[Federal Register Volume 81, Number 167 (Monday, August 29, 2016)]
[Notices]
[Pages 59253-59256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20573]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78642; File No. SR-NASDAQ-2016-071]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change, as Modified by Amendment No. 1, To
List and Trade Shares of the First Trust CEF Income Opportunity ETF and
the First Trust Municipal CEF Income Opportunity ETF
August 23, 2016.
I. Introduction
On May 10, 2016, 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 First Trust CEF Income Opportunity ETF (``CEF
Income Opportunity Fund'') and First Trust Municipal CEF Income
Opportunity ETF (``Municipal CEF Income Opportunity Fund'' and
collectively, ``Funds'') under Nasdaq Rule 5735. On May 20, 2016, the
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ The
Commission published notice of the proposed rule change, as
[[Page 59254]]
modified by Amendment No. 1, in the Federal Register on May 31,
2016.\4\ The Commission received one comment letter on the proposed
rule change.\5\ 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\ Amendment No. 1 is available at https://www.sec.gov/comments/sr-nasdaq-2016-71/nasdaq2016071-2.pdf.
\4\ See Securities Exchange Act Release No. 77895 (May 24,
2016), 81 FR 34407 (NASDAQ-2016-071) (``Notice'').
\5\ See letter from Stephanie Price, dated May 31, 2016. Because
the comment is not directly relevant to the proposed rule change,
the Commission does not address the comment herein.
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II. The Exchange's Description of the Proposal \6\
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\6\ Additional information regarding the Fund, the Shares, and
the Trust (as defined herein), including investment strategies,
investment restrictions, 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, supra note 4, and Registration Statement,
infra note 7.
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The Exchange proposes to list and trade the Shares under Nasdaq
Rule 5735, which governs the listing and trading of Managed Fund Shares
on the Exchange. The Shares will be offered by First Trust Exchange-
Traded Fund VIII (``Trust''), which was established as a Massachusetts
business trust on February 22, 2016.\7\ The investment advisor to the
Funds will be First Trust Advisors L.P. (``Adviser'').\8\ The
Distributor will be the principal underwriter and distributor of the
Shares. The Bank of New York Mellon Corporation will act as the
administrator, accounting agent, custodian and transfer agent to the
Funds.
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\7\ 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 Registration
Statement on Form N-1A for the Trust, dated March 14, 2016 (File
Nos. 333-210186 and 811-23147). In addition, the Exchange states
that the Commission has issued an order, upon which the Trust may
rely, granting certain exemptive relief under the 1940 Act. See
Investment Company Act Release No. 28468 (October 27, 2008) (File
No. 812-13477).
\8\ The Adviser is not a broker-dealer, but it is affiliated
with First Trust Portfolios L.P. (``Distributor''), a broker-dealer,
and has implemented and will maintain a fire wall with respect to
its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to a portfolio. The Funds
do not currently intend to use a sub-adviser. In the event (a) the
Adviser or any sub-adviser registers as a broker-dealer, or becomes
newly affiliated with a broker-dealer, or (b) any new adviser or
sub-adviser is a registered broker-dealer or becomes affiliated with
another broker-dealer, it will implement and will maintain 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 a portfolio and will be
subject to procedures designed to prevent the use and dissemination
of material non-public information regarding such portfolio. In
addition, personnel who make decisions on each Fund's portfolio
composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding
such Fund's portfolio.
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Principal Investments of the Funds
The investment objective of the CEF Income Opportunity Fund will be
to seek to provide current income with a secondary emphasis on total
return. Under normal market conditions,\9\ the CEF Income Opportunity
Fund will seek to achieve its investment objective by investing at
least 80% of its net assets in closed-end funds.\10\
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\9\ The term ``under normal market conditions'' 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.
\10\ The closed-end funds in which each Fund invests (``Closed-
End Funds'') will be registered under the 1940 Act and listed and
traded in the U.S. on registered exchanges.
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The investment objective of the Municipal CEF Income Opportunity
Fund will be to seek to provide current income. Under normal market
conditions, the Municipal CEF Income Opportunity Fund will seek to
achieve its investment objective by investing at least 80% of its net
assets (including investment borrowings) in a portfolio of municipal
closed-end funds.
Non-Principal Investments for Each Fund
While under normal market conditions each Fund will invest at least
80% of its net assets as described above, each Fund may invest (in the
aggregate) up to 20% of its net assets in the following securities and
instruments.
Each Fund may invest in exchange-traded funds (``ETFs'') \11\ and
exchange-traded notes (``ETNs'').\12\
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\11\ ETFs held by either Fund will be listed and traded on a
national securities exchange. Each Fund may invest in inverse ETFs;
neither Fund will invest in leveraged or inverse leveraged (e.g., 2X
or -3X) ETFs. See Notice, supra note 4, 81 FR 34409, n.10.
