[Federal Register Volume 81, Number 17 (Wednesday, January 27, 2016)]
[Notices]
[Pages 4712-4721]
[FR Doc No: 2016-01542]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76944; File No. SR-NASDAQ-2016-002]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To List and Trade Shares of
the First Trust Municipal High Income ETF of First Trust Exchange-
Traded Fund III

January 21, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 6, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in in Items I
and II below, which Items have been prepared by Nasdaq. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    Nasdaq proposes to list and trade the shares of the First Trust
Municipal High Income ETF (the ``Fund'') of First Trust Exchange-Traded
Fund III (the ``Trust'') under Nasdaq Rule 5735 (``Managed Fund
Shares'').\3\ The shares of the Fund are collectively referred to
herein as the ``Shares.''
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    \3\ The Commission approved Nasdaq Rule 5735 in Securities
Exchange Act Release No. 57962 (June 13, 2008), 73 FR 35175 (June
20, 2008) (SR- NASDAQ-2008-039). There are already multiple
actively-managed funds listed on the Exchange; see, e.g., Securities
Exchange Act Release Nos. 71913 (April 9, 2014), 79 FR 21333 (April
15, 2014) (SR-NASDAQ-2014-019) (order approving listing and trading
of First Trust Managed Municipal ETF); 69464 (April 26, 2013), 78 FR
25774 (May 2, 2013) (SR-NASDAQ-2013-036) (order approving listing
and trading of First Trust Senior Loan Fund); 66489 (February 29,
2012), 77 FR 13379 (March 6, 2012) (SR-NASDAQ-2012-004) (order
approving listing and trading of WisdomTree Emerging Markets
Corporate Bond Fund). The Exchange believes the proposed rule change
raises no significant issues not previously addressed in those prior
Commission orders.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements
concerning the purpose of, and basis for, the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    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 \4\ on the Exchange. The Fund will be an actively-
managed exchange-traded fund (``ETF''). The Shares will be offered by
the Trust, which was established as a Massachusetts business trust on
January 9, 2008.\5\ 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.\6\ The Fund will be a series of the Trust. The Fund intends
to qualify each year as a regulated investment company (``RIC'') under
Subchapter M of the Internal Revenue Code of 1986, as amended.
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    \4\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') organized
as an open-end investment company or similar entity that invests in
a portfolio of securities selected by its investment adviser
consistent with its investment objectives and policies. In contrast,
an open-end investment company that issues Index Fund Shares, listed
and traded on the Exchange under Nasdaq Rule 5705, seeks to provide
investment results that correspond generally to the price and yield
performance of a specific foreign or domestic stock index, fixed
income securities index or combination thereof.
    \5\ 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. 30029 (April 10, 2012) (File No.
812-13795) (the ``Exemptive Relief''). In addition, on December 6,
2012, the staff of the Commission's Division of Investment
Management (``Division'') issued a no-action letter (``No-Action
Letter'') relating to the use of derivatives by actively-managed
ETFs. See No-Action Letter dated December 6, 2012 from Elizabeth G.
Osterman, Associate Director, Office of Exemptive Applications,
Division of Investment Management. The No-Action Letter stated that
the Division would not recommend enforcement action to the
Commission under applicable provisions of and rules under the 1940
Act if actively-managed ETFs operating in reliance on specified
orders (which include the Exemptive Relief) invest in options
contracts, futures contracts or swap agreements provided that they
comply with certain representations stated in the No-Action Letter.
    \6\ See Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A for the Trust, dated August 31, 2015 (File
Nos. 333-176976 and 811-22245). The descriptions of the Fund and the
Shares contained herein are based, in part, on information in the
Registration Statement.
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    First Trust Advisors L.P. will be the investment adviser
(``Adviser'') to the Fund. First Trust Portfolios L.P. (the
``Distributor'') will be the principal underwriter and distributor of
the Fund's Shares. Brown Brothers Harriman & Co. (``BBH'') will act as
the administrator, accounting agent, custodian and transfer agent to
the Fund.
    Paragraph (g) of Rule 5735 provides that if the investment adviser
to the investment company issuing Managed Fund Shares is affiliated
with a broker-dealer, such investment adviser shall erect a ``fire
wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition and/or
changes to such investment company portfolio.\7\ In addition, paragraph
(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. Rule 5735(g) is similar to
Nasdaq Rule 5705(b)(5)(A)(i); however, paragraph (g) in connection with
the establishment of a ``fire wall'' between the investment adviser and
the broker-dealer reflects the applicable open-end fund's portfolio,
not an underlying benchmark index, as is the case with index-based
funds. The Adviser is not a broker-dealer, but it is affiliated with
the Distributor, a broker-dealer, and has implemented a fire wall with
respect to its broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the portfolio. In
addition, personnel who make decisions on the Fund's portfolio
composition will be subject to procedures designed to prevent the use
and dissemination of material non-public information regarding 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 a fire wall with respect to its relevant personnel and/or
such broker-dealer affiliate, as applicable, regarding access to
information concerning the composition and/or changes to the portfolio
and will be subject to procedures designed to prevent the use and
dissemination of material non-public information regarding such
portfolio. The Fund currently does not intend to use a sub-adviser.
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    \7\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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First Trust Municipal High Income ETF
Principal Investments
    The primary investment objective of the Fund will be to generate
current income that is exempt from regular federal income taxes and its
secondary objective will be long-term capital appreciation. Under
normal market conditions,\8\ 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
(collectively, ``Municipal Securities'').\9\ Municipal Securities are
generally issued by or on behalf of states, territories or possessions
of the U.S. and the District of Columbia and their political
subdivisions, agencies, authorities and other instrumentalities. 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 \10\ and escrowed to maturity bonds. In addition,
Municipal Securities include securities issued by entities whose
underlying assets are municipal bonds (i.e., tender option bond (TOB)
trusts and custodial receipts trusts). The Fund may invest in Municipal
Securities of any maturity.
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    \8\ The term ``under normal market conditions'' as used herein
includes, but is not limited to, the absence of adverse market,
economic, political or other conditions, including extreme
volatility or trading halts in the 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. On a temporary
basis, including for defensive purposes, during the initial invest-
up period and during periods of high cash inflows or outflows, 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. 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.
    \9\ 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.
    \10\ 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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    Under normal market conditions, the Fund will invest at least 65%
of its net assets in Municipal Securities that are, at the time of
investment, rated below investment grade (i.e., not 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) \11\ (commonly

