[Federal Register Volume 82, Number 102 (Tuesday, May 30, 2017)]
[Notices]
[Pages 24755-24761]
[FR Doc No: 2017-10973]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80745; File No. SR-NASDAQ-2017-033]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendments
No. 1 and 2, To List and Trade Shares of the First Trust California
Municipal High Income ETF

May 23, 2017.

I. Introduction

    On March 24, 2017, 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 First
Trust California Municipal High Income ETF (``Fund'') of First Trust
Exchange-Traded Fund III (``Trust'') under Nasdaq Rule 5735. The
proposed rule change was published for comment in the Federal Register
on April 10, 2017.\3\ On May 12, 2017, the Exchange filed Amendment No.
1 to the proposed rule change.\4\ On May 16, 2017, the Exchange filed
Amendment No. 2 to the proposed rule change.\5\ The Commission has
received no comments on the proposal. The Commission is granting
approval of the proposed rule change, as modified by Amendments No. 1
and 2.
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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. 80369 (April 4,
2017), 82 FR 17314.
    \4\ In Amendment No. 1, which amended and replaced the proposed
rule change in its entirety, the Exchange: (a) Clarified the scope
and definition of Municipal Securities (defined herein) and other
municipal securities in which the Fund may invest; (b) represented
that to the extent the Fund invests in Municipal Securities (as
defined herein) that are asset-backed and mortgage-backed, those
investments will not account, in the aggregate, for more than 20% of
the fixed-income portion of the Fund's portfolio; (c) stated that
the Fund may invest up to 20% of its net assets in the aggregate in
OTC Derivatives (as defined herein) and represented that the Fund
will only enter into transactions in OTC Derivatives with
counterparties that the Adviser reasonably believes are capable of
performing under the applicable contract or agreement; and (d) made
certain technical amendments. Because Amendment No. 1 makes
clarifying changes and does not unique or novel regulatory issues,
it is not subject to notice and comment. Amendment No. 1 to the
proposed rule change is available at: https://www.sec.gov/comments/sr-nasdaq-2017-033/nasdaq2017033-1749423-151718.pdf.
    \5\ In Amendment No. 2, which partially amended the proposed
rule change, as modified by Amendment No. 1, the Exchange clarified
that all statements and representations made in the filing regarding
(a) the description of the portfolio or reference assets, (b)
limitations on portfolio holdings or reference assets, (c)
dissemination and availability of the reference asset or intraday
indicative values, or (d) the applicability of Exchange listing
rules shall constitute continued listing requirements for listing
the Shares on the Exchange. Because Amendment No. 2 does not
materially alter the substance of the proposed rule change or raise
unique or novel regulatory issues, it is not subject to notice and
comment. Amendment No. 2 to the proposed rule change is available
at: https://www.sec.gov/comments/sr-nasdaq-2017-033/nasdaq2017033.htm.
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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 Fund will be an actively-
managed exchange-traded fund (``ETF''). The Trust, which was
established as a Massachusetts business trust on January 9, 2008 and is
registered with the Commission as an investment company, has filed with
the Commission a registration statement on Form N-1A (``Registration
Statement'').\6\ First Trust Advisors L.P. will serve as the investment
adviser (``Adviser'') to the Fund. First Trust Portfolios L.P. will
serve as the principal underwriter and distributor (``Distributor'') of
the Fund's Shares.\7\ Brown Brothers Harriman & Co. will act as the
administrator, accounting agent, custodian, and transfer agent to the
Fund.
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    \6\ See Post-Effective Amendment No. 65 to the Registration
Statement for the Trust, dated March 24, 2017 (File Nos. 333-176976
and 811-22245). The Exchange represents that the Trust has obtained
certain exemptive relief from the Commission under the Investment
Company Act of 1940 (``1940 Act''). See Investment Company Act
Release No. 30029 (April 10, 2002) (File No. 812-13795).
    \7\ The Exchange represents that, while the Adviser is not a
broker dealer, it is affiliated with the Distributor, a broker
dealer. The Exchange states that the Adviser has implemented and
will maintain a fire wall between the Adviser and the Distributor
with respect to access to information concerning the composition of,
and changes to, the Fund's 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 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 of, and/or changes to, the portfolio and will be
subject to procedures designed to prevent the use and dissemination
of material, non-public information regarding such portfolio.
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    The Exchange has made the following representations and statements
in describing the Fund and its 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 Trust, the Fund, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, Fund holdings disclosure policies,
distributions, and taxes, among other information, is included in
the proposed rule change, as modified by Amendments No. 1 and 2, and
the Registration Statement, as applicable. See Amendments No. 1 and
2 and Registration Statement, supra notes 4, 5, and 6, respectively,
and accompanying text.
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A. Exchange's Description of the Fund's Principal Investments

