Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Notices 68323 

9 17 CFR 240.19b–4(f)(2). 

10 15 U.S.C. 78s(b)(2)(B). 

11 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 the Trust, which 

would be the issuer of the funds, filed an 

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

Investment Company Act of 1940 (‘‘1940 Act’’) and 

rules thereunder (File No. 812–13953), dated 

September 1, 2011 (‘‘Exemptive Application’’). The 

Commission published notice of this application 

(‘‘Notice of an Application for Exemptive Relief’’) 

on October 21, 2014. See Investment Company Act 

Release No. 31301 (Oct. 21, 2014), 79 FR 63964 

(Oct. 27, 2014). 

4See Securities Exchange Act Release No. 72787 

(Aug. 7, 2014), 79 FR 47488 (‘‘Notice’’). 

5See Letter from Gary L. Gastineau, President, 

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

Secretary, Commission, dated Aug. 30, 2014 

(‘‘Comment Letter’’). 

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

7See Securities Exchange Act Release No. 73199, 

79 FR 58844 (September 30, 2014). The 

Commission designated November 11, 2014 as the 

date by which it should approve, disapprove, or 

institute proceedings to determine whether to 

disapprove the proposed rule change. 

8See Notice, supra note 4. 

9Under the proposal, a ‘‘Creation Unit’’ is a 

specified minimum number of Managed Portfolio 

Continued 

subparagraph (f)(2) of Rule 19b–4 9

thereunder, because it establishes a due, 

fee, or other charge imposed by the 

Exchange. 

At any time within 60 days of the 

filing of such 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. If the 

Commission takes such action, the 

Commission shall institute proceedings 

under Section 19(b)(2)(B) 10 of the Act to 

determine whether the proposed rule 

change should be approved or 

disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NYSEArca–2014–131 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–NYSEArca–2014–131. 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– 

NYSEArca–2014–131, and should be 

submitted on or before December 5, 

2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.11

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–26945 Filed 11–13–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73559; File No. SR–BATS– 

2014–018) 

Self-Regulatory Organizations; BATS 

Exchange, Inc.; Order Disapproving a 

Proposed Rule Change To Adopt Rule 

14.11(k) to List Managed Portfolio 

Shares and to List and Trade Shares of 

Certain Funds of the Spruce ETF Trust 

November 7, 2014 

On August 4, 2014, BATS Exchange, 

Inc. (‘‘Exchange’’ or ‘‘BATS’’) 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 

BATS Rule 14.11(k), which would 

permit the Exchange to list Managed 

Portfolio Shares, which are shares of 

actively managed exchange-traded 

funds (‘‘ETFs’’) for which the portfolio 

is disclosed quarterly, and to list and 

trade shares of certain funds of the 

Spruce ETF Trust (‘‘Trust’’) 3 under 

proposed BATS Rule 14.11(k). The 

proposed rule change was published for 

comment in the Federal Register on 

August 13, 2014.4 The Commission 

received one comment letter on the 

proposal.5 On September 24, 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 disapprove the proposed 

rule change.7

This Order disapproves the proposed 

rule change. 

I. Description of the Proposal 

The Exchange proposes to: (1) Add 

new BATS Rule 14.11(k) which would 

permit the listing of Managed Portfolio 

Shares; and (2) list and trade shares 

(‘‘Shares’’) of the following funds (each 

a ‘‘Fund’’ and, collectively, the 

‘‘Funds’’) under the proposed rule: 

Large Cap Fund, Large Cap Value Fund, 

Large Cap Growth Fund, Large/Mid Cap 

Fund, Large/Mid Cap Value Fund, 

Large/Mid Cap Growth Fund, Large Cap 

Long-Short Fund, Large Cap Value 

Long-Short Fund, Large Cap Growth 

Long-Short Fund, Large/Mid Cap LongShort Fund, and Large/Mid Cap Value 

Long-Short Fund, Large/Mid Cap 

Growth Long-Short Fund, and Large Cap 

Growth Active Insights Fund. The 

discussion below summarizes the 

Exchange’s proposal, details of which 

are described in the Notice.8

A. Proposed Listing Rules 

The Exchange’s proposal would 

define the term ‘‘Managed Portfolio 

Share’’ as a security that (a) is issued by 

an 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 a 

predetermined Creation Unit 9 size in 

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68324 Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Notices 

