[Federal Register Volume 79, Number 151 (Wednesday, August 6, 2014)]
[Notices]
[Pages 45852-45857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18533]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72728; File No. SR-NASDAQ-2014-059]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule Change, as Modified by Amendment No.
1 Thereto, Relating to the Listing and Trading of the Shares of the
Global X Commodities ETF of Global X Funds
July 31, 2014.
I. Introduction
On May 28, 2014, The NASDAQ Stock Market LLC (``Exchange'' or
``Nasdaq'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of Global X Commodities Strategy ETF (``Fund'') under
Nasdaq Rule 5735. The proposed rule change was published for comment in
the Federal Register on June 16, 2014.\3\ On June 27, 2014, the
Exchange filed Amendment No. 1 to the proposed rule change.\4\ The
Commission received no comments on the proposal. This order grants
approval of the proposed rule change, as modified by Amendment No. 1
thereto.
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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. 72357 (June 10,
2014), 79 FR 34376 (``Notice'').
\4\ In Amendment No. 1, the Exchange clarified which subsections
of Nasdaq Rule 5711 are specifically applicable to pooled investment
vehicles that invest primarily in commodities and commodity-linked
instruments. See infra note 10. Because Amendment No. 1 is technical
in nature, the Commission believes that Amendment No. 1 is not
subject to notice and comment.
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II. Description of the Proposal
Nasdaq proposes to list and trade Shares of the Fund under Nasdaq
Rule 5735, which governs the listing and trading of Managed Fund Shares
on the Exchange. The Shares will be offered by Global X Funds
(``Trust''), which was established as a Delaware statutory trust on
March 6, 2008.\5\ The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A
(``Registration Statement'') with the Commission.\6\ Global X
Management Company LLC will be the investment adviser (``Adviser'') and
administrator (``Administrator'') to the Fund. The Fund and the Adviser
will contract with an investment sub-adviser (``Sub-Adviser'') to
provide day-to-day portfolio management of the Fund.\7\ SEI Investments
Distribution Company will be the principal underwriter and distributor
of the Fund's Shares, and Brown Brothers Harriman (``Custodian'') will
act as the custodian and transfer agent to the Fund.
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\5\ According to the Exchange, the Trust will obtain from the
Commission an order granting certain exemptive relief under the
Investment Company Act of 1940 (``1940 Act'') (File No. 812-14241).
In compliance with Nasdaq Rule 5735(b)(5), which applies to Managed
Fund Shares based on an international or global portfolio, the
Trust's application for exemptive relief under the 1940 Act states
that the Fund will comply with the federal securities laws in
accepting securities for deposits and satisfying redemptions with
redemption securities, including that the securities accepted for
deposits and the securities used to satisfy redemption requests are
sold in transactions that would be exempt from registration under
the Securities Act of 1933.
\6\ See Registration Statement on Form N-1A for the Trust dated
May 23, 2014 (File No. 811-22209).
\7\ The Exchange represents that the Adviser is not registered
as a broker-dealer and is not affiliated with a broker-dealer. In
the event (a) the Adviser registers as a broker-dealer or becomes
newly affiliated with a broker-dealer; or (b) the Sub-Adviser, any
new adviser or new sub-adviser is a registered broker-dealer or
becomes affiliated with a broker-dealer, such Adviser, Sub-Adviser,
or new adviser or sub-adviser, as the case may be, will implement a
fire wall with respect to its relevant personnel or such broker-
dealer affiliate, as applicable, regarding access to information
concerning the composition of and 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.
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The Exchange has made the following representations and statements
in describing the Fund and its investment strategy, including other
portfolio holdings and investment restrictions.\8\
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\8\ The Commission notes that additional information regarding
the Fund, the Trust, and the Shares, including investment
strategies, risks, creation and redemption procedures, fees,
portfolio holdings disclosure policies, distributions, and taxes,
among other things, can be found in the Notice and the Registration
Statement, as applicable. See Notice, supra note 3, and Registration
Statement, supra note 6 and accompanying text, respectively.
