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[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Notices]
[Pages 91822-91824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27015]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 35386; 812-15179-01]

Precidian ETF Trust II, et al.

November 14, 2024.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application to amend a prior order for exemptive 
relief.

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    Summary of Application: Applicants request an order (``Amended 
Order'') that would amend a prior order to permit a Fund to use 
Creation Baskets (as defined below) that include instruments that are 
not included, or that are included with different weightings, in the 
Fund's Pro Rata Basket (as defined below).
    Applicants: Precidian ETF Trust II (``Trust''), Precidian Funds 
LLC, and Foreside Fund Services, LLC (collectively, the 
``Applicants'').
    Filing Dates: The application was filed on November 24, 2020, and 
amended on January 14, 2022, March 28, 2022, September 2, 2022, 
December 13, 2023, April 15, 2024, and November 8, 2024.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by emailing the Commission's 
Secretary at [email protected] and serving Applicants with a 
copy of the request by email, if an email address is listed for the 
relevant Applicant below, or personally or by mail, if a physical 
address is listed for the relevant Applicant below. Hearing requests 
should be received by the Commission by 5:30 p.m. on December 9, 2024 
and should be accompanied by proof of service on the Applicants in the 
form of an affidavit, or, for lawyers, a certificate of service. 
Pursuant to rule 0-5 under the Investment Company Act of 1940 
(``Act''), hearing requests should state the nature of the writer's 
interest, any facts bearing upon the desirability of a hearing on the 
matter, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
emailing to the Commission's Secretary.

ADDRESSES: 
    The Commission: [email protected].
    Applicants: [email protected].

FOR FURTHER INFORMATION CONTACT: Kris Easter Guidroz, Senior Counsel; 
Trace Rakestraw, Senior Special Counsel, at (202) 551-6825 (Division of 
Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: For Applicants' representations, legal 
analysis, and conditions, please refer to Applicants' sixth amended and 
restated application, dated November 8, 2024, which may be obtained via 
the Commission's website by searching for the file number at the top of 
this document, or for an Applicant using the Company name search field 
on the SEC's EDGAR system. The SEC's EDGAR system may be searched at 
https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html. You 
may also call the SEC's Public Reference Room at (202) 551-8090.

I. Introduction

    1. On May 20, 2019, the Commission issued an order \1\ under 
section 6(c) of the Act for an exemption from sections 2(a)(32), 
5(a)(1), and 22(d) of the Act and rule 22c-1 under the Act, under 
sections 6(c) and 17(b) of the Act for an exemption from sections 
17(a)(1) and 17(a)(2) of the Act, and under section 12(d)(1)(J) of the 
Act for an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of the 
Act (the ``Prior Order'').\2\ The Prior Order permits Applicants to 
operate actively-managed exchange-traded funds (``ETFs'') that are not 
required to disclose their full portfolio holdings on a daily basis 
(each, a ``Fund''). Rather, pursuant to the Prior Order, each Fund 
disseminates a ``verified intraday indicative value,'' or

[[Page 91823]]

``VIIV,'' reflecting the value of its portfolio holdings, calculated 
every second throughout the trading day.
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    \1\ See Precidian ETFs Trust, et al., Investment Company Act 
Release No. 33440 (April 8, 2019) (notice) and Investment Company 
Act Release No. 33477 (May. 20, 2019) (order). Except as 
specifically noted in the application for the Amended Order, all 
representations and conditions contained in the application first 
submitted with the Commission (File No. 812-14405), as amended and 
restated, and filed with the Commission on April 4, 2019 (the 
``First Application''), remain applicable to the operation of the 
Funds and will apply to any Funds relying on the Amended Order.
    \2\ The relief granted under section 12(d)(1)(J) of the Act for 
an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of the Act 
(the ``Section 12(d)(1) Relief''), and relief under sections 6(c) 
and 17(b) of the Act for an exemption from sections 17(a)(1) and 
17(a)(2) of the Act relating to the Section 12(d)(1) Relief, expired 
on January 19, 2022. See Fund of Funds Arrangements, Investment 
Company Act Rel. No. 10871 (Oct. 7, 2020), at III.
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    2. Shares of each Fund are purchased and redeemed only in Creation 
Units and generally on an in-kind basis. Purchasers acquire Creation 
Units by transferring to the Fund Deposit Instruments \3\ and 
shareholders redeeming their Shares receive from the Fund Redemption 
Instruments (each, a ``Creation Basket''). Under the Prior Order, the 
names and quantities of the instruments that constitute a Fund's 
Creation Basket must be a pro rata slice of the Fund's actual portfolio 
except for certain cash substitutions (``Pro Rata Basket'').
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    \3\ All capitalized terms not otherwise defined in this notice 
have the meanings ascribed to them in the First Application.
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    3. Applicants now seek to amend the Prior Order to, in effect, give 
the Funds the same flexibility with respect to Creation Basket 
composition as afforded to ETFs relying on rule 6c-1 under the Act.\4\ 
More specifically, Applicants have requested that the Funds be allowed 
to use Creation Baskets that include instruments that are not included, 
or are included but in different weightings, in the Fund's Pro Rata 
Basket. As part of Applicants' request, the Funds would comply with 
additional requirements, including disclosing additional information.
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    \4\ The Funds are not able to operate in reliance on rule 6c-11 
because they do not disclose their portfolio holdings on a daily 
basis as required by the rule. See rule 6c-11(c)(1)(i) (requiring an 
ETF to disclose prominently on its website, publicly available and 
free of charge, the portfolio holdings that will form the basis for 
the Fund's calculation of per share NAV).
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II. The Application

