[Federal Register Volume 81, Number 82 (Thursday, April 28, 2016)]
[Notices]
[Pages 25467-25473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09897]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77688; File No. SR-NASDAQ-2016-030]
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
Elkhorn Dorsey Wright Commodity Rotation Portfolio of Elkhorn ETF Trust
April 22, 2016.
I. Introduction
On February 26, 2016, 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''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
Elkhorn Dorsey Wright Commodity Rotation Portfolio (``Fund''). The
proposed rule change was published for comment in the Federal Register
on March 16, 2016.\3\ The Commission received one comment on the
proposal.\4\ On April 15, 2016, the Exchange filed Amendment No. 1 to
the proposed rule change.\5\ This order
[[Page 25468]]
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. 77338 (March 10,
2016), 81 FR 14142 (``Notice'').
\4\ See Letter from Anonymous to the Commission, dated April 8,
2016 (``Anonymous Letter''), available at: http://www.sec.gov/comments/sr-nasdaq-2016-030/nasdaq2016030-1.htm (commenting in favor
of the Exchange's proposal).
\5\ In Amendment No. 1, which amended and replaced the proposed
rule change in its entirety, the Exchange made the following
clarifications: (1) 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 (as defined herein) and/or a Sub-Adviser (as
defined herein) to be of comparable quality; (2) the Fund and the
Subsidiary (as defined herein) will not invest in leveraged or
inverse leveraged securities of investment companies; (3) the
commodity-linked instruments in which the Fund invests will be
listed and traded in the U.S. on registered exchanges; (4) with
respect to the futures contracts and exchange-traded options on
futures contracts in which the Subsidiary invests, 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 and
options contracts) of the futures and options contracts held by the
Subsidiary in the aggregate shall consist of instruments whose
principal trading market (a) is not a member of the Intermarket
Surveillance Group (``ISG'') or (b) is a market with which the
Exchange does not have a comprehensive surveillance sharing
agreement, provided that, so long as the Exchange may obtain market
surveillance information with respect to transactions occurring on
the Commodity Exchange pursuant to the ISG memberships of the
Chicago Mercantile Exchange, the Chicago Board of Trade and the New
York Mercantile Exchange, futures and options contracts whose
principal trading market is the Commodity Exchange shall not be
subject to the prohibition in (a); (5) all statements and
representations made in the proposal regarding the description of
the portfolio, limitations on portfolio holdings or reference
assets, or the applicability of Exchange rules and surveillance
procedures shall constitute continued listing requirements for
listing the Shares on the Exchange; (6) the issuer has represented
to the Exchange that it will advise the Exchange of any failure by
the Fund to comply with the continued listing requirements; (7)
pursuant to its obligations under Section 19(g)(1) of the Act, the
Exchange will monitor for compliance with the continued listing
requirements; and (8) if the Fund is not in compliance with the
applicable listing requirements, the Exchange will commence
delisting procedures under the Nasdaq 5800 Series. Amendment No. 1
also corrects a typographical error and makes other edits of a
technical nature. Because Amendment No. 1 to the proposed rule
change does not materially alter the substance of the proposed rule
change or raise unique or novel regulatory issues, Amendment No. 1
is not subject to notice and comment (Amendment No. 1 to the
proposed rule change is available at: http://www.sec.gov/comments/sr-nasdaq-2016-030/nasdaq2016030-2.pdf).
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II. Exchange's Description of the Proposed Rule Change
The Exchange proposes to list and trade the 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 the
Elkhorn ETF Trust (``Trust''), which was established as a Massachusetts
business trust on December 12, 2013.\6\ Elkhorn Investments, LLC will
be the investment adviser (``Adviser'') to the Fund. It is currently
anticipated that day-to-day portfolio management for the Fund will be
provided by the Adviser. However, the Fund and the Adviser may contract
with an investment sub-adviser (``Sub-Adviser'') to provide day-to-day
portfolio management for the Fund. ALPS Distributors, Inc.
(``Distributor'') will be the principal underwriter and distributor of
the Fund's Shares. The Fund will contract with unaffiliated third
parties to provide administrative, custodial and transfer agency
services to the Fund. The Exchange represents that the Adviser is not a
broker-dealer, although it is affiliated with a broker-dealer, and it
has implemented a firewall with respect to its broker-dealer affiliate
regarding access to information concerning the composition of, and
changes to, the portfolio.\7\
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\6\ The Exchange represents that the Trust is registered under
the Investment Company Act of 1940 (``1940 Act''). See Registration
Statement on Form N-1A for the Trust dated February 18, 2016 (File
Nos. 333-201473 and 811-22926) (``Registration Statement''). The
Exchange further states that the Trust has obtained certain
exemptive relief under the 1940 Act (File No. 812-14262).
