64436 Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 

12 15 U.S.C. 78s(b)(3)(A). 

13 17 CFR 240.19b–4(f). 

14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The Commission notes that Precidian ETFs 

Trust, which would be the issuer of the Funds, filed 

an Application for an Order under Section 6(c) of 

the 1940 Act for exemptions from various 

provisions of the 1940 Act and rules thereunder 

(File No. 812–14116), dated July 18, 2013 

(‘‘Exemptive Application’’). The Commission 

published notice of this application (‘‘Notice of 

Application for Exemptive Relief’’) on October 21, 

2014. See Investment Company Act Release No. 

31300 (Oct. 21, 2014) (Precidian ETFs Trust, et al.; 

Notice of Application). 

4See Securities Exchange Act Release No. 71588 

(Feb. 20, 2014), 79 FR 10848 (‘‘Notice’’), available 

at http://www.sec.gov/rules/sro/nysearca/2014/34- 

71588.pdf. 5See Letter from Gary L. Gastineau, President, 

ETF Consultants.com, Inc., to Elizabeth M. Murphy, 

Secretary, Commission (Mar. 18, 2014) (‘‘Gastineau 

Letter’’). All comments on this proposal (see also 

notes 8 and 11, infra) are available at http://

www.sec.gov/comments/sr-nysearca-2014-10/

nysearca201410.shtml. 6 15 U.S.C. 78s(b)(2). 

7See Securities Exchange Act Release No. 71895, 

79 FR 20285 (Apr. 11, 2014). The Commission 

designated a longer period within which to take 

action on the proposed rule change and designated 

May 27, 2014, as the date by which it should 

approve, disapprove, or institute proceedings to 

determine whether to disapprove the proposed rule 

change. 8See Letter from Dennis J. DeCore, Former CoHead U.S. Index Arbitrage (1997–2007), Nomura 

Securities, to Elizabeth M. Murphy, Secretary, 

Commission (Apr. 8, 2014) (‘‘DeCore Letter’’); Letter 

from Martha Redding, Chief Counsel and Assistant 

Corporate Secretary, NYSE Euronext, to Secretary, 

Commission (May 14, 2014) (‘‘Response Letter’’). 9 15 U.S.C. 78s(b)(2)(B). 

10See Securities Exchange Act Release No. 72255, 

79 FR 31362 (June 2, 2014). Specifically, the 

Exchange to offer ETPs the ability to list 

on the Exchange without having to pay 

any annual fees. As such, the proposal 

is a competitive proposal that is 

intended to attract additional ETP 

listings, which will, in turn, benefit the 

Exchange and all other BATS-listed 

ETPs. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The Exchange has not solicited, and 

does not intend to solicit, comments on 

this proposed rule change. The 

Exchange has not received any written 

comments from members or other 

interested parties. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 12 and paragraph (f) of Rule 

19b–4 thereunder13 At any time within 

60 days of the filing of the proposed rule 

change, the Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. 

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 rule-comments@

sec.gov. Please include File Number SR– 

BATS–2014–050 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–BATS–2014–050. 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 such 

filing also will be available for 

inspection and copying at the principal 

offices of the Exchange. 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–BATS– 

2014–050, and should be submitted on 

or before November 19, 2014. 

For the Commission, by the Division 

of Trading and Markets, pursuant to 

delegated authority.14

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–25668 Filed 10–28–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73424; File No. SR– 

NYSEArca–2014–10] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Order Disapproving a 

Proposed Rule Change To Adopt NYSE 

Arca Equities Rule 8.900, Which 

Permits the Listing and Trading of 

Managed Portfolio Shares, and To List 

and Trade Shares of the ActiveShares 

Large-Cap Fund, ActiveShares MidCap Fund, and ActiveShares Multi-Cap 

Fund Pursuant to That Rule 

October 24, 2014. 

On February 7, 2014, NYSE Arca, Inc. 

(‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to adopt new NYSE Arca 

Equities Rule 8.900, which would 

govern the listing and trading of 

Managed Portfolio Shares, and to list 

and trade shares of the ActiveShares 

Large-Cap Fund, ActiveShares Mid-Cap 

Fund, and ActiveShares Multi-Cap 

Fund (each a ‘‘Fund’’ and, collectively, 

‘‘Funds’’) under proposed NYSE Arca 

Equities Rule 8.900.3 The proposed rule 

change was published for comment in 

the Federal Register on February 26, 

2014.4 The Commission received one 

comment letter on the proposed rule 

change during the initial comment 

period.5

On April 7, 2014, pursuant to Section 

19(b)(2) of the Exchange Act,6 the 

Commission designated a longer period 

within which to approve the proposed 

rule change, disapprove the proposed 

rule change, or institute proceedings to 

determine whether to approve or 

disapprove the proposed rule change.7

The Commission received two 

additional comment letters on the 

proposed rule change, including a letter 

from the Exchange in support of its 

proposal.8 On May 27, 2014, the 

Commission instituted proceedings 

under Section 19(b)(2)(B) of the 

Exchange Act 9 to determine whether to 

approve or disapprove the proposed 

rule change.10 The Commission 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 64437 

Commission instituted proceedings to allow for 

additional analysis of the proposed rule change’s 

consistency with Section 6(b)(5) of the Exchange 

Act, which requires, among other things, that the 

rules of a national securities exchange be ‘‘designed 

to prevent fraudulent and manipulative acts and 

practices, to promote just and equitable principles 

of trade,’’ and ‘‘to protect investors and the public 

interest.’’ See id., 79 FR at 31368 (text 

accompanying n.86). 

11See Letter from Gary L. Gastineau, President, 

ETF Consultants.com, Inc., to Elizabeth M. Murphy, 

Secretary, Commission (June 23, 2014) (‘‘Second 

Gastineau Letter’’). 

12See Securities Exchange Act Release No. 72901, 

79 FR 51380 (Aug. 28, 2014) (designating October 

24, 2014 as the date by which the Commission must 

either approve or disapprove the proposed rule 

change). 

13See Letter from Reginald M. Browne, Senior 

Managing Director—ETF Group, Cantor Fitzgerald & 

Co, to Mary Jo White, Chair, Commission (Oct. 20, 

2014) (‘‘Browne Letter’’). 

14The Exchange also proposes to amend NYSE 

Arca Equities Rule 7.34(a)(4)(A) (Trading Sessions) 

to include Managed Portfolio Shares in the trading 

halt provision for shares traded pursuant to UTP 

during the Exchange’s Opening Session. 

15See Notice, supra note 4. Additional 

information regarding the Precidian ETFs Trust and 

the Shares, including investment strategies, risks, 

creation and redemption procedures, fees, portfolio 

holdings disclosure policies, distributions, and 

taxes is available in the registration statement filed 

by the Precidian ETFs Trust on January 22, 2014, 

on Form N–1A under the Securities Act of 1933 and 

under the Investment Company Act of 1940 (‘‘1940 

Act’’) relating to the Funds (File Nos. 333–171987 

and 811–22524) (‘‘Registration Statement’’). 

16Certain large market participants, typically 

broker-dealers, can become ‘‘Authorized 

Participants’’ with respect to the Funds. Each 

Authorized Participant would enter into a 

contractual relationship with a Fund or Funds, 

allowing it to engage in redemptions of Shares 

directly with the issuer. 

17NYSE Arca Equities Rule 8.600(c)(2) defines 

the term ‘‘Disclosed Portfolio’’ as the ‘‘identities 

and quantities of the securities and other assets 

held by the Investment Company that will form the 

basis for the Investment Company’s calculation of 

net asset value at the end of the business day.’’ 

