[Federal Register Volume 79, Number 144 (Monday, July 28, 2014)]
[Notices]
[Pages 43799-43801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17641]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72655; File No. TP 14-12]
Order Granting Limited Exemptions from Exchange Act Rule 10b-17
and Rules 101 and 102 of Regulation M to First Trust Dorsey Wright
International Focus 5 ETF Pursuant to Exchange Act Rule 10b-17(b)(2)
and Rules 101(d) and 102(e) of Regulation M
July 22, 2014.
By letter dated July 22, 2014 (the ``Letter''), as supplemented by
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conversations with the staff of the Division of Trading and Markets,
counsel for First Trust Exchange-Traded Fund VI (the ``Trust'') on
behalf of the Trust, First Trust Dorsey Wright International Focus 5
ETF (the ``Fund''), any national securities exchange on or through
which shares issued by the Fund (``Shares'') may subsequently trade,
First Trust Portfolios L.P., and persons or entities engaging in
transactions in Shares (collectively, the ``Requestors'') requested
exemptions, or interpretive or no-action relief, from Rule 10b-17 of
the Securities Exchange Act of 1934, as amended (``Exchange Act'') and
Rules 101 and 102 of Regulation M in connection with secondary market
transactions in Shares and the creation or redemption of aggregations
of Shares of at least 50,000 shares (``Creation Units'').
The Trust is registered with the Commission under the Investment
Company Act of 1940, as amended (``1940 Act''), as an open-end
management investment company. The Fund seeks to track the performance
of an underlying index developed by Dorsey, Wright & Associates, LLC
called the Dorsey Wright International Focus Five Index (``Index'').
The Index is designed to provide targeted exposure to the five First
Trust country or region-based exchange traded funds (``ETFs'') (i.e.,
country or region-based ETFs also advised by the investment adviser to
the Fund) that the index provider believes offer the greatest potential
to outperform the other First Trust country or region-based ETFs. The
Fund intends to operate as an ``ETF of ETFs'' by seeking to track the
performance of its underlying Index through investing at least 90% of
its net assets (plus the amount of any borrowings for investment
purposes) in the ETFs which comprise the Index. Except for the fact
that the Fund will operate as an ETF of ETFs, the Fund will operate in
a manner identical to the ETFs that are included in the Index.
The Requestors represent, among other things, the following:
Shares of the Fund will be issued by the Trust, an open-
end management investment company that is registered with the
Commission;
The Trust will continuously redeem Creation Units at net
asset value (``NAV'') and the secondary market price of the Shares
should not vary substantially from the NAV of such Shares;
Shares of the Fund will be listed and traded on the Nasdaq
Stock Market LLC or other exchange in accordance with exchange listing
standards that are, or will become, effective pursuant to Section 19(b)
of the Exchange Act (the ``Exchange'');\1\
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\1\ Further, the Letter states that should the Shares also trade
on a market pursuant to unlisted trading privileges, such trading
will be conducted pursuant to self-regulatory organization rules
that are effective pursuant to Section 19(b) of the Exchange Act.
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All ETFs in which the Fund is invested will meet all
conditions set forth in a relevant class relief letter,\2\ will have
received individual relief from the Commission, or can rely on
applicable class relief for actively-managed ETFs;\3\
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\2\ Letter from Catherine McGuire, Esq., Chief Counsel, Division
of Market Regulation, to the Securities Industry Association
Derivative Products Committee (November 21, 2005); Letter from
Racquel L. Russell, Branch Chief, Division of Market Regulation, to
George T. Simon, Esq., Foley & Lardner LLP (June 21, 2006); Letter
from James A. Brigagliano, Acting Associate Director, Division of
Market Regulation, to Stuart M. Strauss, Esq., Clifford Chance US
LLP (October 24, 2006); Letter from James A. Brigagliano, Associate
Director, Division of Market Regulation, to Benjamin Haskin, Esq.,
Willkie. Farr & Gallagher LLP (April 9, 2007); or Letter from
Josephine Tao, Assistant Director, Division of Trading and Markets,
to Domenick Pugliese, Esq., Paul, Hastings, Janofsky and Walker LLP
(June 27, 2007). See also Staff Legal Bulletin No. 9, ``Frequently
Asked Questions About Regulation M'' (Apr. 12, 2002) (regarding
actively-managed ETFs).