\7\ See Nasdaq Rule 5735(g). The Exchange further represents
that, in the event (a) the Adviser or a Sub-Adviser becomes, or
becomes newly affiliated with, a broker-dealer or registers as a
broker-dealer, or (b) any new adviser or sub-adviser is a registered
broker-dealer or becomes affiliated with a broker-dealer, it will
implement a firewall with respect to its relevant personnel or
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
describing the Fund and the Fund's investment strategies, including the
Fund's portfolio holdings and investment restrictions.\8\
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\8\ The Commission notes that additional information regarding
the Fund, the Trust, the Subsidiary (as defined herein), and the
Shares, including investment strategies, risks, creation and
redemption procedures, fees, portfolio holdings disclosure policies,
calculation of net asset value (``NAV''), distributions, and taxes,
among other things, can be found in the Notice and the Registration
Statement, as applicable. See Notice and Registration Statement,
supra notes 3 and 6, respectively.
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A. Exchange's Description of the Fund's Investments
According to the Exchange, the Fund's investment objective will be
to provide total return which exceeds that of the DWA Commodity
Rotation Index (``Benchmark'').\9\ The Fund will seek excess return
above the Benchmark solely through the active management of a short
duration portfolio of highly liquid, high quality bonds.
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\9\ The Benchmark is developed, maintained, and sponsored by
Dorsey, Wright & Associates, LLC.
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The Fund will be an actively-managed exchange-traded fund (``ETF'')
that seeks to achieve its investment objective by, under normal market
conditions,\10\ investing in exchange-traded commodity futures
contracts, exchange-cleared and non-exchange-cleared swaps,\11\
exchange-traded options on futures contracts, and exchange-traded
commodity-linked instruments\12\ (collectively, ``Commodities'')
through a wholly-owned subsidiary controlled by the Fund and organized
under the laws of the Cayman Islands (``Subsidiary''), thereby
obtaining exposure to the commodities markets.
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\10\ 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.
\11\ Investments in non-exchange-cleared swaps (through the
Subsidiary) will not represent more than 20% of the Fund's net
assets. When investing in non-exchange-cleared swaps, the Subsidiary
(as defined herein) will seek, where possible, to use
counterparties, as applicable, whose financial status is such that
the risk of default is reduced; however, the risk of losses
resulting from default is still possible. The Adviser and/or a Sub-
Adviser will evaluate the creditworthiness of counterparties on an
ongoing basis. In addition to information provided by credit
agencies, the Adviser's and/or a Sub-Adviser's analysis will
evaluate each approved counterparty using various methods of
analysis, and may consider such factors as the counterparty's
liquidity, its reputation, the Adviser's and/or Sub-Adviser's past
experience with the counterparty, its known disciplinary history,
and its share of market participation.
\12\ Exchange-traded commodity-linked instruments include: (1)
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).
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The Fund's Commodities investments, in part, will be comprised of
exchange-traded futures contracts on commodities that comprise the
Benchmark. Although the Fund, through the Subsidiary, will generally
hold many of the futures contracts included in the Benchmark, the Fund
and the Subsidiary will be actively managed and will not be obligated
to invest in all the futures contracts on commodities that comprise the
Benchmark. In addition, with respect to investments in exchange-traded
futures contracts, the Fund and the Subsidiary will not be obligated to
invest in the same amount or proportion as the Benchmark, or be
obligated to track the performance of the Benchmark. In addition to
exchange-traded futures contracts, the Fund's Commodities investments
will also be comprised of exchange-cleared and non-exchange-cleared
swaps on commodities, exchange-traded options on futures contracts that
provide exposure to the investment returns of the commodities markets,
and exchange-traded commodity-linked instruments, without investing
directly in physical commodities. The Fund will invest in Commodities
through investments in the Subsidiary and will not invest directly in
physical commodities. The Fund's investment in the Subsidiary may not
exceed 25% of the Fund's total assets.
