``Participating parties,'' i.e., brokers or other participants in
the Continuous Net Settlement System of the NSCC, a clearing agency
registered with Commission and affiliated with the Depository Trust
Company (``DTC''), or (2) DTC participants, which in either case
have executed participant agreements with the ETMF's distributor and
transfer agent regarding the creation and redemption of Creation
Units. Investors would not have to be Authorized Participants in
order to transact in Creation Units, but must place an order through
and make appropriate arrangements with an Authorized Participant for
such transactions.
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As with Active ETFs, the creation and redemption process for ETMFs
may be effected ``in kind,'' in cash, or in a combination of securities
and cash. Creation ``in kind'' means that the Authorized Participant--
usually a brokerage house or large institutional investor--purchases
the Creation Unit with a basket of securities equal in value to the
aggregate NAV of the Shares in the Creation Unit. When an Authorized
Participant redeems a Creation Unit in kind, it receives a basket of
securities equal in value to the aggregate NAV of the Shares in the
Creation Unit.
Composition File. As defined in proposed Nasdaq Rule 5475(c)(3),
the Composition File is the specified portfolio of securities and/or
cash that an ETMF will accept as a deposit in issuing a Creation Unit
of ETMF Shares, and the specified portfolio of securities and/or cash
that an ETMF will deliver in a redemption of a Creation Unit of ETMF
Shares. The Composition File will be disseminated through the NSCC once
each business day before the open of trading in ETMF Shares on such
day. Because ETMFs seek to preserve the confidentiality of their
current portfolio trading program, the Composition File generally will
not be a pro rata reflection of the ETMF's securities positions. Each
security included in the Composition File will be a current holding of
the ETMF, but the Composition File generally will not include all of
the securities in the ETMF's portfolio or match the weightings of the
included securities in the portfolio. Securities that the investment
adviser to the ETMF is in the process of acquiring for the ETMF
generally would not be represented in the Composition File until their
purchase has been completed. Similarly, securities that are held in the
ETMF's portfolio but in the process of being sold may not be removed
from the Composition File until the sale program is substantially
completed. ETMFs creating and redeeming Shares in kind would use cash
amounts to supplement the in-kind transactions to the extent necessary
to ensure that Creation Units are purchased and redeemed at NAV. The
Composition File also may consist entirely of cash, in which case it
will not include any of the securities in the ETMF's portfolio.\11\
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\11\ In determining whether an ETMF will issue or redeem
Creation Units entirely on a cash basis, the key consideration will
be the benefit that would accrue to the ETMF and its investors. For
instance, in bond transactions, the investment adviser to the ETMF
may be able to obtain better execution than Authorized Participants
because of the investment adviser's size, experience and potentially
stronger relationships in the fixed-income markets.
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NAV-Based Trading. Because ETMF Shares will be listed and traded on
the Exchange, ETMF Shares will be available for purchase and sale on an
intraday basis, like shares of conventional ETFs and other listed
securities. Different from conventional ETF share trading, however,
ETMF Shares would be purchased and sold in the secondary market at
prices based on the next-determined NAV. All bids, offers and execution
prices would be expressed as a premium/discount (which may be zero) to
the ETMF's next-determined NAV (e.g., NAV - $0.01, NAV + $0.01). An
ETMF's NAV would be determined each business day, normally as of 4:00
p.m. Eastern Time. Trade executions would be binding at the time orders
are matched on Nasdaq's facilities, with the transaction prices
contingent upon the determination of NAV.
Trading Premiums and Discounts. ETMF Share prices would be
quoted throughout the day relative to NAV. The premium or discount to
NAV at which ETMF Share prices are quoted and transactions are executed
would vary depending on market factors, including the balance of supply
and demand for ETMF Shares among investors, transaction fees and other
costs in connection with creating and redeeming Creation Units of ETMF
Shares, competition among market makers and other arbitrageurs, the
ETMF Share inventory positions and inventory strategies of market
makers and other arbitrageurs, and the volume of ETMF Share trading.
