[Federal Register Volume 80, Number 235 (Tuesday, December 8, 2015)]
[Notices]
[Pages 76335-76338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-30835]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76538; File No. SR-NASDAQ-2015-124]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change To List and Trade Shares of the Active
Alts Contrarian ETF of ETFis Series Trust I
December 2, 2015.
I. Introduction
On October 19, 2015, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the Active Alts Contrarian ETF (``Fund'') of ETFis
Series Trust I (``Trust'') under Nasdaq Rule 5735. The proposed rule
change was published for comment in the Federal Register on October 29,
2015.\3\ The Commission received no comments on the proposal. This
order approves the proposed rule change.
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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. 76245 (Oct. 23,
2015), 80 FR 66594 (``Notice'').
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II. The Exchange's Description of the Proposal \4\
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\4\ Additional information regarding, among other things, the
Shares, the Fund, its investment objective, its investments, its
investment strategies, its investment methodology, its fees, its
creation and redemption procedures, availability of information,
trading rules and halts, and surveillance procedures can be found in
the Notice and in the Registration Statement. See Notice, supra note
3, and Registration Statement, infra note 6, respectively.
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Nasdaq proposes to list and trade the Shares under Nasdaq Rule
5735, which governs the listing and trading of Managed Fund Shares.\5\
The Fund will be an actively-managed exchange-traded fund (``ETF'').
The Shares will be offered by the Trust, which was established as a
Delaware series trust on September 20, 2012.\6\ The Fund will be a
series of the Trust. Etfis Capital LLC will be the investment adviser
(``Adviser'') to the Fund. Active Alts Inc. will be the investment sub-
adviser to the Fund (``Sub-Adviser'').\7\ ETF
[[Page 76336]]
Distributors LLC (``Distributor'') will be the principal underwriter
and distributor of the Shares. The Bank of New York Mellon Corporation
(``BNY'') will act as the administrator, accounting agent, custodian
and transfer agent to the Fund.
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\5\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940, as amended (15 U.S.C. 80a-1) (the ``1940 Act'')
organized as an open-end investment company or similar entity that
invests in a portfolio of securities selected by its investment
adviser consistent with its investment objectives and policies.
\6\ 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. See Post-Effective
Amendment No. 70 to Registration Statement on Form N-1A for the
Trust, dated Oct. 16, 2015 (File Nos. 333-187668 and 811-22819). The
description of the Fund and the Shares contained herein is based, in
part, on information in the Registration Statement. The Commission
has issued an order, upon which the Trust may rely (``Exemptive
Order''), granting certain exemptive relief to the investment
adviser to the Fund under the 1940 Act. See Investment Company Act
Release No. 30607 (Jul. 23, 2013) (File No. 812-14080).
\7\ 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, the Sub-Adviser and each such
party's 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 applicable federal securities laws as defined in
Rule 204A-1(e)(4). Accordingly, procedures designed to prevent the
communication and misuse of nonpublic 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 the Adviser is not a broker-dealer,
although it is affiliated with the Distributor, a broker-dealer. The
Adviser has implemented a fire wall with respect to its broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the portfolio. The Exchange represents that the Sub-
Adviser is not a broker-dealer and is not affiliated with a broker-
dealer.\8\
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\8\ See Notice, supra note 3, 80 FR at 66595. In the event (a)
the Adviser or the Sub-Adviser becomes newly affiliated with a
broker-dealer or registers as a broker-dealer, or (b) any new
adviser or new sub-adviser is a registered broker-dealer or is or
becomes affiliated with a broker-dealer, it will implement a fire
wall with respect to its relevant personnel and/or such broker-
dealer affiliate, as applicable, regarding access to information
concerning the composition and/or changes to the Fund portfolio and
will be subject to procedures designed to prevent the use and
dissemination of material nonpublic information regarding such
portfolio.
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A. Principal Investments of the Fund
The Exchange states that the Fund's investment objective is to seek
current income and capital appreciation. The Fund will seek to achieve
its investment objective by primarily investing in U.S. exchange-traded
equity securities (referred to herein as ``Equities'' \9\) that the
Sub-Adviser believes have a higher potential for capital appreciation
as a result of a ``short squeeze.'' \10\ The Sub-Adviser's process for
identifying short squeeze opportunities involves analysis of both
fundamental factors (e.g., quality of earnings, fundamental stability
of business, etc.) and technical factors (e.g., price and volume
characteristics, relative strength, etc.). Using this analysis, the
Sub-Adviser seeks to identify securities where, in the opinion of the
Sub-Adviser, short interest is significant, is increasing or is
expected to increase, but is unjustified based on the Sub-Adviser's
analysis.