In addition to Commodities, the Fund may invest its assets in (1)
the following short-term debt instruments:\13\ fixed rate and floating
rate U.S. government securities, including bills, notes and bonds
differing as to maturity and rates
[[Page 25469]]
of interest, which are either issued or guaranteed by the U.S. Treasury
or by U.S. government agencies or instrumentalities;\14\ certificates
of deposit issued against funds deposited in a bank or savings and loan
association; bankers' acceptances, which are short-term credit
instruments used to finance commercial transactions; repurchase
agreements,\15\ which involve purchases of debt securities; 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; and commercial paper, which are short-term unsecured
promissory notes (collectively, ``Short-Term Debt Instruments'');\16\
(2) corporate debt obligations;\17\ (3) money market instruments;\18\
(4) investment companies (other than those that are commodity-linked
instruments),\19\ including both exchange-traded and non-exchange-
traded investment companies, that provide exposure to (a) commodities,
(b) equity securities, and (c) fixed income securities, to the extent
permitted under the 1940 Act and any applicable exemptive relief;\20\
and (5) cash and other cash equivalents (collectively, ``Other
Investments''). The Fund will use the Other Investments as investments,
to provide liquidity, and to collateralize the Subsidiary's commodity
exposure on a day-to-day basis.
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\13\ Short-term debt instruments are issued by issuers having a
long-term debt rating of at least A by Standard & Poor's Ratings
Services, Moody's Investors Service, Inc., or Fitch Ratings, and
have a maturity of one year or less.
\14\ Such 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, which 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.
\15\ According to the Exchange, the Fund intends to enter into
repurchase agreements only with financial institutions and dealers
believed by the Adviser and/or a Sub-Adviser to present minimal
credit risks in accordance with criteria approved by the Board of
Trustees of the Trust (``Board''). The Adviser and/or a Sub-Adviser
will review and monitor the creditworthiness of such institutions.
The Adviser and/or a Sub-Adviser 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.
\16\ 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 and/or a Sub-Adviser to be of comparable quality.
\17\ At least 75% of corporate debt obligations will have a
minimum principal amount outstanding of $100 million or more.
\18\ For the Fund's purposes, money market instruments will
include only the following instruments: 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; and money
market mutual funds.
\19\ According to the Exchange, 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. The
exchange-traded investment companies 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). The non-
exchange-traded investment companies in which the Fund may invest
include all non-exchange-traded investment companies that are not
money market instruments, as described above. While the Fund and the
Subsidiary may invest in inverse commodity-linked instruments or
securities of investment companies, the Fund and the Subsidiary will
not invest in leveraged or inverse leveraged (e.g., 2X or -3X)
commodity-linked instruments or securities of investment companies.
\20\ The exchange-traded investment companies and commodity-
linked instruments in which the Fund invests will be listed and
traded in the U.S. on registered exchanges.
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The Fund's investment in the Subsidiary will be designed to help
the Fund achieve exposure to commodity returns in a manner consistent
with the federal tax requirements applicable to the Fund and other
regulated investment companies. 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.
B. Exchange's Description of the Subsidiary's Investments
The Subsidiary will generally seek to make investments in
Commodities, and its portfolio will be managed by the Adviser or a Sub-
Adviser.\21\ The Adviser or a Sub-Adviser will use its discretion to
determine the percentage of the Fund's assets allocated to the
Commodities held by the Subsidiary that will be invested in exchange-
traded commodity futures contracts, exchange-cleared and non-exchange-
cleared swaps, exchange-traded options on futures contracts, and
exchange-traded commodity-linked instruments. The Subsidiary will have
the same investment objective as the Fund, but unlike the Fund, it may
invest without limitation in Commodities.
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\21\ 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 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.