Shares that an Authorized Participant may purchase 

from the issuer for the current net asset value. 10 Depending on the context, the term ‘‘NAV’’ 

may refer to the NAV per Share, the NAV per 

Creation Unit, or the NAV of a fund. 11Under the proposal, a ‘‘Beneficial Owner’’ is 

defined as: (1) A natural person; (2) a trust 

established for the benefit of a natural person or a 

group of related family members; or (3) a tax 

deferred retirement plan where investments are 

selected by a natural person purchasing for its own 

account. 12Under the proposal, a ‘‘Redemption Unit’’ is a 

specified number of Managed Portfolio Shares that 

an Authorized Participant may sell to the issuer for 

the current NAV and which is also used for 

determining whether a Beneficial Owner may 

redeem for cash. See infra note 14. 13The records relating to Bid/Ask Prices would 

be retained by the Funds and its service providers. 14Certain 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. 15BATS Rule 14.11(i)(3)(B) 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 NAV at 

the end of the business day. BATS Rule 

14.11(i)(4)(B)(ii)(a) 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. 

16A 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 is required 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 www.sec.gov. 

17BlackRock Fund Advisors is an indirect wholly 

owned subsidiary of BlackRock, Inc. 

18The term ‘‘under normal circumstances’’ 

includes, but is not limited to, the absence of 

adverse market, economic, political, or other 

conditions, including 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 

type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of 

terrorism, riot, or labor disruption, or any similar 

intervening circumstance. 

19Equity securities would include common stock, 

preferred stock, securities convertible into common 

stock and securities or other instruments whose 

price is linked to the value of common stock, which 

includes, but is not limited to, shares of other 

investment companies. 

20 Derivatives would include the following: 

treasury futures, equity index futures, currency 

futures, currency forwards, interest rate swaps, 

credit default swaps, total return swaps, equity 

index options, and single stock equity options. The 

derivatives, excluding currency forwards, would be 

exchange traded and/or centrally cleared. Each 

Fund’s use of derivatives may be used to enhance 

leverage, but such leverage would never exceed 1/ 

3 of a Fund’s total assets. 

21See supra note 5. The commenter notes that he 

has a retained economic interest in a product that 

may be competitive with Managed Portfolio Shares, 

exchange for a cash amount equal to the 

next determined Net Asset Value 

(‘‘NAV’’),10 (c) pursuant to the ‘‘Small 

Allotment Redemption Option,’’ may be 

redeemed for cash by any Beneficial 

Owner 11 in any size less than a 

Redemption Unit 12 for a cash amount 

equal to the next determined NAV for at 

least 15 calendar days, in the event that 

for 10 consecutive Business Days, or 

such shorter period as determined by 

the issuer, the midpoint of the national 

best bid and offer at the time of the 

calculation of the NAV (the ‘‘Bid/Ask 

Price’’),13 for the security has a discount 

of 5% or greater from the NAV; and (d) 

when aggregated in a number of shares 

equal to a Redemption Unit, or 

multiples thereof, may be redeemed at 

an Authorized Participant’s 14 request, 

which each Authorized Participant 

would be paid through a blind trust 

established for its benefit a portfolio of 

securities and/or cash with a value 

equal to the next determined NAV. 

Funds issuing Managed Portfolio 

Shares would be actively-managed, and 

in that respect would be similar to 

Managed Fund Shares, which are 

actively-managed funds listed and 

traded under BATS Rule 14.11(i). 

Managed Portfolio Shares, however, 

would differ from Managed Fund Shares 

in the following important respects. 