A. Applicants' Proposal

    4. Upon amending the Prior Order, each Fund would continue to offer 
its Pro Rata Basket every Business Day but could also offer a Creation 
Basket that differs from the Pro Rata Basket to provide Authorized 
Participants the option to transact in either basket. Each Business 
Day, before the open of trading on the Exchange where the Fund is 
listed, the Fund will publish on its website the composition of any 
Creation Basket exchanged with an Authorized Participant on the 
previous Business Day that differed from such Business Day's Pro Rata 
Basket other than solely with respect to cash substitutions.
    5. Applicants represent that a Fund may determine that it is 
desirable to use Creation Baskets that differ from a Pro Rata Basket. 
For example, a Fund may use a Creation Basket that contains one or more 
instruments that are not included in its Pro Rata Basket if the Adviser 
or Sub-Adviser seeks to add an instrument to the Fund's portfolio 
without incurring transaction costs associated with the purchase of the 
instrument for cash. Similarly, if the Adviser or Sub-Adviser decides 
to sell an instrument from a Fund's portfolio, the Fund may include the 
instrument in a Creation Basket with the expectation that the Fund will 
deliver it in-kind during a redemption transaction.
    6. The Funds will use the requested basket flexibility only in 
circumstances in which Applicants believe there will be no harm to the 
Funds or their shareholders and in order to benefit the Funds and their 
shareholders by reducing costs, increasing efficiency, and improving 
trading. To ensure that there is effective arbitrage on Business Days 
when the Adviser determines a Fund should use a Creation Basket that 
differs from its Pro Rata Basket, the Adviser will cause the Fund to 
disclose on its website that Business Day, before the opening of 
regular trading on the primary listing Exchange of the Fund's Shares: 
(i) that the Fund is accepting Creation Baskets that differ from the 
Pro Rata Basket, (ii) a basket of securities and cash that is designed 
to closely track the daily performance of the Fund (an ``Optimized 
Basket''),\5\ and (iii) an Optimized Basket Overlap metric that 
measures the overlap between the Optimized Basket and the Fund's actual 
portfolio.
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    \5\ A Fund's Optimized Basket will be comprised of: (i) 
portfolio holdings; (ii) other securities that the Fund can 
purchase, including U.S. listed ETFs; and (iii) cash and cash 
equivalents.
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    7. For at least the first three years after a Fund begins using 
Creation Baskets that differ from its Pro Rata Basket, the Adviser will 
promptly call a meeting of the Board, and the Board will promptly meet 
to consider recommendations for appropriate remedial measures presented 
by the Adviser, if the tracking error of the Optimized Basket exceeds 
1% (i.e., the difference, in percentage terms, between the NAV per 
share of the Optimized Basket and that of the actual portfolio at the 
end of a trading day).
    8. Pursuant to condition 6, each Fund will maintain and preserve a 
copy of each Optimized Basket published on the Fund's website and a 
copy of each Creation Basket made available.
    9. In addition, pursuant to conditions 6 and 10, each Fund will 
comply with the recordkeeping requirements of rule 6c-11 and will adopt 
and implement written policies and procedures that govern the 
construction of Creation Baskets as required under rule 6c-11 except 
that only Creation Baskets different from a Fund's Pro Rata Basket will 
be treated as a ``custom basket'' under subsections (d)(2)(ii) and 
(c)(3) of rule 6c-11.