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In addition to investing in Commodities, the Subsidiary, like the
Fund, may invest in Other Investments (e.g., as investments or to serve
as margin or collateral or otherwise support the Subsidiary's positions
in Commodities). The Subsidiary's investments will provide the Fund
with exposure to domestic and international markets.\22\
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\22\ See Notice, supra note 3, 81 FR at 14144-45 (listing the
futures contracts in which the Subsidiary will initially consider
investing and providing instrument's trading hours, exchange, and
ticker symbol). The Exchange states that, as: (1) The U.S. and
foreign exchanges list additional contracts; (2) currently listed
contracts on those exchanges gain sufficient liquidity; or (3) other
exchanges list sufficiently liquid contracts, the Adviser and/or any
Sub-Adviser will include those contracts in the list of possible
investments of the Subsidiary. The Exchange further represents that
the Commodity Futures Trading Commission (``CFTC'') has adopted
substantial amendments to CFTC Rule 4.5 relating to the permissible
exemptions and conditions for reliance on exemptions from
registration as a commodity pool operator. As a result of the
instruments that will be indirectly held by the Fund, the Adviser
will register as a commodity pool operator and will also be a member
of the National Futures Association (``NFA''). Any Sub-Adviser will
register as a commodity pool operator or commodity trading adviser,
as required by CFTC regulations. 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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C. Exchange's Description of Investment Restrictions
While the Fund will be permitted to borrow as permitted under the
1940 Act, the Fund's investments will be consistent with the Fund's
investment objective and will not be used to seek performance that is
the multiple or inverse multiple (i.e., 2X and -3X) of an index. In
addition, 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, its agencies or instrumentalities,
or 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 and the Subsidiary will not invest in any non-U.S. equity
securities (other than shares of the Subsidiary). 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. In addition, the Exchange represents that, with respect to the
futures contracts and exchange-traded options on futures
[[Page 25470]]
contracts in which the Subsidiary invests, 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 and options
contracts) of the futures and options contracts held by the Subsidiary
in the aggregate shall consist of instruments whose principal trading
market (a) is not a member of ISG or (b) is a market with which the
Exchange does not have a comprehensive surveillance sharing agreement;
provided that, so long as the Exchange may obtain market surveillance
information with respect to transactions occurring on the Commodity
Exchange pursuant to the ISG memberships of the Chicago Mercantile
Exchange, the Chicago Board of Trade, and the New York Mercantile
Exchange, futures and options contracts whose principal trading market
is the Commodity Exchange will not be subject to the limitation in (a)
above. Investments in non-exchange-cleared swaps (through the
Subsidiary) will not represent more than 20% of the Fund's net assets.
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.\23\ 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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\23\ 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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III. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act \24\ and the rules and regulations thereunder applicable to a
national securities exchange.\25\ In particular, the Commission finds
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\26\ which requires, among other things, that the Exchange's rules
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
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\24\ 15 U.S.C. 78f.
\25\ 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).
\26\ 15 U.S.C. 78f(b)(5).
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The Commission also 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,\27\ which sets forth the finding of Congress 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. An estimated value, defined in Nasdaq Rule 5735(c)(3) as the
``Intraday Indicative Value,'' that reflects an estimated intraday
value of the Fund's portfolio (including the Subsidiary's portfolio),
will be disseminated. The Intraday Indicative Value, available on the
NASDAQ OMX Information LLC proprietary index data service \28\ will be
based upon the current value for the components of the Disclosed
Portfolio 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 (``Disclosed Portfolio,'' as defined in Nasdaq Rule 5735(c)(2))
held by the Fund and the Subsidiary that will form the basis for the
Fund's calculation of NAV at the end of the business day.\30\
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\27\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\28\ 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.
According to the Exchange, GIDS provides investment professionals
with the daily information needed to track or trade Nasdaq indexes,
listed ETFs, or third-party partner indexes and ETFs.
\29\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 4:00 a.m. to
9:30 a.m., E.T.; (2) Regular Market Session from 9:30 a.m. to 4:00
p.m. or 4:15 p.m., E.T.; and (3) Post-Market Session from 4:00 p.m.
or 4:15 p.m. to 8:00 p.m., E.T.).
\30\ The Fund's disclosure of derivative positions in the
Disclosed Portfolio will include information that market
participants can use to value these positions intraday. 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
such as the type of swap), the identity of the security, commodity
or other asset or instrument underlying the holding, if any; for
options, the option strike price; 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.
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The Fund's NAV will be determined as of the close of trading
(normally 4:00 p.m., E.T.) on each day the New York Stock Exchange is
open for business.\31\
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Additionally, 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, which can be accessed by authorized participants and
other investors.\32\ The Fund's Web site will include a form of the
prospectus for the Fund and additional data relating to NAV and other
applicable quantitative information.