Reflecting these and other market factors, prices for ETMF Shares in
the secondary market may be above, at or below NAV.
Transmitting and Processing Orders. Member firms would
utilize existing order types and interfaces to transmit ETMF Share bids
and offers to Nasdaq, which would process ETMF Share trades like trades
in shares of conventional ETFs and other listed securities. In the
systems used to transmit and process transactions in ETMF Shares,
Nasdaq expects an ETMF's next-determined NAV to be represented by a
proxy price (e.g., 100.00) and a premium/discount of a stated amount to
the next-determined NAV to be represented by the same increment/
decrement from the proxy price used to denote NAV (e.g., NAV - $0.01
would be represented as 99.99; NAV + $0.01 as 100.01).\12\
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\12\ Order transmission and processing systems currently in
common use by exchanges and member firms are generally not designed
to accommodate pricing arrangements, such as NAV-Based Trading, in
which bids, offers and execution prices are determined by reference
to a price or value that is unknown at the time of trade execution.
Compared to the alternative of building and maintaining (and
requiring member firms to build and maintain) a dedicated NAV-Based
Trading order transmission and processing system, the Exchange
believes that the proposed approach (using, for processing purposes,
a proxy price to represent next-determined NAV) offers major
advantages in terms of cost, efficiency and time to implement. To
convert proxy prices used to represent intraday bids, offers and
execution prices into prices expressed in relation to the next-
determined NAV, member firms would subtract from the reported proxy
price (e.g., 99.99) the proxy for NAV (e.g., 100.00) and inserting
``NAV'' in front of the calculated number expressed in dollars
(e.g., 99.99-100.00 = -0.01, expressed as ``NAV - $0.01'').
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To avoid potential investor confusion, Nasdaq would work with
member firms and providers of market data services to seek to ensure
that representations of intraday bids, offers and execution prices for
ETMFs that are made available to the investing public follow the ``NAV
- $0.01/NAV + $0.01'' (or similar) display format, rather than
displaying proxy prices. Nasdaq expects all ETMFs listed on the
Exchange to have a unique identifier associated with their ticker
symbols, which would indicate that their Shares are traded using NAV-
Based Trading. Nasdaq makes available to member firms and market data
services certain proprietary data feeds (``Nasdaq Data Feeds'') that
are designed to supplement the market information disseminated through
the consolidated tape (``Consolidated Tape''). The Exchange would use a
Nasdaq Data Feed to disseminate intraday price and quote data for ETMFs
in real time in the ``NAV - $0.01/NAV + $0.01'' (or similar) display
format. Member firms could use the Nasdaq Data Feed to source intraday
ETMF prices for presentation to the investing public in the ``NAV -
$0.01/NAV + $0.01'' (or similar) display format. Alternatively, member
firms could source intraday ETMF prices in proxy price format from the
Consolidated Tape and use a simple algorithm to convert prices into the
``NAV - $0.01/NAV + $0.01'' (or similar) display format.
Intraday Reporting of Quotes and Trades. All ETMF bids,
offers and trade executions would be reported intraday in real time by
the Exchange to the
[[Page 14096]]
Consolidated Tape \13\ and separately disseminated to member firms and
market data services through a Nasdaq Data Feed. The Exchange would
also provide the member firms participating in each ETMF Share trade
with a contemporaneous notice of trade execution, indicating the number
of ETMF Shares bought or sold and the executed premium/discount to
NAV.\14\
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\13\ Due to systems limitations, the Consolidated Tape would
report intraday execution prices and quotes for ETMFs using a proxy
price format. As noted, Nasdaq would separately report real-time
execution prices and quotes to member firms and providers of market
data services in the ``NAV - $0.01/NAV + $0.01'' (or similar)
display format, and otherwise seek to ensure that representations of
intraday bids, offers and execution prices for ETMFs that are made
available to the investing public follow the same display format.
\14\ All orders to buy or sell an ETMF Share that are not
executed on the day the order is submitted will be automatically
cancelled as of the close of trading on such day.