NYSE Arca Equities Rule 8.600(d)(2)(B)(i) requires 

that the Disclosed Portfolio be disseminated at least 

once daily and that it be made available to all 

market participants at the same time. 

18A mutual fund is required to file with the 

Commission its complete portfolio schedules for the 

second and fourth fiscal quarters on Form N–SAR 

under the 1940 Act, and to file its complete 

portfolio schedules for the first and third fiscal 

quarters on Form N–Q under the 1940 Act, within 

60 days of the end of the quarter. Form N–Q 

requires funds to file the same schedules of 

investments that are required in annual and semiannual reports to shareholders. These forms are 

available to the public on the Commission’s Web 

site at http://www.sec.gov/. 

19A ‘‘Redemption Unit’’ is a specified number of 

Managed Portfolio Shares used for determining 

whether a retail investor may redeem for cash. 

According to the Notice, a Redemption Unit is 

currently 50,000 Shares. 

20Under the proposal, a ‘‘Retail Investor’’ is 

defined as (i) a natural person; (ii) a trust 

established exclusively for the benefit of a natural 

person or a group of related family members; or (iii) 

a tax deferred retirement plan where investments 

are selected by a natural person purchasing for its 

own account. 

21With respect to the three Funds that are the 

subject of the proposal, the Exchange has 

represented that fees for creations and redemptions 

by Retail Investors would not exceed two percent, 

in accordance with the requirements of Rule 22c– 

2 under the 1940 Act. 

received a second letter from one of the 

commenters.11 On August 22, 2014, the 

Commission designated a longer period 

for Commission action on the proposed 

rule change.12 The Commission 

subsequently received an additional 

comment letter regarding the proposed 

rule change.13

This Order disapproves the proposed 

rule change. 

I. Description of the Proposal 

The Exchange proposes: (1) To adopt 

new NYSE Arca Equities Rule 8.900 to 

permit the listing and trading, or trading 

pursuant to unlisted trading privileges 

(‘‘UTP’’), of Managed Portfolio Shares, 

which are securities issued by an 

actively managed open-end investment 

management company; and (2) to list 

and trade shares (‘‘Shares’’) of the Funds 

under proposed NYSE Arca Equities 

Rule 8.900.14 The discussion below 

summarizes the Exchange’s proposal, 

details of which are described in the 

Notice.15

A. Proposed Listing Rules 

The Exchange’s proposal defines the 

term ‘‘Managed Portfolio Share’’ as a 

security that (a) is issued by a registered 

investment company (‘‘Investment 

Company’’) organized as an open-end 

management investment company or 

similar entity that invests in a portfolio 

of securities selected by the Investment 

Company’s investment adviser 

consistent with the Investment 

Company’s investment objectives and 

policies; (b) is issued in any number of 

shares for a cash amount equal to the 

next determined net asset value 

(‘‘NAV’’); (c) may be redeemed for cash 

by any Retail Investor (as defined 

below) in any size less than a 

Redemption Unit (as defined below) for 

a cash amount equal to the next 

determined NAV; and (d) when 

aggregated in a number of shares equal 

to a Redemption Unit or multiples 

thereof, may be redeemed by or through 

an Authorized Participant,16 with 

payment to be made, through a blind 

trust established for the Authorized 

Participant’s benefit, in the form of 

securities, cash, or both with a value 

equal to the next determined NAV. 

While funds issuing Managed 

Portfolio Shares would be actively 

managed and, to that extent, would be 

similar to Managed Fund Shares (which 

are actively managed funds listed and 

traded under NYSE Arca Equities Rule 

8.600), Managed Portfolio Shares differ 

from Managed Fund Shares in the 

following significant respects. 

• In contrast to Managed Fund 

Shares, for which a ‘‘Disclosed 

Portfolio’’ is required to be disseminated 

at least once daily,17 the portfolio for an 

issue of Managed Portfolio Shares 

would be disclosed once quarterly in 

accordance with disclosure 

requirements otherwise applicable to 

open-end investment companies 

registered under the 1940 Act.18

• In connection with the redemption 

of shares in Redemption Unit 19 size, the 

in-kind delivery of any portfolio 

securities would generally be effected 

through a blind trust for the benefit of 

the redeeming Authorized Participant, 

and the blind trust would liquidate the 

portfolio securities pursuant to standing 

instructions from the Authorized 

Participant without disclosing the 

identity of those securities to the 

Authorized Participant. 

• Investors, including ‘‘Retail 

Investors,’’ 20 would be able to purchase 

shares either (a) in the secondary 

markets (e.g., the Exchange) at market 

prices or (b) for cash directly from a 

Fund in any amount on any day a fund 

determines its NAV, as described in 

more detail below. 

• As with traditional open-end 

investment companies, Retail Investors 

would be able to redeem shares for cash 

directly from a fund on any day and in 

any size less than a Redemption Unit at 

the fund’s NAV.21

For each series of Managed Portfolio 

Shares, an estimated value, defined in 

the proposed rules as the ‘‘Portfolio 

Indicative Value’’ (‘‘PIV’’), that reflects 

an estimated intraday value of a fund’s 

portfolio, based on the last market price 

or last sale price, would be 

disseminated. The PIV would be based 

upon all of a Fund’s holdings as of the 

close of the prior business day and 

would be widely disseminated by one or 

more major market data vendors at least 

every 15 seconds during the Exchange’s 

Core Trading Session (normally, 9:30 

a.m. to 4:00 p.m., Eastern Time). 

The Exchange’s proposal provides 

that the Exchange would file separate 

proposals under Section 19(b) of the 

Exchange Act before listing and trading 

any additional series of Managed 

Portfolio Shares. 

B. Description of the Funds 

The portfolio for each Fund would 

consist primarily of stocks in the Russell 

3000 Index (which consists of stocks 

included in the Russell 1000 Index and 

the Russell 2000 Index) and shares 

issued by other exchange-traded funds 

(‘‘ETFs) that invest primarily in shares 

of issuers in the Russell 3000 Index. The 

mstockstill on DSK4VPTVN1PROD with NOTICES

64438 Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 

22The terms ‘‘normally’’ and ‘‘under normal 

market conditions’’ would include, but not be 

limited to, the absence of extreme volatility or 

trading halts in the equity markets or the financial 

markets generally; operational issues causing 

dissemination of inaccurate market information; or 

force majeure 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. 

23This commenter notes that he has a retained 

economic interest in a product that may be 

competitive with Managed Portfolio Shares and 

states that his views on the Exchange’s filing ‘‘may 

be considered subject to a conflict of interest.’’ 

Gastineau Letter, supra note 5, at 1, n.1. The 

Exchange asserts that the concerns of the opposing 

commenter are driven by competitive motives and 

that these concerns should not affect the 

Commission’s decision to approve or disapprove 

the proposed rule change. See Response Letter, 

supra note 8, at 5. Instead, according to the 

Exchange, different proposals to list and trade 

actively managed EFTs without daily portfolio 

disclosure should be assessed on their individual 

merits and risks. See id. The opposing commenter 

asserts that the Commission should not ignore his 

comments just because they are raised by a 

competitor. See Second Gastineau Letter, supra 

note 11, at 7. The opposing commenter argues that 

the Commission should consider legitimate issues 

raised by any credible source, and he asserts that 

his comments are made in the public interest and, 

to the best of his ability, are not influenced by any 

conflict. See id. 

24See Gastineau Letter, supra note 5, at 6. 

25See id. at 8. 

26See id. 

27See id. 

28See id. (citing Antti Petajisto, Inefficiencies in 

the Pricing of Exchange-Traded Funds (Working 

Paper Sept. 20, 2013 (‘‘Petajisto Study’’)). 