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A. Investment Strategy
According to the Exchange, the Fund will be an actively managed ETF
that will seek to achieve a total return that exceeds that of the
Credit Suisse Composite Commodities Index (``Benchmark''),\9\
consistent with
[[Page 45853]]
prudent investment management. The Exchange represents that the
Benchmark is a monthly rebalancing, long-only, fully collateralized
futures index that offers multi-sector exposure to energy, industrial
metals, precious metals, and agricultural commodities. It is a total
return index that measures the hypothetical returns on an
uncollateralized investment in certain futures contracts, plus the
interest that could be earned on the funds committed to a
collateralized investment in such contracts. In general, the Fund will
pursue its objective by seeking to invest in commodity-linked futures--
in similar weightings to the Benchmark--and in other commodity-linked
instruments. The Fund's investments in commodity-linked futures and
other commodity-linked instruments will be backed by an actively
managed, low-volatility portfolio of fixed income instruments.
Specifically with respect to the commodity-linked futures and other
commodity-linked instruments holdings, the Fund will indirectly invest
in exchange-traded futures contracts and exchange-traded commodity-
linked instruments \10\ (collectively, ``Commodities'') through a
wholly-owned subsidiary controlled by the Fund and organized under the
laws of the Cayman Islands (``Subsidiary'').\11\ The Fund will not be
an ``index tracking'' ETF and will not be required to invest in all of
the components of the Benchmark. The Fund will generally seek to hold
through the Subsidiary similar instruments to those included in the
Benchmark and seek to gain exposure to commodities included in the
Benchmark. The Exchange states that the Fund will invest in Commodities
only through the Subsidiary.
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\9\ The Exchange represents that the Benchmark is developed,
maintained, and sponsored by Credit Suisse International (``CS''),
which is not a U.S. registered broker-dealer, but is affiliated with
a broker-dealer and, with respect to such broker-dealer affiliate,
has implemented a fire wall and procedures designed to prevent the
illicit use and dissemination of material, non-public information
regarding the Benchmark. The Fund will not be sponsored, endorsed,
sold, or promoted by CS. CS's only relationship to the Fund will be
the licensing of certain service marks and service names of CS and
of the Benchmark, which will be determined, composed, and calculated
by CS without regard to the Adviser, the Sub-Adviser, or the Fund.
CS will have no obligation to take the needs of the Adviser, the
Sub-Adviser, or the Fund into consideration in determining,
composing, or calculating the Benchmark.
\10\ Exchange-traded commodity-linked instruments include: (1)
exchange-traded funds (``ETFs'') that provide exposure to
commodities as would be listed under Nasdaq Rules 5705 and 5735; and
(2) pooled investment vehicles that invest primarily in commodities
and commodity-linked instruments as would be listed under Nasdaq
Rules 5710 and 5711(b), (d), (f), (g), (h), (i), and (j). Such
pooled investment vehicles are commonly referred to as ``exchange-
traded funds,'' but they are not registered as investment companies
because of the nature of their underlying investments. See infra
note 16 (providing additional information and descriptions about
ETFs, in general, and ETFs to be held by the Fund, in particular).
\11\ The Exchange represents that, as a result of the
instruments that will be indirectly held by the Fund, the Adviser
will register as a commodity pool operator (as defined in Section
1a(11) of the Commodity Exchange Act) and will also be a member of
the National Futures Association (``NFA''). The Exchange represents
that the Sub-Adviser will register as a commodity pool operator or
commodity trading adviser, as required by the Commodity Futures
Trading Commission (``CFTC'') regulations and that the Fund and the
Subsidiary will be subject to regulation by the CFTC and NFA and
additional disclosure, reporting, and recordkeeping rules imposed
upon commodity pools.
