[Federal Register Volume 79, Number 104 (Friday, May 30, 2014)]
[Notices]
[Pages 31156-31160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12521]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72241; File No. SR-NASDAQ-2014-027]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
List and Trade Shares of the PowerShares Multi-Strategy Alternative
Portfolio of PowerShares Actively Managed Exchange-Traded Fund Trust
May 23, 2014.
I. Introduction
On March 24, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade the shares
(``Shares'') of the PowerShares Multi-Strategy Alternative Portfolio
(``Fund'') under Nasdaq Rule 5735. The proposed rule change was
published for comment in the Federal Register on April 11, 2014.\3\ The
Commission received no comments on the proposal. On May 21, Nasdaq
filed Amendment No. 1 to the proposal.\4\ The Commission is publishing
this notice to solicit comments on Amendment No. 1 from interested
persons and is approving the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.
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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. 71892 (Apr. 7,
2014), 79 FR 20262 (``Notice'').
\4\ In Amendment No. 1, Nasdaq amended the proposed rule change
to: (i) Narrow the scope of the Fund's investments to exclude non-
U.S. exchange traded index options; and (ii) specify where quotation
and last sale information could be found for underlying exchange
traded equities, options, and futures.
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund under
Nasdaq Rule 5735, which governs the listing and trading of Managed Fund
Shares. The Shares will be offered by PowerShares Actively Managed
Exchange-Traded Fund Trust (``Trust''). The Trust is registered with
the Commission as an investment company as defined by the Investment
Company Act of 1940 (``Investment Company Act'').\5\ The Fund is a
series of the Trust.
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\5\ The Trust has filed a registration statement on Form N-1A
(``Registration Statement'') with the Commission. See Registration
Statement filed on November 27, 2013 (File Nos. 333-147622 and 811-
22148). The descriptions of the Fund and the Shares contained herein
are based, in part, on information in the Registration Statement. In
addition, the Commission has issued an order granting certain
exemptive relief to the Trust under the1940 Act. See Investment
Company Act Release No. 28171 (February 27, 2008) (File No. 812-
13386).
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Invesco PowerShares Capital Management LLC will be the investment
adviser (``Adviser'') to the Fund. The Fund may use one or more sub-
advisers.\6\ Invesco Distributors, Inc. (``Distributor'') will be the
principal underwriter and distributor of the Shares. The Bank of New
York Mellon will act as the administrator, accounting agent, custodian,
and transfer agent for the Fund.
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\6\ The Exchange states that no sub-adviser had been selected as
of the date of filing of the Notice. See Notice supra note 3, 79 FR
at 20263, n.6.
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The Exchange represents that the Adviser is not a broker-dealer
although it is affiliated with the Distributor, which is a broker-
dealer.\7\ The Adviser has implemented a fire wall with respect to its
broker-dealer affiliate regarding access to information concerning the
composition and/or changes to the portfolio. The Exchange also
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 \8\ and that for initial and continued listing, the
Fund must be in compliance with Rule 10A-3 under the Act.\9\
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\7\ See id. at 20263. The Exchange states in the event (a) the
Adviser becomes newly affiliated with a broker-dealer (or becomes a
registered 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, if 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. at 20263.
\8\ See id. at 20267.
\9\ See 17 CFR 240.10A-3. See also Notice, supra note 3 at
20267.
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[[Page 31157]]
The Exchange has made the following additional representations and
statements in describing the Fund and its investment strategy,
including portfolio holdings and investment restrictions:
Principal Investments
According to the Exchange, the Fund's investment objective will be
to seek positive total returns that have low correlation to the broader
securities markets. The Fund seeks to achieve its investment objective
by actively investing in a combination of a varying number of market
neutral and other investment strategies (``Strategies'') that aim to
capture non-traditional risk premia across asset classes.
The Adviser will allocate the weightings of the Fund's investments
across the multiple Strategies according to a rules-based methodology
and will reallocate the Fund's assets among Strategies to achieve the
Fund's investment objective. The Strategies may include, but are not
limited to, quantitative, volatility risk premium and carry Strategies.
The Strategies are similar to the strategies included in its benchmark,
and the Fund may hold the same types of instruments in similar
weightings as the benchmark. The Adviser is not obliged to track the
performance of the benchmark and will use proprietary portfolio
management techniques to seek to exceed the benchmark's performance.
The Fund may take both long and short positions in exchange-traded
equity securities and equity index futures.\10\ The Fund also may take
a long and a short position in various currencies by investing in
currency forward and/or futures contracts.\11\
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\10\ These equity securities, including exchange-traded equity
securities of registered investment companies, and equity index
futures will be traded on U.S. exchanges or non-U.S. exchanges that
are members of the Intermarket Surveillance Group (``ISG'').