29See DeCore Letter, supra note 8, at 1. 

30See Browne Letter, supra note 13, at 2. 

31See Response Letter, supra note 8, at 2. 

32See id. 

33See id. 

34See Gastineau Letter, supra note 5, at 2–3. 

ActiveShares Large Cap Fund would 

invest primarily in securities included 

in the Russell 1000 Index and in ETFs 

that primarily invest in stocks in the 

Russell 1000 Index. The ActiveShares 

Mid-Cap Fund would invest primarily 

in securities that are included in the 

Russell 2000 Index and in ETFs that 

primarily invest in stocks in the Russell 

2000 Index. And the ActiveShares 

Multi-Cap Fund would invest primarily 

in securities included in the Russell 

3000 Index and in ETFs that primarily 

invest in stocks in the Russell 3000 

Index. All exchange-listed equity 

securities in which the Funds would 

invest would be listed and traded on a 

U.S. national securities exchange. 

Each Fund would target an overall net 

equity market exposure of between 70% 

and 130% of the Fund’s assets. Each 

Fund would purchase securities that its 

portfolio managers believed to be 

undervalued and would sell short 

securities that the portfolio managers 

believed to be overvalued. Under 

normal market conditions,22 each 

Fund’s net long equity market exposure 

would not exceed 130%, and its net 

short equity market exposure would not 

exceed 30%, but the portfolio managers 

might at times exceed these percentages. 

Other Investments. While each Fund, 

under normal market conditions, would 

invest primarily in stocks included in 

the Russell 3000 Index and ETFs, as 

described above, each Fund would be 

able to invest its remaining assets in 

repurchase agreements and reverse 

repurchase agreements, high-quality 

money market instruments, and the 

securities of other investment 

companies to the extent allowed by law. 

II. Summary of the Comments Received 

As noted above, the Commission 

received two letters from the same 

commenter opposing the proposed rule 

change,23 two letters from commenters 

supporting the proposal, and a letter 

from the Exchange responding to the 

opposing commenter’s objections. 

Comments on the proposal raised two 

broad issues—(1) the effectiveness of 

arbitrage in the absence of daily 

portfolio disclosure, and (2) the benefits 

and drawbacks of the Funds’ unique 

creation and redemption processes—as 

well as a number of other issues that are 

narrower in scope. 

A. The Effectiveness of Arbitrage in the 

Absence of Daily Portfolio Disclosure 

The opposing commenter predicts 

that, compared to most existing ETFs, 

the Shares would probably trade with 

significantly wider bid-ask spreads, 

with more variable premiums and 

discounts, or with both, because of what 

the opposing commenter characterizes 

as the unreliability of the Funds’ 

proposed method for ensuring 

secondary market trading efficiency.24

The opposing commenter states that the 

Funds’ market makers would have only 

indirect, and likely imperfect, 

information about Fund holdings.25 As 

a result, according to the opposing 

commenter, effectively arbitraging the 

Funds would be significantly more 

difficult than the arbitrage for most 

existing foreign ETFs.26

The opposing commenter argues that 

there is no support for the Exchange’s 

contention that existing ETFs holding 

portfolios of foreign securities, such as 

index-based ETFs holding Asian stocks, 

have demonstrated efficient pricing 

characteristics even though they do not 

provide opportunities for riskless 

arbitrage transactions during much of 

the trading day.27 The opposing 

commenter also cites a draft academic 

working paper for the propositions that 

market trading efficiency varies 

significantly by type and size of ETF; 

that funds with high share trading 

volumes, liquid underlying holdings, 

and efficient arbitrage mechanisms trade 

with relatively tight bid-ask spreads and 

more stable premiums and discounts; 

and that funds lacking these 

characteristics generally trade with 

wider spreads and more variable 

premiums and discounts.28

Another commenter predicts that 

trading spreads in Managed Portfolio 

Shares would not be as ‘‘tight’’ as 

trading spreads in the SPY or QQQ 

(where futures, options, and equity 

portfolios can be used as a pure hedge), 

but that a frequent update of the 

intraday indicative value would allow 

market maker spreads to be 

reasonable.29 A third commenter, who 

is a market maker in ETFs, states that, 

in his professional opinion and after 

significant analysis, ‘‘given a clearly 

defined investment objective within a 

known universe of securities, efficient 

markets can and will be made in ETFs 

utilizing Precidian’s Blind Trust 

Structure.’’ 30

The Exchange responds to the 

opposing commenter that, as set forth in 

the Notice, market makers have 

indicated that the available information 

regarding the Shares would be sufficient 

for arbitrage and hedging purposes.31

Additionally, the Exchange states that, 

based on discussions with market 

makers, it expects that market makers 

would agree to act as lead market 

makers (‘‘LMMs’’) in the Shares and 

believes that no market maker would 

accept an LMM assignment if it were 

not entirely comfortable in its ability to 

hedge its positions.32 The Exchange 

argues that the opposing commenter 

offers no direct support for his doubts 

regarding efficient secondary market 

trading, and the Exchange asserts that 

these LMMs are uniquely suited to 

prospectively assess the effectiveness of 

arbitrage in the shares.33

Regarding the Exchange’s assertion 

that market makers will be able to make 

efficient and liquid markets priced near 

the PIV as long as an accurate PIV is 

disseminated every 15 seconds and 

market makers have knowledge of a 

fund’s means of achieving its 

investment objective, the opposing 

commenter states that, for a number of 

reasons, the dissemination of a PIV by 

the Funds is likely to prove ineffective 

in ensuring alignment of secondary 

market prices for the Shares with the 

values of the underlying portfolios.34

The opposing commenter asserts that, 

during periods of rapid market 

movement, the use of last-sale prices to 

calculate a PIV, coupled with the 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 64439 

35See id. at 10. 

36See id. 

37See id. at 10–11. 

38See id. at 11. 

39See id. at 13. 

40See id. 

41See id. 

42See Response Letter, supra note 8, at 2. 

43See id. 

44See id. 45See id. 46See id. 47See id. at 3. 48See id. 

49See Second Gastineau Letter, supra note 11. 

50See Response Letter, supra note 8. 

51See Second Gastineau Letter, supra note 11, at 

3. 

52See id. 

53See id. 

54See id. at 4–5. 

55See id. at 5. 

56See id. 

57See id. at 3. 

58See supra note 28. 