    According to the Exchange, the primary investment objective of the
Fund will be to seek to provide current income that is exempt from
regular federal income taxes and California income taxes, and its
secondary objective will be long-term capital appreciation. Under
normal market conditions,\9\ the Fund will seek to

achieve its investment objectives by investing at least 80% of its net
assets (including investment borrowings) in municipal debt securities
that pay interest that is exempt from regular federal income taxes and
California income taxes (collectively, ``Municipal Securities'').\10\
Municipal Securities will be issued by or on behalf of the State of
California or territories or possessions of the U.S. (including without
limitation Puerto Rico, the U.S. Virgin Islands and Guam), and/or the
political subdivisions, agencies, authorities, and other
instrumentalities of such State, territories, or possessions. Municipal
Securities issued by or on behalf of territories or possessions of the
U.S. and/or the political subdivisions, agencies, authorities, and
other instrumentalities of such territories or possessions
(collectively, ``Territorial Obligations'') will pay interest that is
exempt from regular federal income taxes and California income taxes.
Under normal market conditions, except for the initial invest-up period
and periods of high cash inflows or outflows, the Fund will invest at
least 80% of its net assets in Municipal Securities that are not
Territorial Obligations.
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    \9\ The term ``under normal market conditions'' for purposes of
the filing, includes, but is not limited to, the absence of adverse
market, economic, political or other conditions, including extreme
volatility or trading halts in the fixed income 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. The Exchange
represents that, on a temporary basis, including for defensive
purposes, during the initial invest-up period (for purposes of this
filing, i.e., the six-week period following the commencement of
trading of Shares on the Exchange) and during periods of high cash
inflows or outflows (for purposes of this filing, i.e., rolling
periods of seven calendar days during which inflows or outflows of
cash, in the aggregate, exceed 10% of the Fund's net assets as of
the opening of business on the first day of such periods), the Fund
may depart from its principal investment strategies; for example, it
may hold a higher than normal proportion of its assets in cash.
During such periods, the Fund may not be able to achieve its
investment objectives. According to the Exchange, the Fund may adopt
a defensive strategy when the Adviser believes securities in which
the Fund normally invests have elevated risks due to political or
economic factors and in other extraordinary circumstances.
    \10\ Assuming compliance with the investment requirements and
limitations described herein, the Fund may invest up to 100% of its
net assets in Municipal Securities that pay interest that generates
income subject to the federal alternative minimum tax.
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    The types of Municipal Securities in which the Fund may invest
include municipal lease obligations (and certificates of participation
in such obligations), municipal general obligation bonds, municipal
revenue bonds, municipal notes, municipal cash equivalents, private
activity bonds (including, without limitation, industrial development
bonds), and pre-refunded \11\ and escrowed to maturity bonds. In
addition, Municipal Securities include securities issued by entities
(referred to as ``Municipal Entities'') whose underlying assets are
municipal bonds (i.e., tender option bond trusts and custodial receipts
trusts).
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    \11\ A pre-refunded municipal bond is a municipal bond that has
been refunded to a call date on or before the final maturity of
principal and remains outstanding in the municipal market. The
payment of principal and interest of the pre-refunded municipal
bonds held by the Fund will be funded from securities in a
designated escrow account that holds U.S. Treasury securities or
other obligations of the U.S. government (including its agencies and
instrumentalities). As the payment of principal and interest is
generated from securities held in a designated escrow account, the
pledge of the municipality has been fulfilled and the original
pledge of revenue by the municipality is no longer in place. The
escrow account securities pledged to pay the principal and interest
of the pre-refunded municipal bond do not guarantee the price
movement of the bond before maturity. Investment in pre-refunded