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Final Trade Pricing, Reporting and Settlement. All
executed ETMF Share trades would be recorded and stored intraday by
Nasdaq to await the calculation of the ETMF's end-of-day NAV and the
determination of final trade pricing. After the Reporting Authority
calculates an ETMF's NAV and provides this information to the Exchange,
Nasdaq would price each ETMF Share trade entered into during the day at
the ETMF's NAV plus/minus the trade's executed premium/discount. Using
the final trade price, each executed ETMF Share trade would then be
disseminated to member firms and market data services through the
Nasdaq Data Feed used to report ETMF Share trades, and confirmed to the
member firms participating in the trade to supplement the previously
provided information to include final pricing. After the pricing is
finalized, Nasdaq would deliver the ETMF Share trading data to NSCC for
clearance and settlement, following the same processes used for the
clearance and settlement of trades in conventional ETFs and other
exchange-traded securities.
Portfolio Disclosure and ETMF Share Trading Efficiency. As required
for traditional open-end investment companies, ETMFs would disclose
their full portfolio positions at least quarterly, with a delay (not to
exceed 60 days) to limit opportunities for other market participants to
engage in predatory trading practices that might harm fund
shareholders.\15\
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\15\ See 17 CFR 249.332; 17 CFR 274.130. In adopting the
requirement for quarterly portfolio disclosure with not more than a
60 day delay, the Commission noted that it took seriously concerns
that more frequent portfolio disclosure and/or a shorter delay for
release of this information might expand the opportunities for other
market participants to engage in predatory trading practices that
harm fund shareholders. Shareholder Reports and Quarterly Portfolio
Disclosure of Registered Management Investment Companies, Securities
Exchange Act Release No. 49333 (Feb. 27, 2004). As with traditional
mutual funds, an ETMF could elect to provide more frequent
disclosure of portfolio positions, if appropriate.
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Rule 5735 requires Active ETFs to disclose publicly their full
portfolio positions at least once daily. The purpose of this
requirement is to provide Active ETF market makers with the portfolio
information needed to hedge the intraday market risk they assume as
they take inventory positions in connection with their market making
activities. In conventional ETF trading, a condition to maintaining a
tight relationship between market trading prices and contemporaneous
underlying portfolio values is that market makers have sufficient
information regarding portfolio positions to enable them to earn
reliable arbitrage profits by entering into long (or short) positions
in ETF shares and offsetting short (or long) positions in the
underlying holdings (or a suitable proxy).
In ETMF trading, by contrast, a market maker assumes no intraday
market risk in connection with its inventory positions because all ETMF
Share transaction prices are based on the next-determined NAV. Whether
an ETMF's underlying value goes up or down over the course of a trading
day will not affect how much profit a market maker earns by selling (or
buying) ETMF Shares in the market at a net premium (discount) to NAV,
and then purchasing (redeeming) an offsetting number of ETMF Shares at
the end of the day in transactions with the ETMF. No intraday market
risk means no requirement for intraday hedging, and therefore no
associated requirement for portfolio disclosure to maintain a tight
relationship between ETMF Share trading prices and NAV.
The arbitrage that connects ETMF trading prices to NAV is effected
at the end of each trading day when a market maker or other arbitrageur
purchases (or redeems) Creation Units of ETMF Shares through an
Authorized Participant to offset the net amount of ETMF Shares it has
sold (bought) over the course of the trading day, and buys (sells) the
quantity of Composition File instruments corresponding to the number of
Creation Units purchased (redeemed). An ETMF market maker that
purchases (or redeems) a Creation Unit at the end of a trading day to
offset its net intraday sales (purchases) of a Creation Unit quantity
of ETMF Shares will earn arbitrage profits to the extent that it either
sells (buys) Shares at an aggregate premium (discount) to NAV or buys
(sells) a Creation Unit-equivalent quantity of Composition File
instruments at an aggregate discount (premium) to their end-of-day
values, and the net amount of ETMF premium (discount) plus Composition
File instruments discount (premium) exceeds the transaction fee that
applies to a purchase (redemption) of a Creation Unit of ETMF
Shares.\16\
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\16\ The arbitrage mechanism is simplified for cash creations
and redemptions. An ETMF market maker that purchases (or redeems) a
Creation Unit in cash to offset its net intraday sales (purchases)
of a Creation Unit quantity of ETMF Shares will earn arbitrage
profits to the extent that it sells (buys) ETMF Shares in the
secondary market at an aggregate premium (discount) to NAV that
exceeds the transaction fee that applies to a cash creation
(redemption) of a Creation Unit of ETMF Shares.