dissemination of the PIV only every 15 

seconds, would mean that the PIV 

would be a lagging indicator of actual 

portfolio values.35 Additionally, the 

opposing commenter asserts that the 

PIV may reflect clearly erroneous values 

for securities that have not yet opened 

for trading on a particular business day 

or that are subject to an intraday 

interruption in trading.36 The opposing 

commenter also criticizes the 

Exchange’s representation that the 

adviser and calculation agent would use 

‘‘commercially reasonable efforts’’ to 

calculate the PIV, arguing that this is a 

substantially lower standard of care 

than that applying to NAV calculations 

for ETFs and mutual funds.37 The 

opposing commenter further asserts that 

the proposal does not provide that any 

entity would stand behind a Fund’s PIV 

to ensure timeliness and accuracy.38

The opposing commenter predicts 

that frequent PIV errors would cause 

‘‘erroneous share trades’’ to be 

executed.39 The opposing commenter 

states that the proposal does not address 

whether PIV errors and related 

erroneous trades would be detected by 

the Exchange, whether such trades 

would be cancelled, or whether the 

Exchange would apply a materiality 

standard for cancellations.40 The 

opposing commenter argues that, as a 

condition of approval, the Exchange 

should be required to monitor the 

timeliness and accuracy of PIV 

dissemination and to implement 

procedures to address trades when an 

erroneous PIV has been disseminated.41

The Exchange agrees with the 

opposing commenter that an accurate 

PIV would be essential for trading in the 

Shares, but asserts that the opposing 

commenter offers no support for the 

assertion that the PIV would be 

unreliable.42 The Exchange reiterates 

that market makers have indicated that, 

after the first few days of trading, there 

would be sufficient data to run a 

statistical analysis that would lead to 

differences between the Share price of 

the ETF and the PIV being tightened 

substantially.43 The Exchange states that 

it has no reason to believe that the PIV, 

which would be calculated using 

methodology substantially similar to 

that used in the calculation of all other 

ETF intraday indicative values, would 

be inherently unreliable.44 The 

Exchange asserts that market 

participants would accept the PIV as a 

reliable, indicative real-time value 

because (a) the PIV would be calculated 

and disseminated based on a Fund’s 

actual portfolio holdings; (b) the 

securities in which the Funds plan to 

invest are generally highly liquid and 

actively traded and therefore generally 

have accurate real-time pricing 

available; and (c) market participants 

would have a daily opportunity to 

evaluate whether the PIV at or near the 

close of trading was indeed predictive of 

the actual NAV.45

The Exchange states that, because it 

has no reason to believe that the PIVs 

would be inherently unreliable, it does 

not propose to institute any additional 

monitoring programs.46 Instead, the 

Exchange states that it would rely on its 

existing surveillance systems to monitor 

trading in the Shares and that these 

procedures are adequate to properly 

deter and detect violations of Exchange 

rules and federal securities laws 

applicable to trading on the Exchange.47

The Exchange also states that its 

existing rule applicable to trade 

cancellations (NYSE Area Equities Rule 

7.10) neither addresses trade 

cancellations in the event erroneous 

PIVs are disseminated nor provides the 

Exchange with the discretion to cancel 

trades.48

In his second comment letter,49 which 

addresses the Exchange’s Response 

Letter,50 the opposing commenter states 

that he does not question the veracity of 

LMMs who have discussed with the 

Exchange their ability to make efficient 

and liquid markets in the Shares, but 

that he questions whether the important 

caveat—that accurate PIVs are 

available—would reliably be met.51 He 

offers the following reasons why 

dissemination of PIVs at 15-second 

intervals throughout the Exchange’s 

Core Trading Session would not provide 

a reliable and sufficient basis for 

ensuring that market trading prices of 

Shares maintain a close correspondence 

to each Share’s underlying value: (a) 

PIVs may not be calculated in the same 

manner as NAV; (b) PIVs would be 

based on consolidated last sale 

information and may reflect clearly 

erroneous values for securities that have 

not opened for trading on a particular 

business day or that are subject to an 

intraday interruption in trading; (c) PIVs 

would be calculated based on a 

‘‘commercially reasonable’’ standard of 

care, not the higher standards that apply 

to a Fund’s daily NAV calculations; (d) 

there would be no time or scope for 

checking calculated PIV values before 

they are released in real time 1,560 

times each trading day; and (e) the 

calculation of PIVs would require the 

coordinated actions of multiple parties, 

none of which would guarantee the 

accuracy of disseminated PIVs or 

assume liability for damages resulting 

from PIV errors.52

The opposing commenter asserts that 

disseminated PIVs for ETFs with 

transparent portfolios have essentially 

no relevance to secondary market 

trading efficiency and limited overall 

utility for investors.53 In contrast, 

according to the opposing commenter, 

the officially disseminated PIVs would 

be the foundation supporting market 

trading of the Shares, because Fund 

holdings would not be disclosed, and 

market makers in the Shares would not 

be able to calculate their own 

independent estimates of intraday Fund 

values or to verify the accuracy of the 

Fund-disseminated PIVs.54 The 

opposing commenter states that he is 

unaware of any studies that demonstrate 

the reliability of the intraday values 

disseminated for existing ETFs based on 

substantially the same calculation 

methodology and standards as proposed 

for the Shares.55 He recommends that, if 

the Exchange is unwilling to undertake 

a surveillance program to detect 

erroneous PIVs and to establish 

procedures for cancelling trades based 

on erroneous trades, the Commission 

should condition any approval of the 

proposed rule change on a 

demonstration of the prospective 

reliability of Fund PIVs through a 

comprehensive study of the historical 

accuracy of the disseminated intraday 

values of existing ETFs with investment 

profiles similar to the Funds.56

The opposing commenter also 

questions whether the terms ‘‘efficient 

and liquid markets’’ and ‘‘priced near 

the PIV’’ (used by the cited LMMs) are 

properly defined or are suitable 

standards for open-end funds issuing 

redeemable securities.57 The opposing 

commenter asserts that the Petajisto 

Study 58 demonstrates that the trading 

mstockstill on DSK4VPTVN1PROD with NOTICES

64440 Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 

59See Second Gastineau Letter, supra note 11, at 

3. 

60See id. 

61See id. 

62See id. at 4. 

63See id. 

64See Gastineau Letter, supra note 5, at 12. 

65See id. 

66See id. at 16. 

67See Response Letter, supra note 8, at 4–5. 

68See id. at 4. 

69See id. at 4–5. 

70See Second Gastineau Letter, supra note 11, at 

2. 

71See Gastineau Letter, supra note 5, at 5. 

72See id.; Second Gastineau Letter, supra note 11, 

at 2. 

73See Response Letter, supra note 8, at 4–5. 

74See Gastineau Letter, supra note 5, at 5. More 

generally, the opposing commenter asserts that 

none of the arguments he made are irrelevant 

because Section 6(b)(5) of the Exchange Act states, 

in relevant part, that the ‘‘rules of the exchange 

must be designed . . . to promote just and equitable 

principles of trade, . . . to remove impediments to 

and perfect the mechanism of a free and open 

market . . . and, in general, to protect investors and 

the public interest; and are not designed to permit 

unfair discrimination’’ among market participants. 

See Second Gastineau Letter, supra note 11, at 2 

(omissions in original). 

efficiency of existing ETFs varies across 

a broad range and that many existing 

ETFs trade with wide bid-ask spreads 

and highly variable premiums/

discounts,59 and he posits that some of 

the LMMs supporting trading in those 

ETFs would nonetheless represent that 

they trade ‘‘efficiently’’ and ‘‘near’’ 

underlying value.60

The opposing commenter 

recommends that the Commission ask 

the Exchange to quantify the range of 

expected bid-ask spreads and 

premiums/discounts at which LMMs 

have indicated they expect the Shares to 

trade and to compare these expectations 

to accurate measures of benchmark 

index ETF trading performance.61

Additionally, the opposing commenter 

argues that the Exchange’s statement 

that it ‘‘expects that a market maker will 

act as [LMM] in the Shares and believes 

no market maker would accept [an 

LMM] assignment if they were not 

entirely comfortable in their ability to 

hedge their positions’’ does not support 

the Exchange’s assertion that the Shares 

can be expected to trade at consistently 

tight bid-ask spreads and stable 

premiums/discounts.62 He asserts that: 

(1) Every closed-end fund listed on the 

Exchange also has an LMM, including 

the many closed-end funds that 

routinely trade at double-digit discounts 

or premiums to NAV; and therefore (2) 

the mere presence of a market maker 

willing to serve as LMM is not evidence 

that a particular fund would trade with 

bid-ask spreads and premiums/

discounts consistent with the 

marketplace’s expectations for how 

ETFs should trade or the legal standard 

applicable to open-end investment 

companies issuing redeemable 

securities.63

B. Creation and Redemption Process 

1. Redemptions by Authorized 

Participants 

The opposing commenter raises a 

number of objections to the Funds’ 

proposed use of a blind trust to effect 

redemption transactions by Authorized 

Participants. He predicts that the 

proposed redemption arrangements 

would introduce additional costs and 

uncertainties for Authorized 

Participants for the following reasons: 