municipal bonds held by the Fund may subject the Fund to interest
rate risk, market risk, and credit risk. In addition, while a
secondary market exists for pre-refunded municipal bonds, if the
Fund sells pre-refunded municipal bonds prior to maturity, the price
received may be more or less than the original cost, depending on
market conditions at the time of sale.
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    The Fund may invest in Municipal Securities of any maturity.
However, under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the weighted
average maturity of the Fund will be less than or equal to 14 years.
    Under normal market conditions, except for the initial invest-up
period and periods of high cash inflows or outflows, the Fund will
invest at least 50% of its net assets in ``investment grade Municipal
Securities,'' which are Municipal Securities that are, at the time of
investment, rated investment grade (i.e., rated Baa3/BBB- or above) by
at least one nationally recognized statistical rating organization
(``NRSRO'') rating such securities (or Municipal Securities that are
unrated and determined by the Adviser to be of comparable quality) \12\
(``Investment Grade Requirement''). The Fund will consider pre-refunded
or escrowed to maturity bonds, regardless of rating, to be investment
grade Municipal Securities. Under normal market conditions, except for
the initial invest-up period and periods of high cash inflows or
outflows, the Fund will invest no more than 50% of its net assets in
Municipal Securities that are, at the time of investment, not
investment grade Municipal Securities (commonly referred to as ``high
yield'' or ``junk'' bonds).\13\ If, subsequent to purchase by the Fund,
a Municipal Security held by the Fund experiences a decrease in credit
quality and is no longer an investment grade Municipal Security, the
Fund may continue to hold the Municipal Security, and it will not cause
the Fund to violate the Investment Grade Requirement; however, the
Municipal Security will be taken into account for purposes of
determining whether purchases of additional Municipal Securities will
cause the Fund to violate the Investment Grade Requirement.
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    \12\ Comparable quality of unrated Municipal Securities will be
determined by the Adviser based on fundamental credit analysis of
the unrated security and comparable rated securities. On a best
efforts basis, the Adviser will attempt to make a rating
determination based on publicly available data. In making a
``comparable quality'' determination, the Adviser may consider, for
example, whether the issuer of the security has issued other rated
securities, the nature and provisions of the relevant security,
whether the obligations under the relevant security are guaranteed
by another entity and the rating of such guarantor (if any),
relevant cash flows, macroeconomic analysis, and/or sector or
industry analysis.
    \13\ These Municipal Securities may include Municipal Securities
that are currently in default and not expected to pay the current
coupon (``Distressed Municipal Securities''). The Fund may invest up
to 10% of its net assets in Distressed Municipal Securities. If,
subsequent to purchase by the Fund, a Municipal Security held by the
Fund becomes a Distressed Municipal Security, the Fund may continue
to hold the Distressed Municipal Security, and it will not cause the
Fund to violate the 10% limitation; however, the Distressed
Municipal Security will be taken into account for purposes of
determining whether purchases of additional Municipal Securities
will cause the Fund to violate such limitation.
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    Certain representations included in this filing, described below,
will meet or exceed similar requirements set forth in the generic
listing standards for actively-managed ETFs (``Generic Listing
Standards''). It is not anticipated that the Fund will meet the
requirement that components that in the aggregate account for at least
75% of the fixed income weight of the portfolio each have a minimum
original principal amount outstanding of $100 million or more.\14\ In
general terms, as described above, the Fund will operate as an
actively-managed ETF that normally invests in a portfolio of Municipal
Securities and will be subject to the Investment Grade Requirement. The
Adviser notes that debt issuance sizes for municipal obligations are
generally smaller than for corporate obligations. Furthermore, as a
general matter, municipal borrowers in certain industries with
municipal obligations rated in the ``A'' and ``BBB'' categories (in
which the Fund currently intends to significantly invest) \15\ tend to
have less