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Different from ETFs trading in conventional intraday markets, ETMFs
offer market makers an arbitrage profit opportunity that does not
depend on either corresponding intraday adjustments in fund share and
underlying portfolio positions or the use of a hedge portfolio to
manage intraday market risk. A ``perfect arbitrage'' in an ETMF
requires only that market makers holding short (or long) positions in
ETMF Shares accumulated intraday transact with the ETMF to purchase
(redeem) a corresponding number of Creation Units of ETMF Shares, buy
(sell) the equivalent quantities of Composition File instruments at
market-closing or better prices, and offload any remaining sub-Creation
Unit ETMF Share inventory through secondary market transactions by the
market close.\17\
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\17\ Market makers are expected generally to seek to minimize
their exposure to price risk in ETMF Shares by holding little or no
overnight inventory. Establishing Creation Unit sizes for ETMFs that
are somewhat smaller (i.e., in a range of 5,000 to 50,000 Shares)
than is customary for ETFs should support efficient arbitrage
between an ETMF's trading prices and NAV by facilitating tighter
market maker inventory management. To the extent that market makers
hold small positions in ETMF Shares overnight, they are expected to
aggregate such holdings with other risk positions and transact at or
near the market close to buy or sell offsetting positions in
appropriate, broad-based hedging instruments. Such hedging of
overnight inventory risk on a macro basis does not require
disclosure of non-Composition File portfolio positions.
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Because the arbitrage mechanism that underlies ETMF trading is
simpler, more reliable and exposes market makers to less risk than ETF
arbitrage, market makers should require less profit inducement to
establish and maintain markets in ETMF Shares than in similarly
constituted ETFs, thereby enabling ETMFs to routinely trade at smaller
premiums/discounts and narrower bid-ask spreads. Further, because the
arbitrage mechanism that underlies efficient trading of ETMFs
[[Page 14097]]
does not involve portfolio positions that are not included in the
Composition File, the need for full portfolio transparency to achieve
tight markets in ETMF Shares is eliminated.
Recognizing the potential harm to shareholders of disclosing
portfolio trading information on a current basis (and the absence of a
need for such information to maintain tight trading markets using NAV-
Based Trading), proposed Nasdaq Rule 5745 would not require daily
portfolio disclosure or specify a minimum level of correspondence
between an ETMF's portfolio positions and its Composition File.
Intraday Indicative Value. For each series of ETMF Shares, an
estimated value of an individual ETMF Share, defined in proposed Nasdaq
Rule 5745(c)(2) as the ``Intraday Indicative Value,'' would be widely
disseminated by one or more major market data vendors at intervals of
not more than 15 minutes throughout the Regular Market Session when
ETMF Shares trade on the Exchange. The IIV would be based on current
information regarding the value of the securities and other assets held
by an ETMF.\18\ Unlike Nasdaq Rule 5735, which requires dissemination
of IIVs every 15 seconds for Managed Fund Shares, proposed Nasdaq Rule
5745 would not require the dissemination of an IIV on such a frequent
basis. Dissemination of IIVs plays a different, and lesser, role in
NAV-Based Trading of ETMF Shares than in conventional ETF trading. For
Managed Fund Shares (and ETFs generally), the primary purpose of IIVs
is to provide retail investors with a measure of the contemporaneous
underlying value of a fund's positions, allowing them to assess the
reasonableness of trading prices in relation to underlying value. For
ETMF Shares, NAV-Based Trading provides investors with a direct measure
of the relationship between trading prices and NAV (e.g., NAV - $0.01,
NAV + $0.02) and, using limit orders, a means for controlling the
premium or discount to NAV at which they trade shares. The purpose of
IIVs in NAV-Based Trading is to enable investors to estimate the next-
determined NAV so they can determine the number of ETMF Shares to buy
or sell if they want to transact in an approximate dollar amount (e.g.,
if an investor wants to acquire approximately $5,000 of an ETMF, how
many Shares should the investor buy?).\19\ For this purpose,
dissemination of IIVs at intervals of not more than 15 minutes should
generally be sufficient. More frequent dissemination of IIVs may
increase fund costs without apparent benefit and could focus
unwarranted investor attention on these disclosures. Moreover, for
certain strategies, more frequent IIV disclosure could provide
unintended information about current portfolio trading activity to
market participants who possess the requisite analytical capabilities,
computation power and motivation to reverse engineer the ETMF's
portfolio positions. As proposed, an ETMF would be permitted to
disseminate IIVs at intervals of less than 15 minutes, but would not be
required to do so to maintain trading on the Exchange.