• The Funds’ custodian would have a 

monopoly position as the sole eligible 

provider of trustee services for the blind 

trust; 

• the Funds’ adviser, rather than the 

Authorized Participant, would negotiate 

the fees paid to the trustee; 

• in contrast to existing ETFs, no 

Authorized Participant would have the 

potential ability to use its market 

knowledge and market position to 

enhance arbitrage profits (or offset 

arbitrage costs) by managing sales of the 

distributed securities to minimize 

market impact or to realize prices above 

the market close; and 

• the Funds’ custodian, who acts for 

the Authorized Participant in the sale of 

distributed securities, would have no 

apparent incentive to sell distributed 

securities with low market impact or at 

prices above the close and would 

experience little or no downside from 

doing the opposite.64

The opposing commenter also asserts 

that redeeming Authorized Participants 

would be exposed to potential costs and 

risks associated with not being able to 

control disposition of significantly more 

concentrated redemption proceeds, and 

the opposing commenter argues that 

these extra costs and risks associated 

with the blind trust arrangement would 

be passed through to shareholders 

transacting in the secondary market, 

reflected as wider bid-ask spreads, more 

volatile premiums and discounts for the 

Shares, or both.65

In addition, the opposing commenter 

argues that the Commission should not 

grant the issuer’s pending request for 

exemptive relief under the 1940 Act to 

maintain early Order Cut-Off Times for 

Fund redemptions, which are intended 

to facilitate the timely sale of distributed 

securities by the blind trusts that receive 

the proceeds of Authorized Participant 

redemptions and to facilitate the 

efficient processing of redemptions by 

retail investors through the Retail 

Redemption Facility.66

In response, the Exchange argues that 

the opposing commenter’s arguments 

regarding cost considerations are 

irrelevant under the Exchange Act 67

and that limiting broker-dealer 

processing fees on direct purchases and 

redemptions of Shares would require 

Commission rulemaking.68 The 

Exchange also argues that the opposing 

commenter’s arguments regarding early 

Order Cut-Off Times for redemption is 

not relevant under the Exchange Act.69

The opposing commenter argues, in 

response, that mandatory early Order 

Cut-Off Times for direct purchases and 

redemptions of Shares, while raising 

issues under the 1940 Act, also raise 

Exchange Act issues due to the potential 

impact on secondary market trading. 

Specifically, the opposing commenter 

asks: (1) If Authorized Participants 

cannot enter orders to purchase and 

redeem Shares after a designated cut-off 

time, how would this affect market 

trading later in the session; and (2) if 

market makers cannot transact with the 

Fund to offload long and short positions 

in Shares accumulated after the cut off 

time, how could the Funds’ proposed 

arbitrage mechanism function 

effectively? 70

In connection with the unique 

redemption features of the Funds, the 

opposing commenter further asserts that 

there is a ‘‘significant risk’’ that the 

Internal Revenue Service (‘‘IRS’’) would 

deny the purported tax benefits of the 

Funds’ distinctive in-kind redemption 

program.71 Therefore, the opposing 

commenter recommends that approval 

of the proposal be conditioned on the 

issuer obtaining a favorable IRS 

determination of the tax treatment 

through a Private Letter Ruling.72

In response, the Exchange argues that 

the opposing commenter’s arguments 

regarding the tax treatment of in-kind 

distributions through the blind trust are 

not relevant under the Exchange Act.73

The opposing commenter’s second 

letter restates his belief that the tax 

treatment of the Funds’ in-kind 

redemptions is relevant and again urges 

the Commission to condition any 

approval of the proposed rule change on 

the issuer receiving a Private Letter 

Ruling from the IRS affirming the 

claimed tax treatment of the Funds’ inkind redemptions.74

2. The Retail Redemption Facility 

The opposing commenter posits that a 

principal purpose of including direct 

Share purchases and the Retail 

Redemption Facility in the proposal is 

to provide comfort to the Commission 

and market participants that investors 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 64441 

75See Gastineau Letter, supra note 5, at 17. 

76See id. at 17–18. 

77See Second Gastineau Letter, supra note 11, at 

6. 

78See id. 

79See id. 

80See id. 

81See id. 

82See Gastineau Letter, supra note 5, at 20. 

83See id. 

84See id. 

85See id. at 20–21. 

86See Response Letter, supra note 8, at 4. 

87See Gastineau Letter, supra note 5, at 27–28. 

88See Response Letter, supra note 8, at 4–5. 

89See Second Gastineau Letter, supra note 11, at 

3. 

90See Gastineau Letter, supra note 5, at 25. 

91See id. 

would be able to transact with the Fund 

at or near NAV whenever secondary 

market trading prices of shares vary 

significantly from NAV.75 The opposing 

commenter argues that these provisions, 

as proposed, are inadequate for this 

purpose because: (a) The Retail 

Redemption Facility would be available 

only to a limited set of shareholders and 

would be restricted to redemptions of 

less than a Redemption Unit of shares; 

(b) the expected early Order Cut-Off 

Time for direct share purchases and the 

Retail Redemption Facility means that 

an investor’s ability to directly purchase 

or redeem shares for cash would exist 

for only a portion of each business day; 

(c) investors who directly purchase and 

redeem shares would be subject to 

transaction fees imposed by the Fund of 

up to 2% and may also be subject to 

broker-dealer processing fees; (d) selfdirected investors may not have 

adequate information about the 

available liquidity options to make 

intelligent choices about how best to 

buy and sell shares; (e) broker-dealers 

may not have adequate information to 

ensure that their customers consistently 

receive best execution on transactions in 

shares, given the two distinct liquidity 

pathways; and (f) broker-dealers may 

not have or may not develop the 

systems capabilities necessary to 

support customer transactions in Funds 

offering both secondary market trading 

in shares and direct share purchases and 

redemptions.76

The opposing commenter asserts that 

the Exchange’s statements that 

‘‘investors may choose to purchase 

Shares directly from a Fund if they want 

to assure that they would not purchase 

Shares at a premium’’ and that ‘‘Retail 

Investors may decide to redeem their 

Shares for cash if they want to make 

sure they receive the NAV and do not 

want to risk selling their Shares in the 

secondary market at a discount’’ are 

valid only to the extent that a Fund’s 

direct purchase and redemption options 

apply to a particular investor, are 

available at the particular time of day 

when the investor seeks to buy or sell 

Shares, are not negated by 

disproportionate fees, and are backed by 

investor information and broker-dealer 

systems adequate to support informed 

decision-making and effective execution 

of direct transactions in Shares.77 The 

opposing commenter expresses concern 

that, because of the challenges to brokerdealer trade management and order 

processing systems introduced by the 

Funds’ unique dual-liquidity features, 

broker-dealers (if left unregulated) 

would charge significantly higher fees 

on direct purchases and redemptions 

than the commissions they charge on 

comparably sized secondary market 

trades in Shares.78 He argues that, if 

broker-dealer fees on direct transactions 

in Shares are too high, then 

shareholders would, in a practical 

sense, lose access to the Funds’ 

intended mechanism for ensuring 

continued access to liquidity at or near 

NAV during periods when market 

trading prices of Shares vary 

significantly from NAV.79 To the extent 

that the Commission values the Funds’ 