\12\ The Exchange represents that while the Funds may invest in
inverse ETNs, the Funds will not invest in leveraged or inverse
leveraged (e.g., 2X or -3X) ETNs. See id. at 34409, n.11.
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Each Fund may invest in money market mutual funds that will be
investment companies registered under the 1940 Act.
Each Fund may hold cash or invest in the following short-term debt
instruments: \13\ (1) Fixed rate and floating rate U.S. government
securities, including bills, notes and bonds differing as to maturity
and rates of interest, which are either issued or guaranteed by the
U.S. Treasury or by U.S. government agencies or instrumentalities; (2)
certificates of deposit issued against funds deposited in a bank or
savings and loan association; (3) bankers' acceptances, which are
short-term credit instruments used to finance commercial transactions;
(4) repurchase agreements,\14\ which involve purchases of debt
securities; (5) 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 (6) commercial paper, which is short-
term unsecured promissory notes.\15\
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\13\ The Exchange represents that these short-term debt
instruments will be issued by issuers having a long-term debt rating
of at least BBB-/Baa3 by Standard & Poor's Ratings Services, a
Division of The McGraw-Hill Companies, Inc., Moody's Investors
Service, Inc. or Fitch Ratings and will have a maturity of one year
or less. See id. at 34409, n.12.
\14\ The Exchange states that each Fund intends to enter into
repurchase agreements only with financial institutions and dealers
believed by the Adviser to present minimal credit risks in
accordance with criteria approved by the Board of Trustees of the
Trust. The Adviser will review and monitor the creditworthiness of
such institutions. The 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. See id. at 34409,
n.13.
\15\ The Exchange represents that each Fund may only invest in
commercial paper rated A-1 or higher by S&P Ratings, Prime-1 or
higher by Moody's or F1 or higher by Fitch. See id. at 34409, n.14.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\16\ 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 Exchange Act,\17\ 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 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 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
[[Page 59255]]
Exchange Act,\18\ which sets forth Congress's 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.
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\16\ 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).
\17\ 15 U.S.C. 78f(b)(5).
\18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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The Commission 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. As
stated in the Notice, 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. According to the
Exchange, 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 (``CTA'') plans for the Shares. Quotation and last-
sale information for the Closed-End Funds, ETFs, and ETNs will be
available from the exchanges on which they are traded as well as in
accordance with any applicable CTA plans. Pricing information for
short-term U.S. government securities, commercial paper, bankers'
acceptances, repurchase agreements, bank time deposits, and
certificates of deposit will be available from major broker-dealer
firms and/or major market data vendors or pricing services. Pricing
information for Closed-End Funds, ETFs, and ETNs will be available from
the applicable listing exchange (as indicated above) and from major
market data vendors. Prices for money market mutual funds will be
available through the applicable fund's Web site or from major market
data vendors. In addition, for each Fund, an estimated value, defined
in Exchange Rule 5735(c)(3) as the ``Intraday Indicative Value,'' that
reflects an estimated intraday value of the Fund's Disclosed Portfolio,
will be disseminated. Moreover, the Intraday Indicative Value,
available on the NASDAQ OMX Information LLC proprietary index data
service,\19\ 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.\20\
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\19\ The Exchange states that the NASDAQ OMX Global Index Data
Service (``GIDS'') is the Nasdaq global index data feed service,
offering real-time updates, daily summary messages, and access to
widely followed indexes and Intraday Indicative Values for ETFs. See
Notice, supra note 4, 81 FR at 34411, n.25.
\20\ The Exchange states that premiums and discounts between the
Intraday Indicative Value and the market price may occur, but that
the dissemination of the Intraday Indicative Value, together with
the Disclosed Portfolio, will allow investors to determine the value
of the underlying portfolio of a Fund on a daily basis and will
provide a close estimate of that value throughout the trading day.
See id. at 34411.
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Nasdaq will halt trading in the Shares under the conditions
specified in Nasdaq Rules 4120 and 4121, including the trading pauses
under Nasdaq Rules 4120(a)(11) and (12). Trading may be halted because
of market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable.\21\ Trading in the Shares also
will be subject to Rule 5735(d)(2)(D), which sets forth circumstances
under which trading in the Shares may be halted.\22\
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\21\ These may include: (1) The extent to which trading is not
occurring in the securities and/or the other assets constituting the
Disclosed Portfolio of a Fund; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present.
\22\ 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.
See id. at 34411.