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B. Principal Investments of the Fund
The Fund will be an actively managed ETF that will seek to achieve
a total return that exceeds that of the Benchmark. The Exchange states
that under normal market conditions,\12\ the Fund will invest in
Commodities through the Subsidiary. The Fund's investment in the
Subsidiary may not exceed 25% of the Fund's total assets. The remainder
of the Fund's assets will be invested in: (1) Short-term, investment
grade fixed income securities that include U.S. government and agency
securities,\13\ corporate debt obligations, and repurchase agreements;
\14\ (2) money market instruments; \15\ (3) ETFs (other than those that
are commodity-linked instruments) \16\ and other investment companies
registered under the 1940 Act, including exchange-traded closed-end
funds, that provide exposure to commodities, equity securities, and
fixed income securities to the extent permitted under the 1940 Act and
any applicable exemptive relief; (4) certain bank instruments; \17\ and
(5) cash and other cash equivalents. In addition, the Fund may enter
into foreign currency transactions on a spot (i.e., cash) basis.
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\12\ The Exchange states that the term ``under normal market
conditions'' includes, but is not limited to, the absence of extreme
volatility or trading halts in the fixed income markets, futures
markets, or the financial markets generally; operational issues
causing dissemination of inaccurate market information; or force
majeure type events such as systems failure, natural or man-made
disaster, act of God, armed conflict, act of terrorism, riot or
labor disruption, or any similar intervening circumstance.
\13\ These securities will include securities that are issued or
guaranteed by the U.S. Treasury, by various agencies of the U.S.
government, or by various instrumentalities that have been
established or sponsored by the U.S. government. U.S. Treasury
obligations are backed by the ``full faith and credit'' of the U.S.
government. Securities issued or guaranteed by federal agencies and
U.S. government-sponsored instrumentalities may or may not be backed
by the full faith and credit of the U.S. government.
\14\ The Exchange states that the Fund intends to enter into
repurchase agreements only with financial institutions and dealers
believed by the Adviser to present minimal credit risks in
accordance with criteria approved by the Trust's Board of Trustees
(``Board''). The Adviser will review and monitor the
creditworthiness of such institutions and will monitor the value of
the collateral at the time the transaction is entered into and at
all times during the term of the repurchase agreement.
\15\ Money market instruments will include: short-term, high-
quality securities issued or guaranteed by non-U.S. governments,
agencies, and instrumentalities; non-convertible corporate debt
securities with remaining maturities of not more than 397 days that
satisfy ratings requirements under Rule 2a-7 under the 1940 Act;
money market mutual funds; and deposits and other obligations of
U.S. and non-U.S. banks and financial institutions. In addition, the
Fund may invest in commercial paper, which are short-term unsecured
promissory notes. The Fund may invest in commercial paper only if it
has received the highest rating from at least one nationally
recognized statistical rating organization or, if unrated, has been
judged by the Adviser to be of comparable quality.
\16\ See supra note 10 and accompanying text. In general, an ETF
is an investment company registered under the 1940 Act that holds a
portfolio of securities. Many ETFs are designed to track the
performance of a securities index, including industry, sector,
country, and region indexes. The Exchange represents that the ETFs
included in the Fund will be listed and traded in the U.S. on
registered exchanges. According to the Exchange, the Fund may invest
in the securities of ETFs in excess of the limits imposed under the
1940 Act pursuant to exemptive orders obtained by other ETFs and
their sponsors from the Commission. In addition, the Fund may invest
in the securities of certain other investment companies in excess of
the limits imposed under the 1940 Act pursuant to an exemptive order
obtained by the Trust and the Adviser from the Commission. See
Investment Company Act Release No. 30454 (Apr. 9, 2013) (File No.
812-14079). The ETFs in which the Fund may invest include Index Fund
Shares (as described in Nasdaq Rule 5705), Portfolio Depository
Receipts (as described in Nasdaq Rule 5705), and Managed Fund Shares
(as described in Nasdaq Rule 5735). While the Fund and the
Subsidiary may invest in inverse commodity-linked instruments, the
Fund and the Subsidiary will not invest in leveraged or inverse
leveraged (e.g., 2X or -3X) commodity-linked instruments.
\17\ The Fund may invest in certificates of deposit issued
against funds deposited in a bank or savings and loan association.