direct purchase and redemption 

facilities, he recommends that the 

Commission place appropriate limits on 

associated broker-dealer fees and Fund 

Transactions Fees.80 The opposing 

commenter also repeats his views that 

the Funds’ proposed direct purchase 

and redemptions options should apply 

equally to all investors and should be 

available throughout each business 

day’s Regular Trading Session, arguing 

that disparate redemption rights for 

different groups of shareholders are 

inherently discriminatory and 

inconsistent with the Requirements of 

Section 6(b)(5) of the Exchange Act.81

The opposing commenter 

recommends that the Funds should be 

required to extend eligibility for the 

Retail Redemption Facility to all 

shareholders and that the Order Cut-Off 

Times for direct purchases of shares and 

redemptions under the Retail 

Redemption Facility be established as of 

the close of the Exchange’s regular 

trading session.82 The opposing 

commenter recommends that the 

Exchange be required to limit trading in 

shares to broker-dealers that have 

represented to the Exchange that they 

have systems in place (a) to 

accommodate direct purchases and 

redemptions of Shares on terms no less 

favorable than secondary market 

transactions and (b) to ensure best 

execution of transactions in shares, 

considering both secondary market 

trading and direct purchase and 

redemption options.83 The opposing 

commenter also recommends that the 

broker-dealers trading shares on the 

Exchange should not be permitted to 

charge their customers processing fees 

on direct purchases and redemptions of 

shares that exceed what they charge the 

same customers for secondary market 

trades.84 Further, the opposing 

commenter recommends that the Funds 

should not be permitted to charge 

transaction fees on direct purchases and 

redemptions of shares that exceed the 

associated Fund expenses incurred, 

taking into account the size of a specific 

transaction.85

In response, the Exchange does not 

address the individual objections raised 

by the opposing commenter, but instead 

asserts that the process proposed in the 

Notice is consistent with the applicable 

provisions of the Exchange Act.86

C. Other Issues 

1. Disclosures 

The opposing commenter alleges that 

the prospectus contains a number of 

material misstatements and omissions 

relating to in-kind redemptions and 

direct purchases and redemptions.87 In 

response, the Exchange argues that the 

opposing commenter’s arguments 

regarding prospectus disclosures are 

irrelevant under the Exchange Act.88

The opposing commenter, in his second 

comment letter, argues that adequacy of 

Fund disclosures is critically important 

to evaluation of the proposal under both 

the 1940 Act and the Exchange Act 

because efficient, informed, and nondiscriminatory trading in the Shares 

requires market participants to have 

access to timely and accurate 

information regarding the Funds, 

including risks and special 

considerations in buying and selling 

Shares.89

With respect to improved disclosures 

and availability of information, the 

opposing commenter states that, given 

the importance of the PIV to the 

decision-making process of current and 

prospective Fund investors, all Fund 

investors should have ongoing access to 

current PIV values.90 The opposing 

commenter suggests that each Fund’s 

current PIV be provided at no charge on 

a public Web site and made available to 

the public no later than it is made 

available to any other market 

participant.91 The opposing commenter 

also suggests that the following be 

published on the Funds’ Web site: Realtime PIVs and historical PIV 

information; statistics regarding closingprice premiums and discounts, statistics 

mstockstill on DSK4VPTVN1PROD with NOTICES

64442 Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 

92See id. at 26–27. 

93See id. at 28. 

94See id. 

95See Response Letter, supra note 8, at 4. 

96See id. 

97See id. 

98See Second Gastineau Letter, supra note 11, at 

7. 

99See Gastineau Letter, supra note 5, at 24. 

100See Response Letter, supra note 8, at 4. 

101See Second Gastineau Letter, supra note 11, at 

3. 

102See Second Gastineau Letter, supra note 11, at 

3. 

103See Gastineau Letter, supra note 5, at 24. 

104See id. 

105See id. 

106See Response Letter, supra note 8, at 3. 

107See Second Gastineau Letter, supra note 11, at 

7. 

108See id. 

109See Gastineau Letter, supra note 5, at 14–15. 

110See id. at 14. 

regarding intraday estimated premiums 

and discounts; statistics regarding bidask spreads; statistics regarding long or 

short equity market exposure and the 

amount of investment leverage 

employed; and statistics regarding 

transaction fees applicable to direct 

purchases of shares, redemptions 

through the Retail Redemption Facility, 

and Redemption Unit redemptions by 

Authorized Participants.92

Further, the opposing commenter 

asserts that, given the fundamental 

differences in how the Shares may be 

bought or sold, compared to other ETFs, 

it is not appropriate for the Funds to be 

advertised or marketed as ETFs.93

Therefore, the opposing commenter 

recommends that the Commission take 

appropriate steps to ensure that the 

Exchange, broker-dealers, and market 

data providers do not describe the 

Funds as ETFs.94

In response, the Exchange states that 

such real-time Web site disclosure of an 

indicative value is not required of other 

ETFs.95 The Exchange states that the 

PIV is designed to provide guidance 

regarding variances between the prior 

day’s closing prices and intraday 

changes in the value of the underlying 

portfolio.96 The pricing of the Shares 

themselves would be disseminated in 

real time through the Consolidated 

Quotation System, according to the 

Exchange.97

Responding to the Exchange’s 

assertion that the Funds should not be 

required to provide investors with free 

public access to real-time PIVs and 

other Fund trading information because 

these requirements do not apply to 

existing ETFs, the opposing commenter 

asserts that the Funds would differ from 

all existing ETFs in three respects for 

which the suggested requirements for 

additional PIV and other Fund trading 

information disclosures are highly 

relevant: (a) The Funds would offer 

shareholders two distinct pathways for 

buying and selling Shares (i.e., direct 

transactions and secondary market 

trades) and therefore should be 

obligated to give investors sufficient 

information about Share trading 

conditions to help them determine how 

best to buy and sell Shares; (b) the 

arbitrage mechanism intended to 

support efficient secondary market 

trading in Shares is untested and is 

likely to be less reliable than the 

mechanism supporting efficient trading 

in existing ETFs, meaning that investors 

in the Funds should appropriately pay 

more attention to Share trading costs 

and must have access to enhanced 

trading information to make that 

possible; and (c) the arbitrage 

mechanism underlying trading in 

Shares is uniquely reliant upon PIVs, 

with the result that a level playing field 

among market participants can only be 

achieved if all Fund investors have 

equal access to this critical Fund data.98

2. Proposed Limits on Fund Holdings 

The opposing commenter asserts that 

the Funds should: (a) Be required to 

limit their equity investments to U.S.- 

exchange-listed stocks with market caps 

of $5 billion or greater (consistent with 

the general understanding of large- and 

medium-cap stocks, a universe of about 

700 stocks currently); (b) not be 

permitted to invest in illiquid assets or 

debt instruments of non-U.S. issuers; 

and (c) not be permitted to employ 

investment leverage or hold short 

positions.99

In response, the Exchange argues that 

the opposing commenter’s 

recommendation to curtail the 

permitted investments of the Funds is 

not relevant under the Exchange Act.100

In his second letter, the opposing 

commenter argues that the nature of the 

Funds’ holdings is highly relevant 

because the reliability of a Fund’s PIVs 

would depend on the availability, 

timeliness, and accuracy of intraday 

valuations for the Fund’s underlying 

holdings, which in turn would vary 

significantly by holdings type.101 He 

asserts that, if intraday valuation 

information for a Fund’s holdings does 

not support the dissemination of timely 

and accurate PIVs throughout the 

Regular Trading Session, the Fund 

cannot be expected to trade 

efficiently.102

3. Trading Hours 

The opposing commenter notes that 

the Exchange would permit trading in 

the Shares between 4:00 a.m. and 8:00 

p.m., but that the PIV would only be 

disseminated during the Core Trading 

Session of 9:30 a.m. to 4:00 p.m.103 The 

opposing commenter asserts that the 

proposal does not adequately address 

the significant risk that the prices of 

shares bought or sold in the Opening 

Session (4:00 a.m. to 9:30 a.m.) and Late 

Trading Session (4:00 p.m. to 8:00 p.m.) 