First, in contrast to Managed Fund 

Shares, for which a ‘‘Disclosed 

Portfolio’’ is required to be disseminated 

at least once daily,15 the portfolio for an 

issue of Managed Portfolio Shares 

would be disclosed at least quarterly in 

accordance with normal disclosure 

requirements otherwise applicable to 

open-end investment companies 

registered under the 1940 Act.16 Second, 

creations of Managed Portfolio Shares 

would generally be effected through a 

delivery of only cash, whereas creations 

of Managed Fund Shares are generally 

effected through an in-kind delivery of 

securities and cash. Third, in 

connection with the redemption of 

shares in Redemption Unit size, the inkind 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 

instructions from the Authorized 

Participant without disclosing the 

identity of those securities to the 

Authorized Participant. Fourth, 

pursuant to the Small Allotment 

Redemption Option, Beneficial Owners 

would be able to redeem shares for cash 

directly from a fund in any size less 

than a Redemption Unit at the fund’s 

NAV in limited circumstances. 

For each series of Managed Portfolio 

Shares, an estimated value, defined in 

the proposed rule as the ‘‘Intraday 

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

an estimated intraday value of a fund’s 

portfolio would be disseminated. The 

IIV 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 Regular 

Trading Hours (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 series of Managed Portfolio Shares. 

B. Description of the Funds 

BlackRock Fund Advisors would be 

the investment adviser (‘‘Adviser’’) to 

the Funds.17 State Street Bank and Trust 

Company would be the administrator, 

custodian, and transfer agent for the 

Trust (‘‘Custodian’’ or ‘‘Transfer 

Agent’’). BlackRock Investments, LLC 

(‘‘Distributor’’) would serve as the 

distributor for the Trust. 

Under normal circumstances,18 each 

Fund would invest at least 80% of its 

net assets in a portfolio of long positions 

(or engage in borrowings for the purpose 

of establishing short positions for the 

Long-Short Funds) in U.S. equity 

securities.19 The Funds may in some 

instances also invest in non-U.S. equity 

securities with similar market 

capitalization, liquidity, and risk-return 

profiles to the U.S. equity securities 

eligible for investment. Each Fund 

would hold equity securities of at least 

13 non-affiliated issuers, primarily from 

the 1,200 largest U.S. stocks by market 

capitalization as determined by The 

Frank Russell Company annually. 

Generally, the Large/Mid Cap Funds 

would select securities from a universe 

of approximately the 1,200 largest 

equity securities traded on U.S. 

exchanges and the Large Cap Funds 

would select securities from a universe 

of approximately the 1,000 largest 

equity securities traded on U.S. 

exchanges. 

A Fund may, to a limited extent 

(under normal circumstances, less than 

20% of the Fund’s net assets), engage in 

transactions in futures contracts, 

forward contracts, options, and swaps.20

A Fund may also invest a portion of its 

assets in high-quality money market 

instruments. 

II. Summary of the Comment Letter 

The Commission received one letter 

opposing the proposed rule change, 

which raises several concerns.21 First, 

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Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Notices 68325 

and states that his views on the Exchange’s filing 

‘‘may be considered subject to a conflict of 

interest.’’ Comment Letter, supra note 5, at 1, n.1. 

He states that his comments are made in the public 

interest and to the best of his ability are not 

influenced by any conflict. See id. 

22See id. at 4. 

23See id. 

24See id. at 7. 

25See id. 

26See id. at 9. 

27 ‘‘Inefficiencies in the Pricing of ExchangeTraded Funds,’’ Antti Petajisto, September 20, 2013, 

available at http://www.petajisto.net/. 

28See Comment Letter, supra note 5, at 8. 

29See id. at 9. 

30See id. at 9–10. 

31See id. at 10. 

32See id. 

33See id. at 12. 

34See id. 

35See id. 

36See id. at 11. 

37See id. 

38See id. at 13. 

39See id. at 13–14. 

