[Federal Register Volume 79, Number 158 (Friday, August 15, 2014)]
[Notices]
[Pages 48264-48269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-19335]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72809; File No. SR-NASDAQ-2014-063]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
No. 1, Relating to the Listing and Trading of the Shares of the Arrow
DWA Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield
ETF of Arrow Investments Trust
August 11, 2014.
I. Introduction
On June 23, 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''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the Arrow
DWA Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield
ETF (each a ``Fund'' and, collectively, ``Funds'') under Nasdaq Rule
5735. On June 26, 2014, the Exchange filed Amendment No. 1 to the
proposed rule change.\3\ The proposed rule change, as modified by
Amendment No. 1, was published for comment in the Federal Register on
July 3, 2014.\4\ The Commission received no comments on the proposed
rule change. This order approves the proposed rule change, as modified
by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange clarified that the Arrow
Investments Trust will issue and sell shares of the Arrow DWA
Balanced ETF, Arrow DWA Tactical ETF and Arrow DWA Tactical Yield
ETF only in aggregations of 100,000 shares.
\4\ See Securities Exchange Act Release No. 72493 (June 27,
2014), 79 FR 38088 (``Notice'').
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II. Description of the Proposal
The Exchange has made the following representations and statements
in describing the Funds and their respective investment strategies,
including other portfolio holdings and investment restrictions.\5\
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\5\ The Commission notes that additional information regarding
the Trust, the Funds, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, portfolio holdings disclosure
policies, distributions, and taxes, among other information, is
included in the Notice and the Registration Statement, as
applicable. See Notice and Registration Statement, supra note 4 and
infra note 6, respectively.
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The Exchange proposes to list and trade the Shares under Nasdaq
Rule 5735 (``Managed Fund Shares''), which governs the listing and
trading of Managed Fund Shares. Each Fund is a series of the Arrow
Investments Trust (``Trust'').\6\ Arrow Investment Advisors, LLC is the
investment adviser (``Adviser'') to the Funds.\7\ Gemini Fund Services,
LLC will act as the administrator and transfer agent to the Funds.
Brown Brothers Harriman & Co. (``Custodian'') will act as the custodian
and transfer agent to the Funds. Northern Lights Distributors, LLC is
the principal underwriter and distributor of each Fund's Shares.
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\6\ See Post-Effective Amendment No. 7 to Registration Statement
on Form N-1A for the Trust (File Nos. 333-178164 and 811-22638)
(``Registration Statement'').
\7\ The Exchange states that the Adviser is not a broker-dealer,
but it is affiliated with a broker-dealer. The Exchange states that
the Adviser has implemented a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the
composition of or changes to the portfolio. The Exchange further
states that, in the event (a) the Adviser 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, the adviser or sub-adviser, as
applicable, will implement a fire wall with respect to its relevant
personnel or its broker-dealer affiliate, as applicable, 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.
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Arrow DWA Balanced ETF
The Exchange represents that the Fund's primary investment
objective is to seek to achieve an appropriate balance between long-
term capital appreciation and capital preservation. In pursuing its
investment objective, the Fund will invest in other ETFs \8\ that each
invests primarily in domestic and foreign (including emerging markets)
(i) equity securities \9\ of any market capitalization, (ii) fixed
income securities \10\ of any credit quality, or (iii) alternative
assets.\11\ In addition, the Fund will invest in commodity futures
through a wholly-owned and controlled Cayman subsidiary (``Balanced
Subsidiary''). The Fund's fixed income securities may be rated below
investment grade (rated BB+ or lower by Standard & Poor's Ratings
Services (``S&P'') or comparably rated by another nationally recognized
statistical rating organization (``NRSRO''), also known as ``high
yield'' or ``junk'' bonds, and in unrated debt securities determined by
the Adviser to be of comparable quality.
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\8\ The ETFs in which the Fund may invest include Index Fund
Shares and Portfolio Depositary Receipts (as described in Nasdaq
Rule 5705(a) and (b)) and Managed Fund Shares (as described in
Nasdaq Rule 5735).
\9\ The Fund defines ``equity securities'' to be exchange-traded
common and preferred stocks.
\10\ The Fund defines ``fixed income securities'' to be bonds,
notes or debentures.
\11\ The Fund defines ``alternative assets'' to be investments
that are historically uncorrelated to either equity or fixed income
investments, which are commodity futures, exchange-traded master
limited partnerships (``MLPs'') and real estate-related securities,
which include foreign and domestic exchange-traded real estate
investment trusts (``REITs'') or exchange-traded real estate
operating companies (``REOCs'').