referred to as ``high yield'' or ``junk'' bonds); \12\ however, the
Fund will consider pre-refunded or escrowed to maturity bonds,
regardless of rating, to be investment grade securities. The Fund may
invest up to 35% of its net assets in Municipal Securities that are, at
the time of investment, rated investment grade (i.e., rated Baa3/BBB-
or above) by each NRSRO rating such securities (or Municipal Securities
that are unrated and determined by the Adviser to be of comparable
quality). If, subsequent to purchase by the Fund, a Municipal Security
held by the Fund experiences an improvement in credit quality and
becomes investment grade, the Fund may continue to hold the Municipal
Security and it will not cause the Fund to violate the 35% investment
limitation; 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 such limitation.
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    \11\ 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.
    \12\ The Municipal Securities in which the Fund will invest to
satisfy this 65% investment requirement 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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    The Fund will be actively managed and will not be tied to an index.
However, the Fund believes that, under normal market conditions, on a
continuous basis determined at the time of purchase, its portfolio of
Municipal Securities \13\ will generally meet, as applicable, all
except for one of the criteria for non-actively managed, index-based,
fixed income ETFs contained in Nasdaq Rule 5705(b)(4)(A), as described
below.
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    \13\ For purposes of this statement and the discussion of the
requirements of Nasdaq Rule 5705(b)(4)(A) below, with respect to
Municipal Securities that are issued by entities whose underlying
assets are municipal bonds, the underlying municipal bonds, rather
than the securities issued by such entities, will be taken into
account.
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    Nasdaq Rule 5705(b)(4)(A)(i) requires that the index or portfolio
consist of ``Fixed Income Securities.'' Since ``Fixed Income
Securities'' include, among other things, municipal securities, the
Fund believes that its portfolio of Municipal Securities will satisfy
this requirement under normal market conditions.
    Nasdaq Rule 5705(b)(4)(A)(iii) applies to convertible securities
and, therefore, since Municipal Securities do not include convertible
securities, this requirement is not applicable.
    Nasdaq Rule 5705(b)(4)(A)(iv) requires that no component fixed
income security (excluding Treasury securities) will represent more
than 30% of the weight of the index or portfolio, and that the five
highest weighted component fixed income securities will not in the
aggregate account for more than 65% of the weight of the index or
portfolio. The Fund believes that its portfolio of Municipal Securities
will satisfy this requirement under normal market conditions.
    Nasdaq Rule 5705(b)(4)(A)(v) requires that an underlying index or
portfolio (excluding one consisting entirely of exempted securities)
include securities from a minimum of 13 non-affiliated issuers. Since,
under Section 3(a)(12) of the Act, exempted securities include
municipal securities, the Fund believes that its portfolio of Municipal
Securities will satisfy this requirement under normal market
conditions.
    Nasdaq Rule 5705(b)(4)(A)(vi) requires that component securities
that in the aggregate account for at least 90% of the weight of the
index or portfolio be either exempted securities or from a specified
type of issuer. Since, as noted above, exempted securities include
municipal securities, the Fund believes that its portfolio of Municipal
Securities will satisfy this requirement under normal market
conditions.
    The Fund does not believe that its portfolio of Municipal
Securities will satisfy Rule 5705(b)(4)(A)(ii), which requires that
components that in the aggregate account for at least 75% of the weight
of the index or portfolio have a minimum original principal amount
outstanding of $100 million or more. However, the Fund believes that,
under normal market conditions, 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 original principal amount outstanding of $75
million or more. The Commission has previously issued orders approving
proposed rule changes relating to the listing and trading under NYSE
Arca Equities Rule 5.2(j)(3), Commentary .02 (which governs the listing
and trading of fixed-income index ETFs on NYSE Arca, Inc.), to various
ETFs that track indexes comprised of municipal securities (including
high-yield municipal index ETFs) that did not meet the analogous
requirement included in Commentary .02(a)(2) to NYSE Arca Equities Rule
5.2(j)(3),\14\ but demonstrated that the portfolio of municipal
securities in which the ETFs would invest would be sufficiently liquid.
Similarly, the Fund is of the view that its belief that its portfolio
of Municipal Securities will satisfy all except for one of the
applicable requirements of Nasdaq Rule 5705(b)(4)(A), coupled with its
belief that a significant portion (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 original principal amount outstanding of $75
million or more, should provide support regarding the anticipated
liquidity of its Municipal Securities portfolio.
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    \14\ See, e.g., Securities Exchange Act Release Nos. 75376 (July
7, 2015), 80 FR 40113 (July 13, 2015) (SR-NYSEArca-2015-18) (order
approving listing and trading of Vanguard Tax-Exempt Bond Index
Fund); 71232 (January 3, 2014), 79 FR 1662 (January 9, 2014) (SR-
NYSEArca-2013-118) (order approving listing and trading of Market
Vectors Short High-Yield Municipal Index ETF); and 63881 (February
9, 2011), 76 FR 9065 (February 16, 2011) (SR-NYSEArca-2010-120)
(order approving listing and trading of SPDR Nuveen S&P High Yield
Municipal Bond ETF).
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Other Investments
    Under normal market conditions, the Fund will invest substantially
all of its assets to meet its investment objectives as described above.
In addition, the Fund may invest its assets or hold cash as generally
described below.
    The Fund may invest up to 10% of its net assets in taxable
municipal securities. The Fund may also invest up to 10% of its net
assets in short-term debt instruments (described below), money market
funds and other cash equivalents, or it may hold cash. The percentage
of the Fund invested in such holdings or held in cash will vary and
will depend on several factors, including market conditions.
    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 Standard & Poor's Ratings Services
(``S&P Ratings''), 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,\15\ 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.\16\
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    \15\ 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 (``Trust Board''). 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.
    \16\ The Fund may only invest in commercial paper rated A-3 or
higher by S&P Ratings, Prime-3 or higher by Moody's or F3 or higher
by Fitch.
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    With respect to up to 20% of its net assets, the Fund may (i)
invest in the securities of other investment companies registered under
the 1940 Act, including money market funds, other ETFs,\17\ 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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    \17\ An ETF is an investment company registered under the 1940
Act that holds a portfolio of securities. Many ETFs are designed to
track the performance of a securities index, including industry,
sector, country and region indexes. ETFs included in the Fund will
be listed and traded in the U.S. on registered exchanges. The Fund
may invest in the securities of ETFs in excess of the limits imposed
under the 1940 Act pursuant to exemptive orders obtained by other
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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    With respect to up to 20% of its net assets, 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 and (ii) acquire short
positions in the foregoing derivatives. Transactions in the foregoing
derivatives may allow the Fund to obtain net long or short exposures to
selected interest rates. These derivatives may also be used to hedge
risks, including interest rate risks and credit risks, associated with
the Fund's portfolio investments. 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 an index.
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.\18\ 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.\19\
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    \18\ 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).
    \19\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also Investment Company Act
Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970)
(Statement Regarding ``Restricted Securities''); Investment Company
Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992)
(Revisions of Guidelines to Form N-1A). A fund's portfolio security
is illiquid if it cannot be disposed of in the ordinary course of
business within seven days at approximately the value ascribed to it
by the fund. See Investment Company Act Release No. 14983 (March 12,
1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7
under the 1940 Act); Investment Company Act Release No. 17452 (April
23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under
the Securities Act of 1933).
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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.\20\
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    \20\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests more than 25% of
the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
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Creation and Redemption of Shares
    The Fund will issue and redeem Shares on a continuous basis at net
asset value (``NAV'') \21\ only in large blocks of Shares (``Creation
Units'') in transactions with authorized participants, generally
including broker-dealers and large institutional investors
(``Authorized Participants''). Creation Units generally will consist of
50,000 Shares, although this may change from time to time. Creation
Units, however, are not expected to consist of less than 50,000 Shares.
As described in the Registration Statement and consistent with the
Exemptive Relief, the Fund will issue and redeem Creation Units in
exchange for an in-kind portfolio of instruments and/or cash in lieu of
such instruments (the ``Creation Basket'').\22\ In addition, if there
is a difference between the NAV attributable to a Creation Unit and the
market value of the Creation Basket exchanged for the Creation Unit,
the party conveying instruments with the lower value will pay to the
other an amount in cash equal to the difference (referred to as the
``Cash Component'').
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    \21\ The NAV of the Fund's Shares generally will be calculated
once daily Monday through Friday as of the close of regular trading
on the New York Stock Exchange (``NYSE''), generally 4:00 p.m.,
Eastern Time (the ``NAV Calculation Time''). NAV per Share will be
calculated by dividing the Fund's net assets by the number of Fund
Shares outstanding. For more information regarding the valuation of
Fund investments in calculating the Fund's NAV, see the Registration
Statement.
    \22\ Subject to, and in accordance with, the provisions of the
Exemptive Relief, it is expected that the Fund will typically issue
and redeem Creation Units on a cash basis; however, at times, it may
issue and redeem Creation Units on an in-kind (or partially in-kind)
basis.
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    Creations and redemptions must be made by or through an Authorized
Participant that has executed an agreement that has been agreed to by
the Distributor and BBH with respect to creations and redemptions of
Creation Units. All standard orders to create Creation Units must be
received by the transfer agent no later than the closing

