August 29, 2013.
On July 8, 2013, NYSE Arca, Inc. (“Exchange” or “NYSE Arca”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act” or “Exchange Act”) 
and Rule 19b-4 thereunder,
a proposed rule change to list and trade shares (“Shares”) of the First Trust Inflation Managed Fund (“Fund”) under NYSE Arca Equities Rule 8.600. The proposed rule change was published for comment in the Federal Register on July 25, 2013.
The Commission received no comments on the proposed rule change. This order grants approval of the proposed rule change.
II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant to NYSE Arca Equities Rule 8.600, which governs the listing and trading of Managed Fund Shares on the Exchange. The Shares will be offered by First Trust Exchange-Traded Fund IV (“Trust”), which is organized as a Massachusetts business trust and is registered with the Commission as an open-end management investment company.
The investment adviser to the Fund will be First Trust Advisors L.P. (“Adviser” or “First Trust”). First Trust Portfolios L.P. will be the principal underwriter and distributor of the Fund's Shares. Bank of New York Mellon (“BNY”) will serve as the administrator, custodian, and transfer agent for the Fund. The Exchange states that the Adviser is not a broker-dealer but is affiliated with 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 Fund's portfolio.
The Fund's primary investment objective will be to seek long-term capital appreciation, and its secondary investment objective will be to seek current income. The Fund will be an actively managed exchange-traded fund that will invest in: (1) Exchange-listed common stocks and other equity securities described below (including “Depositary Receipts,” as defined herein) of companies in the agriculture, energy, metals, and mining sectors; (2) exchange-traded products (“Underlying ETPs”) 
that hold commodities, such as Start Printed Page 54701gold and silver, or futures on such commodities; (3) debt securities and Underlying ETPs that invest in such securities; and (4) real estate interests, including other exchange-traded funds that invest in such interests.
The asset class allocation between equity securities, bonds, commodities, and real estate will be performed on a quarterly basis by First Trust. Changes to the asset allocation will be considered on a shorter time frame if market conditions warrant.
After the initial asset class allocation, the securities for each asset type will be selected as described below.
The Fund may invest in equity securities, which include common stocks; preferred securities; warrants to purchase common stocks or preferred securities; securities convertible into common stocks or preferred securities; and other securities with equity characteristics. The Fund also may invest in U.S. dollar-denominated foreign equity securities.
Under normal market conditions,
the Fund will invest, in addition to common stocks, in U.S. dollar-denominated sponsored depositary receipts, which will include American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”), European Depositary Receipts (“EDRs”), and American Depositary Shares (“ADSs”) (collectively “Depositary Receipts”),
of agriculture, energy, metals, and mining companies.
The Adviser anticipates that the equities portion of the portfolio initially will represent 60% of the net assets of the Fund, although this percentage may vary over time.
An initial universe of inflation-related stocks will be created by selecting stocks of agricultural, energy, metals, and mining companies that trade on a U.S. stock exchange and have adequate liquidity for investment. The Fund's portfolio will be selected by examining the historical financial results of the securities from the initial universe. Companies that do not produce positive cash flow or companies with credit quality issues will be eliminated. The securities will then be evaluated by fundamental factors such as sales, earnings, and cash flow growth; valuation factors such as price/earnings, price/cash flow, price/sales, and price/book; and technical factors such as price momentum and earnings surprises. An estimated value will be calculated for each of the companies. The companies that currently trade at an attractive market price relative to their estimated value will be favored over companies that do not. The final portfolio will then be selected by the Adviser based on the security's fundamentals, valuation and technical factors, the security's relative valuation, and other qualitative factors such as competitive advantages, new products, and quality of management.
The Fund will invest in the types of bonds described below primarily through investing in Underlying ETPs that concentrate in these types of holdings. Bonds with fixed coupons during periods of rising inflation expectations may likely experience price depreciation due to the impact of rising interest rates. The negative effects of inflation on bonds may be offset through Underlying ETPs that invest in inflation-linked bonds. Inflation-linked government bonds, commonly known in the U.S. as Treasury Inflation-Protected Securities (“TIPS”), are securities issued by governments that are designed to provide inflation protection to investors. The coupon payments and principal value on these securities are adjusted according to inflation over the life of the bonds. The Underlying ETPs chosen to represent the bond portion of the portfolio will be reviewed for capitalization, liquidity, expenses, tracking error, and taxation structure factors. First Trust anticipates that the bond portion of the portfolio will initially represent approximately 20% of the net assets of the Fund, although this percentage may vary over time.
The Fund, through investments in Underlying ETPs, will invest primarily in investment grade debt securities with respect to the bond portion of its portfolio and may invest up to 15% of its net assets in high yield debt securities, including leveraged loans,
that are rated below investment grade at the time of purchase, or unrated securities deemed by the Fund's Adviser to be of comparable quality. “Below investment grade” is defined as those securities that have a long-term credit rating below “BBB-” by Standard & Poor's Rating Group, a division of McGraw Hill Companies, Inc. (“S&P”), or below “Baa3” by Moody's Investors Service, Inc. (“Moody's”), or comparably rated by another nationally recognized statistical rating organization.