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\9\ The term ``Equities'' includes American Depository Receipts,
but does not include shares of ETFs or closed-end investment
companies that are U.S. exchange-traded.
\10\ The Exchange describes a ``short squeeze'' as occurring
when investors who have sold short shares of an equity security seek
to rapidly cover or buy back the short position due to actual or
perceived appreciation in the security, which may occur because of
positive news or events related to the company, its market sector or
the market generally. The Exchange states that often, the additional
buying momentum created by short sellers covering their short
positions escalates the increase in the price of the shares.
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The Exchange states that, to the extent the Sub-Adviser has not
identified Equities suitable for investment, the Fund principally will
be invested in cash or money market instruments,\11\ and to the extent
permitted by applicable law and the Fund's investment restrictions, the
Fund may invest in shares of money-market mutual funds.
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\11\ The following is a list of the money market instruments in
which the Fund may invest: short-term (less than one-year) notes
issued by (i) the U.S. government, (ii) an agency of the U.S.
government, or (iii) a U.S. corporation.
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The Fund may also determine to lend out portfolio securities that
the Sub-Adviser believes to be strong candidates for a short squeeze to
short sellers and other market participants for a premium recognized as
income.
B. Other Investments
The Exchange states that the Fund may invest in any type of ETF
that is U.S. exchange-traded, including index based ETFs, sector based
ETFs, and fixed-income ETFs. The Fund also may invest in closed-end
investment companies that are U.S. exchange-traded.
C. Investment Restrictions
The Fund will not be limited with respect to its investments in any
sector or industry, but the Fund will limit investments in a single
issuer to no more than five percent of the total assets of the Fund and
to no more than five percent of the security's public float. In
addition, the Fund will limit its Equities investments to companies
with a market capitalization of $250 million or more.
The Fund will be prevented from purchasing more than 3% of an ETF's
outstanding shares, unless: (i) The ETF or the Fund has received an
order for exemptive relief from the 3% limitation from the Commission
that is applicable to the Fund; and (ii) the ETF and the Fund take
appropriate steps to comply with any conditions in such order.
The Fund's investments (including investments in ETFs) will not be
utilized to seek to achieve a leveraged return on the Fund's net
assets.
The Fund will not invest in futures contracts, will not invest in
options, will not invest in swaps, and will not invest in other
derivative instruments. The Fund also will not invest in leveraged
ETFs.
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.\12\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act,\13\ 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.
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\12\ 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).
\13\ 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,\14\ 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 and for the Equities and any other exchange-
traded securities held by the Fund will be available via UTP Level 1,
as well as Nasdaq proprietary quote and trade services. Intra-day,
executable price quotations of the Equities, any other exchange-traded
securities, and money market instruments and money-market mutual funds
held by the Fund are available from major broker-dealer firms or on the
exchanges on which they are traded, if applicable. The foregoing
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intra-day price information is available through subscription services,
such as Bloomberg and Thomson Reuters, which can be accessed by
authorized participants and other investors. Information regarding
market price and volume of the Shares is and 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. The previous day's closing
price and trading volume information for the Equities and any other
exchange-traded securities held by the Fund will be published daily in
the financial section of newspapers.
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\14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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The Commission also 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. On each business day, before commencement of trading in Shares
in the Regular Market Session \15\ on the Exchange, the Fund will
disclose on its Web site the Disclosed Portfolio that will form the
basis for the Fund's calculation of NAV at the end of the business
day.\16\
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\15\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 7 a.m. to 9:30
a.m. Eastern time; (2) Regular Market Session from 9:30 a.m. to 4
p.m. or 4:15 p.m. Eastern time; and (3) Post-Market Session from 4
p.m. or 4:15 p.m. to 8 p.m. Eastern time).
\16\ Under accounting procedures to be followed by the Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1'').
Notwithstanding the foregoing, portfolio trades that are executed
prior to the opening of the Exchange on any business day may be
booked and reflected in NAV on such business day. Accordingly, the
Fund will be able to disclose at the beginning of the business day
the portfolio that will form the basis for the NAV calculation at
the end of the business day.
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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. Moreover, the Intraday Indicative Value,
available on the NASDAQ OMX Information LLC proprietary index data
service,\17\ will be based upon the current value for the components of
the Disclosed Portfolio and will be updated and widely disseminated and
broadly displayed at least every 15 seconds during the Regular Market
Session. In addition, during hours when the local markets for foreign
securities in the Fund's portfolio are closed, the Intraday Indicative
Value will be updated at least every 15 seconds during the Regular
Market Session to reflect currency exchange fluctuations.