time of the regular trading session on the NYSE (ordinarily 4:00 p.m.,
Eastern Time) (the ``Closing Time''), in each case on the date such
order is placed in order for the creation of Creation Units to be
effected based on the NAV of Shares as next determined on such date
after receipt of the order in proper form. Shares may be redeemed only
in Creation Units at their NAV next determined after receipt, not later
than the Closing Time, of a redemption request in proper form by the
Fund through the transfer agent and only on a business day.
    The Fund's custodian, through the National Securities Clearing
Corporation, will make available on each business day, prior to the
opening of business of the Exchange, the list of the names and
quantities of the instruments comprising the Creation Basket, as well
as the estimated Cash Component (if any), for that day. The published
Creation Basket will apply until a new Creation Basket is announced on
the following business day prior to commencement of trading in the
Shares.
Net Asset Value
    The Fund's NAV will be determined as of the close of regular
trading on the NYSE on each day the NYSE is open for trading. If the
NYSE closes early on a valuation day, the NAV will be determined as of
that time. NAV per Share will be calculated for the Fund by taking the
value of the Fund's total assets, including interest or dividends
accrued but not yet collected, less all liabilities, including accrued
expenses and dividends declared but unpaid, and dividing such amount by
the total number of Shares outstanding. The result, rounded to the
nearest cent, will be the NAV per Share. All valuations will be subject
to review by the Trust Board or its delegate.
    The Fund's investments will be valued daily. As described more
specifically below, investments traded on an exchange (i.e., a
regulated market), will generally be valued at market value prices that
represent last sale or official closing prices. In addition, as
described more specifically below, non-exchange traded investments
(including Municipal Securities) will generally be valued using prices
obtained from third-party pricing services (each, a ``Pricing
Service'').\23\ If, however, valuations for any of the Fund's
investments cannot be readily obtained as provided in the preceding
manner, or the Pricing Committee of the Adviser (the ``Pricing
Committee'') \24\ questions the accuracy or reliability of valuations
that are so obtained, such investments will be valued at fair value, as
determined by the Pricing Committee, in accordance with valuation
procedures (which may be revised from time to time) adopted by the
Trust Board (the ``Valuation Procedures''), and in accordance with
provisions of the 1940 Act. The Pricing Committee's fair value
determinations may require subjective judgments about the value of an
asset. The fair valuations attempt to estimate the value at which an
asset could be sold at the time of pricing, although actual sales could
result in price differences, which could be material.
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    \23\ The Adviser may use various Pricing Services or discontinue
the use of any Pricing Services, as approved by the Trust Board from
time to time.
    \24\ The Pricing Committee will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding the Fund's portfolio.
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    Certain securities, including in particular Municipal Securities,
in which the Fund may invest will not be listed on any securities
exchange or board of trade. Such securities will typically be bought
and sold by institutional investors in individually negotiated private
transactions that function in many respects like an over-the-counter
secondary market, although typically no formal market makers will
exist. Certain securities, particularly debt securities, will have few
or no trades, or trade infrequently, and information regarding a
specific security may not be widely available or may be incomplete.
Accordingly, determinations of the value of debt securities may be
based on infrequent and dated information. Because there is less
reliable, objective data available, elements of judgment may play a
greater role in valuation of debt securities than for other types of
securities.
    The information summarized below is based on the Valuation
Procedures as currently in effect; however, as noted above, the
Valuation Procedures are amended from time to time and, therefore, such
information is subject to change.
    The following investments will typically be valued using
information provided by a Pricing Service: (a) Except as provided
below, Municipal Securities; (b) except as provided below, short-term
U.S. government securities, commercial paper, and bankers' acceptances,
all as set forth under ``Other Investments'' (collectively, ``Short-
Term Debt Instruments''); and (c) except as provided below, taxable
municipal securities. Debt instruments may be valued at evaluated mean
prices, as provided by Pricing Services. Pricing Services typically
value non-exchange-traded instruments utilizing a range of market-based
inputs and assumptions, including readily available market quotations
obtained from broker-dealers making markets in such instruments, cash
flows, and transactions for comparable instruments. In pricing certain
instruments, the Pricing Services may consider information about an
instrument's issuer or market activity provided by the Adviser.
    Municipal Securities, Short-Term Debt Instruments and taxable
municipal securities having a remaining maturity of 60 days or less
when purchased will typically be valued at cost adjusted for
amortization of premiums and accretion of discounts, provided the
Pricing Committee has determined that the use of amortized cost is an
appropriate reflection of value given market and issuer-specific
conditions existing at the time of the determination.
    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.
    Equity securities (including ETFs and closed-end funds) listed on
any exchange other than the Exchange will typically be valued at the
last sale price on the exchange on which they are principally traded on
the business day as of which such value is being determined. Such
equity securities (including ETFs and closed-end funds) listed on the
Exchange will typically be valued at the official closing price on the
business day as of which such value is being determined. If there has
been no sale on such day, or no official closing price in the case of
securities traded on the Exchange, such equity securities will
typically be valued using fair value pricing. Such equity securities
traded on more than one securities exchange will be valued at the last
sale price or official closing price, as applicable, on the business
day as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
    Money market funds and other registered open-end management
investment companies (other than ETFs, which will be valued as
described above) will typically be valued at their net asset values as
reported by such registered open-end management investment companies to
Pricing Services.