40See id. The commenter discusses certain factors 

determining a fund’s susceptibility to reverse 

engineering using intraday valuations disseminated 

at 15 second intervals. See id. at 14. 

the commenter 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.22 Therefore, the 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.23

In addition, the 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 commenter characterizes as the 

unreliability of the Funds’ proposed 

method for ensuring secondary market 

trading efficiency. The commenter states 

that the Funds’ market makers would 

have only indirect, and likely imperfect, 

information about Fund holdings.24 The 

commenter argues that effectively 

arbitraging the Funds would be 

significantly more difficult than the 

arbitrage for most existing foreign 

ETFs.25 The commenter also 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, because 

foreign stocks do not trade during the 

same hours as U.S. ETFs, the ETFs 

holding foreign stocks do not provide 

opportunities for riskless arbitrage 

transactions during much of the trading 

day.26 The commenter also cites a draft 

academic working paper 27 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 traded with 

wider spreads and more variable 

premiums and discounts.28

The commenter also states its view 

that, for a number of reasons, the 

dissemination of an IIV by the Funds 

would likely prove ineffective in 

ensuring alignment of secondary market 

prices for the Shares with the values of 

the underlying portfolios. The 

commenter asserts that, during periods 

of rapid market movement, the use of 

last-sale prices to calculate an IIV, 

coupled with the dissemination of the 

IIV only every 15 seconds, would mean 

that the IIV would be a lagging indicator 

of actual portfolio values.29

Additionally, the commenter asserts 

that the IIV 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.30 The commenter also states 

that no one would stand behind a 

Fund’s IIV to ensure timeliness and 

accuracy.31 The commenter predicts 

that, without a reliable IIV, the Shares 

cannot and would not trade acceptably 

in the secondary market.32

The commenter predicts that frequent 

IIV errors would in turn cause 

‘‘erroneous share trades’’ to be 

executed.33 The commenter states that 

the proposal does not address the 

treatment of erroneous share trades 

resulting from a faulty IIV—namely, 

whether IIV errors and related erroneous 

trades would be detected by the 

Exchange, whether such trades would 

be cancelled, and whether the Exchange 

would apply a materiality standard for 

cancellations.34 The commenter argues 

that, as a condition of approval, the 

Exchange should be required to monitor 

the timeliness and accuracy of IIV 

dissemination and to implement 

procedures to address trades when an 

erroneous IIV has been disseminated.35

The commenter also predicts that the 

following elements of the proposed 

redemption arrangements would 

introduce additional costs and 

uncertainties for Authorized 

Participants: 

• The Custodian would have a 

monopoly position as the sole eligible 

provider of trustee services for the blind 

trust; 

• The 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 Custodian, who stands in 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.36

The 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 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.37

The commenter posits that the lack of 

portfolio transparency would favor 

market makers and other professional 

traders over other market participants, 

such as investors.38 Notwithstanding 

the public dissemination of the IIV, the 

commenter argues that market makers 

and other professional traders would 

have a significant indirect information 

advantage over other participants 

because of their ability to glean 

information about a Fund’s holdings 

through sophisticated data analysis of 

changes in the IIV.39 In particular, the 

commenter asserts that IIV disclosures 

might enable market makers and 

professional traders to uncover a Fund’s 

holdings and trading activity, rendering 

the Fund susceptible to the dilutive 

effects of front running.40 The 

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 reverseengineering risk and the conflicts the 

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68326 Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Notices 

41See id. at 14. 

42See id. at 15. 

43See id. 

44See id. at 15–16. 

45See id. at 16. 

46See id. at 17. 

47See id. at 20. 

48See id. 

49See id. at 21. 

50See id. 

51See id. 

52See id. 

53See id. at 21–22. 

54See id. at 22–23. 

55 15 U.S.C. 78s(b)(2)(C)(i). 

56 15 U.S.C. 78s(b)(2)(C)(ii). 

57 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). 

58Neither 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. 