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\31\ In determining the value of the assets held by the Fund and
the Subsidiary, the Fund's and the Subsidiary's investments will be
generally valued using market valuations. A market valuation
generally means a valuation (i) obtained from an exchange, a pricing
service, or a major market maker (or dealer), (ii) based on a price
quotation or other equivalent indication of value supplied by an
exchange, a pricing service, or a major market maker (or dealer), or
(iii) based on amortized cost. The Fund and the Subsidiary may use
various pricing services or discontinue the use of any pricing
service. A price obtained from a pricing service based on such
pricing service's valuation matrix may be considered a market
valuation. If available, Short-Term Debt Instruments (other than
certificates of deposits, bank time deposits, and repurchase
agreements), corporate debt obligations, other cash equivalents, and
money market instruments (other than money market mutual funds) 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
instrument is actively traded. The third-party pricing agents may
also value debt instruments 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 instruments. Short-Term Debt Instruments
(other than certificates of deposit, bank time deposits, and
repurchase agreements), corporate debt obligations, other cash
equivalents, and money market instruments (other than money market
mutual funds) 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 instrument will be
valued based on values supplied by independent brokers or by fair
value pricing. Certificates of deposit and bank time deposits will
typically be valued at cost. Repurchase agreements will typically be
valued as follows: Overnight repurchase agreements will be valued at
amortized cost when it represents the best estimate of value. Term
repurchase agreements (i.e., those whose maturity exceeds seven
days) will be valued at the average of the bid quotations obtained
daily from at least two recognized dealers. Futures contracts will
be valued at the settlement price established each day by the board
or exchange on which they are traded. Exchange-traded options will
be valued at the closing price in the market where such contracts
are principally traded. Swaps will be valued based on valuations
provided by independent, third-party pricing agents. Securities of
non-exchange-traded investment companies will be valued at the
investment company's applicable NAV. Equity securities (including
exchange-traded commodity-linked instruments and exchange-traded
investment companies, other than exchange-traded commodity-linked
instruments) 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). For a security that trades on multiple exchanges, the primary
exchange will generally be considered to be the exchange on which
the security generally has the highest volume of trading activity.
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 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. 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. In the
event that current market valuations are not readily available or
such valuations do not reflect current market values, the affected
investments will be valued using fair value pricing pursuant to the
pricing policy and procedures approved by the Board in accordance
with the 1940 Act. The frequency with which the Fund's and the
Subsidiary's investments are valued using fair value pricing will be
primarily a function of the types of securities and other assets in
which they invest pursuant to their respective investment
objectives, strategies, and limitations.
\32\ More specifically, pricing information for exchange-traded
commodity futures contracts, exchange-traded options on futures
contracts, exchange-traded commodity-linked instruments, and
exchange-traded investment companies (other than exchange-traded
commodity-linked instruments) will be available on the exchanges on
which they are traded and through subscription services. Pricing
information for non-exchange-traded U.S. registered open-end
investment companies will be available through the applicable fund's
Web site or major market data vendors. Pricing information for
swaps, corporate debt obligations, money market instruments (other
than money market mutual funds), other cash equivalents, and Short-
Term Debt Instruments will be available through subscription
services and/or broker-dealer firms and/or pricing services.
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.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the issuer of the Shares that the NAV 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 the Shares also will be subject to 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. These may include: (1) The extent to which trading is not
occurring in the securities, Commodities, and 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. Trading in the
Shares also will be subject to 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, non-public information by its employees. The
Exchange also represents that the Adviser is affiliated with a broker-
dealer, and the Adviser has implemented a firewall with respect to its
broker-dealer affiliate regarding access to information concerning the
composition of, and changes to, the portfolio.\33\ Moreover, the
Exchange represents that FINRA, on behalf of the Exchange, will
communicate as needed regarding trading in the Shares and in the
exchange-traded Commodities and exchange-traded investment companies
not included within the definition of ``Commodities'' (such investment
companies, together with exchange-traded Commodities, are referred to
as ``Exchange-Traded Instruments'') held by the Fund and the Subsidiary
with other markets and other entities that are members of the ISG,\34\
and FINRA may obtain trading information regarding trading in the
Shares and in the Exchange-Traded Instruments 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 Instruments 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. Moreover, FINRA,
on behalf of the Exchange,\35\ will be able to access, as needed, trade
information for certain
[[Page 25472]]
fixed income securities held by the Fund reported to FINRA's TRACE.
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\33\ See supra note 7 and accompanying text. 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 any 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.
\34\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio may trade on markets that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.
\35\ According to the Exchange, FINRA surveils trading on the
Exchange pursuant to a regulatory services agreement, and the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
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The Exchange 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. 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) The Exchange represents that its surveillance 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. 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.
(4) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and in the Exchange-Traded Instruments
held by the Fund and the Subsidiary with other markets and other
entities that are members of the ISG and FINRA may obtain trading
information regarding trading in the Shares and in the Exchange-Traded
Instruments 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 Instruments
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. Moreover, 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.