    Exchange-listed derivatives (including options on U.S. Treasury
securities, options on U.S. Treasury futures contracts, and U.S.
Treasury futures contracts) will typically be valued at the closing
price in the market where such instruments are principally traded.
Availability of Information
    The Fund's Web site (www.ftportfolios.com), which will be publicly
available prior to the public offering of Shares, will include a form
of the prospectus for the Fund that may be downloaded. The Web site
will include the Shares' ticker, CUSIP and exchange information along
with additional quantitative information updated on a daily basis,
including, for the Fund: (1) Daily trading volume, the prior business
day's reported NAV and closing price, mid-point of the bid/ask spread
at the time of calculation of such NAV (the ``Bid/Ask Price''),\25\ and
a calculation of the premium and discount of the Bid/Ask Price against
the NAV; and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily Bid/Ask Price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. On each business day, before commencement
of trading in Shares in the Regular Market Session\26\ on the Exchange,
the Fund will disclose on its Web site the identities and quantities of
the portfolio of securities and other assets (the ``Disclosed
Portfolio'' as defined in Nasdaq Rule 5735(c)(2)) held by the Fund that
will form the basis for the Fund's calculation of NAV at the end of the
business day.\27\ 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. 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), the
identity of the security 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 information will be publicly available at no charge.
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    \25\ The Bid/Ask Price of the Fund will be determined using the
midpoint of the highest bid and the lowest offer on the Exchange as
of the time of calculation of the Fund's NAV. The records relating
to Bid/Ask Prices will be retained by the Fund and its service
providers.
    \26\ See Nasdaq Rule 4120(b)(4) (describing the three trading
sessions on the Exchange: (1) Pre-Market Session from 4 a.m. to 9:30
a.m., Eastern Time; (2) Regular Market Session from 9:30 a.m. to 4
p.m. or 4:15 p.m., Eastern Time; and (3) Post-Market Session from 4
p.m. or 4:15 p.m. to 8 p.m., Eastern Time).
    \27\ 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.
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    In addition, for the Fund, an estimated value, defined in 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,\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. The Intraday Indicative
Value will be based on quotes and closing prices provided by a dealer
who makes a market in those instruments. Premiums and discounts between
the Intraday Indicative Value and the market price may occur. This
should not be viewed as a ``real time'' update of the NAV per Share of
the Fund, which is calculated only once a day.
---------------------------------------------------------------------------