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\18\ IIVs disseminated throughout each trading day would be
based on the same portfolio as used to calculate that day's NAV.
Like Managed Fund Shares, ETMFs will reflect purchases and sales of
portfolio positions in their NAV the next business day after trades
are executed.
\19\ Because, in NAV-Based Trading, prices of executed trades
are not determined until the reference NAV is calculated, buyers and
sellers of ETMF Shares during the trading day will not know the
final value of their purchases and sales until the end of the
trading day. An ETMF's registration statement, Web site and any
advertising or marketing materials will include prominent disclosure
of this fact. Although IIVs may provide useful estimates of the
value of intraday trades, they cannot be used to calculate with
precision the dollar value of the ETMF Shares to be bought or sold.
An IIV of an ETMF will generally differ from NAV to the extent that
the value of the ETMF's portfolio holdings change intraday between
the time the IIV is calculated and the end of the trading day. The
fact that an investor placing an order to purchase or sell ETMF
Shares would not know the trade price at the time the order is
entered is similar to certain existing order types in conventional
share trading. For standard market orders, trading prices are not
known until the order executes. For market-on-close orders, trading
prices are not established until the end of the trading day. In
addition, for purchases and sales of share quantities of mutual
funds, an investor does not know the transaction value until NAV is
calculated at the end of the day. Member firms may have different
systems for communicating these trade characteristics to their
customers and for ensuring that customers have sufficient resources
to engage in these trades. Member firms may require that a cash
buffer be maintained in a customer's account relative to the current
value of the security to be purchased. Alternatively, customers may
have margin accounts or arrangements with their broker-dealer to
provide for payment subsequent to trade execution, but prior to
trade settlement.
---------------------------------------------------------------------------
Availability of Information. Prior to the commencement of market
trading in ETMF Shares, each ETMF will be required to establish and
maintain a public Web site through which its current prospectus may be
downloaded. The Web site will include additional ETMF information
updated on a daily basis, including most recent NAV. The Composition
File will be disseminated through the NSCC before the open of trading
in ETMF Shares on Nasdaq on each business day. Consistent with the
disclosure requirements that apply to traditional open-end investment
companies, a complete list of current ETMF portfolio positions will be
made available at least once each calendar quarter, with a reporting
lag of not more than 60 days. ETMFs may provide more frequent
disclosures of portfolio positions at their discretion.
Reports of ETMF Share transactions will be disseminated to the
market and delivered to the member firms participating in the trade
contemporaneous with execution. Once an ETMF's daily NAV has been
calculated, Nasdaq would price each ETMF Share trade entered into
during the day at the ETMF's NAV plus/minus the trade's executed
premium/discount. Using the final trade price, each executed ETMF Share
trade would then be disseminated to member firms and market data
services through the Nasdaq Data Feed used to report ETMF Share trades,
and confirmed to the member firms participating in the trade to
supplement the previously provided information to include final
pricing.