The Fund, or the Underlying ETPs in which it may invest, may invest in a variety of debt securities, including corporate debt securities, U.S. government securities, and non-U.S. debt securities. Corporate debt securities are fixed-income securities issued by businesses to finance their operations. Notes, bonds, debentures, and commercial paper are the most common types of corporate debt securities, with the primary difference being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. Certain debt securities held by the Fund may include debt instruments that have economic characteristics that are similar to preferred securities. Such debt instruments are typically issued by corporations, generally in the form of interest bearing notes, or by an affiliated business trust of a corporation, generally in the form of (i) beneficial interests in subordinated debentures or similarly structured securities or (ii) more senior debt securities that pay income and trade in a manner similar to preferred securities. Such debt instruments that have economic characteristics similar to preferred securities include trust preferred securities, hybrid trust Start Printed Page 54702preferred securities, and senior notes/baby bonds.
The Fund will invest in Underlying ETPs that are designed to track government bond indexes, bank loan indexes, and floating rate security indexes.
The Fund will invest in commodities through investing in Underlying ETPs that invest in commodities or futures on such commodities, such as gold, silver, and commodity indexes. In general, commodities have relatively high correlations with inflation, and the prices of real assets, such as gold, silver, oil, and copper, often rise along with increasing interest rates and inflation. Additionally, commodities normally move in the opposite direction of the U.S. dollar. First Trust anticipates that the commodities portion of the portfolio will represent 10% of the initial net assets of the Fund, although this percentage may vary over time.
Real Estate Allocation
The Fund will invest in U.S. exchange-listed securities of real estate investment trusts (“REITS”). In general, real estate prices have generated a correspondingly large increase in return and largely preserved the purchasing power of the original investment during periods of high inflation. The real estate portion of the portfolio will represent 10% of the initial net assets of the Fund, although this percentage may vary over time. The Fund also may invest in exchange-traded funds designed to track real estate indexes.
Normally, the Fund will invest substantially all of its assets in the securities allocations described above to meet its investment objectives. The Fund may invest the remainder of its assets in securities with maturities of less than one year or cash equivalents, or it may hold cash. The percentage of the Fund invested in such holdings may vary and depend on several factors, including market conditions. For temporary defensive purposes and during periods of high cash inflows or outflows, the Fund may depart from its principal investment strategies and invest part or all of its assets in these securities or it may hold cash.
During such periods, the Fund may not be able to achieve its investment objectives. The Fund may adopt a defensive strategy when the portfolio manager believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances.
The Fund may invest up to 15% of its net assets in U.S. exchange-listed futures, interest rate swaps, total return swaps, non-U.S. currency swaps, credit default swaps,
U.S. exchange-listed options, forward contracts, and other derivative instruments in the aggregate to seek to enhance returns,
to hedge some of the risks of its investments in securities,
as a substitute for a position in the underlying asset, to reduce transaction costs, to maintain full market exposure in a given asset class, to manage cash flows, to limit exposure to losses due to changes to non-U.S. currency exchange rates, or to preserve capital.
The Fund will only enter into transactions in derivative instruments with counterparties that First Trust reasonably believes are capable of performing under the contract 
and will post as collateral at least $250,000 each day.
The Fund may invest in shares of money market funds to the extent permitted by the 1940 Act.
The Fund may not invest 25% or more of the value of its total assets in securities of issuers in any one industry or group of industries. This restriction does not apply to obligations issued or guaranteed by the U.S. government, its agencies, or instrumentalities.
The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser 
and master demand notes. 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 securities. Illiquid securities 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 intends to qualify annually and to elect to be treated as a regulated investment company under the Internal Revenue Code.
The Fund may invest up to 10% of its net assets in inverse Underlying ETPs, but it will not invest in leveraged or inverse leveraged Underlying ETPs.
The Fund's investments will be consistent with the Fund's investment objectives and will not be used to enhance leverage. That is, while the Fund will be permitted to borrow as Start Printed Page 54703permitted under the 1940 Act, the Fund's investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the Fund's broad-based securities market index (as defined in Form N-1A) (i.e., S&P 500).
Additional information regarding the Trust and the Shares, including investment strategies, risks, creation and redemption procedures, fees, portfolio holdings disclosure policies, distributions, and taxes, among other things, is included in the Notice and Registration Statement, as applicable.
III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of Section 6 of the Act 
and the rules and regulations thereunder applicable to a national securities exchange.
In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,
which requires, among other things, that the Exchange's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission notes that the Fund and the Shares must comply with the requirements of NYSE Arca Equities Rule 8.600 for the Shares to be listed and traded on the Exchange.