In addition, the Fund may invest in bankers' acceptances, which are
short-term credit instruments used to finance commercial
transactions. The Fund also may invest in bank time deposits, which
are monies kept on deposit with banks or savings and loan
associations for a stated period of time at a fixed rate of
interest.
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The Exchange represents that the Fund will use the fixed income
securities as investments and to collateralize the Subsidiary's
commodity exposure on a day-to-day basis.
C. Investments of the Subsidiary
The Exchange represents that, under normal market conditions,\18\
the Subsidiary is expected to invest in futures contracts in
proportional weights and allocations that are similar to the Benchmark,
as well as in other exchange-traded commodity-linked
[[Page 45854]]
instruments.\19\ The Subsidiary will have the same investment objective
as the Fund; however, unlike the Fund, the Subsidiary may invest
without limitation in Commodities. As indicated above, the Benchmark
will include, and the Subsidiary will have holdings in, futures
contracts that consist of only long positions in Commodities.
Therefore, the Fund, through the Subsidiary, will benefit if a security
or instrument increases in value. Conversely, the Fund, through the
Subsidiary, will be adversely impacted if a security or instrument
declines in value. The Fund, through the Subsidiary, may have a higher
or lower exposure to any sector or component within the Benchmark at
any time.
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\18\ See supra note 12.
\19\ According to the Exchange, the Benchmark will include, and
the Subsidiary will have holdings in, futures contracts that consist
of only long positions in Commodities. Additional information
regarding the Benchmark, including the specific commodities
underlying the futures contracts included in the Benchmark as of May
23, 2014, can be found in a table in the Notice. See Notice, supra
note 3, 79 FR 34376, 34378. The table contained in the Notice also
provides each instrument's trading hours, exchange, and ticker
symbol. See id. The Exchange notes that the table is subject to
change. As stated above, the Subsidiary will not in all cases invest
in the futures contracts included in the Benchmark. The Fund,
through the Subsidiary, may have a higher or lower exposure to any
sector or component within the Benchmark at any time.
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The Exchange states that the Subsidiary will be advised by the Sub-
Adviser \20\ and that the Fund's investment in the Subsidiary is
intended to provide the Fund with exposure to commodity markets within
the limits of current federal income tax laws applicable to investment
companies, such as the Fund. These federal income tax laws limit the
ability of investment companies to invest directly in the derivative
instruments. The Subsidiary's investments will provide the Fund with
exposure to both domestic and international markets.\21\
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\20\ The Exchange states that the Subsidiary will not be
registered under the 1940 Act and will not be directly subject to
its investor protections, except as noted in the Registration
Statement. However, the Subsidiary will be wholly-owned and
controlled by the Fund. Therefore, the Exchange represents that the
Fund's ownership and control of the Subsidiary will prevent the
Subsidiary from taking action contrary to the interests of the Fund
or its shareholders. The Board will have oversight responsibility
for the investment activities of the Fund, including its expected
investment in the Subsidiary, and the Fund's role as the sole
shareholder of the Subsidiary. The Subsidiary will also enter into
separate contracts for the provision of custody, transfer agency,
and accounting agent services with the same or with affiliates of
the same service providers that provide those services to the Fund.
\21\ The Exchange represents that not more than 10% of the
weight (to be calculated as the value of the contract divided by the
total absolute notional value of the Subsidiary's futures contracts)
of the futures contracts held by the Subsidiary in the aggregate
shall consist of instruments whose principal trading market is not a
member of the Intermarket Surveillance Group (``ISG'') or is a
market with which the Exchange does not have a comprehensive
surveillance sharing agreement. The Exchange further represents that
all commodity-linked instruments in which the Subsidiary invests
will be traded on ISG member markets.
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D. Investment Restrictions
The Fund intends to qualify for and to elect to be treated as a
separate regulated investment company under Subchapter M of the
Internal Revenue Code. In addition, while the Fund will be permitted to
borrow as permitted under the 1940 Act, the Fund's investments will not
be used to seek performance that is the multiple or inverse multiple
(i.e., 2X and -3X) of the Fund's Benchmark.
The Fund may not invest more than 25% of the value of its total
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 or its agencies or instrumentalities
or to securities of other investment companies.