outstanding debt than municipal borrowers in other municipal
industries.
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    \14\ See Nasdaq Rule 5735(b)(1)(B)(i).
    \15\ These industries include charter schools, senior living
facilities (i.e., continuing care retirement communities), and
special tax districts, among others. See infra note 27 and
accompanying text (providing additional information regarding the
Fund's exposure to different industries). In the case of a municipal
conduit financing (in general terms, the issuance of municipal
securities by an issuer to finance a project to be used primarily by
a third party (``conduit borrower'')), the ``borrower'' is the
conduit borrower (i.e., the party on which a bondholder must rely
for repayment). In the case of other municipal financings, the
``borrower'' is the issuer of the municipal securities.
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    Therefore, under normal market conditions, except for the initial
invest-up period and periods of high cash inflows or outflows, at least
40% (based on dollar amount invested) of the Municipal Securities in
which the Fund invests \16\ will be issued by issuers with total
outstanding debt issuances that, in the aggregate, have a minimum
amount of municipal debt outstanding at the time of purchase of $50
million or more (``40/50 Requirement''). The Adviser believes that the
40/50 Requirement is appropriate in light of the Fund's investment
objectives and the manner in which the Fund intends to pursue them.
Given the expected availability of Municipal Securities that will
satisfy the Fund's investment parameters and the debt issuance profiles
of the corresponding issuers and borrowers, the 40/50 Requirement
should both provide the Fund with flexibility to construct its
portfolio and, when combined with the other representations in this
filing (including certain representations set forth below pertaining to
fixed income securities weightings and number of non-affiliated issuers
that are based on, but more stringent than, the Generic Listing
Standards), should support the potential for diversity and liquidity,
thereby mitigating the Commission's concerns about manipulation.
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    \16\ For the avoidance of doubt, in the case of Municipal
Securities that are issued by Municipal Entities, the underlying
municipal bonds will be taken into account.
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    Under normal market conditions, except for the initial invest-up
period and periods of high cash inflows or outflows, no component fixed
income security (excluding the U.S. government securities described in
``Other Investments'' below) will represent more than 15% of the Fund's
net assets, and the five most heavily weighted component fixed income
securities in the Fund's portfolio (excluding U.S. government
securities) will not, in the aggregate, account for more than 25% of
the Fund's net assets.\17\ Further, under normal market conditions,
except for the initial invest-up period and periods of high cash
inflows or outflows, the Fund's portfolio of Municipal Securities will
include securities from a minimum of 30 non-affiliated issuers.\18\
Moreover, under normal market conditions, except for the initial
invest-up period and periods of high cash inflows or outflows,
component securities that in the aggregate account for at least 90% of
the weight of the Fund's portfolio of Municipal Securities will be
exempted securities as defined in Section 3(a)(12) of the Act.\19\
Additionally, to the extent the Fund invests in Municipal Securities
that are mortgage-backed or asset-backed securities, such investments
will not account, in the aggregate, for more than 20% of the weight of
the fixed income portion of the Fund's portfolio.\20\
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    \17\ See the Generic Listing Standards requirement set forth in
Nasdaq Rule 5735(b)(1)(B)(ii), which provides that that no component
fixed income security (excluding U.S. Treasury securities and
government-sponsored entity (``GSE'') securities) may represent more
than 30% of the fixed income weight of the portfolio, and that the
five most heavily weighted component fixed income securities in the
portfolio (excluding U.S. Treasury securities and GSE securities)
may not in the aggregate account for more than 65% of the fixed
income weight of the portfolio. In the case of Municipal Securities
that are issued by Municipal Entities, the underlying municipal
bonds will be taken into account.
    \18\ See the Generic Listing Standards requirement set forth in
Nasdaq Rule 5735(b)(1)(B)(iii), which provides that generally an
underlying portfolio (excluding exempted securities) that includes
fixed income securities must include a minimum of 13 non-affiliated
issuers. In the case of Municipal Securities that are issued by
Municipal Entities, the underlying municipal bonds will be taken
into account. Additionally, for purposes of this restriction, each
separate political subdivision, agency, authority, or
instrumentality of the State of California, and each guarantor, if
any, will be treated as separate, non-affiliated issuers of
Municipal Securities.
    \19\ See the Generic Listing Standards requirement set forth in
Nasdaq Rule 5735(b)(1)(B)(iv)(d). For the avoidance of doubt, in the
case of Municipal Securities that are issued by Municipal Entities,
the underlying municipal bonds will be taken into account.
    \20\ See the Generic Listing Standards requirement set forth in
Nasdaq Rule 5735(b)(1)(B)(v).
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B. Exchange's Description of the Fund's Other Investments