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The Exchange states that the Fund is a ``fund of funds,'' which
means that it primarily invests in ETFs; however, the Adviser may elect
to invest directly in the types of securities described above. The
Adviser may elect to make these direct investments when it is cost
effective for the Fund to do so (such as when the Fund reaches a size
sufficient to effectively purchase the underlying securities held by
the ETFs in which it invests, allowing the Fund to avoid the costs
associated with indirect investments). The Adviser uses technical
analysis \12\ to allocate the Fund's portfolio among the asset classes
described above.
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\12\ Technical analysis is the method of evaluating securities
by analyzing statistics generated by market activity, such as past
prices and trading volume, in an effort to determine probable future
prices.
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The Exchange states that under normal market conditions,\13\ the
Fund will invest:
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\13\ The term ``under normal market conditions'' as used herein
includes, but is not limited to, the absence of adverse market,
economic, political or other conditions, including extreme
volatility or trading halts in the securities markets or the
financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
type events such as systems failure, natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance. In periods of
extreme market disturbance, the Fund may take temporary defensive
positions, by overweighting its portfolio in cash/cash-like
instruments; however, to the extent possible, the Adviser would
continue to seek to achieve the Fund's investment objective.
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From 25% to 65% in ETFs that invest in equity securities;
from 25% to 65% in ETFs that invest in fixed income
securities; and
from 10% to 40% in ETFs that invest in alternative assets.
The Fund will have the ability to invest up to 25% of its total
assets in the Balanced Subsidiary. The Balanced Subsidiary will invest
primarily in commodity futures, as well as fixed income securities and
cash equivalents, which are intended to serve as margin
[[Page 48265]]
or collateral for the Balanced Subsidiary's investments in commodity
futures.
The Fund will invest in ETFs within specific asset classes when the
technical models used by the Adviser indicate a high probability that
the applicable asset classes and ETFs are likely to outperform the
applicable universe. The Fund will sell interests or reduce investment
exposure among an asset class or ETF when the technical models used by
the Adviser indicate that such asset class or ETF is likely to
underperform the applicable universe. The Fund may be more heavily
invested in fixed-income ETFs, cash positions and similar securities
when the technical models indicate these assets should significantly
outperform the equity and/or alternative asset classes.
The Exchange states that, in general, the Fund's investments in
equity securities are intended to achieve the capital appreciation
component of its investment objective and the Fund's investments in
fixed income securities are intended to achieve the capital
preservation component of its investment objective. Under normal market
conditions, the Adviser expects that the Fund will invest a combined
minimum of 35% in fixed-income securities and in alternative assets.
The Fund's investments in alternative assets are intended to enable the
portfolio to be less reliant on fixed-income investments for reducing
volatility and equities for increasing returns. The Adviser may engage
in frequent buying and selling of portfolio securities to achieve the
Fund's investment objective.
The Exchange states that the Fund seeks to achieve its investment
objective by implementing a proprietary technical asset allocation
(``TAA'') model. The Adviser will overweight asset classes, rotation
strategies, and underlying ETFs exhibiting positive relative strength,
and underweight asset classes, rotation strategies, and underlying ETFs
exhibiting negative relative strength. In essence, TAA works by
reallocating at different times in response to the changing patterns of
returns available in the markets. This methodology does not attempt to
predict the future; it simply reacts to pattern changes in the
marketplace at any given time. This methodology allows the Fund to be
adaptive to current market conditions. The tactical model relies on a
number of technical indicators when making allocation decisions for the
Fund. The Adviser utilizes relative strength as the primary technical
indicator to tactically allocate assets both within and across asset
classes and rotation strategies. The relative strength indicator is
important because it adapts to the changing market conditions. Relative
strength measures the likelihood that an ETF or a group of ETFs will
outperform the appropriate base index. When the indicator is moving up,
it shows that the ETF or group of ETFs is performing better than the
base index. When the indicator is moving down, it shows that the ETF or
group of ETFs is performing worse than the base index (i.e., not rising
as fast or falling faster).\14\
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\14\ For example, in the sector rotation strategy, the Adviser
creates a sector-based index to compare all available sector ETFs
for investment in the Fund. The performance of each ETF is compared
to the base index and ranked. The Adviser generally purchases the
ETFs that demonstrate the highest-ranked relative strength and sells
any positions that are not included in that list.