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\17\ Currently, the NASDAQ OMX Global Index Data Service
(``GIDS'') is the NASDAQ OMX global index data feed service,
offering real-time updates, daily summary messages, and access to
widely followed indexes and Intraday Indicative Values for ETFs.
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.
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BNY, through the National Securities Clearing Corporation, will
make available on each business day, immediately prior to the opening
of business on the Exchange's Regular Market Session (currently 9:30
a.m. Eastern time), the list of the names and the required number of
shares of each Deposit Security to be included in the current Fund
Deposit (based on information at the end of the previous business day)
for the Fund. The NAV of the Fund will be calculated by BNY and
determined at the close of regular trading on the New York Stock
Exchange (ordinarily 4:00 p.m. Eastern time) on each day that such
exchange is open. The Web site for the Fund will include a form of the
prospectus for the Fund and additional data relating to NAV and other
applicable quantitative information.
The Exchange represents that trading in Shares will be halted if
the circuit breaker parameters in Nasdaq Rule 4120(a)(11) have been
reached or because of market conditions or for reasons that, in the
view of the Exchange, make trading in the Shares inadvisable, and
trading in the Shares will be subject to Nasdaq Rule 5735(d)(2)(D),
which sets forth circumstances under which Shares of the Fund may be
halted. The Exchange states that it has a general policy prohibiting
the distribution of material, nonpublic information by its
employees.\18\ The Exchange represents that the Adviser is affiliated
with a broker-dealer and has implemented a ``fire wall'' with respect
to such broker-dealer regarding access to information concerning the
composition and/or changes to the Fund's portfolio. The Exchange has
represented that the Sub-Adviser is not a broker-dealer and is not
affiliated with a broker-dealer.\19\
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\18\ See Notice, supra note 3, 80 FR at 66598.
\19\ See note 8, supra, and accompanying text.
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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. The Exchange states 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.\20\ On behalf of the Exchange,
FINRA will communicate as needed regarding trading in the Shares,
Equities, or other exchange-traded securities with other markets and
other entities that are Intermarket Surveillance Group (``ISG'')
members, and FINRA, on behalf of the Exchange, may obtain trading
information regarding trading in the Shares, Equities, or other
exchange-traded securities from such markets and other entities. In
addition, the Exchange may obtain information regarding trading in the
Shares, Equities, or other exchange-traded securities from markets and
other entities that are members of ISG or with which the Exchange has
in place a comprehensive surveillance sharing agreement.\21\ FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain money market instruments held by the Fund reported to
FINRA's Trade Reporting and Compliance Engine.
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\20\ FINRA surveils trading on the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for
FINRA's performance under this regulatory services agreement.
\21\ For a list of the current members of ISG, see
www.isgportal.org.
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The Exchange represents that it deems the Shares to be equity
securities, thus rendering trading in the Shares subject to Nasdaq's
existing rules governing the trading of equity securities.\22\ In
support of this proposal, the Exchange has also made the following
representations:
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\22\ See Notice, supra note 3, 80 FR at 66598.
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(1) The Shares will be subject to Rule 5735, which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares.\23\
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\23\ See id. at 66594.
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(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.\24\
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\24\ See id. at 66598.
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(3) Trading in the Shares will be subject to the existing trading
surveillances, administered by both Nasdaq and also the 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
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rules and applicable federal securities laws.\25\
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\25\ See id.
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(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.\26\
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\26\ See id. at 66598-66599.
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(5) For initial and/or continued listing, the Fund must be in
compliance with Rule 10A-3under the Act.\27\
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\27\ See 17 CFR 240.10A-3. See also Notice, supra note 3, 80 FR
at 66598.
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(6) The Fund will limit its Equities investments to companies with
a market capitalization of $250 million or more.\28\
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\28\ See id. at 66595.
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(7) All Equities and any shares of ETFs or closed-end investment
companies held by the Fund will be listed on a U.S. exchange that is a
member of the ISG or a party to a comprehensive surveillance sharing
agreement with the Exchange.\29\
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\29\ See id. at 66598.
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(8) The Fund will not invest in leveraged ETFs.\30\
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\30\ See id. at 66595.
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(9) The Fund will not invest in futures contracts, will not invest
in options, will not invest in swaps, and will not invest in other
derivative instruments.\31\
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\31\ See id. at 66596.
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(10) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.\32\
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\32\ See id. at 66598.
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This approval order is based on all of the Exchange's
representations, including those set forth above and in the Notice.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \33\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\33\ 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
Exchange Act, that the proposed rule change (SR-NASDAQ-2015-124) be,
and it hereby is, approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-30835 Filed 12-7-15; 8:45 am]
BILLING CODE 8011-01-P