would vary widely from underlying 

portfolio values because an updated 

PIVs would not be available.104

Therefore, the opposing commenter 

suggests that trading in shares should be 

limited to the Exchange’s Core Trading 

Session.105

In response, the Exchange states that: 

(a) Its surveillance procedures are 

operative during all trading sessions and 

are adequate to monitor trading in the 

Shares; (b) that it has no reason to 

discount the assertions of market 

makers regarding their ability to make 

efficient markets during all trading 

sessions; and (c) it would ensure that 

the information bulletin required by the 

Exchange’s listing standards would 

adequately address the special 

characteristics and risks associated with 

trading in the Shares.106

In response, the opposing commenter 

questions: (a) How a market maker 

would have any idea whether Shares 

were trading at a premium or a discount 

during the Opening and Late Trading 

Sessions, if PIVs are not being 

disseminated; and (b) how a market 

maker would have a basis to construct 

hedge positions against Share inventory 

accumulated during these sessions.107

He asserts again that the Shares should 

not trade during periods when neither 

the contents nor any estimates of 

current values of Fund holdings are 

known in the marketplace.108

4. Potential Informational Advantages 

for Certain Market Participants 

The opposing commenter argues that 

the lack of portfolio transparency would 

favor market makers and other 

professional traders over other market 

participants, such as investors, and the 

opposing commenter concludes that this 

disparate treatment is contrary to the 

principle that all participants should be 

on an equal footing with respect to 

knowledge of a fund’s holdings.109

Notwithstanding the public 

dissemination of the PIV, the opposing 

commenter argues that market makers 

and other professional traders would 

have a significant indirect informational 

advantage over other participants 

because of their ability to glean 

information about a Fund’s holdings 

through sophisticated data analysis of 

changes in the PIV.110 In particular, the 

mstockstill on DSK4VPTVN1PROD with NOTICES

Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 64443 

111See id. at 15. 

112See id. 

113See Response Letter, supra note 8, at 3. 

114See id. 

115See Second Gastineau Letter, supra note 11, at 

6. 

116See id. 

117See id. 

118See DeCore Letter, supra note 8, at 1. 

119See id. at 1–2. 

120See Browne Letter, supra note 13, at 1. 

121See Browne Letter, supra note 13, at 2. 

122See Response Letter, supra note 8, at 5. 

123 15 U.S.C 78s(b)(2)(C)(i). 

124 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR 

201.700(b)(3). 

125 17 CFR 201.700(d)(3). The description of a 

proposed rule change, its purpose and operation, its 

effect, and a legal analysis of its consistency with 

applicable requirements must all be sufficiently 

detailed and specific to support an affirmative 

Commission finding. See id. Any failure of a selfregulatory organization to provide the information 

solicited by Form 19b-4 may result in the 

Commission not having a sufficient basis to make 

an affirmative finding that a proposed rule change 

is consistent with the Exchange Act and the rules 

and regulations issued thereunder that are 

applicable to the self-regulatory organization. Id. 

126 15 U.S.C. 78f(b)(5). In disapproving the 

proposed rule change, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

127Neither an ETF that has obtained 1940 Act 

exemptive relief but does not fall within 

Commission-approved exchange listing standards, 

nor an ETF that falls within Commission-approved 

listing standards but has been denied 1940 Act 

exemptive relief, can legally be listed and traded on 

a national securities exchange. 

128See note 3, supra. The Precidian ETFs Trust 

submitted an application for an order under section 

Continued 

opposing commenter asserts that market 

makers and professional traders could 

uncover a Fund’s holdings and trading 

activity and front-run the Fund.111 The 

opposing commenter asserts that, prior 

to approval, the proposal should be 

amended to include: (1) A discussion of 

the steps to be taken to minimize 

reverse-engineering risk; (2) a 

discussion of how the Funds propose to 

resolve the conflict between providing 

market makers with adequate 

information to support efficient Share 

trading and protecting against reverse 

engineering; and (3) representations that 

the Funds would adequately disclose 

reverse-engineering risk and the 

conflicts the Funds face in seeking to 

provide for efficient market trading and 

protection against reverse 

engineering.112

The Exchange states that the 

following information would be 

publicly available to market 

professionals and retail investors alike: 

a PIV, disseminated every 15 seconds; 

an NAV, disseminated daily after the 

close; and the national best bid and offer 

and last trade for the Shares, 

disseminated in real-time through the 

Consolidated Quotation System and the 

Consolidated Tape.113 The Exchange 

also states that, as with other ETFs, any 

independent view that market 

participants might have about the 

composition of the fund holdings and 

the value of those holdings would be 

included in the prices at which those 

participants would be willing to trade 

the product.114

The opposing commenter counters 

that all investors would not have equal 

access to Share trading information 

unless, as he recommends, the 

Commission conditions approval of the 

proposal on the Funds providing free 

access to PIVs on a public Web site and 

PIVs being available to the general 

public as soon as they are available to 

any party.115 Otherwise, the opposing 

commenter argues, market makers 

would be able to generate an 

informational advantage regarding a 

Fund’s holdings through sophisticated 

time-series analysis of intraday changes 

in the Fund’s PIVs.116 He asserts that 

the dissemination of market information 

in a manner that facilitates unfair 

discrimination among market 

participants is inconsistent with 

equitable principles of trade and, 

therefore, with the requirements of 

Section 6(b)(5) of the Exchange Act.117

5. Potential Benefits 

One commenter supports the 

proposed rule change, asserting that 

investors would have access for the first 

time to many different types of active 

management strategies.118 This 

commenter also asserts that Managed 

Portfolio Shares would have the benefit 

of intraday trading and of creation and 

redemption at closing NAV and that 

they would, unlike other ETFs, offer the 

additional advantage of allowing 

investors to create or redeem directly for 

cash in amounts less than a creation 

unit.119 Another commenter states that 

the Funds would permit investors to 

‘‘avail themselves of the alphagenerating capabilities of professional 

managers and potentially greater 

returns, while enjoying greater access 

and information than a mutual fund can 

provide.’’ 120 This commenter also notes 

that money managers, too, would enjoy 

benefits in the form of ‘‘lower 

infrastructure costs, greater efficiency 

and the associated flexibility to make 

portfolio changes, and the ability to 

maintain portfolio confidentiality while 

avoiding professional front running.’’ 121

The Exchange asserts that, assuming 

investor protection concerns are 

adequately addressed, investors and the 

marketplace can only benefit from 

listing and trading of a variety of 

products with different structures, 

positing that competitive forces would 

ultimately decide the success or failure 

of such initiatives.122

III. Discussion and Commission 

Findings 

Under Section 19(b)(2)(C) of the 

Exchange Act, the Commission shall 

approve a proposed rule change of a 

self-regulatory organization if the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

that are applicable to that 

organization.123 The Commission shall 

disapprove a proposed rule change if it 

does not make such a finding.124

Commission Rule of Practice 700(d)(3) 