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 (other than shares of the Subsidiary) and the Subsidiary will not
invest in any non-U.S. equity securities. The Fund will not purchase
securities of open-end or closed-end investment companies except in
compliance with the 1940 Act or any applicable exemptive relief.
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including securities deemed illiquid by the Adviser.\22\ 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 assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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\22\ In reaching liquidity decisions, the Adviser may consider
the following factors: the frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer).
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The Fund will not invest directly in Commodities. The Fund expects
to primarily gain exposure to these investments by investing in the
Subsidiary. In addition, the Fund and the Subsidiary will not invest in
options contracts, swaps, or forward investments.
Additional information regarding the Trust, Fund, and Shares,
including investment strategies and restrictions, risks, creation and
redemption procedures, fees, portfolio holdings, disclosure policies,
distributions and taxes, calculation of net asset value per share
(``NAV''), availability of information, trading rules and halts, and
surveillance procedures, among other things, can be found in the Notice
and the Registration Statement, as applicable.\23\
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\23\ See Notice, supra note 3; see also Registration Statement,
supra note 6.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\24\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act,\25\ which requires, among other things, that the Exchange's rules
be designed to promote just and equitable principles of trade, 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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\24\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\25\ 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
Exchange Act,\26\ 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
[[Page 45855]]
and trade services, as well as in accordance with the Unlisted Trading
Privileges and the Consolidated Tape Association plans for the Shares.
In addition, the Intraday Indicative Value,\27\ as defined in Rule
5735(c)(3), will be available on the NASDAQ OMX Information LLC
proprietary index data service \28\ and will be updated and widely
disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market
Session.\29\ 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 identities and quantities of the portfolio
of securities, Commodities, and other assets held by the Fund and the
Subsidiary (the ``Disclosed Portfolio,'' as defined in Nasdaq Rule
5735(c)(2)) that will form the basis for the Fund's calculation of NAV
at the end of the business day.\30\ In addition, the Custodian, through
the National Securities Clearing Corporation, will make available on
each business day, prior to the opening of business of the Exchange,
the list of the names and quantities of the instruments composing the
creation basket, as well as the estimated cash component (if any), for
that day. The Fund's NAV will be determined as of the close of trading
(normally 4:00 p.m., Eastern Time (``E.T.'')) on each day the New York
Stock Exchange (``NYSE'') is open for business.\31\ Information
regarding market price and trading volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. The previous
day's closing price and trading volume information for the Shares will
be published daily in the financial section of newspapers. Intra-day
executable price quotations on the securities and other assets held by
the Fund and the Subsidiary will be available from major broker-dealer
firms or on the exchange on which they are traded, as applicable.
Intra-day price information on the securities and other assets held by
the Fund and the Subsidiary will also be available through subscription
services, such as Bloomberg and Thomson Reuters. Specifically, pricing
information for Commodities, ETFs (other than Commodities), and closed-
end funds will be available on the exchanges on which they are traded
and through subscription services. Pricing information for fixed income
securities and money market instruments will be available through
subscription services and broker-dealer firms. Additionally, the Trade
Reporting and Compliance Engine (``TRACE'') of the Financial Industry
Regulatory Authority (``FINRA'') will be a source of price information
for certain fixed income securities held by the Fund. Information
relating to the Benchmark, including its constituents, weightings, and
changes to its constituents will be available on the Web site of CS.
The Fund's Web site (www.globalxfunds.com), which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund and additional data relating to NAV and
other applicable quantitative information.
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\26\ 15 U.S.C. 78k(a)(1)(C)(iii).
\27\ According to the Exchange, the Intraday Indicative Value
will reflect an estimated intraday value of the Fund's portfolio
(including the Subsidiary's portfolio) and will be based upon the
current value of the components of the Disclosed Portfolio.
\28\ The NASDAQ OMX Global Index Data Service (``GIDS'') is a
data feed service that provides real-time updates, daily summary
messages, and access to widely followed indexes and Intraday
Indicative Values for ETFs.