    The Fund may invest up to an aggregate of 20% of its net assets in
the securities and other instruments (including cash) described in this
section.
    The Fund may invest in the short-term debt instruments described
below, money market funds and other cash equivalents, and taxable
municipal securities and other municipal securities that are not
Municipal Securities, or it may hold cash.
    Short-term debt instruments, which do not include Municipal
Securities, are issued by issuers having a long-term debt rating of at
least A-/A3 (as applicable) by S&P Global Ratings (``S&P''), Moody's
Investors Service, Inc. (``Moody's'') or Fitch Ratings (``Fitch'') and
have a maturity of one year or less. The Fund may invest in the
following short-term debt instruments: (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,\21\ 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.\22\
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    \21\ The Fund intends to enter into repurchase agreements only
with financial institutions and dealers believed by the Adviser to
present minimal credit risks in accordance with criteria approved by
the 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.
    \22\ The Fund may only invest in commercial paper rated A-3 or
higher by S&P, Prime-3 or higher by Moody's, or F3 or higher by
Fitch.
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    The Fund may (i) invest in the securities of other investment
companies registered under the 1940 Act, including money market funds,
ETFs,\23\ open-end funds (other than money market funds and other
ETFs), and closed-end funds and (ii) acquire short positions in the
securities of the foregoing investment companies.
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    \23\ An ETF is an investment company registered under the 1940
Act that holds a portfolio of securities. ETFs included in the Fund
will be listed and traded in the U.S. on one or more registered
exchanges. The Fund may invest in the securities of certain ETFs in
excess of the limits imposed under the 1940 Act pursuant to
exemptive orders obtained by such ETFs and their sponsors from the
Commission. In addition, the Fund may invest in the securities of
certain other investment companies in excess of the limits imposed
under the 1940 Act pursuant to an exemptive order that the Trust has
obtained from the Commission. See Investment Company Act Release No.
30377 (February 5, 2013) (File No. 812-13895). The ETFs in which the
Fund may invest include Index Fund Shares (as described in Nasdaq
Rule 5705), Portfolio Depository Receipts (as described in Nasdaq
Rule 5705), and Managed Fund Shares (as described in Nasdaq Rule
5735). While the Fund may invest in inverse ETFs, the Fund will not
invest in leveraged or inverse leveraged (e.g., 2X or -3X) ETFs.
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    The Fund may (i) invest in exchange-listed options on U.S. Treasury
securities, exchange-listed options on U.S. Treasury futures contracts,
and exchange-listed U.S. Treasury futures contracts (collectively,
``Listed Derivatives'') and (ii) acquire short positions in the Listed
Derivatives. Transactions in the Listed Derivatives may allow the Fund
to obtain net long

or short exposures to selected interest rates. The Listed Derivatives
may also be used to hedge risks, including interest rate risks and
credit risks, associated with the Fund's portfolio investments. In
addition, to hedge interest rate risks associated with the Fund's
portfolio investments, the Fund may invest in over-the-counter
(``OTC'') forward contracts and OTC swaps (collectively, ``OTC
Derivatives'').\24\ The Fund will only enter into transactions in OTC
Derivatives with counterparties that the Adviser reasonably believes
are capable of performing under the applicable contract or
agreement.\25\ The Fund's investments in derivative instruments will be
consistent with the Fund's investment objectives and the 1940 Act and
will not be used to seek to achieve a multiple or inverse multiple of
the Fund's broad-based securities market index (as defined in Form N-
1A).
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    \24\ On both an initial and continuing basis, no more than 20%
of the assets in the Fund's portfolio will be invested in the OTC
Derivatives and, for purposes of calculating this limitation, the
Fund's investment in the OTC Derivatives will be calculated as the
aggregate gross notional value of the OTC Derivatives.
    \25\ The Fund 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 will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser's analysis
will evaluate each approved counterparty using various methods of
analysis and may consider the Adviser's past experience with the
counterparty, its known disciplinary history and its share of market
participation.
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C. Exchange's Description of the Fund's Investment Restrictions