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The Exchange states that the Adviser has discretion to add to or
delete from the universe of eligible ETFs for each strategy based on
holdings, expense ratio, volume, liquidity, new product availability,
and other factors that can positively contribute to achieving the
Fund's investment objectives.
Arrow DWA Tactical ETF
The Exchange states that the Fund's primary investment objective is
to seek to achieve long-term capital appreciation with capital
preservation as a secondary objective. In pursuing its investment
objective, the Fund will invest in other ETFs \15\ that each invests
primarily in domestic and foreign (including emerging markets) (i)
equity securities \16\ of any market capitalization, (ii) fixed-income
securities \17\ of any credit quality, or (iii) alternative assets.\18\
In addition, the Fund will invest in commodity futures through a
wholly-owned and controlled Cayman subsidiary (``Tactical
Subsidiary''). The Fund's fixed income securities may be rated below
investment grade (rated BB+ or lower by S&P or comparably rated by
another NRSRO, also known as ``high yield'' or ``junk'' bonds, and in
unrated debt securities determined by the Adviser to be of comparable
quality.
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\15\ See supra note 8.
\16\ See supra note 9.
\17\ See supra note 10.
\18\ See supra note 11.
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The Exchange represents that the Fund is a ``fund of funds,'' which
means that it primarily invests in ETFs; however, the Adviser may elect
to invest directly in the types of securities described above. The
Adviser may elect to make these direct investments when it is cost
effective for the Fund to do so (such as when the Fund reaches a size
sufficient to effectively purchase the underlying securities held by
the ETFs in which it invests, allowing the Fund to avoid the costs
associated with indirect investments). The Adviser uses technical
analysis to allocate the Fund's assets among the asset classes
described above.\19\
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\19\ See supra note 12.
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The Exchange states that under normal market conditions, the Fund
will invest:
From 0% to 100% of its assets in ETFs that invest in
equity securities;
From 0% to 100% of its assets in ETFs that invest in
fixed-income securities; and
From 0% up to 90% of its assets in ETFs that invest in
alternative assets.
The Exchange states that the Fund will have the ability to invest
up to 25% of its total assets in the Tactical Subsidiary. The Tactical
Subsidiary will invest primarily in commodity futures, as well as
fixed-income securities and cash equivalents, which are intended to
serve as margin or collateral for the Tactical Subsidiary's investments
in commodity futures.
The Exchange states that the Fund will invest in ETFs within
specific asset classes when the technical models used by the Adviser
indicate a high probability that the applicable asset classes and ETFs
are likely to outperform the applicable universe. The Fund will sell
interests or reduce investment exposure among an asset class or ETF
when the technical models used by the Adviser indicate that such asset
class or ETF is likely to underperform the applicable universe. The
Fund may invest more heavily in fixed-income ETFs, cash positions and
similar securities when the technical models indicate these assets
should significantly outperform the equity and/or alternative asset
classes.
The Exchange states that, in general, the Fund's investments in
equity securities are intended to achieve the capital appreciation
component of the Fund's investment objectives. At times, the Fund may
invest in fixed-income securities in order to achieve the capital
preservation component of the Fund's investment objectives. The Fund's
investments in alternative assets are intended to enable the portfolio
to be less reliant on fixed-income investments for reducing volatility
and equities for increasing returns. The Adviser may engage in frequent
buying and selling of portfolio securities to achieve the Fund's
investment objectives.
The Exchange states that the Fund seeks to achieve its investment
objectives by implementing a proprietary TAA model. The Adviser will
overweight asset classes, rotation
[[Page 48266]]
strategies and underlying ETFs exhibiting positive relative strength
and underweight asset classes, rotation strategies and underlying ETFs
exhibiting negative relative strength. The tactical model relies on a
number of technical indicators when making allocation decisions for the
Fund. The Adviser utilizes relative strength as the primary technical
indicator to tactically allocate assets both within and across asset
classes and rotation strategies. The relative strength indicator is
important because it adapts to the changing market conditions. Relative
strength measures the likelihood that an ETF or a group of ETFs will
outperform the appropriate base index. When the indicator is moving up,
it shows that the ETF or group of ETFs is performing better than the
base index. When the indicator is moving down, it shows that the ETF or
group of ETFs is performing worse than the base index (i.e., not rising
as fast or falling faster).\20\
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\20\ See supra note 14.
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The Exchange states that the Adviser has discretion to add to or
subtract from the universe of eligible ETFs for each strategy based on
holdings, expense ratio, volume, liquidity, new product availability
and other factors that can positively contribute to achieving the
Fund's investment objectives.