    \28\ 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.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with
the Disclosed Portfolio, will allow investors to determine the value of
the underlying portfolio of the Fund on a daily basis and will provide
a close estimate of that value throughout the trading day.
    Investors will also be able to obtain the Fund's Statement of
Additional Information (``SAI''), the Fund's annual and semi-annual
reports (together, ``Shareholder Reports''), and its Form N-CSR and
Form N-SAR, filed twice a year. The Fund's SAI and Shareholder Reports
will be available free upon request from the Fund, and those documents
and the Form N-CSR and Form N-SAR may be viewed on-screen or downloaded
from the Commission's Web site at www.sec.gov. 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. 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 municipal securities will be the Electronic Municipal Market
Access (``EMMA'') of the Municipal Securities Rulemaking Board
(``MSRB'').\29\ 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,
Short-Term Debt Instruments (including short-term U.S. government
securities, commercial paper, and bankers' acceptances), and repurchase
agreements will be available from major broker-dealer firms and/or
major market data vendors and/or Pricing Services.
---------------------------------------------------------------------------

    \29\ 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'').
---------------------------------------------------------------------------

    Pricing information for exchange-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.

    Additional information regarding the Fund and the Shares, including
investment strategies, risks, creation and redemption procedures, fees,
Fund holdings disclosure policies, distributions and taxes will be
included in the Registration Statement.
Initial and Continued Listing
    The Shares will be subject to Rule 5735, which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares. The Exchange represents that, for initial and continued
listing, the Fund must be in compliance with Rule 10A-3 \30\ under the
Act. A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange. 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.
---------------------------------------------------------------------------

    \30\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund. 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.
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.
Trading Rules
    Nasdaq 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. Nasdaq will allow trading in the Shares
from 4:00 a.m. until 8:00 p.m., Eastern Time. The Exchange has
appropriate rules to facilitate transactions in the Shares during all
trading sessions. As provided in Nasdaq Rule 5735(b)(3), the minimum
price variation for quoting and entry of orders in Managed Fund Shares
traded on the Exchange is $0.01.
Surveillance
    The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by both Nasdaq and
also FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\31\ The Exchange 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.
---------------------------------------------------------------------------

    \31\ 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 surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
    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,
exchange-listed options on U.S. Treasury securities, exchange-listed
options on U.S. Treasury futures, and exchange-listed U.S. Treasury
futures contracts) with other markets and other entities that are
members of the Intermarket Surveillance Group (``ISG''),\32\ 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.\33\
---------------------------------------------------------------------------

    \32\ 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.
    \33\ For Municipal Securities, trade information can generally
be found on the MSRB's EMMA.
---------------------------------------------------------------------------

    At least 90% of the Fund's net assets that are invested 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 (in the aggregate) will be invested in
instruments that trade in markets that are members of ISG or are
parties to a comprehensive surveillance sharing agreement with the
Exchange. All of the Fund's net assets that are invested in exchange-
listed equity securities (including closed-end funds and ETFs) will be
invested in securities that trade in markets that are members of ISG or
are parties to a comprehensive surveillance sharing agreement with the
Exchange.
    In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Circular
    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: (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 Act.
    Additionally, the Information Circular will reference that the Fund
is subject to various fees and expenses described in the Registration
Statement. The Information Circular will also disclose the trading
hours of the Shares of the