Information regarding NAV-based trading prices and volumes of ETMF
Shares will be continually available on a real-time basis throughout
each trading day on brokers' computer screens and other electronic
services. The previous trading day's closing price and volume
information for the ETMF Shares will be published daily.
Exchange Listing. Nasdaq intends to enter into a license agreement
to allow for the listing and trading of ETMF Shares on the
Exchange.\20\ ETMF Shares listed on the Exchange may trade pursuant to
UTP on other national securities exchanges that have obtained
appropriate licenses, adopted applicable exchange rules and developed
systems to support NAV-Based Trading. Fees collected by the Exchange in
connection with the listing and trading of ETMF Shares will comply with
the statutory requirements set forth in the Act.
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\20\ Aspects of ETMFs and NAV-Based Trading are protected
intellectual property subject to issued and pending U.S. patents
held by Navigate Fund Solutions LLC (``Navigate''), a wholly owned
subsidiary of Eaton Vance Corp. Nasdaq would enter into a license
agreement with Navigate to allow for NAV-Based Trading on the
Exchange of ETMFs that have themselves entered into license
agreements with Navigate.
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Trading Halts
The Exchange may consider all relevant factors in exercising its
discretion to halt or suspend trading in ETMF Shares. Nasdaq will halt
trading in ETMF Shares under the conditions specified in Nasdaq Rules
4120, as proposed to be amended, and in proposed Nasdaq Rule
5745(d)(2)(C), as discussed above. Additionally, Nasdaq may cease
trading ETMF Shares if other
[[Page 14098]]
unusual conditions or circumstances exist which, in the opinion of
Nasdaq, make further dealings on Nasdaq detrimental to the maintenance
of a fair and orderly market. To manage the risk of a non-regulatory
ETMF Share trading halt, Nasdaq has in place back-up processes and
procedures to ensure orderly trading. Because, in NAV-Based Trading,
all trade execution prices are linked to end-of-day NAV, buyers and
sellers of ETMF Shares should be less exposed to risk of loss due to
intraday trading halts than buyers and sellers of conventional ETFs and
other exchange-traded securities.
Trading Rules
Nasdaq deems ETMF Shares to be equity securities, thus rendering
trading in ETMF Shares to be subject to Nasdaq's existing rules
governing the trading of equity securities. Nasdaq will allow trading
in ETMF Shares from 9:30 a.m. until 4:00 p.m. Eastern Time.\21\ As
provided in proposed Nasdaq Rule 5745(b)(3), the minimum price
variation for quoting and entry of orders in ETMF Shares traded on the
Exchange will be $0.01.
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\21\ See, supra note 6.
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Surveillance
The Exchange represents that trading in ETMF Shares will be subject
to the existing trading surveillances, administered by both Nasdaq and
the Financial Industry Regulatory Authority, Inc. (``FINRA'') on behalf
of the Exchange, which are designed to detect violations of Exchange
rules and applicable federal securities laws.\22\ The Exchange
represents that these procedures are adequate to properly monitor
trading of ETMF Shares on the Exchange and to deter and detect
violations of Exchange rules and applicable federal securities laws.
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\22\ FINRA provides surveillance of trading on the Exchange
pursuant to a regulatory services agreement. The Exchange is
responsible for FINRA's performance under this regulatory services
agreement.
---------------------------------------------------------------------------
The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
FINRA, on behalf of the Exchange, will communicate as needed with
other markets and other entities that are members of the Intermarket
Surveillance Group (``ISG'') \23\ regarding trading in ETMF Shares, and
in exchange-traded securities and instruments held by ETMFs (to the
extent such exchange-traded securities and instruments are known
through the publication of the Composition File and periodic public
disclosures of an ETMF's portfolio), and FINRA may obtain trading
information regarding such trading from other markets and other
entities. In addition, the Exchange may obtain information regarding
trading in ETMF Shares, and in exchange-traded securities and
instruments held by ETMFs (to the extent such exchange-traded
securities and instruments are known through the publication of the
Composition File and periodic public disclosures of an ETMF's
portfolio), from markets and other entities that are members of ISG,
which includes securities and futures exchanges, or with which the
Exchange has in place a comprehensive surveillance sharing agreement.