\29\ Regular Market Session means the trading session from 9:30
a.m. until 4:00 p.m. or 4:15 p.m. See Nasdaq Rule 4120(b)(4)(D).
\30\ On a daily basis, the Fund will disclose on the Fund's Web
site the following information regarding each portfolio holding, as
applicable to the type of holding: ticker symbol, CUSIP number, or
other identifier, if any; a description of the holding (including
the type of holding), the identity of the security, commodity, or
other asset or instrument underlying the holding, if any; quantity
held (as measured by, for example, par value, notional value, or
number of shares, contracts, or units); maturity date, if any;
coupon rate, if any; effective date, if any; market value of the
holding; and percentage weighting of the holding in the Fund's
portfolio. The Web site and information will be publicly available
at no charge.
\31\ The NAV of the Fund will be calculated by dividing the
value of the net assets of such Fund (i.e., the value of its total
assets, less total liabilities) by the total number of outstanding
Shares, generally rounded to the nearest cent. According to the
Exchange, the Fund's and the Subsidiary's investments will be
generally valued using market valuations. If available, debt
securities and money market instruments with maturities of more than
60 days will typically be priced based on valuations provided by
independent third-party pricing agents. Such values will generally
reflect the last reported sales price if the security is actively
traded. The third-party pricing agents may also value debt
securities at an evaluated bid price by employing methodologies that
utilize actual market transactions, broker-supplied valuations, or
other methodologies designed to identify the market value for such
securities. Debt obligations with remaining maturities of 60 days or
less may be valued on the basis of amortized cost, which
approximates market value. If such prices are not available, the
security will be valued based on values supplied by independent
brokers or by fair value pricing. Futures contracts will be valued
at the settlement price established each day by the board or
exchange on which they are traded. Redeemable securities issued by
U.S. registered open-end investment companies will be valued at the
investment company's applicable NAV, with the exception of ETFs,
which will be priced as described below. In the case of shares of
funds that are not traded on an exchange, a market valuation means
such fund's published NAV per share. Equity securities (including
exchange-traded commodity-linked instruments, other ETFs, and
closed-end funds) listed on a securities exchange, market, or
automated quotation system for which quotations are readily
available (except for securities traded on the Exchange) will be
valued at the last reported sale price on the primary exchange or
market on which they are traded on the valuation date (or at
approximately 4:00 p.m., E.T. if a security's primary exchange is
normally open at that time). If it is not possible to determine the
last reported sale price on the relevant exchange or market on the
valuation date, the value of the security will be taken to be the
most recent mean between the bid and asked prices on such exchange
or market on the valuation date. Absent both bid and asked prices on
such exchange, the bid price may be used. For securities traded on
the Exchange, the Exchange's official closing price will be used. If
such prices are not available, the security will be valued based on
values supplied by independent brokers or by fair value pricing, as
described below. The prices for foreign instruments will be reported
in local currency and converted to U.S. dollars using currency
exchange rates. Exchange rates will be provided daily by recognized
independent pricing agents.
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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 Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the
NAV and the Disclosed Portfolio will be made available to all market
participants at the same time. Nasdaq will halt 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 may
be halted because of market conditions or for reasons that, in the view
of the Exchange, make trading in the Shares inadvisable.\32\ Trading in
the Shares also will be subject to Nasdaq Rule 5735(d)(2)(D), which
sets forth additional circumstances under which Shares of the Fund may
be halted. The Exchange represents that it has a general policy
prohibiting the distribution of material, non-public information by its
employees. In addition, the Exchange represents that the Adviser is not
registered as a broker-dealer and is not affiliated with a broker-
dealer.\33\ Prior to
[[Page 45856]]
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.
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\32\ These reasons may include: (1) The extent to which trading
is not occurring in the securities, Commodities, or other assets
constituting the Disclosed Portfolio of the Fund and the Subsidiary;
or (2) whether other unusual conditions or circumstances detrimental
to the maintenance of a fair and orderly market are present. With
respect to trading halts, the Exchange states that it may consider
all relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.