Fund and the applicable NAV Calculation Time for the Shares. The
Information Circular will disclose that information about the Shares of
the Fund will be publicly available on the Fund's Web site.
2. Statutory Basis
    Nasdaq believes that the proposal is consistent with Section 6(b)
of the Act in general and Section 6(b)(5) of the Act in particular in
that it is 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, and to remove impediments to and perfect
the mechanism of a free and open market and, in general, to protect
investors and the public interest.
    The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in Nasdaq Rule 5735. The
Exchange represents that trading in the Shares will be subject to the
existing trading surveillances, administered by both Nasdaq and also
FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities laws.
    The Adviser is not a broker-dealer, but it is affiliated with a
broker-dealer and is required to implement a ``fire wall'' with respect
to such broker-dealer affiliate regarding access to information
concerning the composition and/or changes to the Fund's portfolio. In
addition, paragraph (g) of Nasdaq Rule 5735 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.
    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,
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) 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. At least 90% of the Fund's net assets that
are invested 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 (in the aggregate) will
be invested in instruments that trade in markets that are members of
ISG or are parties to a comprehensive surveillance sharing agreement
with the Exchange. All of the Fund's net assets that are invested in
exchange-listed equity securities (including closed-end funds and ETFs)
will be invested in securities that trade in markets that are members
of ISG or are parties to a comprehensive surveillance sharing agreement
with the Exchange.
    The primary investment objective of the Fund will be to generate
current income that is exempt from regular federal income taxes and its
secondary objective will be long-term capital appreciation. Under
normal market conditions, the Fund will seek to achieve its investment
objectives by investing at least 80% of its net assets (including
investment borrowings) in Municipal Securities. Under normal market
conditions, the Fund will invest at least 65% of its net assets in
Municipal Securities that are, at the time of investment, rated below
investment grade by at least one NRSRO rating such securities (or
Municipal Securities that are unrated and determined by the Adviser to
be of comparable quality) (commonly referred to as ``high yield'' or
``junk'' bonds). The Fund may invest up to 10% of its net assets in
taxable municipal securities. In addition, the Fund may invest up to
10% of its net assets in Distressed Municipal Securities. With respect
to up to 20% of its net assets, 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 and (ii) acquire short positions in the foregoing
derivatives. 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
an index. Also, 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. Illiquid
assets include securities subject to contractual or other restrictions
on resale and other instruments that lack readily available markets as
determined in accordance with Commission staff guidance.
    The Fund's investments will be valued daily. Investments traded on
an exchange (i.e., a regulated market), will generally be valued at
market value prices that represent last sale or official closing
prices. Non-exchange traded investments (including Municipal
Securities) will generally be valued using prices obtained from a
Pricing Service. If, however, valuations for any of the Fund's
investments cannot be readily obtained as provided in the preceding two
sentences, or the Pricing Committee questions the accuracy or
reliability of valuations that are so obtained, such investments will
be valued at fair value, as determined by the Pricing Committee, in
accordance with the Valuation Procedures and in accordance with
provisions of the 1940 Act.
    The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
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. In addition, a large amount of
information will be publicly available regarding the Fund and the
Shares, thereby promoting market transparency. Moreover, the Intraday
Indicative Value, available on the NASDAQ OMX Information LLC
proprietary index data service, will be widely disseminated by one or
more major market data vendors and broadly displayed at least every 15
seconds during the Regular Market Session. 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 Disclosed Portfolio that will form the basis for the
Fund's calculation of NAV at the end of the business day. 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, and 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 CTA plans for the Shares. One
source of price information for Municipal Securities and taxable
municipal securities will be the MSRB's EMMA. 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, Short-Term Debt
Instruments (including short-term U.S. government securities,
commercial paper, and bankers' acceptances), and repurchase agreements
will be available from major broker-dealer firms and/or major market
data vendors and/or Pricing Services.
    Pricing information for exchange-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.
    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. Trading in Shares of the Fund will be halted
under the conditions specified in Nasdaq Rules 4120 and 4121 or because
of market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable, and trading in the Shares will
be subject to Nasdaq Rule 5735(d)(2)(D), which sets forth circumstances
under which Shares of the Fund may be halted. In addition, as noted
above, investors will have ready access to information regarding the
Fund's holdings, the Intraday Indicative Value, the Disclosed
Portfolio, and quotation and last sale information for the Shares.
    The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange-traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, 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, 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) 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. Furthermore, as noted above, investors
will have ready access to information regarding the Fund's holdings,
the Intraday Indicative Value, the Disclosed Portfolio, and quotation
and last sale information for the Shares.
    For the above reasons, Nasdaq believes the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposed rule change will facilitate the listing and trading of an
additional type of actively-managed exchange-traded fund that will
enhance competition among market participants, to the benefit of
investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-NASDAQ-2016-002 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2016-002. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal

office of Nasdaq. All comments received will be posted without change;
the Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NASDAQ-2016-002 and should be submitted on or before February 17, 2016.
---------------------------------------------------------------------------

    \34\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
Brent J. Fields,
Secretary.
[FR Doc. 2016-01542 Filed 1-26-16; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register Volume 84, Number 108 (Wednesday, June 5, 2019)]
[Rules and Regulations]
[Pages 25984-25986]
[FR Doc No: 2019-11739]

-----------------------------------------------------------------------

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2018-0916; Product Identifier 2018-NE-33-AD; Amendment
39-19643; AD 2019-10-04]
RIN 2120-AA64

Airworthiness Directives; BRP-Rotax GmbH & Co KG Engines

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: We are adopting a new airworthiness directive (AD) for certain
BRP-Rotax GmbH & Co KG (Rotax) 912 and 914 model engines. This AD was
prompted by power loss and engine revolutions per minute (RPM) drop on
certain Rotax 912 and 914 model engines due to a quality control
deficiency in the manufacturing process of certain valve push-rod
assemblies resulting in partial wear on the rocker arm ball socket and
possible malfunction of the valve. This AD requires one-time inspection
and, depending on the findings, replacement of the affected parts with
parts eligible for installation. We are issuing this AD to address the
unsafe condition on these products.

DATES: This AD is effective July 10, 2019.
    The Director of the Federal Register approved the incorporation by
reference of a certain publication listed in this AD as of July 10,
2019.

ADDRESSES: For service information identified in this final rule,
contact BRP-Rotax GmbH & Co KG, Rotaxstrasse 1, A-4623 Gunskirchen,
Austria; phone: +43 7246 601 0; fax: +43 7246 601 9130; email:
<EMAIL_ADDRESS>internet: www.flyrotax.com. You may view this
service information at the FAA, Engine and Propeller Standards Branch,
1200 District Avenue, Burlington, MA 01803. For information on the
availability of this material at the FAA, call<PHONE_NUMBER>. It is also
available on the internet at http://www.regulations.gov by searching
for and locating Docket No. FAA-2018-0916.

Examining the AD Docket

    You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-
0916; or in person at Docket Operations between 9 a.m. and 5 p.m.,
Monday through Friday, except Federal holidays. The AD docket contains
this final rule, the mandatory continuing airworthiness information
(MCAI), the regulatory evaluation, any comments received, and other
information. The address for Docket Operations (phone:<PHONE_NUMBER>) is
U.S. Department of Transportation, Docket Operations, M-30, West
Building Ground Floor, Room W12-140, 1200 New Jersey Avenue SE,
Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT: Wego Wang, Aerospace Engineer, ECO
Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-
238-7134; fax:<PHONE_NUMBER>; email<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Discussion