The Subsidiaries
The Exchange represents that the Balanced Fund and Tactical Fund
each has the ability to invest up to 25% of its total assets in the
Balanced Subsidiary and the Tactical Subsidiary, respectively (each a
``Subsidiary''; together, ``Subsidiaries''). Each Subsidiary will
invest primarily in commodity futures, as well as fixed-income
securities and cash equivalents, which are intended to serve as margin
or collateral for each Subsidiary's investments in commodity futures.
Each Subsidiary may have both long and short positions in commodities
futures. However, for a given commodity, each Subsidiary will have a
net long exposure. Each Subsidiary will also be advised by the
Adviser.\21\
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\21\ Neither Subsidiary will be registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') nor will be
directly subject to its investor protections, except as noted in the
Registration Statement. However, each Subsidiary will be wholly-
owned and controlled by the applicable Fund and will be advised by
the Adviser. Therefore, each Fund's ownership and control of its
respective Subsidiary will prevent the applicable Subsidiary from
taking action contrary to the interests of the Fund or its
shareholders. The Board of Trustees of the Trust (``Board'') will
have oversight responsibility for the investment activities of each
Fund, including its expected investment in the applicable
Subsidiary, and the Fund's role as the sole shareholder of the
applicable Subsidiary. The Adviser will receive no additional
compensation for managing the assets of each Subsidiary. Each
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 Funds.
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By investing in commodities futures indirectly through the
applicable Subsidiary, the Exchange states that each of the Balanced
Fund and the Tactical Fund will obtain exposure to the commodities
markets within the federal tax requirements that apply to the Fund.
Investment in each Subsidiary is expected to provide the applicable
Fund with exposure to the commodities markets within the limitations of
the federal tax requirements of Subchapter M of the Internal Revenue
Code.
Because each of the Balanced Fund and the Tactical Fund may invest
up to 25% of its assets in its respective Subsidiary, each Fund may be
considered to be investing indirectly in such investments through its
Subsidiary, and references to each of the Balanced Fund and Tactical
Fund may also include its Subsidiary. When viewed on a consolidated
basis, each Subsidiary will be subject to the same investment
restrictions and limitations, and follow the same compliance policies
and procedures, as the applicable Fund.
The Exchange represents that as a result of the instruments that
will be indirectly held by each of the Balanced Fund and the Tactical
Fund, the Adviser has registered as a commodity pool operator \22\ and
is also a member of the National Futures Association (``NFA''). Each of
the Balanced Fund, Tactical Fund, and the Subsidiaries are subject to
regulation by the Commodity Futures Trading Commission and NFA, and to
additional disclosure, reporting, and recordkeeping rules imposed upon
commodity pools.
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\22\ As defined in Section 1a(11) of the Commodity Exchange Act.
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Arrow DWA Tactical Yield ETF
The Exchange states that the Fund's primary investment objective is
to seek high current income with an appropriate balance between long-
term capital appreciation and capital preservation. In pursuing its
investment objective, the Fund will invest in other ETFs \23\ that each
invest in domestic and foreign (including emerging markets) (i) equity
securities \24\ of any market capitalization or (ii) fixed-income
securities \25\ of any credit quality. The Fund also invests indirectly
in these asset classes through various exchange-traded products
(``ETPs'') \26\ and exchange-traded closed-end funds, and directly
through individual securities. In order to mitigate the settlement risk
of the foreign denominated securities in which it invests due to
currency fluctuations, the Fund may also invest up to 25% of its net
assets in Spot Forex futures.
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\23\ See supra note 8.
\24\ The Fund defines equity securities to be exchange-traded
common and preferred stocks and exchange-traded REITs.
\25\ See supra note 10.
\26\ The ETPs in which the Fund may invest include exchange-
traded currency trusts (as described in Nasdaq Rule 5711(e)) and
exchange-traded notes (``ETNs'') (as described in Nasdaq Rule 5730).
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The Exchange states that the Fund will maintain two income
strategies that focus on (i) securities that generate ``high beta
yield,'' consisting of securities correlated to equities based on a
proprietary methodology, and (ii) securities that generate ``low beta
yield,'' consisting of securities less correlated to equities based on
a proprietary methodology. Beta is a measure of the price volatility,
or risk, of a security or a portfolio in comparison to the market as a
whole. A security's correlation to equities is a measure of the
performance similarity of the security to the S&P 500 index. The high
beta strategy is a composite of securities that are selected based on
their credit and equity risk premiums characteristics. The low beta
yield strategy is a composite of securities that are selected based on
their inflation, interest, and credit risk characteristics. The Fund
uses a proprietary selection methodology designed to identify
securities that demonstrate strong relative strength characteristics
within each strategy. The Fund will then utilize a quantitative
methodology that relies on economic and fundamental factors to
tactically underweight and overweight the income strategies.