\3\ See, e.g., Exchange Act Rel. No. 67215 (Jun. 19, 2012); 77
FR 37941 (Jun. 25, 2012).
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All the components of the Index will have publicly
available last sale trade information;
The intra-day proxy value of the Fund per share and the
value of the Index will be publicly disseminated by a major market data
vendor throughout the trading day;
On each business day before the opening of business on the
Exchange, the Fund's custodian, through the National Securities
Clearing Corporation, will make available the list of the names and the
numbers of securities and other assets of the Fund's portfolio that
will be applicable that day to creation and redemption requests;
The Exchange or other market information provider will
disseminate (i) continuously every 15 seconds throughout the trading
day, through the facilities of the consolidated tape, the market value
of a Share and (ii) every 15 seconds throughout the trading day, a
calculation of the intraday indicative value of a Share;
The arbitrage mechanism will be facilitated by the
transparency of the Fund's portfolio and the availability of the intra-
day indicative value, the liquidity of securities and other assets held
by the Fund, ability to acquire such securities, as well as the
arbitrageurs' ability to create workable hedges;
The Fund will invest solely in liquid securities;
The Fund will invest in securities that will facilitate an
effective and efficient arbitrage mechanism and the ability to create
workable hedges;
The Requestors believe that arbitrageurs are expected to
take advantage of price variations between the Fund's market price and
its NAV; and
A close alignment between the market price of Shares and
the Fund's NAV is expected.
Regulation M
While redeemable securities issued by an open-end management
investment company are excepted from the provisions of Rule 101 and 102
of Regulation M, the Requestors may not rely upon that exception for
the Shares.\4\ However, we find that it is appropriate in the public
interest and is consistent with the protection of investors to grant a
conditional exemption from Rules 101 and 102 to persons who may be
deemed to be participating in a distribution of Shares of the Fund as
described in more detail below.
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\4\ While ETFs operate under exemptions from the definitions of
``open-end company'' under Section 5(a)(1) of the 1940 Act and
``redeemable security'' under Section 2(a)(32) of the 1940 Act, the
Fund and its securities do not meet those definitions.
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Rule 101 of Regulation M
Generally, Rule 101 of Regulation M is an anti-manipulation rule
that, subject to certain exceptions, prohibits any ``distribution
participant'' and its ``affiliated purchasers'' from bidding for,
purchasing, or attempting to induce any person to bid for or purchase
any security which is the subject of a distribution until after the
applicable restricted period, except as specifically permitted in the
rule. Rule 100 of Regulation M defines ``distribution'' to mean any
offering of securities that is distinguished from ordinary trading
transactions by the magnitude of the offering and the presence of
special selling efforts and selling methods. The provisions of Rule 101
of Regulation M apply to underwriters, prospective underwriters,
brokers, dealers, or other persons who have agreed to participate or
are participating in a distribution of securities. The Shares are in a
continuous distribution and, as such, the restricted period in which
distribution participants and their affiliated purchasers are
prohibited from bidding for, purchasing, or attempting to induce others
to bid for or purchase extends indefinitely.
Based on the representations and facts presented in the Letter,
particularly that the Trust is a registered open-end management
investment company that
[[Page 43801]]
will continuously redeem at the NAV Creation Unit size aggregations of
the Shares of the Fund and that a close alignment between the market
price of Shares and the Fund's NAV is expected, the Commission finds
that it is appropriate in the public interest and consistent with the
protection of investors to grant the Trust an exemption under paragraph
(d) of Rule 101 of Regulation M with respect to the Fund, thus
permitting persons participating in a distribution of Shares of the
Fund to bid for or purchase such Shares during their participation in
such distribution.\5\
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\5\ Additionally, we confirm the interpretation that a
redemption of Creation Unit size aggregations of Shares of the Fund
and the receipt of securities in exchange by a participant in a
distribution of Shares of the Fund would not constitute an ``attempt
to induce any person to bid for or purchase, a covered security
during the applicable restricted period'' within the meaning of Rule
101 of Regulation M and therefore would not violate that rule.