The Commission finds that the proposal to list and trade the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the Act,
which sets forth Congress's finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for, and transactions in, securities. Quotation and last-sale information for the Shares will be available via the Consolidated Tape Association (“CTA”) high-speed line. In addition, the Portfolio Indicative Value, as defined in NYSE Arca Equities Rule 8.600(c)(3), will be widely disseminated every 15 seconds throughout the Exchange's Core Trading Session by one or more major market data vendors.
On each business day, before commencement of trading in Shares in the Core Trading Session on the Exchange, the Fund will disclose on its Web site the Disclosed Portfolio, as defined in NYSE Arca Equities Rule 8.600(c)(2), that will form the basis for the Fund's calculation of NAV at the end of the business day.
The Fund's NAV will be determined as of the close of trading (normally 4:00 p.m. Eastern Time) on each day the New York Stock Exchange is open for business. A basket composition file, which will include the security names and share quantities required to be delivered in exchange for the Fund's Shares, together with estimates and actual cash components, will be publicly disseminated daily prior to the opening of the New York Stock Exchange via the National Securities Clearing Corporation. 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 intra-day, closing, and settlement prices of the portfolio securities will also be readily available from the national securities exchanges trading such securities, automated quotation systems, published or other public sources, or on-line information services such as Bloomberg or Reuters. 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.
The Commission further believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately and to prevent trading when a reasonable degree of transparency cannot be assured. The Commission notes that the Exchange will obtain a representation from the issuer of the Shares that the NAV per Share will be calculated daily and that the NAV and the Disclosed Portfolio will be made available to all market participants at the same time.
In addition, trading in the Shares will be subject to NYSE Arca Equities Rule 8.600(d)(2)(D), which sets forth circumstances under which Shares of the Fund may be halted. The Exchange may halt trading in the Shares if trading is not occurring in the securities and/or the financial instruments comprising the Disclosed Portfolio of the Fund, or if other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present.
Further, the Commission notes that the Reporting Authority 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.
The Commission notes that the Financial Industry Regulatory Authority (“FINRA”), on behalf of the Exchange,
will communicate as needed regarding trading in the Shares, equity securities, futures contracts, and options contracts with other markets and other entities that are members of the ISG, and FINRA, on behalf of the Exchange, may obtain trading information regarding trading in the Start Printed Page 54704Shares, equity securities, futures contracts, and options contracts from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, equity securities, futures contracts, and options contracts from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. The Exchange states that it has a general policy prohibiting the distribution of material, non-public information by its employees. The Exchange also states that the Adviser is not a broker-dealer but is affiliated with a broker-dealer, and the Adviser has implemented a fire wall with respect to its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio.
The Exchange represents that the 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:
(1) The Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rule 8.600.
(2) The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions.
(3) The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws and 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.
(4) Prior to the commencement of trading, the Exchange will inform its Equity Trading Permit (“ETP”) Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (a) the procedures for purchases and redemptions of Shares in Creation Units (and that Shares are not individually redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (c) the risks involved in trading the Shares during the Opening and Late Trading Sessions when an updated Portfolio Indicative Value will not be calculated or publicly disseminated; (d) how information regarding the Portfolio Indicative Value will be disseminated; (e) the requirement that ETP Holders 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/or continued listing, the Fund will be in compliance with Rule 10A-3 under the Exchange Act,
as provided by NYSE Arca Equities Rule 5.3.
(6) The equity securities in which the Fund will invest, including Underlying ETPs, Depositary Receipts, REITs, common stocks, preferred securities, warrants, convertible securities, and U.S. dollar-denominated foreign securities, as well as certain derivatives such as options and futures contracts, will trade in markets that are ISG members or are parties to a comprehensive surveillance sharing agreement with the Exchange.
(7) The Fund may hold up to an aggregate amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including Rule 144A securities deemed illiquid by the Adviser and master demand notes.
(8) A minimum of 100,000 Shares of the Fund will be outstanding at the commencement of trading on the Exchange.
(9) The Fund's investments will be consistent with the Fund's investment objectives and will not be used to enhance leverage. The Fund may invest up to 10% of its net assets in inverse Underlying ETPs, but it will not invest in leveraged or inverse leveraged Underlying ETPs.
(10) The Fund will only enter into transactions in derivative instruments with counterparties that First Trust reasonably believes are capable of performing under the contract 
and will post as collateral at least $250,000 each day. In addition, to the extent practicable, the Fund will invest in swaps cleared through the facilities of a centralized clearing house.
This approval order is based on all of the Exchange's representations and description of the Fund, including those set forth above and in the Notice.
For the foregoing reasons, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act 
and the rules and regulations thereunder applicable to a national securities exchange.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSEArca-2013-70) be, and it hereby is, approved.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
[FR Doc. 2013-21533 Filed 9-4-13; 8:45 am]
BILLING CODE 8011-01-P