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\23\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of an
ETMF's portfolio may trade on markets that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material non-public information by its employees.
Information Circular
Prior to the commencement of trading in an ETMF, the Exchange will
inform its members in an Information Circular of the special
characteristics and risks associated with trading the ETMF Shares.
Specifically, the Information Circular will discuss the following: (1)
The procedures for purchases and redemptions of ETMF Shares in Creation
Units (and noting that ETMF Shares are not individually redeemable);
(2) Nasdaq Rule 2111A, which imposes suitability obligations on Nasdaq
members with respect to recommending transactions in ETMF Shares to
customers; (3) how information regarding the IIV is disseminated; (4)
the requirement that members deliver a prospectus to investors
purchasing ETMF Shares prior to or concurrently with the confirmation
of a transaction; and (5) information regarding NAV-Based Trading
protocols.
In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the ETMF. Members purchasing ETMF Shares from the ETMF
for resale to investors will deliver a summary prospectus to such
investors. The Information Circular will also discuss any exemptive,
no-action and interpretive relief granted by the Commission from any
rules under the Act.
The Information Circular also will reference that the ETMF is
subject to various fees and expenses described in its registration
statement. The Information Circular will also disclose the trading
hours of the ETMF Shares and the applicable NAV calculation time for
the ETMF Shares. The Information Circular will disclose that
information about the ETMF Shares will be publicly available on the
ETMF's Web site.
Information regarding ETMF trading protocols will be disseminated
to Nasdaq members in accordance with current processes for newly listed
products. Nasdaq intends to provide its members with a detailed
explanation of NAV-Based Trading through a Trading Alert issued prior
to the commencement of trading in ETMF Shares on the Exchange.
2. Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b)
of the Act \24\ in general, and Section 6(b)(5) of the Act \25\ in
particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. Nasdaq also believes that
imposition of an initial entry fee and an annual fee in connection with
the listing of ETMF Shares under proposed Nasdaq Rule 5940 is
consistent with Section 6(b)(4) of the Act \26\ in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among members and issuers and other persons using any facility or
system that the Exchange operates or controls.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
\26\ 15 U.S.C. 78f(b)(4).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that ETMF
Shares would be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in proposed Nasdaq Rule 5745.
The Exchange believes that its surveillance procedures are adequate to
properly monitor the trading of ETMF Shares on Nasdaq and to deter and
detect violations of
[[Page 14099]]
Exchange rules and the applicable federal securities laws. If the
investment adviser to an ETMF is a registered broker-dealer or
affiliated with a broker-dealer, such investment adviser shall erect a
``fire wall'' between the investment adviser and the broker-dealer
personnel or broker-dealer affiliate, as applicable, with respect to
access to information concerning the composition and/or changes to the
ETMF's portfolio holdings. The Exchange may obtain information via ISG
from other exchanges that are members of ISG or with which the Exchange
has entered into a comprehensive surveillance sharing agreement, to the
extent necessary.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest.
The Exchange will obtain a representation from each issuer of ETMF
Shares that the NAV per ETMF Share will be calculated on each business
day that the New York Stock Exchange is open for trading and that the
NAV will be made available to all market participants at the same time.
In addition, a large amount of information would be publicly available
regarding ETMFs and ETMF Shares, thereby promoting market transparency.
An IIV will be disseminated by one or more major market data vendors at
intervals of not more than 15 minutes during trading on the Exchange.
Prior to the commencement of market trading in ETMF Shares, each ETMF
will be required to establish and maintain a public Web site through
which its current prospectus may be downloaded. The Web site will
include additional ETMF information updated on a daily basis, including
the most recent NAV. The Composition File will be disseminated through
the NSCC before the open of trading in ETMF Shares on each business
day. A complete list of current ETMF portfolio positions will be made
available at least once each calendar quarter, with a reporting lag of
not more than 60 days. ETMFs may provide more frequent disclosures of
portfolio positions at their discretion.