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Rule 102 of Regulation M
Rule 102 of Regulation M prohibits issuers, selling security
holders, and any affiliated purchaser of such person from bidding for,
purchasing, or attempting to induce any person to bid for or purchase a
covered security during the applicable restricted period in connection
with a distribution of securities effected by or on behalf of an issuer
or selling security holder.
Based on the representations and facts presented in the Letter,
particularly that the Trust is a registered open-end management
investment company that will redeem at the NAV Creation Units of Shares
of the Fund and that a close alignment between the market price of
Shares and the Fund's NAV is expected, the Commission finds that it is
appropriate in the public interest and consistent with the protection
of investors to grant the Trust an exemption under paragraph (e) of
Rule 102 of Regulation M with respect to the Fund, thus permitting the
Fund to redeem Shares of the Fund during the continuous offering of
such Shares.
Rule 10b-17
Rule 10b-17, with certain exceptions, requires an issuer of a class
of publicly traded securities to give notice of certain specified
actions (for example, a dividend distribution) relating to such class
of securities in accordance with Rule 10b-17(b). Based on the
representations and facts in the Letter, and subject to the conditions
below, we find that it is appropriate in the public interest, and
consistent with the protection of investors to grant the Trust a
conditional exemption from Rule 10b-17 because market participants will
receive timely notification of the existence and timing of a pending
distribution, and thus the concerns that the Commission raised in
adopting Rule 10b-17 will not be implicated.\6\
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\6\ We also note that timely compliance with Rule 10b-
17(b)(1)(v)(a) and (b) would be impractical in light of the nature
of the Fund. This is because it is not possible for the Fund to
accurately project ten days in advance what dividend, if any, would
be paid on a particular record date.
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Conclusion
It is hereby ordered, pursuant to Rule 101(d) of Regulation M, that
the Trust, based on the representations and facts presented in the
Letter, is exempt from the requirements of Rule 101 with respect to the
Fund, thus permitting persons who may be deemed to be participating in
a distribution of Shares of the Fund to bid for or purchase such Shares
during their participation in such distribution.
It is further ordered, pursuant to Rule 102(e) of Regulation M,
that the Trust, based on the representations and the facts presented in
the Letter, is exempt from the requirements of Rule 102 with respect to
the Fund, thus permitting the Fund to redeem Shares of the Fund during
the continuous offering of such Shares.
It is further ordered, pursuant to Rule 10b-17(b)(2), that the
Trust, based on the representations and the facts presented in the
Letter and subject to the conditions below, is exempt from the
requirements of Rule 10b-17 with respect to transactions in the shares
of the Fund.
This exemptive relief is subject to the following conditions:
The Trust will comply with Rule 10b-17 except for Rule
10b-17(b)(1)(v)(a) and (b); and
The Trust will provide the information required by Rule
10b-17(b)(1)(v)(a) and (b) to the Exchange as soon as practicable
before trading begins on the ex-dividend date, but in no event later
than the time when the Exchange last accepts information relating to
distributions on the day before the ex-dividend date.
This exemptive relief is subject to modification or revocation at
any time the Commission determines that such action is necessary or
appropriate in furtherance of the purposes of the Exchange Act. Persons
relying upon this exemption shall discontinue transactions involving
the Shares of the Fund under the circumstances described above and in
the Letter, pending presentation of the facts for the Commission's
consideration, in the event that any material change occurs with
respect to any of the facts or representations made by the Requestors.
In addition, persons relying on this exemption are directed to the
anti-fraud and anti-manipulation provisions of the Exchange Act,
particularly Sections 9(a), 10(b), and Rule 10b-5 thereunder.
Responsibility for compliance with these and any other applicable
provisions of the federal securities laws must rest with the persons
relying on this exemption. This order should not be considered a view
with respect to any other question that the proposed transactions may
raise, including, but not limited to the adequacy of the disclosure
concerning, and the applicability of other federal or state laws to,
the proposed transactions.
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\7\ 17 CFR 200.30-3(a)(6) and (9).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\7\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17641 Filed 7-25-14; 8:45 am]
BILLING CODE 8011-01-P