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The Exchange represents that it has a general policy prohibiting
the distribution of material, non-public information by its
employees.\23\ Nasdaq Rule 5735(g) further requires that personnel who
make decisions on the open-end fund's portfolio composition must be
subject to procedures designed to prevent the use and dissemination of
material non-public information regarding the open-end fund's
portfolio. The Exchange states that the Adviser is not a broker-dealer,
but it is affiliated with the Distributor, a broker-dealer, and has
implemented and will maintain a fire wall with respect to its broker-
dealer affiliate regarding access to information concerning the
composition and/or changes to a portfolio. In the event (a) the Adviser
or any sub-adviser registers as a broker-dealer, or becomes newly
affiliated with a broker-dealer, or (b) any new adviser or sub-adviser
is a registered broker-dealer or becomes affiliated with another
broker-dealer, it will implement and will maintain a fire wall with
respect to its relevant personnel or such broker-dealer affiliate, as
applicable, regarding access to information concerning the composition
and/or changes to a portfolio and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding such portfolio. In addition, personnel who make
decisions on each Fund's portfolio composition will be subject to
procedures designed to prevent the use and dissemination of material
non-public information regarding such Fund's portfolio.\24\
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\23\ See id. at 34412.
\24\ See supra, note 8.
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In support of this proposal, the Exchange has made the following
representations:
(1) The Shares will conform to the initial and continued listing
criteria under NASDAQ Rule 5735.\25\
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\25\ See Notice, supra note 4, 81 FR at 34412.
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(2) 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,
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.\26\
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\26\ See id. at 34411-12. 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. See id. at 34412, n.27.
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(3) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and the Closed-End Funds, ETFs, and
ETNs 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 such
securities held by the Funds from such markets and other entities. In
addition, the Exchange may obtain information regarding trading in the
Shares and the Closed-End Funds, ETFs, and ETNs held by the Funds from
markets and other entities that are members of ISG, which includes
securities 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 Funds
reported to FINRA's Trade Reporting and Compliance Engine.\27\
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\27\ See id. at 34412.
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(4) The Closed-End Funds, ETFs, and ETNs held by the Funds will
trade in markets that are members of ISG or are
[[Page 59256]]
parties to a comprehensive surveillance sharing agreement with the
Exchange.\28\
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\28\ See Notice, supra note 4.
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(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 for each Fund will discuss the following: (1) The
procedures for purchases and redemptions of Shares in Creation Units
(and that Shares are not individually redeemable); (2) Nasdaq Rule
2111A, which imposes suitability obligations on Nasdaq members with
respect to recommending transactions in the Shares to customers; (3)
how information regarding the Intraday Indicative Value and the
Disclosed Portfolio is disseminated; (4) 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; (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (6) trading information. The
Information Circular will also discuss any exemptive, no-action and
interpretive relief granted by the Commission from any rules under the
Exchange Act.\29\
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\29\ Additionally, the Information Circular for each Fund will
reference that such Fund is subject to various fees and expenses
described in the Registration Statement. The Information Circular
for each Fund will also disclose the trading hours of the Shares of
such Fund and the applicable NAV Calculation Time for the Shares.
See id.
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(6) For initial and continued listing, each Fund must be in
compliance with Rule 10A-3 under the Exchange Act.\30\
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\30\ 17 CFR 240.10A-3.
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(7) Shares of Closed-End Funds, ETFs, and ETNs held by a Fund will
trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange.
(8) The Funds will not invest in derivative instruments.
(9) While the Funds may invest in inverse ETFs and ETNs, the Funds
will not invest in leveraged or inverse leveraged ETFs or ETNs.\31\
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\31\ See notes 11 and 12, supra.
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(10) Each Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
deemed illiquid by the Adviser. 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 such 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.
(11) 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 34411.
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(12) All statements and representations made in this filing
regarding (a) the description of the portfolios, (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 Funds to comply with the
continued listing requirements, and, pursuant to its obligations under
Section 19(g)(1) of the Exchange Act, the Exchange will monitor for
compliance with the continued listing requirements. If a Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under the Nasdaq 5800 Series.\33\
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\33\ See id. at 34412.
This approval order is based on all of the Exchange's representations,
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including those set forth above and in the Notice.
For the reasons discussed above, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the requirements of the Exchange Act.\34\
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\34\ The Commission notes that the comment letter, supra note 5,
does not raise any specific concerns about whether any aspect of the
proposed rule change is inconsistent with the Exchange Act.
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IV. Conclusion
IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the
Exchange Act,\35\ that the proposed rule change (SR-NASDAQ-2016-071),
as modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20573 Filed 8-26-16; 8:45 am]
BILLING CODE 8011-01-P