Funds face in seeking to provide for 

efficient market trading and protection 

against reverse engineering.41

The 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 the efficient 

processing of redemptions by retail 

investors through the Small Allotment 

Redemption Option.42 The commenter 

questions how the early Order Cut-Off 

Times would impact secondary market 

trading and the Funds’ proposed 

arbitrage mechanism.43

The commenter posits that a principal 

purpose of including the Small 

Allotment Redemption Option in the 

proposal is to provide comfort to the 

Commission and market participants 

that investors would be able to redeem 

Shares with the Fund at or near NAV 

whenever secondary market trading 

prices are at a significant discount to 

NAV.44 The commenter argues that 

these provisions, as proposed, are 

inadequate for this purpose because: (1) 

Shares could trade at persistently wide 

discounts to NAV and still rarely, if 

ever, cause the Small Allotment 

Redemption Option to be invoked due 

to the triggering events thresholds; (2) 

the Small Allotment Redemption 

Option would be available only to a 

limited set of shareholders and would 

be restricted to redemptions of less than 

a Redemption Unit; (3) the expected 

early Order Cut-Off Time for 

redemptions under the Small Allotment 

Redemption Option means that an 

investor’s ability to directly redeem 

Shares for cash would exist for only a 

portion of each business day; and (4) 

investors who 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.45 The commenter recommends that 

the Commission impose the following 

conditions for approval: (1) 

Modification of the triggering events; 46

(2) extension of eligibility for the Small 

Allotment Redemption Option to all 

shareholders and establishment (and 

disclosure) of a reasonable upper limit 

on the value of Shares that are eligible; 

(3) establishing the close of the 

Exchange’s Regular Trading Hours as 

the Order Cut-off Time for redemptions 

under the Small Allotment Redemption 

Option; and (4) establishment of a cap 

on transaction fees that the Funds may 

charge on direct redemptions of 

Shares.47

The commenter believes that the 

Funds would be permitted to hold 

investments that are not well-suited to 

the continuous dissemination of timely 

and accurate IIVs throughout the trading 

day.48 The commenter asserts that the 

Funds should: (1) Be required to limit 

their non-cash 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); (2) not be 

permitted to invest in illiquid assets; 

and (3) not be permitted to employ 

investment leverage or hold short 

positions.49

The commenter notes that the 

Exchange would permit trading in the 

Shares between 8:00 a.m. and 5:00 p.m., 

but that the IIV would only be 

disseminated during the Exchange’s 

Regular Trading Hours, which are 

between 9:30 a.m. and 4:00 p.m. The 

commenter asserts that the proposal 

does not adequately address the 

significant risk that the prices of Shares 

bought or sold in the Pre-Opening 

Session (8:00 a.m. to 9:30 a.m.) and 

After Hours Session (4:00 p.m. to 5:00 

p.m.) would vary widely from 

underlying portfolio values because an 

updated IIVs would not be available.50

Therefore, the commenter suggests that 

trading in Shares should be limited to 

the Exchange’s Regular Trading 

Hours.51

The commenter states that, given the 

importance of the IIV to the decisionmaking process of current and 

prospective Fund investors, all Fund 

investors should have ongoing access to 

current IIV values.52 The commenter 

suggests that each Fund’s current IIV 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.53 The 

commenter also suggests that the 

following information be published on 

the Funds’ Web site: real time IIVs and 

historical IIV information; statistics 

regarding closing price premiums and 

discounts; statistics regarding intraday 

estimated premiums and discounts; 

statistics regarding bid-ask spreads; 

statistics regarding long or short equity 

market exposure and the amount of 

investment leverage employed; and 

statistics regarding transaction fees 

applicable to purchases of Shares, 

redemptions through the Small 

Allotment Redemption Option and 

Redemption Unit redemptions by 

Authorized Participants.54

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.55 The Commission shall 

disapprove a proposed rule change if it 

does not make such a finding.56

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.57

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.58 As 

noted above, the Trust has filed an 

Exemptive Application under the 1940 

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Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Notices 68327 

59See note 3 and accompanying text, supra. The 

Trust, the Advisor, and the Distributor submitted an 

application for an order under section 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. 