provides that, when the Commission 

has instituted proceedings to determine 

whether to approve or disapprove a rule 

filing, the Commission shall makes its 

determination on the basis of the record, 

which ‘‘shall consist of the proposed 

rule change filed on Form 19b-4 by the 

self-regulatory organization, including 

all attachments and exhibits thereto, 

and all written materials received from 

any interested parties on the proposed 

rule change, including the selfregulatory organization that filed the 

proposed rule change . . . as well as 

any written materials that reflect 

communications between the 

Commission and any interested 

parties.’’ 125

After careful consideration, the 

Commission does not find that the 

proposed rule change is consistent with 

the requirements of the Exchange Act 

and the rules and regulations 

thereunder applicable to a national 

securities exchange. In particular, the 

Commission does not find that the 

proposed rule change is consistent with 

Section 6(b)(5) of the Exchange Act, 

which requires that the rules of a 

national securities exchange be 

designed, among other things, to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and to 

protect investors and the public 

interest.126

Before an ETF can list and trade on a 

national securities exchange, the ETF 

must have exemptive relief under the 

1940 Act, and a national securities 

exchange must have effective rules in 

place to list and trade the ETF.127 As 

noted above, the Precidian ETFs Trust 

has filed an Exemptive Application 

under the 1940 Act.128 As stated in the 

mstockstill on DSK4VPTVN1PROD with NOTICES

64444 Federal Register / Vol. 79, No. 209 / Wednesday, October 29, 2014 / Notices 

6(c) of the 1940 Act for an exemption from sections 

2(a)(32), 5(a)(1), 22(d) and 22(e) of the 1940 Act and 

rule 22c–1 under the 1940 Act; under sections 6(c) 

and 17(b) of the 1940 Act for an exemption from 

sections 17(a)(1) and 17(a)(2) of the 1940 Act; and 

under section 12(d)(1)(J) of the 1940 Act for an 

exemption from sections 12(d)(1)(A) and 12(d)(1)(B) 

of the 1940 Act. 

129Notice of Application for Exemptive Relief, 

supra note 3, at 3. 

130 Id. at 29. 

131The Commission’s determinations under 

Section 6(c) of the 1940 Act with respect to the 

Funds are preliminary and could change if a 

hearing were requested, the Commission were to 

grant the request, and persuasive new information 

were presented. Under Section 19(b)(2) of the 

Exchange Act, however, the last date on which the 

Commission can take final action to approve or 

disapprove the Exchange’s proposed rule change is 

no later than 240 days after notice of the proposed 

rule change was published in the Federal Register. 

As a result, the Commission must either approve or 

disapprove the proposed rule change by October 24, 

2014, and it must do so on the basis of the facts 

as they currently exist, irrespective of any 

information that might be presented to or 

considered by the Commission at a later date in the 

context of its final determination under Section 6(c) 

of the 1940 Act. 

132Having found for the reasons explained above 

that the Exchange’s proposed rule change is not 

consistent with the requirements of the Exchange 

Act, the Commission does not believe it is 

necessary to address each of the particular 

objections raised by the commenter who opposes 

the proposed rule change. 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 71990 

(April 22, 2014), 79 FR 23389 (‘‘Notice’’). 

4See Securities Exchange Act Release No. 72328, 

79 FR 33605 (June 11, 2014). 

5See Securities Exchange Act Release No. 72654, 

79 FR 43808 (July 28, 2014) (‘‘Order Instituting 

Proceedings’’). 

6 15 U.S.C. 78s(b)(2). 

7See Order Instituting Proceedings, supra note 5. 

8 15 U.S.C. 78s(b)(2). 

9 17 CFR 200.30–3(a)(31). 

Notice of an Application for Exemptive 

Relief, however, ‘‘the Commission 

preliminarily believes that [Precidian’s] 

proposed ETFs do not meet the standard 

for exemptive relief under section 6(c) 

of the [1940] Act,’’ 129 and accordingly, 

‘‘absent a request for a hearing that is 

granted by the Commission, the 

Commission intends to deny 

[Precidian’s] request for an exemption 

under section 6(c) of the [1940] Act as 

not necessary or appropriate in the 

public interest and as not consistent 

with the protection of investors and the 

purposes fairly intended by the policy 

and provisions of the [1940] Act.’’ 130

The purpose of the Exchange’s 

proposed rule change is to allow the 

listing and trading of the proposed 

Funds and future Funds of the same 

type. The Commission does not believe 

that approving this proposed rule 

change would be consistent with the 

requirement under the Exchange Act 

that an exchange’s rules be consistent 

with the protection of investors and the 

public interest, because the Commission 

has stated its intention to deny the 

Funds exemptive relief under the 1940 

Act and because denying this exemptive 

relief would mean that the Funds could 

not legally operate.131

IV. Conclusion 

For the reasons set forth above, the 

Commission does not find that the 

proposed rule change is consistent with 

the requirements of the Exchange Act 

and the rules and regulations 

thereunder applicable to a national 

securities exchange, and in particular, 

with Section 6(b)(5) of the Exchange 

Act.132

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act, 

that the proposed rule change (SR– 

NYSEArca–2014–10) be, and it hereby 

is, disapproved. 

By the Commission. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–25714 Filed 10–28–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73416; File No. SR– 

NASDAQ–2014–034] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Designation of a Longer Period for 

Commission Action on a Proposed 

Rule Change Relating to Proposed 

Changes To Remove From the 

Exchange Rules Fee Provisions 

Regarding Re-Transmission of ‘‘ThirdParty Data’’ 

October 23, 2014. 

On April 7, 2014, The NASDAQ Stock 

Market LLC (‘‘Nasdaq’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

remove, from the Exchange rules, fee 

provisions with respect to third-party 

data feeds that Nasdaq receives from 

multiple sources and then re-transmits 

to clients in connection with the 

Exchange’s co-location services. The 

proposed rule change was published for 

comment in the Federal Register on 

April 28, 2014.3 On June 5, 2014, the 

Commission extended the time to act on 

the proposal until July 25, 2014.4 On 

July 22, 2014, the Commission 

instituted proceedings to determine 

whether to disapprove the proposed 

rule change in an order published in the 

Federal Register.5 The Commission 

received no comment letters on the 

proposed rule change. 

Section 19(b)(2) of the Act 6 provides 

that, after initiating disapproval 

proceedings, the Commission shall issue 

an order approving or disapproving the 

proposed rule change not later than 180 

days after the date of publication of 

notice of the filing of the proposed rule 

change. The Commission may extend 

the period for issuing an order 

approving or disapproving the proposed 

rule change, however, by not more than 

60 days if the Commission determines 

that a longer period is appropriate and 

publishes the reasons for such 

determination. The proposed rule 

change was published for notice and 

comment in the Federal Register on 

April 28, 2014. October 25, 2014 is 180 

days from that date, and December 24, 

2014 is an additional 60 days from that 

date. 

The Commission finds that it is 

appropriate to designate a longer period 

within which to take action on the 

proposed rule change so that it has 

sufficient time to consider the issues 

raised in connection with the proposed 

rule change. Specifically, as the 

Commission noted in the Order 

Instituting Proceedings, the proposed 

rule change raises issues such as 

whether the proposed rule change is 

consistent with the statutory definition 

of the term ‘‘facility’’ and the statutory 

requirements applicable to national 

securities exchanges.7

Accordingly, the Commission, 

pursuant to Section 19(b)(2) of the Act,8

designates December 24, 2014, as the 

date by which the Commission should 

either approve or disapprove the 

proposed rule change. 

For the Commission, by the Division 

of Trading and Markets, pursuant to 

delegated authority.9

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–25672 Filed 10–28–14; 8:45 am] 

BILLING CODE 8011–01–P 

mstockstill on DSK4VPTVN1PROD with NOTICES