    We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR
part 39 by adding an AD that would apply to certain Rotax 912 and 914
model engines. The NPRM published in the Federal Register on November
6, 2018 (83 FR 55502). The NPRM was prompted by power loss and engine
RPM drop on certain Rotax 912 and 914 model engines due to a quality
control deficiency in the manufacturing process of certain valve push-
rod assemblies resulting in partial wear on the rocker arm ball socket
and possible malfunction of the valve. The NPRM proposed to require a
one-time inspection and, depending on the findings, replacement of the
affected parts with parts eligible for installation. We are issuing
this AD to address the unsafe condition on these products.
    The European Union Aviation Safety Agency (EASA), which is the
Technical Agent for the Member States of the European Community, has
issued EASA AD 2017-0208, dated October 13, 2017 (referred to after
this as ``the MCAI''), to address the unsafe condition on these
products. The MCAI states:

    Power loss and engine RPM drop have been reported on Rotax 912/
914 engines in service. It has been determined that, due to a
quality control deficiency in the manufacturing process of certain
valve push-rod assemblies, manufactured between 08 June 2016 and 02
October 2017 inclusive, partial wear on the rocker arm ball socket

may occur, which may lead to malfunction of the valve train.
    This condition, if not detected and corrected, may lead to rough
engine operation and loss of power, possibly resulting in a forced
landing, with consequent damage to the aeroplane and injury to
occupants.

Revision to Applicability Section

    We revised paragraph (c)(4), in the Applicability section of this
AD, to refer to ``Rotax 912 F2, 912 F3, 912 F4, 912 S2, 912 S3, 912 S4,
914 F2, 914 F3, and 914 F4 engines (all S/Ns) on which a valve push-rod
assembly has been replaced with one manufactured between June 8, 2016,
and October 2, 2017,'' rather than ``Rotax 912 F2, 912 F3, 912 F4, 912
S2, 912 S3, 912 S4, 914 F2, 914 F3, and 914 F4 engines (all S/Ns) on
which a valve push-rod assembly has been replaced between June 8, 2016,
and the effective date of this AD,'' as proposed in the NPRM. This
change clarifies the applicability and is consistent with the MCAI and
with Rotax Service Bulletin (SB) SB-912 i-008 R1/SB-912-070 R1/SB-914-
052 R1 (single document), Revision 1, dated October 12, 2017. Our
proposed wording would have unnecessarily extended the applicability of
this AD to all valve push-rod assemblies that were replaced on the
affected Rotax engines from October 2, 2017 until the effective date of
this AD.

Comments

    We gave the public the opportunity to participate in developing
this final rule. We received no comments on the NPRM or on the
determination of the cost to the public.

Conclusion

    We reviewed the relevant data and determined that air safety and
the public interest require adopting this final rule as proposed--
except for minor editorial changes and the changes to the Applicability
section discussed above. We have determined that these minor changes:
     Are consistent with the intent that was proposed in the
NPRM for addressing the unsafe condition; and
     Do not add any additional burden upon the public than was
already proposed in the NPRM.

Related Service Information Under 1 CFR Part 51

    We reviewed Rotax SB SB-912 i-008 R1/SB-912-070 R1/SB-914-052 R1
(single document), Revision 1, dated October 12, 2017. The SB describes
procedures for inspection and replacement of the valve push-rod
assembly and the left and right rocker arms. This service information
is reasonably available because the interested parties have access to
it through their normal course of business or by the means identified
in the ADDRESSES section.

Costs of Compliance

    We estimate that this AD affects 150 engines installed on airplanes
of U.S. registry.
    We estimate the following costs to comply with this AD:

                                                 Estimated Costs
----------------------------------------------------------------------------------------------------------------
                                                                                Cost per      Cost on U.S.
                Action                         Labor cost           Parts cost        product        operators
----------------------------------------------------------------------------------------------------------------
Inspect the push-rod rocker arm ball    1 work-hour x $85 per                 $0             $85         $12,750
 sockets.                                hour = $85.
----------------------------------------------------------------------------------------------------------------

    We estimate the following costs to do any necessary replacements
that would be required based on the results of the proposed inspection.
We estimate that 50 engines will need this replacement.

                                               On-Condition Costs
----------------------------------------------------------------------------------------------------------------
                                                                                Cost per      Cost on U.S.
                Action                         Labor cost           Parts cost        product        operators
----------------------------------------------------------------------------------------------------------------
Replace the valve push-rod assembly     0.5 work-hours x $85 per          $3,000       $3,042.50        $152,125
 and rocker arm ball sockets.            hour = $42.50.
----------------------------------------------------------------------------------------------------------------

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. Subtitle VII: Aviation Programs,
describes in more detail the scope of the Agency's authority.
    We are issuing this rulemaking under the authority described in
Subtitle VII, Part A, Subpart III, Section 44701: ``General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.
    This AD is issued in accordance with authority delegated by the
Executive Director, Aircraft Certification Service, as authorized by
FAA Order 8000.51C. In accordance with that order, issuance of ADs is
normally a function of the Compliance and Airworthiness Division, but
during this transition period, the Executive Director has delegated the
authority to issue ADs applicable to engines, propellers, and
associated appliances to the Manager, Engine and Propeller Standards
Branch, Policy and Innovation Division.

Regulatory Findings

    This AD will not have federalism implications under Executive Order
13132. This AD will not have a substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government.
    For the reasons discussed above, I certify this AD:
    (1) Is not a ``significant regulatory action'' under Executive
Order 12866,
    (2) Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979),

    (3) Will not affect intrastate aviation in Alaska, and
    (4) Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

Adoption of the Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA amends 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

0
1. The authority citation for part 39 continues to read as follows:

    Authority:  49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13   [Amended]

0
2. The FAA amends Sec.  39.13 by adding the following new airworthiness
directive (AD):

2019-10-04 BRP-Rotax GmbH & Co KG (formerly BRP-Powertrain GmbH & Co
KG; Bombardier-Rotax GmbH & Co KG; Bombardier-Rotax GmbH): Amendment
39-19643; Docket No. FAA-2018-0916; Product Identifier 2018-NE-33-
AD.

(a) Effective Date

    This AD is effective July 10, 2019.