The Exchange represents that the Fund will, under normal market
conditions, invest as follows:
From 20% to 80% in the Low Beta (LB). The LB will be
comprised of equity and fixed income securities, including ETPs that
invest in international and domestic securities; and
From 20% to 80% in the High Beta (HB). The HB will be in
equity and fixed income securities, including ETPs that invest in
international and domestic securities.
The Exchange states that the Fund expects to be a ``fund of
funds,'' which means that it primarily invests in ETFs, ETPs, and
closed-end funds; however, the Adviser may elect to invest directly in
the asset classes described above. The Adviser may elect to make these
direct
[[Page 48267]]
investments when it is cost effective for the Fund to do so (such as
when the Fund reaches a size sufficient to effectively purchase the
underlying securities held by the ETFs, ETPs, or closed-end Funds in
which it invests, allowing the Fund to avoid the costs associated with
indirect investments).
All Funds
The Exchange represents that in certain situations or market
conditions, a Fund may temporarily depart from its normal investment
policies and strategies, provided that the alternative is consistent
with the Fund's investment objective and is in the best interest of the
Fund. For example, a Fund may hold a higher than normal proportion of
its assets in cash in times of extreme market stress. The Funds may
borrow money from a bank as permitted by the 1940 Act or other
governing statute, by applicable rules thereunder, or by Commission or
other regulatory agency with authority over the Funds, but only for
temporary or emergency purposes. The use of temporary investments is
not a part of a principal investment strategy of the Funds.
The Exchange represents that each Fund may hold up to an aggregate
amount of 15% of its net assets in illiquid assets (calculated at the
time of investment). Each 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 a 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.
The Exchange represents that each Fund will not invest 25% or more
of the value of its total assets in securities of issuers in any one
industry.
The Exchange states that the Funds will be classified as ``non-
diversified'' investment companies under the 1940 Act, and that the
Funds intend to qualify for and to elect treatment as a separate
regulated investment company under Subchapter M of the Internal Revenue
Code.
The Funds will not invest in options or swaps.
The Exchange represents that each Fund's investments and each
Subsidiary's investments will be consistent with its (or its applicable
Fund's) respective investment objective and, although certain
derivative investments will have a leveraging effect on the Funds and
Subsidiaries, the Funds and Subsidiaries will not seek leveraged
returns (e.g., 2X or -3X).
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 Act and
the rules and regulations thereunder applicable to a national
securities exchange.\27\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Act,\28\ 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 Funds and the Shares must comply with the
requirements of Nasdaq Rule 5735 to be listed and traded on the
Exchange.
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\27\ 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).
\28\ 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,\29\ 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
for the Shares. In addition, the Intraday Indicative Value,\30\ as
defined in Nasdaq Rule 5735(c)(3), of each Fund will be available on
the NASDAQ OMX Information LLC proprietary index data service, and will
be widely disseminated by one or more major market data vendors and
broadly displayed at least every 15 seconds during the Regular Market
Session.\31\ On each business day, before commencement of trading in
Shares in the Regular Market Session \32\ on the Exchange, the Funds
will disclose on their Web site the identities and quantities of the
portfolio of securities and other assets (``Disclosed Portfolio'' as
defined in Nasdaq Rule 5735(c)(2)) held by each Fund that will form the
basis for each Fund's calculation of NAV at the end of the business
day.\33\ 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, as well as amount of cash (if any),
constituting the creation basket for each Fund for that day. The NAV of
each Fund will be determined once each business day, normally as of the
close of trading of the New York Stock Exchange, generally, 4:00 p.m.
Eastern Time.\34\ 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. 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. Intraday, executable price
quotations on the securities and other assets held by the Funds and
Subsidiaries will be available from major broker-dealer firms or on the
exchange on which they are traded, as applicable. Intraday 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
[[Page 48268]]
investors. Pricing information for exchange-traded securities such as
common and preferred stocks, ETFs, ETPs, ETNs, closed-end funds,
futures contracts, REITs, MLPs, and REOCs will be publicly available
from the Web sites of the exchanges on which they trade, on public
financial Web sites, and through subscription services such as
Bloomberg and Thompson Reuters. Pricing information regarding debt
securities (including high yield fixed-income securities, bonds, notes,
and debentures) will be available through subscription services such as
Markit, Bloomberg, and Thompson Reuters. The Funds' Web site will
include a form of the prospectus for the Funds and additional data
relating to NAV and other applicable quantitative information.