(5) With respect to the futures contracts and exchange-traded
options on futures contracts in which the Subsidiary invests, 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 and options contracts) of the futures and options contracts
held by the Subsidiary in the aggregate shall consist of instruments
whose principal trading market (a) is not a member of ISG or (b) is a
market with which the Exchange does not have a comprehensive
surveillance sharing agreement, provided, that so long as the Exchange
may obtain market surveillance information with respect to transactions
occurring on the Commodity Exchange pursuant to the ISG memberships of
the Chicago Mercantile Exchange, the Chicago Board of Trade and the New
York Mercantile Exchange, futures and options contracts whose principal
trading market is the Commodity Exchange shall not be subject to the
prohibition in (a) above.
(6) 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.
(7) For initial and/or continued listing, the Fund and the
Subsidiary must be in compliance with Rule 10A-3 under the Act.\36\
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\36\ See 17 CFR 240.10A-3.
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(8) 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.
(9) The Fund and the Subsidiary will not invest in any non-U.S.
equity securities (other than shares of the Subsidiary).
(10) The Fund will invest in Commodities through investments in the
Subsidiary and will not invest directly in physical commodities. The
Fund's investment in the Subsidiary may not exceed 25% of the Fund's
total assets.
(11) Investments in non-exchange-cleared swaps (through the
Subsidiary) will not represent more than 20% of the Fund's net assets.
(12) The exchange-traded investment companies and commodity-linked
instruments in which the Fund invests will be listed and traded in the
U.S. on registered exchanges.
(13) The Fund and the Subsidiary will not invest in leveraged or
inverse leveraged (e.g., 2X or -3X) commodity-linked instruments or
securities of investment companies.
(14) At least 75% of corporate debt obligations will have a minimum
principal amount outstanding of $100 million or more.
(15) While the Fund will be permitted to borrow as permitted under
the 1940 Act, the Fund's investments will be consistent with the Fund's
investment objective and will not be used to seek performance that is
the multiple or inverse multiple (i.e., 2X and -3X) of an index.
(16) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
The Exchange represents that all statements and representations
made in this filing regarding (a) the description of the portfolio, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange rules and surveillance procedures shall
constitute continued listing requirements for listing the Shares on the
Exchange. In addition, the issuer has represented to the Exchange that
it will advise the Exchange of any failure by the Fund to comply with
the continued listing requirements, and, pursuant to its obligations
under Section 19(g)(1) of the Act, the Exchange will monitor for
compliance with the continued listing requirements.\37\ If the Fund is
not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures under the Nasdaq 5800
Series.
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\37\ The Commission notes that certain other proposals for the
listing and trading of Managed Fund Shares include a representation
that the exchange will ``surveil'' for compliance with the continued
listing requirements. See, e.g., Securities Exchange Act Release No.
77499 (April 1, 2016), 81 FR 20428 (April 7, 2016) (Notice of Filing
of Amendment No. 2, and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, to List and
Trade Shares of the SPDR DoubleLine Short Duration Total Return
Tactical ETF of the SSgA Active Trust), available at: http://www.sec.gov/rules/sro/bats/2016/34-77499.pdf. In the context of this
representation, it is the Commission's view that ``monitor'' and
``surveil'' both mean ongoing oversight of the Fund's compliance
with the continued listing requirements. Therefore, the Commission
does not view ``monitor'' as a more or less stringent obligation
than ``surveil'' with respect to the continued listing requirements.
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This approval order is based on all of the Exchange's
representations, including those set forth above, in the
[[Page 25473]]
Notice, and in Amendment No. 1 to the proposed rule change. The
Commission notes that a commenter has expressed support for the
proposal.\38\ The Commission further notes that the Fund and the Shares
must comply with the requirements of Nasdaq Rule 5735, including those
set forth in this proposed rule change, as modified by Amendment No. 1
thereto, to be listed and traded on the Exchange on an initial and
continuing basis.
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\38\ See Anonymous Letter, supra note 4.
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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 \39\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\39\ 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,\40\ that the proposed rule change (SR-NASDAQ-2016-030), as
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\40\ 15 U.S.C. 78s(b)(2).
\41\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
Brent J. Fields,
Secretary.
[FR Doc. 2016-09897 Filed 4-27-16; 8:45 am]
BILLING CODE 8011-01-P