(b) Affected ADs

    None.

(c) Applicability

    This AD applies to:
    (1) BRP-Rotax GmbH & Co KG (Rotax) 912 F2, 912 F3, and 912 F4
engines, with serial number (S/N) 4 413 066 to 4 413 067, inclusive;
and S/N 4 413 101 to 4 413 111, inclusive;
    (2) Rotax 912 S2, 912 S3, and 912 S4 engines, with S/Ns 9 563
826 to 9 563 849, inclusive; S/Ns 9 564 301 to 9 564 508, inclusive;
and S/N 9 564 510 to 9 564 534, inclusive;
    (3) Rotax 914 F2, 914 F3, and 914 F4 engines, with S/Ns 4 421
581 to 4 421 597, inclusive; and S/N 4 421 701 to 4 421 833,
inclusive; and
    (4) Rotax 912 F2, 912 F3, 912 F4, 912 S2, 912 S3, 912 S4, 914
F2, 914 F3, and 914 F4 engines (all S/Ns) on which a valve push-rod
assembly has been replaced with one manufactured between June 8,
2016, and October 2, 2017.

(d) Subject

    Joint Aircraft System Component (JASC) Code 8530, Reciprocating
Engine Cylinder Section.

(e) Unsafe Condition

    This AD was prompted by power loss and engine revolutions per
minute drop on Rotax 912 and 914 model engines due to a quality
control deficiency in the manufacturing process of certain valve
push-rod assemblies resulting in partial wear on the rocker arm ball
socket and possible malfunction of the valve. We are issuing this AD
to prevent failure of the valve push-rod assembly and the left and
right rocker arms. The unsafe condition, if not addressed, could
result in loss of engine thrust control and reduced control of the
airplane.

(f) Compliance

    Comply with this AD within the compliance times specified,
unless already done.

(g) Required Actions

    (1) Visually inspect the push-rod ball sockets of each valve
push-rod assembly in accordance with the Accomplishment
Instructions, paragraph 3.1.2, of BRP-Rotax Service Bulletin (SB)
SB-912 i-008 R1/SB-912-070 R1/SB-914-052 R1 (single document),
Revision 1, dated October 12, 2017, and within the following
compliance times.
    (i) For engines with 160 engine flight hours (FHs) or fewer
since new, inspect before exceeding 170 FHs since new, or within
three months after the effective date of this AD, whichever occurs
first.
    (ii) For engines with greater than 160 engine FHs since new,
inspect within 10 FHs, or three months after the effective date of
this AD, whichever occurs first.
    (2) If the inspection required by paragraph (g)(1) of this AD
finds a black surface color on a valve push-rod assembly, part
number (P/N) 854861, then before further flight, remove the valve
push-rod assembly and the left and right rocker arm ball sockets, P/
Ns 854383 and 854393, from service, and replace with parts eligible
for installation.

(h) Installation Prohibition

    After the effective date of this AD, do not install a valve
push-rod assembly, P/N 854861, that was manufactured between June 8,
2016, and October 2, 2017, or that exhibits a black surface color on
the push-rod rocker arm ball sockets, on any engine.

(i) Alternative Methods of Compliance (AMOCs)

    (1) The Manager, ECO Branch, FAA, has the authority to approve
AMOCs for this AD, if requested using the procedures found in 14 CFR
39.19. In accordance with 14 CFR 39.19, send your request to your
principal inspector or local Flight Standards District Office, as
appropriate. If sending information directly to the manager of the
ECO Branch, send it to the attention of the person identified in
paragraph (j)(1) of this AD. You may email your request to<EMAIL_ADDRESS>    (2) Before using any approved AMOC, notify your appropriate
principal inspector, or lacking a principal inspector, the manager
of the local flight standards district office/certificate holding
district office.

(j) Related Information

    (1) For more information about this AD, contact Wego Wang,
Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue,
Burlington, MA 01803; phone:<PHONE_NUMBER>; fax:<PHONE_NUMBER>; email:
<EMAIL_ADDRESS>    (2) Refer to European Union Aviation Safety Agency (EASA) AD
2017-0208, dated October 13, 2017, for more information. You may
examine the EASA AD in the AD docket on the internet at http://www.regulations.gov by searching for and locating it in Docket No.
FAA-2018-0916.

(k) Material Incorporated by Reference

    (1) The Director of the Federal Register approved the
incorporation by reference (IBR) of the service information listed
in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
    (2) You must use this service information as applicable to do
the actions required by this AD, unless the AD specifies otherwise.
    (i) Rotax Service Bulletin (SB) SB-912 i-008 R1/SB-912-070 R1/
SB-914-052 R1 (single document), Revision 1, dated October 12, 2017.
    (ii) [Reserved]
    (3) For Rotax service information identified in this AD, contact
BRP-Rotax GmbH & Co KG, Rotaxstrasse 1, A-4623 Gunskirchen, Austria;
phone: +43 7246 601 0; fax: +43 7246 601 9130; email:
<EMAIL_ADDRESS>internet: www.flyrotax.com.
    (4) You may view this service information at FAA, Engine &
Propeller Standards Branch, 1200 District Avenue, Burlington, MA
01803. For information on the availability of this material at the
FAA, call<PHONE_NUMBER>.
    (5) You may view this service information that is incorporated
by reference at the National Archives and Records Administration
(NARA). For information on the availability of this material at
NARA, call<PHONE_NUMBER>, or go to: http://www.archives.gov/federal-register/cfr/ibr-locations.html.

    Issued in Burlington, Massachusetts, on May 24, 2019.
Karen M. Grant,
Acting Manager, Engine and Propeller Standards Branch, Aircraft
Certification Service.
[FR Doc. 2019-11739 Filed 6-4-19; 8:45 am]
 BILLING CODE 4910-13-P