Transactions in ETMF Shares will be reported to the Consolidated
Tape, disseminated to member firms and market data services through the
Nasdaq Data Feed used to report ETMF Share trades, and reported to the
member firms participating in the trade contemporaneous with execution.
Once an ETMF's daily NAV has been calculated and the final price of its
intraday Share trades has been determined, Nasdaq disseminate final
pricing information through the Nasdaq Data Feed used to report ETMF
Share trades and deliver a confirmation with final pricing to the
transacting parties. Information regarding NAV-based trading prices and
volumes of ETMF Shares traded will be continually available on a real-
time basis throughout each trading day on brokers' computer screens and
other electronic services. The previous trading day's closing price and
volume information for the ETMF Shares will be published daily. Because
ETMF Shares will trade at prices based on the next-determined NAV,
investors will be able to buy and sell individual Shares at a known
premium or discount to NAV that they can limit by transacting using
limit orders. NAV-Based Trading provides a level of trading cost
transparency and control that is normally not achievable in
conventional ETF trading. Trading in ETMF Shares would be subject to
proposed Nasdaq Rules 5745(d)(2)(B) and (C), which provide for the
suspension of trading or trading halts under certain circumstances,
including if, in the view of the Exchange, trading in ETMF Shares
becomes inadvisable.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest. Proposed Nasdaq Rule 5745 will permit the listing and
trading of a new type of exchange-traded product that can provide
investors with access to a broad range of active strategies in a
structure that provides the cost and tax efficiencies and shareholder
protections of ETFs, while removing the requirement for portfolio
transparency to ensure a tight relationship between market trading
prices and NAV. Because proposed Nasdaq Rule 5745 would not require
ETMFs to publish portfolio positions daily, ETMFs are expected to have
broad appeal among active managers who seek to make their strategies
available in an exchange-traded structure, but have not embraced Active
ETFs due to concerns about the adverse effects of publicly disclosing
portfolio trading information on a daily basis.
For the above reasons, Nasdaq believes the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act.
With respect to the imposition of initial entry fees and annual
fees for the listing of ETMF Shares under proposed Nasdaq Rule 5940,
Nasdaq believes that the proposed fees are reasonable and equitably
allocated. Nasdaq notes that the proposed fees would be in the same
amount as the entry fees and annual fees that apply to Portfolio
Depository Receipts, Index Fund Shares and Managed Fund Shares, which,
like ETMF Shares, are exchange-listed shares of investment companies
registered under the 1940 Act.
Accordingly, Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(4) of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. In fact, the
Exchange believes that the introduction of ETMFs would promote
competition. ETMFs would permit investment managers that have been
unwilling to sponsor Active ETFs to introduce actively managed
exchange-traded investment companies with features that could be
attractive to investors. The Exchange believes that the NAV-Based
Trading of ETMF Shares would provide investors with an ability to
control trading costs in a way that is not normally available in
conventional ETF trading. These developments could significantly
enhance competition to the benefit of the markets and investors.
Nasdaq intends to enter into a license agreement to allow for the
listing and trading of ETMF Shares.\27\ ETMF Shares listed on the
Exchange may trade pursuant to UTP on other national securities
exchanges that have obtained appropriate licenses, adopted applicable
exchange rules and developed systems to support NAV-Based Trading. Fees
collected by the Exchange in connection with the listing and trading of
ETMF Shares will comply with the statutory requirements set forth in
the Act. Nasdaq believes that this proposal would enable a unique
investment product to begin trading in a regulated exchange environment
and thereby provide additional trading choices to the benefit of
investors, including retail investors.
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\27\ As noted above, aspects of ETMFs and NAV-Based Trading are
protected intellectual property subject to issued and pending U.S.
patents.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i)
[[Page 14100]]
as the Commission may designate up to 90 days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the Exchange consents, the Commission
shall:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2014-020 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2014-020. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2014-020 and should
be submitted on or before April 2, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05320 Filed 3-11-14; 8:45 am]
BILLING CODE 8011-01-P