    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 Rule 144A securities deemed illiquid by the Adviser.\26\ 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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    \26\ 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 in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
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    The Fund may not invest 25% or more of the value of its total
assets in securities of issuers in any one industry. This restriction
does not apply to (a) municipal securities issued by governments or
political subdivisions of governments, (b) obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
or (c) securities of other investment companies. In addition, under
normal market conditions, except for the initial invest-up period and
periods of high cash inflows or outflows, the Fund's investments in
Municipal Securities will provide exposure (based on dollar amount
invested) to at least 10 different industries \27\ (with no more than
25% of the value of the Fund's net assets comprised of Municipal
Securities that provide exposure to any single industry).\28\
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    \27\ The municipal industry classification system used by the
Fund will divide the municipal securities universe into distinct
categories that are intended to reflect either the use of proceeds
generated by particular subsets of municipal securities or the
collateral/sources of repayment securing/backing such municipal
securities. For example, municipal bonds associated with the airport
industry are issued to construct or expand an airport and/or related
facilities and are secured by revenues generated from the use of the
airport.
    \28\ For the avoidance of doubt, in the case of Municipal
Securities that are issued by Municipal Entities, the underlying
municipal bonds will be taken into account.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's
proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\29\ In
particular, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\30\ 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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    \29\ 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).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Act,\31\ 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 (``CTA'') plans for the Shares. Quotation and last-
sale information for exchange-listed equity securities (including other
ETFs and closed-end funds) will be available from the exchanges on
which they are traded as well as in accordance with any applicable CTA
plans. Quotation and last-sale information for U.S. exchange-listed
options will be available via the Options Price Reporting Authority.
One source of price information for Municipal Securities and taxable
and other municipal securities will be the Electronic Municipal Market
Access (``EMMA'') of the Municipal Securities Rulemaking Board
(``MSRB'').\32\ Additionally, the MSRB offers trade data subscription
services that permit subscribers to obtain same-day pricing information
about municipal securities transactions. Moreover, pricing information
for Municipal Securities, as well as for taxable municipal securities
and other municipal securities, Short-Term Debt Instruments (including
short-term U.S. government securities, commercial paper, and bankers'
acceptances), repurchase agreements and OTC Derivatives (including
forward contracts and swaps) will be available from major broker-dealer
firms and/or major market data vendors and/or Pricing Services. Pricing
information for Listed Derivatives (including options on U.S. Treasury
securities, options on U.S. Treasury futures contracts, and U.S.
Treasury futures contracts), ETFs and closed-end funds will be
available from the applicable listing exchange and from major market
data vendors. Money market funds and other open-end funds (excluding
ETFs) are typically priced once each business day and their prices will
be available through the applicable fund's Web site or from major
market data vendors.
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    \31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \32\ Information available on EMMA includes next-day information
regarding municipal securities transactions and par amounts traded.
In addition, a source of price information for certain taxable
municipal securities is the Trade Reporting and Compliance Engine
(``TRACE'') of the Financial Industry Regulatory Authority
(``FINRA'').
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    The Intraday Indicative Value, available on the NASDAQ OMX
Information LLC proprietary index data

service,\33\ will be based upon the current value for the components of
the Disclosed Portfolio (defined below) 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.\34\ 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 and other assets (``Disclosed Portfolio,'' as defined in
Nasdaq Rule 5735(c)(2)) \35\ held by the Fund that will form the basis
for the Fund's calculation of NAV at the end of the business day.\36\
The Fund's Web site, which will be publicly available prior to the
public offering of Shares, will include a form of the prospectus for
the Fund and additional data relating to NAV and other applicable
quantitative information that may be downloaded.
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    \33\ Currently, 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. GIDS
provides investment professionals with the daily information needed
to track or trade Nasdaq indexes, listed ETFs, or third-party
partner indexes and ETFs.
    \34\ See Nasdaq Rule 4120(b)(4) (describing the trading sessions
on the Exchange).
    \35\ 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). 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.
    \36\ In addition to disclosing the identities and quantities of
the portfolio of securities and other assets in the Disclosed
Portfolio, the Fund also will disclose on a daily basis on its Web
site the following information, 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); with respect to holdings in derivatives, the
identity of the security, index or other asset upon which the
derivative is based; 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 information will be publicly available at no charge. The
Fund's NAV will be determined as of the close of regular trading on
the New York Stock Exchange (``NYSE'') on each day the NYSE is open
for trading.
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    Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. The Fund's disclosure of derivative positions in
the Disclosed Portfolio will include sufficient information for market
participants to use to value these positions intraday. Additionally,
FINRA, on behalf of the Exchange, will communicate as needed regarding
trading in the Shares and the exchange-listed securities and
instruments held by the Fund (including closed-end funds, ETFs, and
Listed Derivatives) with other markets and other entities that are
members of the Intermarket Surveillance Group (``ISG''),\37\ and FINRA
may obtain trading information regarding trading in the Shares and such
exchange-listed securities and instruments held by the Fund from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares and the exchange-listed
securities and instruments held by the Fund 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.\38\
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    \37\ 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.
    \38\ For Municipal Securities, trade information can generally
be found on the MSRB's EMMA.
---------------------------------------------------------------------------