\11\ Currency futures contracts will be traded on U.S. exchanges
or non-U.S. exchanges that are ISG members. Currency forward
contracts will be traded over-the-counter.
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Additionally, the Fund may invest in index options.\12\ In
following various Strategies, the Fund may purchase and sell interest
rate futures, including Eurodollar interest rate futures or Euro
Euribor interest rate futures, and Chicago Board Options Exchange
Volatility Index futures contracts.\13\
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\12\ Index options will be traded on U.S. exchanges that are ISG
members. See Notice, supra note 3, at 20263, n.12. See also
Amendment No. 1, supra, note 4.
\13\ These futures contracts will be traded on U.S. exchanges or
non-U.S. exchanges that are ISG members. See id. at 20263, n.13.
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The Subsidiary
The Fund may seek to gain exposure to these various derivative
investments through investments in a subsidiary (``Subsidiary''), which
in turn would make investments in those derivatives and other
instruments. If utilized, the Subsidiary would be wholly-owned and
controlled by the Fund, and its investments would be consolidated into
the Fund's financial statements.
Should the Fund invest in the Subsidiary, that investment may not
exceed 25% of the Fund's total assets at each quarter-end of the Fund's
fiscal year. Further, should the Fund invest in the Subsidiary, it
would be expected to provide the Fund with exposure to futures
contracts and other derivatives within the limits of Subchapter M of
the Internal Revenue Code applicable to investment companies, such as
the Fund, which limit the ability of investment companies to invest
directly in derivative instruments.
The Subsidiary would be able to invest in the same asset classes in
which the Fund may invest, and the Subsidiary would be subject to the
same general investment policies and restrictions as the Fund, except
that, unlike the Fund, which must invest in derivatives in compliance
with the requirements of Subchapter M of the Internal Revenue Code,
federal securities laws and the Commodity Exchange Act, the Subsidiary
may invest without limitation in futures contracts. According to the
Exchange, references to the investment strategies and risks of the Fund
include the investment strategies and risks of the Subsidiary.\14\
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\14\ See id. at 20264.
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Other Investments
The Fund may invest in U.S. government securities, money market
instruments, cash and cash equivalents (e.g., corporate commercial
paper) to provide liquidity and to collateralize its investments in
derivative instruments.
The Fund may invest in: (i) Short-term obligations issued by the
U.S. Government; \15\ (ii) short term negotiable obligations of
commercial banks, fixed time deposits and bankers' acceptances of U.S.
and foreign banks and similar institutions; \16\ and (iii) commercial
paper rated at the date of purchase ``Prime-1'' by Moody's Investors
Service, Inc. or ``A-1+'' or ``A-1'' by Standard & Poor's or, if
unrated, of comparable quality, as the Adviser of the Fund determines.
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\15\ The Fund may invest in U.S. government obligations.
Obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities include bills, notes and bonds issued
by the U.S. Treasury, as well as ``stripped'' or ``zero coupon''
U.S. Treasury obligations representing future interest or principal
payments on U.S. Treasury notes or bonds.
\16\ Time deposits are non-negotiable deposits maintained in
banking institutions for specified periods of time at stated
interest rates. Banker's acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with
international transactions.
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In addition, the Fund may invest in non-exchange listed securities
of other investment companies (including money market funds) beyond the
limits permitted under the 1940 Act, subject to certain terms and
conditions set forth in a Commission exemptive order issued pursuant to
Section 12(d)(1)(J) of the 1940 Act.\17\
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\17\ Investment Company Act Release No. 30238 (October 23, 2012)
(File No. 812-13820).
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Investment Restrictions
The Fund may not concentrate its investments (i.e., invest more
than 25% of the value of its net assets) in securities of issuers in
any one industry or group of industries. This restriction will not
apply to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
The Subsidiary's shares will be offered only to the Fund, and the
Fund will not sell shares of the Subsidiary to other investors. The
Fund and the Subsidiary will not invest in any non-U.S. equity
securities (other than shares of the Subsidiary).
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities or other illiquid assets (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 or other illiquid assets. Illiquid securities and
other illiquid assets include those subject to contractual or other
restrictions on resale and other instruments or assets that lack
readily available markets as determined in accordance with Commission
staff guidance.
Additional information regarding the Trust, Fund, Subsidiary, 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
[[Page 31158]]
found in the Notice or the Registration Statement, as applicable.\18\
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\18\ See Notice and Registration Statement, supra notes 3 and 5,
respectively.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of Section 6 of the Act \19\ and the rules and regulations
thereunder applicable to a national securities exchange.\20\ In
particular, the Commission finds that the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act,\21\
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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\19\ 15 U.S.C. 78(f).
\20\ 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).