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\29\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\30\ According to the Exchange, the Intraday Indicative Value
reflects an estimated intraday value of each Fund's portfolio. The
Intraday Indicative Value will be based upon the current value for
the components of a Disclosed Portfolio.
\31\ Currently, the NASDAQ OMX Global Index Data Service
(``GIDS'') is the NASDAQ OMX global index data feed service. The
Exchange represents that GIDS offers real-time updates, daily
summary messages, and access to widely followed indexes and Intraday
Indicative Values for ETFs and that GIDS provides investment
professionals with the daily information needed to track or trade
NASDAQ OMX indexes, listed ETFs, or third-party partner indexes and
ETFs.
\32\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to
4:00 p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session
from 4:00 p.m. or 4:15 p.m. to 8:00 p.m., Eastern Time).
\33\ The Disclosed Portfolio will include, as applicable, the
names, quantity, percentage weighting and market value of securities
and other assets held by each Fund and each Subsidiary and the
characteristics of such assets. The Web site and information will be
publicly available at no charge.
\34\ NAV will be calculated by deducting all of a Fund's
liabilities from the total value of its assets and dividing the
result by the number of Shares outstanding, rounding to the nearest
cent.
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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. Trading in Shares of the Funds will be
halted under the conditions specified in Nasdaq Rules 4120 and 4121,
including the trading pause provisions under Nasdaq Rules 4120(a)(11)
and (12). Trading in the Shares may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable,\35\ and trading in the Shares will
be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances
under which trading in Shares of the Funds may be halted. The Exchange
states that it has a general policy prohibiting the distribution of
material, non-public information by its employees. 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.\36\ In addition, the Exchange states that the Adviser is not
a broker-dealer, but it is affiliated with a broker-dealer and has
implemented a fire wall with respect to its broker-dealer affiliate
regarding access to information concerning the composition of or
changes to the portfolio.\37\ The Exchange represents that trading in
the Shares will be subject to the existing trading surveillances,
administered by both Nasdaq and also 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.\38\ 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 represents that
FINRA, on behalf of the Exchange, will communicate as needed regarding
trading information it can obtain relating to the Shares and other
exchange-traded securities and instruments held by the Funds with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), 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
all U.S. national securities and certain futures exchanges, or are
parties to a comprehensive surveillance sharing agreement. Moreover,
FINRA, on behalf of the Exchange, will be able to access, as needed,
trade information for certain fixed income securities held by each Fund
reported to FINRA's Trade Reporting and Compliance Engine. Prior to the
commencement of trading, the Exchange states that it will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares.
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\35\ These reasons may include: (1) The extent to which trading
is not occurring in the securities and other assets constituting the
Disclosed Portfolios of the Funds; 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 may consider all relevant factors in exercising its
discretion to halt or suspend trading in the Shares of the Funds.
\36\ See Nasdaq Rule 5735(d)(2)(B)(ii).
\37\ See supra note 7. 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 its 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.
\38\ 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 Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including the following:
(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 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.
(4) At all times, 90% of each Fund's exchange-traded assets will be
securities that trade in markets that are members of the ISG, which
includes all U.S. national securities and certain futures exchanges, or
are parties to a comprehensive surveillance sharing agreement.
(5) 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
[[Page 48269]]
recommending transactions in the Shares to customers; (c) how and by
whom information regarding the Intraday Indicative Value and 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.
(6) For initial and continued listing, the Funds will be in
compliance with Rule 10A-3 under the Act.\39\
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\39\ See 17 CFR 240.10A-3.
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(7) Each Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment). Each
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 a Fund's
net assets are held in illiquid assets.
(8) The Funds will not invest in options or swaps.
(9) Each Fund's investments and each Subsidiary's investments will
be consistent with its (or its applicable Fund's) respective investment
objective and, although certain derivative investments will have a
leveraging effect on the Funds and Subsidiaries, the Funds and
Subsidiaries will not seek leveraged returns (e.g., 2X or -3X).
(10) A minimum of 100,000 Shares of each Fund 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.
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 \40\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\40\ 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,\41\ that the proposed rule change (SR-NASDAQ-2014-063), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\41\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19335 Filed 8-14-14; 8:45 am]
BILLING CODE 8011-01-P