    The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily, and that
the NAV and the Disclosed Portfolio will be made available to all
market participants at the same time. Nasdaq will halt trading in the
Shares under the conditions specified in Nasdaq Rules 4120 and 4121,
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12).
In addition, 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 and/or the other assets constituting the
Disclosed Portfolio of the Fund; 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.
Further, the Commission notes that the Reporting Authority \39\ that
provides the Disclosed Portfolio must implement and maintain, or be
subject to, procedures designed to prevent the use and dissemination of
material, non-public information regarding the actual components of the
portfolio.\40\ In addition, the Exchange states that the Adviser is not
a broker-dealer, but it is affiliated with the Distributor, a broker-
dealer, and is required to implement and maintain a ``fire wall'' with
respect to such broker-dealer affiliate regarding access to information
concerning the composition of, and/or changes to, the Fund's
portfolio.\41\ Moreover, Nasdaq Rule 5735(g) 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 Fund's portfolio.
---------------------------------------------------------------------------

    \39\ Nasdaq Rule 5735(c)(4) defines ``Reporting Authority.''
    \40\ See Nasdaq Rule 5735(d)(2)(B)(ii).
    \41\ See supra note 7. The Exchange states an investment adviser
to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and its related personnel are subject to the provisions of
Rule 204A-1 under the Advisers Act relating to codes of ethics. This
Rule requires investment advisers to adopt a code of ethics that
reflects the fiduciary nature of the relationship to clients as well
as compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
the Advisers Act and Rule 204A-1 thereunder. 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.
---------------------------------------------------------------------------

    The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by both the
Exchange and FINRA, on behalf of the Exchange, which are designed to
detect violations

of Exchange rules and applicable federal securities laws.\42\ The
Exchange further represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions
and to deter and detect violations of Exchange rules and applicable
federal securities laws. Moreover, the Exchange states that, prior to
the commencement of trading, it will inform its members in an
Information Circular of the special characteristics and risks
associated with trading the Shares.
---------------------------------------------------------------------------

    \42\ The Exchange states that 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.
---------------------------------------------------------------------------

    The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including the following:
    (1) The Shares will be subject to Rule 5735, which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares.
    (2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
    (3) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares and the exchange-listed securities and
instruments held by the Fund (including closed-end funds, ETFs, and
Listed Derivatives) with other markets and other entities that are
members of ISG, and FINRA may obtain trading information regarding
trading in the Shares and such exchange-listed securities and
instruments held by the Fund from such markets and other entities. In
addition, the Exchange may obtain information regarding trading in the
Shares and the exchange-listed securities and instruments held by the
Fund 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, and the MSRB's EMMA will be a source of
price information for Municipal Securities and taxable and other
municipal securities.
    (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 information regarding
the Intraday Indicative Value and the Disclosed Portfolio is
disseminated; (d) the risks involved in trading the Shares during the
Pre-Market and Post-Market Sessions when an updated Intraday Indicative
Value will not be calculated or publicly disseminated; (e) the
requirement that members deliver a prospectus to investors purchasing
newly issued Shares prior to or concurrently with the confirmation of a
transaction; and (f) trading information.
    (5) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Act.\43\
---------------------------------------------------------------------------