\21\ 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,\22\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available via Nasdaq
proprietary quote and trade services, as well as in accordance with the
Unlisted Trading Privileges and the Consolidated Tape Association
plans.\23\ Quotation and last sale information for any underlying
exchange-traded equity will also be available via the quote and trade
service of their respective primary exchanges, as well as in accordance
with the Unlisted Trading Privileges and the Consolidated Tape
Association plans.\24\ Quotation and last sale information for any
underlying exchange-traded options will also be available via the quote
and trade service of their respective primary exchanges and through the
Options Price Reporting Authority.\25\ Quotation and last sale
information for any underlying exchange-traded futures contracts will
be available via the quote and trade service of their respective
primary exchanges.\26\ 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,\27\ and will be updated and widely
disseminated and broadly displayed at least every 15 seconds during the
Regular Market Session.\28\ 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,\29\ which
will form the basis for the Fund's calculation of NAV at the end of the
business day.\30\ 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).\31\ 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.\32\ 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.\33\ 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.\34\ 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.\35\ The Fund's Web site
will include a form of the prospectus for the Fund and additional data
relating to NAV and other applicable quantitative information.\36\
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\22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\23\ See Notice, supra note 3, 79 FR at 20267.
\24\ See Amendment No. 1, supra note 4.
\25\ See id.
\26\ See id.
\27\ 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 Notice, supra note 3, 79 FR at 20266.
\28\ See id.
\29\ The Disclosed Portfolio will include, as applicable, the
names, quantity, percentage weighting and market value of securities
and other assets held by the Fund and the Subsidiary and the
characteristics of such assets. See id.
\30\ The Web site information will be publicly available at no
charge. See id.
\31\ See id. at 20265.
\32\ See id. at 20267.
\33\ See id.
\34\ See id. 20266.
\35\ See id. at 20267.
\36\ See id. at 20266.
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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.\37\
Further, trading in the Shares will be subject to Nasdaq 5735(d)(2)(D),
which sets forth circumstances under which trading in the Shares may be
halted.\38\ The Exchange may halt trading in the Shares if trading is
not occurring in the securities or the financial instruments
constituting the Disclosed Portfolio or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\39\ 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.\40\ The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees.\41\ The Exchange
states that the Adviser is not a broker-dealer and although it is
affiliated a broker-dealer, the Adviser has implemented a fire wall
with
[[Page 31159]]
respect to its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio. The
Exchange also states that in the event (a) the Adviser becomes, or
becomes newly affiliated with a broker-dealer or registers as 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 regarding access to information concerning the
composition of or changes to the portfolio and will be subject to
procedures designed to prevent the use and dissemination of material,
non-public information regarding the portfolio.\42\
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\37\ See id at 20267.
\38\ See id.
\39\ 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, 79 FR at 20267.
\40\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\41\ See Notice, supra note 3, 79 FR at 20267.
\42\ See supra note 7 and accompanying text.
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In support of this proposal, the Exchange has made representations,
including:
(1) The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities.
(2) The Shares will be subject to Nasdaq Rule 5735, which sets
forth the initial and continued listing criteria applicable to Managed
Fund Shares.
(3) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(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) Trading in the Shares will be subject to the existing trading
surveillances, administered by both Nasdaq and the Financial Industry
Regulatory Authority (``FINRA'') on behalf of the Exchange, which are
designed to detect violations of Exchange rules and applicable federal
securities laws, and these procedures are adequate to properly monitor
Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities
laws.
(6) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and other exchange-traded securities
and instruments held by the Fund with other markets and other entities
that are members of the ISG \43\ and FINRA may obtain trading
information regarding trading in the Shares and exchange-traded
securities and instruments held by the Fund from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares and exchange-traded securities and instruments
held by the Fund 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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\43\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed 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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(7) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Exchange Act.\44\
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\44\ 17 CFR 240.10A-3.
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(8) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
(9) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (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 assets.
(10) The Fund will not be operated in a manner designed to seek a
multiple of the performance of an underlying reference index.
(11) The Fund's investments will be consistent with the Fund's
investment objective.
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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 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-2014-027 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2014-027. 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-2014-027, and should
be submitted on or before June 20, 2014.
V. Accelerated Approval of Proposed Rule Change, As Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to
[[Page 31160]]
the thirtieth day after the date of publication of notice in the
Federal Register. The amendment clarifies where price information can
be found for certain underlying exchange traded assets, and thereby
provides support that the overlying Shares will be fairly priced.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\45\ to approve the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
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\45\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\46\ that the proposed rule change (SR-NASDAQ-2014-027), as
modified by Amendment No 1, be, and it hereby is, approved on an
accelerated basis.
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\46\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12521 Filed 5-29-14; 8:45 am]
BILLING CODE 8011-01-P