60Notice of Application for Exemptive Relief, 

supra note 3, at 3. 

61 Id. at 31. 

62The 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 Commission must 

approve, disapprove, or institute proceedings to 

disapprove this proposed rule change by November 

11, 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. 

63Having 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. 

64 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

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

4 17 CFR 240.19b–4(f)(2). 

5The term ‘‘Member’’ is defined as ‘‘any 

registered broker or dealer, or any person associated 

with a registered broker or dealer, that has been 

admitted to membership in the Exchange. A 

Member will have the status of a ‘‘member’’ of the 

Exchange as that term is defined in Section 3(a)(3) 

of the Act.’’ See Exchange Rule 1.5(n). 

6See PSX, Equity Trader Alert 2014–95, Updates 

to PSX and BX Pricing for November 2014, dated 

October 27, 2014, available at http://

Continued 

Act.59 As stated in the Notice of an 

Application for Exemptive Relief, 

however, ‘‘the Commission 

preliminarily believes that [the Trust’s] 

proposed ETFs do not meet the standard 

for exemptive relief under section 6(c) 

of the [1940] Act,’’ 60 and accordingly, 

‘‘absent a request for a hearing that is 

granted by the Commission, the 

Commission intends to deny [the 

Trust’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.’’ 61

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 

Trust’s request for exemptive relief 

under the 1940 Act and because 

denying this exemptive relief would 

mean that the Funds could not legally 

operate.62

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.63

It is therefore ordered, pursuant to 

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

that the proposed rule change (SR– 

BATS–2014–018) be, and it hereby is, 

disapproved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.64

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–26947 Filed 11–13–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73564; File No. SR–EDGA– 

2014–26] 

Self-Regulatory Organizations; EDGA 

Exchange, Inc.; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change Related to Fees for Use 

of EDGA Exchange, Inc. 

November 7, 2014. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on October 

31, 2014, EDGA Exchange, Inc. (the 

‘‘Exchange’’ or ‘‘EDGA’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II and III 

below, which Items have been prepared 

by the Exchange. The Exchange has 

designated the proposed rule change as 

one establishing or changing a member 

due, fee, or other charge imposed by the 

Exchange under Section 19(b)(3)(A)(ii) 

of the Act 3 and Rule 19–4(f)(2) 

thereunder,4 which renders the 

proposed rule change effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange filed a proposal to 

amend the fee schedule applicable to 

Members 5 and non-members of the 

Exchange pursuant to EDGA Rules 

15.1(a) and (c). Changes to the fee 

schedule pursuant to this proposal are 

effective upon filing. 

The text of the proposed rule change 

is available at the Exchange’s Web site 

at http://www.directedge.com, at the 

principal office of the Exchange, and at 

the Commission’s Public Reference 

Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange proposes to amend its 

Fee Schedule to decrease the fee for 

orders yielding Flag K, which routes to 

PSX using ROUC or ROUE routing 

strategies. In securities priced at or 

above $1.00, the Exchange currently 

assesses a fee of $0.0026 per share for 

Members’ orders that yield Flag K. The 

Exchange proposes to amend its Fee 

Schedule to decrease this fee to $0.0024 

per share from $0.0026 per share. The 

proposed change represents a pass 

through of the rate that Direct Edge ECN 

LLC (d/b/a DE Route) (‘‘DE Route’’), the 

Exchange’s affiliated routing brokerdealer, is charged for routing orders to 

PSX when it does not qualify for a 

volume tiered reduced fee. The 

proposed change is in response to PSX’s 

November 2014 fee change where PSX 

decreased the fee to remove liquidity via 

routable order types it charges its 

customers, from a fee of $0.0026 per 

share to a fee of $0.0024 per share.6

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