    \43\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    (6) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the Fund will
invest at least 80% of its net assets in Municipal Securities that are
not Territorial Obligations.
    (7) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the Fund will
invest at least 50% of its net assets in investment grade Municipal
Securities, and the Fund will invest no more than 50% of its net assets
in Municipal Securities that are, at the time of investment, not
investment grade Municipal Securities.
    (8) The Fund may not invest more than 10% of its net assets in
Distressed Municipal Securities.
    (9) To the extent the Fund invests in Municipal Securities that are
mortgage-backed or asset-backed securities, such investments will not
account, in the aggregate, for more than 20% of the weight of the fixed
income portion of the Fund's portfolio.
    (10) At least 40% (based on dollar amount invested) of the
Municipal Securities in which the Fund invests will be issued by
issuers with total outstanding debt issuances that, in the aggregate,
have a minimum amount of municipal debt outstanding at the time of
purchase of $50 million or more.
    (11) On both an initial and continuing basis, no more than 20% of
the assets in the Fund's portfolio will be invested in the OTC
Derivatives and, for purposes of calculating this limitation, the
Fund's investment in the OTC Derivatives will be calculated as the
aggregate gross notional value of the OTC Derivatives. The Fund will
only enter into transactions in OTC Derivatives with counterparties
that the Adviser reasonably believes are capable of performing under
the applicable contract or agreement.
    (12) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows, the Fund's
investments in Municipal Securities will provide exposure (based on
dollar amount invested) to at least 10 different industries (with no
more than 25% of the value of the Fund's net assets comprised of
Municipal Securities that provide exposure to any single industry).
    (13) ETFs included in the Fund will be listed and traded in the
U.S. on one or more registered exchanges. While the Fund may invest in
inverse ETFs, the Fund will not invest in leveraged or inverse
leveraged (e.g., 2X or 3X) ETFs.
    (14) Under normal market conditions, except for the initial invest-
up period and periods of high cash inflows or outflows: No component
fixed-income security (excluding the U.S. government securities
described in ``Other Investments'') will represent more than 15% of the
Fund's net assets, and the five most heavily weighted component fixed
income securities in the Fund's portfolio (excluding U.S. government
securities) will not, in the aggregate, account for more than 25% of
the Fund's net assets. Further, under normal market conditions, except
for the initial invest-up period and periods of high cash inflows or
outflows, the Fund's portfolio of Municipal Securities will include
securities from a minimum of 30 non-affiliated issuers. Moreover, under
normal market conditions, except for the initial invest-up period and
periods of high cash inflows or outflows, component securities that in
the aggregate account for at least 90% of the weight of the Fund's
portfolio of Municipal Securities will be exempted securities as
defined in Section 3(a)(12) of the Act.
    (15) 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 Rule 144A securities deemed illiquid by the Adviser. 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.
    (16) The Fund's investments in derivative instruments will be
consistent with the Fund's investment objectives and the 1940 Act and
will not be used to seek to achieve a multiple or inverse multiple of
the Fund's broad-based securities market index (as defined in Form N-
1A).
    (17) 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 the filing regarding (a) the description of the portfolio or
reference assets, (b) limitations on portfolio holdings or reference
assets, (c) dissemination and availability of the reference asset or
intraday indicative values, or (d) the applicability of Exchange
listing rules 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.\44\ If the Fund is not in compliance with the applicable
listing requirements, the Exchange will commence delisting procedures
under the Nasdaq 5800 Series.
---------------------------------------------------------------------------

    \44\ 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) (SR-BATS-2016-
04). In the context of this representation, it is the Commission's
view that ``monitor'' and ``surveil'' both mean ongoing oversight of
a 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.
---------------------------------------------------------------------------

    This order is based on all of the Exchange's representations,
including those set forth above and in Amendments No. 1 and 2. The
Commission notes that the Fund and the Shares must comply with the
requirements of Nasdaq Rule 5735 for the Shares to be listed and traded
on the Exchange.
    For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendments No. 1 and 2, is consistent with
Section 6(b)(5) of the Act \45\ and Section 11A(a)(1)(C)(iii) of the
Act \46\ and the rules and regulations thereunder applicable to a
national securities exchange.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78f(b)(5).
    \46\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\47\ that the proposed rule change (SR-NASDAQ-2017-033), as
modified by Amendments No. 1 and 2, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \47\ Id.
    \48\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10973 Filed 5-26-17; 8:45 am]
BILLING CODE 8011-01-P


P-19-0096 Sanitized Support Documents Index:
 P-19-0096 Sanitized Premanufacture Notice (linked)
 P-19-0096 Sanitized Determination Document (linked)
 P-19-0096 Sanitized CHEM Report (attached)
 P-19-0096 Sanitized ECO Report (attached)
 P-19-0096 Sanitized ENG Report (attached)
 P-19-0096 Sanitized EXP Report (attached)
 P-19-0096 Sanitized Fate Report (attached)
 P-19-0096 Sanitized HLTH Report_POST-FOCUS FINAL (attached)