\33\ See supra note 7. The Exchange further represents, among
other things, that in the event the Sub-Adviser is or becomes a
registered broker-dealer or becomes affiliated with a broker-dealer,
such Sub-Adviser will implement a fire wall with respect to its
relevant personnel or such broker-dealer affiliate, as applicable,
regarding access to information concerning the composition of and
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. See id. The Exchange states
that an investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (``Advisers
Act''). As a result, the Adviser and the Sub-Adviser and their
related personnel are subject to the provisions of Rule 204A-1 under
the Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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The Exchange represents that trading in the Shares will be subject
to existing trading surveillances, administered by both Nasdaq and
FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\34\ The Exchange further represents that these procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and applicable federal securities laws. The Exchange states that FINRA,
on behalf of the Exchange, will communicate as needed regarding trading
in the Shares and in the exchange-traded securities, commodity-linked
instruments, and futures contracts held by the Fund and the Subsidiary
with other markets and other entities that are members of the ISG and
that FINRA may obtain trading information regarding trading in the
Shares and in the exchange-traded securities, commodity-linked
instruments, and futures contracts held by the Fund and the Subsidiary
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in the Shares and in the exchange-
traded securities, commodity-linked instruments, and futures contracts
held by the Fund and the Subsidiary 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. The Exchange states that FINRA, on
behalf of the Exchange, will be able to access, as needed, trade
information for certain fixed income securities held by the Fund
reported to FINRA's TRACE.
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\34\ The Exchange states that FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement and that the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
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The Exchange represents that 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.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will be subject to Rule 5735, which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) Trading in the Shares will be subject to the existing trading
surveillances, administered by both Nasdaq and also FINRA on behalf of
the Exchange, which are designed to detect violations of Exchange rules
and applicable federal securities laws, and that these procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and applicable federal securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its 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 and by whom
information regarding the Intraday Indicative Value and the Disclosed
Portfolio is disseminated; (d) the risks involved in trading the Shares
during the Pre-Market and Post-Market Sessions when an updated Intraday
Indicative Value will not be calculated or publicly disseminated; (e)
the requirement that members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (f) trading information.
(5) For initial and continued listing, the Fund and the Subsidiary
must be in compliance with Rule 10A-3 under the Act.\35\
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\35\ See 17 CFR 240.10A-3.
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(6) The Fund's investments will be consistent with its respective
investment objective. While the Fund and the Subsidiary may invest in
inverse commodity-linked instruments, the Fund and the Subsidiary will
not invest in leveraged or inverse leveraged (e.g., 2X or -3X)
commodity-linked instruments.
(7) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including securities deemed illiquid by the Adviser, in accordance with
Commission guidance.
(8) Not more than 10% of the weight (to be calculated as the value
of the contract divided by the total absolute notional value of the
Subsidiary's futures contracts) of the futures contracts held by the
Subsidiary in the aggregate shall consist of instruments whose
principal trading market is not a member of ISG or is a market with
which the Exchange does not have a comprehensive surveillance sharing
agreement.
(9) All commodity-linked instruments in which the Subsidiary
invests will be traded on ISG member markets. Commodity-linked
instruments include: (a) Exchange-traded funds (``ETFs'') that provide
exposure to commodities as would be listed under Nasdaq Rules 5705 and
5735; and (b) pooled investment vehicles that invest primarily in
commodities and commodity-linked instruments as would be listed under
Nasdaq Rules 5710 and 5711(b), (d), (f), (g), (h), (i), and (j).
(10) The Fund and the Subsidiary will not invest in options
contracts, swaps, or forward investments. In addition, the Fund will
not invest directly in Commodities.
(11) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
This approval order is based on all of the Exchange's representations,
including those set forth above and in the Notice, and the Exchange's
description of the Fund.
[[Page 45857]]
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1 thereto, is consistent with
Section 6(b)(5) of the Act \36\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\36\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\37\ that the proposed rule change (SR-NASDAQ-2014-059), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\37\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18533 Filed 8-5-14; 8:45 am]
BILLING CODE 8011-01-P