B. Considerations relating to the Requested Relief

    10. Applicants represent that the ability to use a Creation Basket 
that includes instruments that are not included, or are included with 
different weightings, in a Fund's Pro Rata Basket, does not raise any 
new policy concerns about reverse engineering of a Fund's portfolio, 
self-dealing or overreaching, or selective disclosure beyond those 
concerns addressed in connection with the Prior Order. Further, the 
Fund will disclose additional information, as noted in paragraph 6 
above, to ensure that there is effective arbitrage on Business Days 
when the Adviser determines a Fund should use a Creation Basket that 
differs from its Pro Rata Basket.
    11. Reverse Engineering. Applicants acknowledge that, by using a 
Creation Basket that includes instruments that are not included in a 
Fund's Pro Rata Basket, or are included in different percentages, and 
by publishing such Creation Basket on its website, the Fund would 
provide market participants with additional information about which 
instruments it adds or removes from the Fund's portfolio. However, 
Applicants represent that they will operate the Funds in a manner 
designed to minimize the risk of reverse engineering and, for the 
reasons set forth in the Application, believe successful front-running 
or free-riding is highly unlikely.
    12. Self-Dealing or Overreaching. Applicants state their belief 
that Authorized Participants and other market participants will not 
have the ability to disadvantage the Funds by manipulating or 
influencing the composition of Creation Baskets, including those that 
differ from a Fund's Pro Rata Basket. Like the basket and custom basket 
policies and procedures required of ETFs by rule 6c-11, the Funds will 
adopt and implement written policies and procedures that govern the 
construction of creation baskets and the process that will be used for 
the acceptance of creation baskets to safeguard the best interests of 
the Funds and their shareholders.\6\
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    \6\ See Exchange-Traded Funds, Investment Company Act Release 
No. 33646 (Sept. 25, 2019) (``ETF Adopting Release''), at 80-94 
(discussion of rule 6c-11 requirement for ETF policies and 
procedures concerning basket construction and acceptance and 
heightened policies and procedures for custom baskets).
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    13. Selective Disclosure. The Funds and each person acting on 
behalf of the

[[Page 91824]]

Funds must continue to comply with Regulation Fair Disclosure as if it 
applied to them (except that the exemptions provided in rule 
100(b)(2)(iii) therein shall not apply). Applicants believe that the 
creation basket flexibility they are seeking does not raise any new 
concerns about selective disclosure of material non-public information. 
First, a Fund's use of, or conversations with Authorized Participants 
about, Creation Baskets that would result in such disclosure would 
effectively be limited by the Funds' obligation to comply with 
Regulation Fair Disclosure. Second, each Business Day before the open 
of trading on the Exchange where a Fund is listed, the Fund will 
publish on its website the composition of any basket accepted by the 
Fund on the previous Business Day that differed from such Business 
Day's Pro Rata Basket.

II. Requested Exemptive Relief

    Applicants believe that the Prior Order continues to meet the 
relevant standards for relief pursuant to section 6(c) of the Act for 
an exemption from sections 2(a)(32), 5(a)(1), and 22(d) of the Act and 
rule 22c-1 under the Act, and under sections 6(c) and 17(b) of the Act 
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act.\7\
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    \7\ See supra note 2.
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III. Applicants' Conditions:

    Applicants agree that any Order of the Commission granting the 
requested relief will be subject to all of the conditions in the Prior 
Order, except condition 2 and condition 6 which are replaced with new 
conditions 2 and 6 below, as well as new condition 10:
    2. The website for the Trust, which will be publicly accessible at 
no charge, will contain, on a per Share basis for each Fund, the prior 
Business Day's NAV and market closing price or Bid/Ask Price of the 
Shares, a calculation of the premium or discount of the market closing 
price or Bid/Ask Price against such NAV, and any other information 
regarding premiums and discounts as may be required for other ETFs 
under Rule 6c-11 under the 1940 Act. The website will also disclose the 
median bid-ask spread for each Fund's most recent fiscal year based on 
the National Best Bid and Offer at the time of calculation of NAV (or 
such other spread measurement as may be required for other ETFs under 
Rule 6c-11 under the 1940 Act). On each applicable Business Day, when 
accepting orders involving a Creation Basket that differs from the 
Fund's Pro Rata Basket, each Fund will publish on its website before 
the opening of regular trading on the primary listing Exchange of the 
Fund's Shares an Optimized Basket and Optimized Basket Overlap.
    6. Each Fund will comply with the recordkeeping requirements of 
Rule 6c-11 under the Act, except that for purposes of this condition, 
only Creation Baskets different from the Fund's Pro Rata Basket will be 
treated as a ``custom basket'' under Rule 6c-11(d)(2)(ii). In addition, 
each Fund will maintain and preserve, for a period of not less than 
five years, in an easily accessible place, (i) a copy of any Optimized 
Basket published on the Fund's website for each Business Day; and (ii) 
a copy of each Creation Basket made available on a given day. In 
addition, each Fund will maintain and preserve, for a period of not 
less than five years, in an easily accessible place, all written 
agreements (or copies thereof) between the Fund and each AP 
Representative related to the AP Representative's role as such.
    10. Each Fund will adopt and implement written policies and 
procedures that govern the construction of Creation Baskets, as 
required under Rule 6c-11(c)(3) under the Act, except that for purposes 
of this condition, any Creation Basket different from the Fund's Pro 
Rata Basket will be treated as a ``custom basket.'' The Fund's basket 
policies and procedures will be covered by the Fund's compliance 
program and other requirements under Rule 38a-1 under the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-27015 Filed 11-19-24; 8:45 am]
BILLING CODE 8011-01-P
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